Business Overview
Tempur Sealy International, Inc. is a leading multinational designer, manufacturer, and distributor of bedding products, including mattresses, foundations, adjustable bases, and other accessories. With a history spanning over 175 years, the company has established a strong presence in the global sleep solutions market through its highly recognized brands, Tempur-Pedic, Sealy, and Stearns & Foster.
The company's origins can be traced back to 1848 when it was founded as the Chattanooga Mattress Company, producing traditional innerspring mattresses. In 1989, the company introduced the revolutionary Tempur-Pedic memory foam mattress, which quickly gained popularity for its innovative pressure-relieving properties. This marked a turning point for the business, as it pivoted towards developing advanced sleep technology products. Over the next decade, Tempur-Pedic rapidly expanded its product portfolio and global footprint, becoming a dominant player in the premium bedding market.
In 2007, Tempur-Pedic International acquired Sealy Corporation, a well-established brand known for its iconic Posturepedic line of mattresses. This strategic move allowed the company to diversify its offerings and reach a broader consumer base, spanning both premium and value-oriented segments. The combined entity was renamed Tempur Sealy International, Inc. in 2013.
Company History and Challenges
Throughout its history, Tempur Sealy has successfully navigated various challenges. During the 2008 financial crisis, which significantly impacted consumer spending on big-ticket items like mattresses, the company responded by strengthening its operational efficiency, investing in product innovation, and expanding its direct-to-consumer channels to better serve customers. More recently, in 2023, Tempur Sealy faced a cybersecurity incident that temporarily disrupted its manufacturing and distribution operations. The company quickly implemented incident response measures and worked to restore its critical systems, minimizing the impact on its business. Tempur Sealy's focus on operational resilience and strong customer relationships helped it weather these storms.
Financials
Tempur Sealy's financial performance has been impressive, with the company reporting annual revenue of $4.93 billion and net income of $368.1 million for the fiscal year ended December 31, 2023. Operating cash flow for the same period was $570.30 million, with free cash flow of $384.90 million.
In the most recent quarter (Q3 2024), the company reported revenue of $1.30 billion, an increase of 1.8% year-over-year. This growth was primarily driven by a 12.4% increase in international sales, partially offset by a 0.8% decline in North America sales. Net income for the quarter was $130.00 million, with operating cash flow of $256.60 million and free cash flow of $240.20 million. The increase in net income was primarily due to operating expense leverage and improved gross margins.
Liquidity
Tempur Sealy maintains a strong financial position with a debt-to-equity ratio of 4.03 as of September 30, 2024. The company's cash balance stood at $104.20 million, with an available credit line of $1.19 billion out of a $1.15 billion revolving credit facility. The current ratio of 1.14 and quick ratio of 0.65 indicate a solid liquidity position and manageable debt levels.
Business Segments
Tempur Sealy operates in two primary business segments: North America and International.
The North America segment consists of manufacturing and distribution subsidiaries and licensees located in the U.S., Canada, and Mexico. This segment sells its products through two main channels - Wholesale and Direct. The Wholesale channel comprises third-party retailers, including third-party distribution, hospitality, and healthcare. The Direct channel includes company-owned stores, online, and call centers.
The International segment consists of manufacturing and distribution subsidiaries, joint ventures, and licensees located in Europe, Asia-Pacific, and Latin America (other than Mexico). Similar to the North America segment, the International segment also sells its products through Wholesale and Direct channels.
In the North America segment, Tempur Sealy enjoys a dominant market position, with its flagship Tempur-Pedic and Sealy brands holding significant market share. The International segment has been a growing contributor to the company's success, with the Tempur brand and the company's Dreams retail operations in the United Kingdom driving strong double-digit sales growth in recent years.
Innovation and Success Factors
One of the key factors behind Tempur Sealy's success has been its unwavering commitment to innovation. The company has consistently invested in research and development to stay at the forefront of sleep technology, introducing groundbreaking products such as the Tempur-Pedic Adapt mattress and the Sealy Posturepedic line. These innovative offerings have resonated with consumers, leading to strong brand loyalty and pricing power.
Recent Performance
In the third quarter of 2024, Tempur Sealy reported net sales of $1.3 billion, a 2% increase compared to the same period in the previous year. Adjusted earnings per share grew 7% to $0.82, driven by a combination of top-line growth and operational efficiency improvements. The company's adjusted EBITDA margin reached 21.1%, the strongest in 10 quarters, showcasing the strength of its diversified business model and the effectiveness of its cost management initiatives.
The International segment was a standout performer, with net sales increasing 12% on a reported basis and 11% on a constant currency basis. The company's legacy International business and its Dreams retail operations in the UK both delivered strong double-digit growth, demonstrating the durability of the Tempur brand and the company's ability to execute in challenging global markets.
In terms of segment performance, the North American adjusted gross margin declined 10 basis points to 43.1% in the third quarter, driven by mix impact of a new distribution win for their OEM business, partially offset by commodity costs and operational efficiencies. The North American adjusted operating margin declined 20 basis points to 20.1%, driven by the decline in gross margin and operating expense deleverage.
The International segment's gross margin improved 70 basis points to 57.3%, driven by operational efficiencies, and the International adjusted operating margin improved 200 basis points to 18.2%, driven by operating expense leverage and the improvement in gross margin, partially offset by the Asia joint venture performance.
Future Outlook
Looking ahead, Tempur Sealy has provided guidance for the full-year 2024, expecting adjusted earnings per share to be between $2.45 and $2.55, which represents a 4% growth year-over-year at the midpoint of the range. The company expects full year 2024 sales to be slightly below the prior year, which implies the fourth quarter will be approximately consistent with the prior year.
Tempur Sealy currently expects the 2024 US bedding industry unit volumes will be down high-single-digits, which implies the industry will be down approximately mid-single-digits on dollars in the fourth quarter, consistent with what they saw in the third quarter. Despite this industry-wide challenge, the company expects adjusted EBITDA of approximately $915 million at the midpoint of the guidance range.
Capital expenditure is expected to be approximately $125 million for the full year 2024, down significantly from prior years as their major capital projects are complete, with $110 million being maintenance CapEx. The company plans to maintain a balanced capital allocation strategy, investing in growth initiatives, returning capital to shareholders through a quarterly dividend of $0.13 per share (an increase of 18% over the prior year), and opportunistically repurchasing shares.
Additional financial guidance for 2024 includes depreciation and amortization of approximately $200 million to $205 million, interest expense of approximately $125 million to $130 million, a tax rate of 24%, and a diluted share count of 179 million shares.
Despite the macroeconomic headwinds facing the bedding industry, which has been in a prolonged downturn with volumes declining over 30% from peak levels in 2021, Tempur Sealy's proven track record of innovation, operational excellence, and diversified business model position it well to navigate the challenges and capitalize on the long-term growth opportunities in the global sleep solutions market. The company expects the industry to normalize in 2025, driven by new product launches and improved consumer confidence.