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A revolution is underway in the mattress business with specialty mattresses growing at a much faster pace than innerspring mattresses. While it should be recognized that this growth is dependent on economic recovery as my last article outlined, assuming we continue to see economic expansion for the new few years, I would expect this trend for specialty mattress to continue. Here are my points for the specialty sector:

1. Specialty mattress are like smart phones in the mobile phone industry - The specialty market is established and growing significantly but its overall growth is obscured by the innerspring mattresses. For example, based on ISPA reports, in 2009, specialty mattresses comprised 21.7% of the retail mattress sales in value and 9.6% of the units sold. By the first quarter of 2012 specialty represented 33% of the sales and 13.5% of the units (ISPA at FurnitureToday -. This shift may not sound like much, but in considering consider this report:

U.S. mattress sales rose 0.2% in units, 7.7% in dollars last year David Perry -- Furniture Today, May 15, 2012

ALEXANDRIA, Va. - The U.S. bedding industry recorded just a 0.2% unit sales gain last year but saw a 7.7% jump in the value of wholesale bedding shipments, the International Sleep Products Assn. reported.

In its final report on 2011, the bedding industry's trade association said the specialty sleep segment significantly outperformed the innerspring segment.

Specialty sleep mattress units soared 24.3% last year, while innerspring mattress units recorded a 1.9% decline, ISPA said. The dollar value of specialty mattresses jumped 29.5% last year, compared with a 2.6% gain in the dollar value of innerspring mattresses.

Those strong growth performances gave the specialty sleep segment another year of market share gains. In units, specialty sleep saw its share rise from 11.2% in 2010 to 13.8% last year. In dollars, specialty sleep grew its share from 25.2% in 2010 to 29.4% last year.

So while the overall mattress industry is grew 7.7% in value this was essentially all accomplished by specialty mattresses which grew at nearly 30% whereas innerspring grew at less than 1/10 the rate or 2.6%. This is similar to the mobile phone and smart phone industry. IDC reports the overall mobile phone market is expected to contract in value by 1.4% in 2012 while the smart phone segment grew at 40% plus. Investors are much more aware of the smart phone market as it is 50 to 100 times bigger. Also, specialty mattresses are not visible gadgets like smart phones. Of course I'm not suggesting the mattress industry will ever grow to be similar to the smart phone market. Rather I'm using smart phones to illustrate how a product segment can overtake and redefine a industry and provide an excellent investment opportunity even if the overall industry is growing at a more moderate pace.

2. There are two leaders in specialty mattresses - SCSS and TPX - In 2011, mattress retailer MattressFirm reported that specialty mattresses leaders, Select Comfort (NASDAQ:SCSS) and Tempur-Pedic (NYSE:TPX), had a 16% share of the market (MattressFirm 2011 10-K, pg 6.) My review of the specialty market size shows SCSS with 2011 revenue on a retail basis of $743mm and TPX had North American sales at a wholesale level of $1,004mm. Compared to a 2011 estimated U.S. retail mattress market of $12.5b. MattressFirm 2011 10-K, pg 5 states the 2010 retail market is $11.6b and updating this for the 7.7% growth in value reported in (2) yields a market estimate of $12.5b for 2012 - this represents about 14% of this market. However, SCSS manufacturers and retails its own beds and TPX manufacturers and wholesales their mattresses through other retailers. So the end market sales, adjusting TPX North American sales to retail using a 35% margin, indicates these two specialty companies manufacture mattresses that represent nearly $2.3b in annual sales or 18% of the overall mattress market alone. This suggests the overall specialty segment is closer to 25% to 30% in 2012 share but using the same relationship as the ISPA reports, still about 16% to 18% in units. This validates the specialty sector size, the fact it is currently dominated by two companies allowing for a direct investment play and validates it is early with less than 20% of the units.

3. Specialty mattresses will ultimately expand the overall mattress industry significantly - given average selling prices of these mattresses range from $800 on the low end to $5,000 or more on the high end with foundations and other accessories, one average sale of a specialty mattresses generates two to three times more revenue on average. This is expanding the market and driving strong sales results for both SCSS and TPX. Notice the dramatic growth in revenues each company has reported over the last nearly three years, (which coincides with the current economic recovery):

2009 2012* CAGR

SSCS $544mm $952mm 20.5%

TPX $831mm $1416mm 19.4%

* nine months annualized and within 1% of street expectations

Now it should be acknowledged that while the growth of specialty mattresses may be obscured to many investors, it is not within the industry as many companies have pursued specialty mattresses on their own. Memory foam is a common point of entry for these companies and I believe it is one of the reasons TPX has recently hit an air pocket in its sales when it reported revenues actually declined in Q3'12 by 9%. SCSS on the other hand reported a 24% increase in revenues for the same quarter and 29% for the nine months ended 9/30/12.

4. Specialty mattresses are viewed to be a good investment by the consumer - with an estimated life of 8 to 16 years for a specialty mattress bed, assuming two people and seven hours of sleep per night, the more expensive cost of a high quality specialty bed that might retail for $3500 still works out to 9 cents per hour of sleep per person at the 8 year life and half of that for 16 years. Not really a premium when you consider the importance and impact of sleep and that one spends a total of two to four years over this period actually in bed.

5. Specialty mattresses have not lost their luster - sales are growing at a faster pace in October and November. According to the industry tracking resource, ISPA, monthly comparative sales for these two months grew at a faster pace than the year to date results leading up to each month. This shows the macro economic trends described in my last Seeking Alpha article are intact. The outlook looks good as well - see this recent report :

ISPA forecasts bedding shipment growth of 6.3% in 2013, 8.5% in 2014 David Perry -- Furniture Today, October 26, 2012

ALEXANDRIA, Va. - In its latest forecast, the International Sleep Products Assn. says the dollar value of bedding shipments will increase 6.3% in 2013 and 8.5% in 2014. Bedding units are forecast to grow by 2.3% and 4.5%, respectively, in those years.

This is ISPA's first look at business in 2014 and is a revision of its previous 2013 forecast, which had called for 6.6% dollar growth and 3.4% unit growth next year.

ISPA's Statistics Committee issues the forecasts, which are based on the results of various econometric models that are reviewed and adjusted by the producers and suppliers on the forecast panel.

The panel also issued its final forecast for business this year, projecting a 10.5% gain in the dollar value of bedding shipments, and a 6.5% increase in bedding units.

If that 2012 forecast materializes, the value of mattress shipments will surpass the industry's 2007 dollar value, which has been the historic high.

To summarize, the specialty mattresses are like smart phones. They are both taking over the industry with growth, significantly changing the way we use the product and the benefits provided to the consumer and providing an excellent investment opportunity. One key difference is we are much earlier in the specialty mattress growth with only 13.8% of all mattress units in 2011 and an estimate of 16% in units for 2012. Compare this to smartphones which have a 53% share of the mobile phone market in late 2012.

Source: Specialty Mattress Companies - Revolutionizing The Mattress Industry