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Summary

  • Shares of Tempur Sealy sold off after the company’s earnings report came in weaker than expected.
  • I still see Tempur Sealy as the best bet for investors in the mattress space.
  • I said in my earlier article that an increase in marketing spending would crimp margins and earnings and that 2014 would be a transition year.

Tempur Sealy International (NYSE:TPX) reported Q2 earnings of $0.39, which missed estimates by $0.02, but were $0.03 higher than last year. Revenues grew 8.2% y/y to $715 million and were $11.7 million higher than expected. Tempur Sealy saw sales increase at all three of its divisions. Overall gross margin declined to 37.5% from 38.6% last year due to an increase in marketing spending and the rollout of new products.

Of its three business segments, the best performer in Q2 was North America. North America sales increased 10.1% to $237.3 million. The next best performer was the international segment with a 9% increase in sales. The one negative in the international market was that Tempur Sealy's Central European market remains weak. The third segment is Sealy, which saw a 6.8% increase in sales to $368.2 million. The Sealy division is the company's largest segment in terms of revenues.

Tempur Sealy issued guidance and expects to earn $2.60 to $2.85 per share for all of 2014. In my article back in February, I forecast Tempur Sealy to earn $2.76 this year. So I'm right in the middle of the company's projection. Even though shares sold off 10% after earnings, they're still up over 13% since my February article. CEO Mark Sarvary expects "significant margin improvement for the balance of the year" now that the new products have been rolled out. For this reason, I expect shares to rebound from the earnings selloff and see this as a dip that can be bought.

Disclosure: The author is long TPX. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Update: Tempur Sealy International Earnings