Tempur Sealy: Money Under The Mattress - Part 2

| About: Tempur Sealy (TPX)

Summary

Consolidated gross margin YoY expansion of 250 bps, driven by 340 bps expansion in North America adjusted gross margin.

Increased EBITDA guidance.

Conversation with TPX CFO.

Please see the attached PDF for the full research.

Since we published our initial research note in June 2016 recommending investors buy Tempur Sealy International (NYSE:TPX) below $57 per share, the shares are up nearly 30%, driven by an increase in adjusted earnings of 12% and an increase in the LTM Adj. P/E multiple of 18%

The significant increase in the P/E multiple highlights incremental risk. However, given TPX's consistent ability to raise average selling prices, the opportunity for NA Industry volume expansion, ongoing cost improvements, and the allocation of capital to share repurchases with implied minimum IRR targets of 10%, we recommend holding TPX shares and buying, should it fall below $57 per share.

Consolidated gross margin YoY expansion of 250 bps, driven by 340 bps expansion in North America adjusted gross margin. "4 Wall Margin" increases by 200 bps, with upside going forward. Consolidated TPX gross margin of 41.9% at the highest level since Q1 2013 (pre-Sealy).

Net Leverage at 3.2x consistent with Q1 despite incremental $200 million of share repurchases during the quarter.

Management updated the low end of the 2016 EBITDA guidance from $500 million to $525 million, while keeping the top end at $550 million.

Despite new international TPX stores yielding double-digit growth and internet sales growing 40%, TPX board and executives continue to highlight share repurchases drive the highest yield (or return on invested capital). Assuming the company continues to repurchase shares at a price over $76, the minimum TPX share price in 12 months should be $84.

We spoke with the TPX CFO Mr. Barry Hytinen and include a full Q&A section below. In brief, the CFO highlighted significant potential margin improvements due to current underutilization rates.

We visited the new Casper pop-up store in Venice, California (LA). The store is located on a prime commercial real estate location, with monthly rent expense estimated to be over $30,000. Why is a low-cost mattress company located on one of the hippest and most expensive streets in LA?

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.