Second Quarter Results
Tempur-Pedic reported second quarter earnings of $29.1 million, or $0.45 per share, compared to $0.76 per share in the second quarter of 2011. Earnings also beat the analysts consensus of $0.38 per share, after the company warned for disappointing results a month ago. Revenues fell 4% on the year to $329.5 million, or 1% on a constant currency basis. Revenues came in slightly ahead of analysts consensus of $327.5 million. North American sales fell 8% on the year while international markets reported 8% revenue growth. On a constant currency basis international revenue growth came in at 17%.
Gross margins fell 220 basis points to 50.7% as a result of increased promotions and discounts. Operating margins fell from 24.2% to 14.4% as a result of deleveraging through the income statement.
CEO Sarvary commented:
Changes in the competitive environment in North America during the second quarter had an adverse impact on our performance. We are taking actions across our operations to realign our expense structure appropriately. At the same time, we are focused on a series of new initiatives designed to strengthen our competitive position.
The company repurchased 4.9 million shares throughout the second quarter, for a total cost of $138 million. The average repurchase price came in around $28 per share and the company has $100 million remaining under its current authorization.
Mattress sales fell 4% in total, driven by a 8% decrease in North America and an 11% increase in the international segment. On a constant currency basis, international revenue growth came in at 20%. Pillow sales fell 2% in total, driven by a 10% decrease in North America and a 5% increase in the international segment. On a constant currency basis, international growth increased 12%.
The company maintains its full year outlook for 2012. Net sales are expected to come in around $1.43 billion. The company expects to earn approximately $2.80 per share for the full year. Earnings per share could come in on the high side as a result of more share buybacks.
Tempur Pedic ended the second quarter with $134 million in cash and equivalents and operates with $681 million in short- and long-term debt for a net debt position of around $547 million. The company generated $714 million in revenues for the first six months of 2012, on which it generated net profits of $85 million, or $1.31 per share. As such, the company is on track to generate $1.4 billion in annual revenues and profits of $180 million. This values Tempur at 1.3 times annual revenues and 10-11 times annual earnings.
The valuation multiple compares to a revenue multiple of 2.0 times for competitor Select Comfort Corp (SCSS), which trades at 20 times annual earnings.
Tempur currently does not pay a dividend.
Shares of Tempur-Pedic have seen a disastrous year, trading down 50% year to date, after peaking at $87 in April of this year. Intense competition in North America and a strong U.S. dollar are impacting results. I recently picked up some shares around the $22 level, as the market offered shares in this quality consumer brand at a 75% discount compared to their levels in April.
Shares are likely to trade around $30 in Wednesday's trading session, valuing the firm at merely 10 times 2012's expected annual earnings. I think this is a fairly cheap valuation for a premium consumer brand. For now, the situation seems under control given the reiteration of the full year guidance and the slight beat on lowered expectations. Given the strong performance internationally and the fact that the company is aggressively addressing its problems, I remain a holder of the stock.
I see further upside towards $40 per share in the medium-term.