Tempur Pedic's Q2: Sales Weakness Spreads to Europe

Tempur Pedic International Inc. (TPX) reported second quarter of 2008 earnings on July 17th after the market close, and held a conference call to discuss the results. Earnings and revenues both declined year over year due to a weak demand environment, but beat street estimates. The stock is up 18% to $10.25.

Although domestic direct retail was the weakest, TPX management said that weakness in sales has spread to some European markets, particularly at the end of the quarter.

TPX also issued revised guidance for 2008:

Net sales – range of $0.98 billion to $1.02 billion.
EPS - range from $1.05 to $1.20 per diluted share.

If the company meets its guidance, it would mean a decrease from 2007 in EPS from 31-39%, and a decrease in revenues from 8-11%.

Financial Highlights

Revenues - $238.7 million.
EPS - $ 0.27 (diluted).
Cash - $68.4 million.
Long-term debt - $ 556 million.
Gross margin - 44.4%.

Management Comments

“In the second quarter, domestic mattress industry trends continued to decline and many international markets continued to weaken, particularly towards the end of the quarter.”

“Industry trends, third party research, and retailer feedback lead us to believe that many premium buyers are deferring high-end mattress purchases. The good news for us is the premium buyers are not trading down to cheaper products.”

“By channel our US direct business continues to be the most severely impacted, down 38%. As we have mentioned before the US direct channel generally serves a lower consumer demographic than our retail channel and direct is more affected by economic slowdowns.”

“Some of our key European markets appear to be impacted by microeconomic factors. While our reported results reflect a 4% increase in sales to $90 million, this is driven by favorable foreign exchange rates. On a constant currency basis our international sales declined 9%.”

“…Costs for raw materials and transportation costs were up as compared to last year.”

Q & A

Are problems more macro or related to competitors?

“More the macro and specifically how the macro environment is impacting price points within the industry…you see the average sale price per mattress continues to go down and as we said, third party research that’s been conducted shows that a large percentage of premium buyers are deferring their purchases.”

Any stabilization in the US in mattresses?

“We did actually a little bit more in total revenue in the second quarter in the US than we did in the first quarter. They were essentially flat quarter-to-quarter so that’s a little bit of a - we feel like that we see stabilization in the business.”

Guidance Assumptions?

“At the low side of our guidance it calls for the international business to get worse…we do expect in the second half the US dollar to strengthen some…so there’s much less currency impact in the back half of the year than there was in the first.”

“Not assuming additional price increases on mattresses...”

“We tried to be conservative as it relates to commodity costs and built additional commodity cost increases into the back half even though we have not received any notice of any pending or coming chemical cost increases.”

Losing floor space within the retail channel to cheaper product as consumers trade down?

“No, we have not lost floor space. Actually we’ve continued to expand the average number of slots in the stores that we’re doing business with…”

Trend in your accounts receivables, your reserves there?

“Accounts receivable aging overall is the same as or actually slightly better than it was a year ago….increased our receivable reserves by $1.5 million even though our agings and our experience didn’t say we had to.”

Stock repurchase?

“We need to be focused on reducing debt to protect the company on the credit agreement. Once we are completely comfortable and feel like things are turning positively, we may reconsider that.”

Read my post from January 2008 on TPX.

Disclosure – I am short this stock.