Tempur Sealy Comments
Scott L. Thompson – Tempur Sealy International, Inc.
Thank you, Aubrey. Good morning, and thank you for joining us on our 2018 first quarter earnings call. In a few minutes Bhaskar will review our quarterly financial performance with you in detail. I would like to reflect on the progress the team has made in resetting the foundation of the company following the termination of our supply agreement with Mattress Firm approximately a year ago. I’m very proud of what’s been accomplished as an organization in the face of an unexpected challenge.
While there’s still more work to be done, I’d like to highlight four key items. First highlight is that we are making progress balancing our distribution model. Our primary focus will always be third-party retail distribution as the vast majority of consumers still prefer to try out mattresses in well-run local stores before purchasing. However, with the termination of our supply agreement with Mattress Firm, our domestic doors declined by 3,500 locations, leaving us gaps in our retail network. We have worked to address this issue in two ways. First, we’ve bolstered our relationship with supportive retail partners and those retailers are enjoying success with higher ASP and strong closing rates.
Second, we’ve begun to fill some of the more significant gaps in our retail network by selectively opening our own stores. This quarter, we opened 16 new Tempur-Pedic stores, bringing our total North American store count up to 29 at the end of the quarter.
These stores are performing ahead of expectations. And based on our early analysis, we believe they are generating incremental sales and likely increasing Tempur-Pedic’s brand awareness in the local market, which should aid all retailers. As I have mentioned before, each of these high-touch customer-focused stores are designed to have about the same economics to us as 20 Mattress Firm stores.
Additionally, as certain consumers prefer to shop from home, we continue to be focused on enhancing our online business to enable us to be everywhere customers want to shop. As Bhaskar will highlight in a minute, the result of our efforts in North America drove a 29% growth rate in our direct-to-consumer business.
Today, we have a more balanced distribution footprint in North America than we did 12 months ago, led by a diversified group of strong retail partners and support by a growing direct business. While I’m pleased with our initial progress on managing this balanced omni-channel approach, this transformation doesn’t happen overnight and we still have ways to go.
The second highlight is that we have meaningfully enhanced our product portfolio in North America, further elevating our brands in the marketplace. Our new Sealy Hybrid line has been successfully launched and very well received by our retail partners. It is performing above our expectations.
In recent weeks, we have begun to roll out our entirely new Tempur-Pedic bedding system, including the Adapt and the ProAdapt mattresses, a refreshed line of pillows, and a home and family of adjustable bases. As a reminder, the Adapt and ProAdapt models represent the first phase of our all new Tempur mattress rollout, with the new premium models set to be introduced in late 2018 or early 2019. The new Tempur-Pedic products have been well received by our retail partners and to-date, orders have been strong and in line with our expectation.
The third highlight is the solid growth we have seen in our international business. International sales grew 17%, and on a constant currency basis, 8%. We realized growth on a constant currency basis in all three major geographic areas: Europe, Asia-Pacific, and Latin America. As a reminder, in 2017, we launched new Tempur-Pedic products internationally. Our growth this year has been driven by the success of the 2017 rollout.
The fourth and final highlight I’d like to cover, the resilience of our gross margin. This quarter, our gross margins were meaningfully impacted, as compared to first quarter last year by the operating deleverage associated with the termination of Mattress Firm business, which was heavily weighted towards higher-margin Tempur-Pedic products.
We also absorbed $12 million of commodity cost inflation during the quarter as our price increase did not take effect until mid-March. Despite these significant headwinds, our gross margins were consistent with the first quarter last year.
With the Mattress Firm comparison period behind us, and our new Tempur-Pedic product launching, we expect to drive EBITDA growth in future quarters.
While it’s been a challenging 12 months for the team, we have put our company on a stronger footing with a diversified third-party retailer base, a rapidly growing direct-to-consumer business, and enhanced product portfolio. We believe that supporting our strong portfolio of brands with significant advertising spend, properly servicing customers, launching innovative products, manufacturing them effectively, and making them available where the consumers want to shop is a winning strategy and the path to creating meaningful shareholder value over the long term.
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