Tempur Sealy International, Inc. (TPX) Q3 2023 Earnings Call Transcript

Nov. 02, 2023 11:17 AM ETTempur Sealy International, Inc. (TPX)1 Comment

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Q3: 2023-11-02 Earnings Summary

EPS of $0.66 misses by $0.17 | Revenue of $1.28B (-0.48% Y/Y) misses by $25.12M

Tempur Sealy International, Inc. (NYSE:TPX) Q3 2023 Earnings Conference Call November 2, 2023 8:00 AM ET

Company Participants

Aubrey Moore – VP, IR

Scott L. Thompson – Chairman, CEO & President

Bhaskar Rao – EVP & CFO

Scott L. Thompson

Thanks Aubrey. Good morning everyone and thank you for joining us on our 2023 third quarter earnings call. I will start by sharing some highlights for my third quarter performance and then Bhaskar will review our financial performance in more detail. After that I will provide an update on a proposed acquisition of Mattress Firm before opening up the call for Q&A. Today we are reporting the third best third quarter sales and ETF in the company’s history. For the third quarter of 2023, we reported net sales of approximately 1.3 billion and adjusted EPS of $0.77. Our results are approximately consistent with the third quarter of last year despite a more challenging macroeconomic operating background.

The U.S. betting industry as a whole underperformed our expectations with estimated volume down low double-digits in the quarter. We mitigated the impact of the softer than expected U.S. market with solid company performance that exceeded our expectations on both a relative market performance and year-over-year gross margin expansion. Internationally, the betting industry and our operations performed in line with our expectations. Overall, despite down markets and the disruption of a major cyber security incident in the third quarter, our strong relative performance and cash flow generation demonstrate strong — strength of our brands, operations, and team. We believe Tempur Sealy is well positioned for continued success.

Turning to highlights for the quarter. First, our industry leading brands and products continue to resonate with the U.S. consumer, driving our strong performance relative to the broader market. All of our new Tempur products and supporting advertising initiatives has strengthened Tempur’s appeal to the premium, relative minded consumer. The incremental cooling and comfort innovation of our new lineup of breeze mattresses generate robust retail advocacy and favorable mix in the quarter compared to the prior year. The lumbar feature acoustic massage, the wake up and wind down technologies, and our new smart based lineup continue to strengthen the value proposition of our adjustable offering driving an improvement in detachment rates year-over-year. These innovations drove a 5% increase in Tempur Mattress and Foundation ASP in the third quarter. Looking ahead to 2024, we expect to complete the full refresh of our U.S. Tempur portfolio by introducing our next generation of adapter products. We expect strong returns on investment and our new products for years to come.

Over the quarter we continued to support our new Tempur products and along from health of our Tempur brands with continued investments in national and digital Tempur-Pedic advertising. These marketing investments support very solid e-commerce performance and drove an increase in US Tempur search interest year-over-year. Our strategic investment and product distribution and marketing also continue to drive strong performance and expand brand awareness of Stearns & Foster in the U.S. market. We completed the roll out of our all new Stearns & Foster mattress collection earlier this year. We continue to see these new products connecting with the premium traditional inner spring consumer driving sales growth year-over-year. The consumer centric innovation, elevated design, and pants step up opportunities are resonating with premium inner spring customer. We are thrilled that our high end products are performing well and the ASP of Stearns & Foster product is up double-digit from last year. Additionally, Stearns & Foster’s search interest and e-commerce traffic were up 50% this year. Clearly our multiyear strategy for Stearns & Foster is working well for us and our retailers.

Second highlight, our international operation is performing well and driving solid sales growth amid the current macro backdrop. We successfully launched our new international Tempur lineup in over 90 markets worldwide including the rollout in nearly all the key markets in Europe and Asia. The launch is on track and will be substantially completed before the end of the year. The new products are being well received. Additionally, Dreams our UK retail operation is also performing well in both sales outperforming versus the broader market and has a record customer satisfaction. This quarter performance demonstrates the strength of our international strategy and pain [ph], highlighting the long-term opportunity for the international operations.

Third, we choose significant consolidated growth margin expansion year-over-year, and are progressing towards normalized margins. After multiple years of COVID overhang, rapid inflation, macroeconomic disruption, pressured margins for a while, we are pleased to report 340 basis point improvement to consolidated adjusted gross margin year-over-year thanks to the successful management of commodity fluctuations, improved supplier contracts, and operational improvements. This is a significant step towards driving profitability, which the team remains laser focus on achieving. The growth driver of our gross margin improvement is our ability to pass on pricing to offset commodity inflation. As you may recall we experienced approximately 400 basis points of margin compression between 2020 and 2022. This commodity price has increased at a historical pace. Now that pricing changes have been implemented, the commodity prices have started to normalize. You can see the positive results in our reported financial statements. Additionally, we’re optimistic that our scale in the market and our new product innovations would drive further gross margin expansion.

Bhaskar Rao

Thank you, Scott. In the third quarter of 2023, consolidated sales were approximately $1.3 billion and adjusted earnings per share was $0.77. While these results were slightly below our expectations, we believe we continue to outperform our competitive set in a challenging market. We have approximately $32 million of Pro Forma adjustments in the quarter, all of which are consistent with the terms of our senior credit facility. These adjustments are primarily related to cost incurred in connection with the planned acquisition of Mattress Firm and the previously disclosed cyber event.

Turning to North American results. Net sales declined 3% in the third quarter. On a reported basis the wholesale channel declined 4% and the direct channel declined 1%. North American adjusted gross margin improved a very robust 300 basis points to 43.2% driven by favorable commodities and operational efficiencies partially offset by deleverage. North American adjusted operating margin improved 50 bps to 20.3% driven by improvement in gross margins partially offset by investments in growth initiatives.

Now turning to international. International net sales increased a very solid 12% on a reported basis and 7% on a constant currency basis. As compared to the prior year, our international gross margin improved a robust 320 basis points to 56.6% driven by commodities, mix, and favorable leverage. Our international adjusted operating margin improved a 150 basis points to 16.2% driven by improvements in gross margin partially offset by investments. Global commodity prices continued to brand largely in line with our expectations. We continue to expect favorable commodity prices for the remainder of the year, though remaining significantly elevated from 2020 levels. In addition to the benefit of favorable commodity markets we assigned multiple agreements with certain global suppliers who have recognized our scale momentum. These relationships will benefit our gross margins over the long-term

Scott L. Thompson

Thanks. Nice job, Bhaskar. Before opening up the call for questions let me provide a brief update on our pending acquisition of Mattress Firm. Consistent with our expectations we’re currently responding to the Federal Trade Commission’s robust second request, which we expect to complete in the fourth quarter of 2023. We continue to expect the transactions to close in mid to late 2024. We continue to work closely with Mattress Firm’s leadership team. We received high level updates on numerous topics, including their financial performance. Mattress Firm has an October 3 fiscal year end and will report their physical results when their audit is complete, most likely in early December. The preliminary results are in line with our expectations.

Finally, I’m pleased to share that Tempur Sealy and Mattress Firm continue to make joint progress in planning for post-closing, including solidifying key supplier relations ahead of the expected close. Since announcing the acquisition in May Tempur Sealy has signed numerous post-closing supply agreements with existing Mattress Firm suppliers and one supply agreement for the company not currently supplying Mattress Firm. These contracts are consistent with our expectation for Mattress Firm to continue as a multi branded retailer post-closing. A few additional discussions regarding supplier relations are ongoing.

In summary, our progress towards the transaction close is on track and we look forward to joining with the Mattress Firm team. And with that, I’ll open up the call for questions. Operator.

Susan Maklari

Thank you. Good morning, everyone. Scott, why don’t we start by talking a bit about the demand environment. I think that, obviously things felt a little softer in the quarter than maybe some had anticipated and appreciating the color you gave in your comments. But, can you talk a bit more about how things trended during the quarter, any sort of anything of note in there, and how you’re thinking about the business as we progress through the balance of this year?

Scott L. Thompson

Sure. Thanks for your question, Susan. I mean, first of all, let’s not overlook that the international team had good solid growth in the quarter. And I think your question is really more directed towards North America. And then to kind of streamline your question even further, our Mexico operations had a great quarter and Canada was solid. So kind of ratcheted down our largest market, which is where your question is really focused is the U.S. market. As far as how that quarter progressed, the same trends that I think we talked about probably in the second quarter we saw in the third quarter, which is in non-holiday periods, the troughs had gotten deeper and then during holiday periods, we’re seeing growth in the market. But the holiday periods haven’t been strong enough to offset the trough. So that would be we’ll call that in quarter kind of trend. That’s the same trend that we would expect in the fourth quarter. It continues to be what I’d call the normalization of the seasonality that the business used to incur before COVID with maybe slightly deeper troughs, and slightly higher peaks during the holiday period.

I think you also kind of asked in general, just like demand. I mean, I think as you well know, the industry has been — from a unit standpoint has been in decline for nine quarters, making it where we currently are sitting at great recession kind of volumes in the industry that we’re working through and ensure some of that has to do with slowdown in the general economy. And we’re talking U.S. here and wallet shift. There’s probably some minor pullback, a pull forward from COVID. Although we’ve never really thought that that was a big number. I think the biggest thing that the industry is working through is really advertising. And, as you know, we’ve got a lot of smart people, a lot of analytics that go on to look at advertising both ours and the effectiveness of it, what goes on in the industry. And in looking at it as we tried to understand why the industry is having such a tough slug compared to historical volumes that were offered trend lines.

If you look at it manufacturer advertising over the last three years is down 40%. And if you look at the retailer’s, their advertising is down 20%. And yeah, that’s an issue. But I think probably a bigger issue is when you dive into that reduced advertising and you look at the mix of what people are doing both from a manufacturing standpoint and a retailer standpoint. They’ve moved from top of funnel advertising over the last three years to the bottom of the funnel. The manufacturers have moved about 40% of their advertising from the top of the funnel to the bottom. And retailers have also moved probably 40% to 40% plus of their advertising from the top of the funnel to the bottom of the funnel.

So what’s that mean? That means we’re not putting enough customers in the funnel triggering, they’re thinking about mattresses, and we’re all kind of fighting for the few customers that happen to trip into the funnel is what’s going on in the industry. If you play with the math, that means total top funnel advertising for manufacturers is down 64% when you include the decline in advertising plus the mix change. And for retailers, it’s down 44%. That is an enormous amount of advertising dollars taken off the top of the funnel. And I think that’s the big problem in traffic. I think that’s actually the bigger issue than share of wallet and other things that people like to talk about.

Now from our standpoint, we continue to support the industry as a manufacturer and in our advertising expense we have not cut. So with us not cutting, you can see the other ad manufacturers are clearly not helping pull the funnel forward. We have moved some to the bottom of the funnel and we’re looking at that. And what we’re doing to help kind of get the industry back on track is we’re working with other retailers and major retailers, walking them through some of this analysis, talking to them about it. And it’s resonating with them. And some of the large retailers are really looking at their advertising mix in dollar amount.

Jason Haas

Hey, good morning, and thanks for taking my question. Scott, in light of your comments to a previous question, I’m curious if you could say what you think is needed for the industry to get back to more normalized unit levels, do you think we need to see a pickup in industry advertising, do we need to see more housing turnover, is it just going to take time, what do you think is key to get there?

Scott L. Thompson

Yeah, I think we all fell in love with low funnel advertising. And some others pulled back on their advertising hoping to draft on other people. I think the bedding is an industry that you have to trigger the customer to think about. People don’t wake up one day and say let’s go buy a bunch of beds and the industry is very successful when it advertises. And so I think it’s primarily a lack of advertising by people and probably a little bit of a mixed fine tuning. I think I would also point to if you look at what Tempur Sealy has done, I mean, look, it’s not any secret. We’ve gathered a lot of market share and you can see that in our Stearns & Foster product where we’ve done higher than historical advertising dollars in there. So we’ve proven that advertising works. Yeah, the product is great, sales team is great but you got to have the advertising in there. And so yeah, I think advertising is the key. You’ll hear retailers talk about traffic and that is the issue and everybody needs to get back to working a little bit on the top funnel and getting people in the funnel rather than waiting till the last minute grab them off their purchase journey at the end. Things like manufacturers slot mind are doing spiffs those kinds of dollar investments are all just fighting over the customers in the marketplace and aren’t productive. And they really aren’t something that Tempur Sealy is done. We’ve had some other manufacturers try to work that angle.

Brad Thomas

Hey, thanks, good morning. Scott, was hoping I could get a little bit of your kind of first blush on how you’re thinking about the industry as you look out to 2024. Obviously, some of the leading indicators of the health of the consumer like ramping student loan payments could be a headwind, obviously interest rates are going higher. Housing has been slower. So curious, your early take on 2024 and if the industry stays challenge, can you help us think about how Tempur might change strategy if at all in that kind of environment? Thanks.

Scott L. Thompson

And we certainly see and agree that there are some headwinds in 2024 and don’t want to underestimate those or let you think that we’ve got our head in the sand. Those are those are all good points of why the macro, there should be some headwinds in there. But if you look at the industry, we’re already so far on the bottom from historical standpoint that I think that we probably are in good shape. I think some of this is self-inflicted from our execution of an industry standpoint on advertising. So I’ve used the term bouncing around the bottom. Probably the industry took a little bit of a step down, probably bounced a little further down in the bottom. But I think you either get in 2024 bouncing around the bottom or you get this slow recovery that we’ve been looking for in the industry. What that means for Tempur Sealy, I see nothing going on in the marketplace that would make me think that we would not continue to take market share. And so without I don’t know what 2024 looks like yet, we haven’t finished our budgeting. But I think even if it’s we’ll call it a softer overall market, I think more market share gains will help offset issues there. And then as I mentioned earlier on the call, we’ve got some internal issues that we’re in control of from a cost standpoint, that I think give us some optimism, as to we’ll call it EPS, when you get down there. Top line is going to be a little more volatile to look at but I think we feel relatively comfortable going into 2024 with more details coming when it’s appropriate.

Carla Casella

Hi, thank you for taking the question. You commented on commodities and how they’re improving or normalizing a bit but there’s still some that are well above the pandemic. Can you just break it down a little bit in terms of what some of the key commodities that you’re seeing?

Scott L. Thompson

Absolutely. So the way I think about that is just from a framing standpoint is that we indicated historically that we’ve been able to cover the cost of the commodity inflation through taking price however, from a mathematical standpoint that created a margin, meaning the math issue approximately 400 basis points. So sitting here today, we think there is still about half of that to go. The way I think about from a commodity overall standpoint, it’s really puts and takes. Everything is definitely off its peaks and whether that be chemicals, lumber, steel, etc. However, if you look at where we started this journey, there’s still a way, there’s still a way to go. However, commodities in and of itself is not the story. It is that there’s also another component of that story, which is we continue to work with our suppliers, our major suppliers to make sure that they understand the potential from a company standpoint and the momentum that we have. So yes, we’ve seen some tailwinds from commodities over the last couple of bps. However, what we’ve also done is we’ve entered into very constructive win-win contracts and relationships with our existing suppliers to ensure that the gift keeps on giving not only from a commodity standpoint but as a relationship, strategic relationship to see benefits from an EBITDA standpoint.

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