Tempur Sealy International, Inc. (TPX) Q4 2022 Earnings Call Transcript

Feb. 09, 2023 10:17 AM ETTempur Sealy International, Inc. (TPX)

Tempur Sealy International, Inc. (NYSE:TPX) Q4 2022 Earnings Conference Call February 9, 2023 8:00 AM ET

Company Participants

Lauren Avritt – Investor Relations Manager

Scott Thompson – Chairman, President, and Chief Executive Officer

Bhaskar Rao – Executive Vice President, and Chief Financial Officer

Scott Thompson

Thank you, Lauren. Good morning, everyone, and thank you for joining us on our 2022 fourth quarter and full earnings call. I’ll begin with some highlights from our fourth quarter, and then I will turn to discuss how we delivered on our long-term initiatives. Then Bhaskar will review our fourth quarter financial performance in more detail and discuss our 2022 guidance. Finally, I’ll close with a few comments on how we view the current market environment, then we will open the call up for Q&A.

In the fourth quarter of 2022, net sales were approximately 1.2 billion and adjusted EPS was $0.54. This represents a 36% growth in sales and a 59% growth in adjusted EPS as compared to the fourth quarter of 2019, a pre-COVID period. Compared to the same period last year, this represents a 13% decline in sales and a 39% decline in adjusted EPS as we navigated a weak overall market and experienced robust inflation.

However, we continue to outperform the broader industry by a good bit and enhanced our competitive position. Consistent with our previous quarter, we observed a slight increase in resilience of our premium customers with sales of value focused customers a bit more subdued.

I’d like to begin by highlighting some of the key wins for the quarter. First, as we discussed last quarter, we successfully kicked-off the North America launch of our new collection of Stearns & Foster products, which is designed to further distinguish our high-end traditional Innerspring brand from the numerous mid-market Innerspring brands in marketplace.

Our third-party retail partners have demonstrated their enthusiasm for both the new Stearns & Foster product portfolio and our commitment to supporting the line-up through compelling national brand marketing. This excitement for the new product is reflected in robust year-over-year order trends.

In order to ensure the new product meets our stringent quality requirements, we have extended the launch window in response to a slight component delay. We expect to complete the rollout by Memorial Day holiday selling period. Overall, we remain on track to expand Stearns retail slot by more than 20%.

Turning to our second highlight, our U.S. e-commerce channel performance performed well in the quarter delivering approximately double-digit growth. Our new Stearns & Foster and Sealy e-commerce sites have exceeded our expectation, the greater mix into the more premium SKU assortments resulting in unexpectedly high ASP across both brands.

Our Tempur e-commerce business also delivered solid growth in the quarter, which is especially notable considering a difficult prior year compare. With the recent launch of our new Sealy website, we now have operation to direct-to-consumer websites to the U.S. at each of our leading brands. Our expanded e-commerce presence is a powerful tool that enables us to be closer to the customer, drive [share of voice] [ph] and build on our omnichannel strategy.

For the last five years, we’ve developed a direct relationship with millions of customers, gaining valuable consumer insights and furthering our direct marketing capability. This helps build our long-term customer relationships and drives marketing efficiencies. Moving to ESG, we further our commitment to protect and improve our communities and the environment.

We recently published our 2023 corporate social value report, which is available on our IR website. We are proud of the progress we’ve made in our ESG goals. In the fourth quarter, we achieved our goal of 100% landfill diversion from our U.S. and European manufacturing operations. We also made progress towards our goal of carbon neutrality for our global operations reporting a decrease in emissions per unit.

Before turning the call over to Bhaskar, I want to take a moment to step back and review the progress we’ve made on our long-term initiatives during 2022. Though the year was fluid from a macroeconomic standpoint, we remained focused on positioning the business for long-term success.

Starting with our first key initiative, which is to develop the highest quality products in all the markets we serve. When it comes to product development, our Number 1 objective is to anticipate and react to consumers evolving suite preferences. In early 2022, we made continued progress against this objective through various product launches.

As part of the refresh of our U.S. Sealy Posturepedic portfolio, we launched a new line of premium and hybrid Sealy mattresses featuring improved comfort, superior support, innovative cooling technology. This lineup has truly resonated with our Sealy targeted consumer base.

We leveraged our Sealy brand to tap into new market segments as well. We launched our new Sealy Natural Collection in the second half of the year, constructive or ecofriendly sustainable source material. This collection appeals to environmentally conscious consumers and continues to broaden our customer base. We also launched our Sealy FlexGrid mattress line, which features pressure relieving grid, gel grid, it represents the evolution of the technology in the market today.

With a unique scalable manufacturing approach, we’re able to offer these products at a mid-market retail price. In addition to supporting our 2022 launches, we set the innovation pipeline for 2023 and beyond. Later this quarter in the U.S. we’ll launch an upgraded line of TEMPUR-breeze products and smart adjustable basis.

Then later in the year, we expect to expand the distribution of our TEMPUR ACTIVEbreeze cooling system into select wholesale doors. We expect these launches to further strengthen Tempur’s appeal to the premium wellness minded consumer and drive improved attach rates and strong ASP.

Turning to our International group. Beginning this quarter, we’ll undertake the largest international product roll-out in the company’s history, reaching more than 90 markets worldwide. This new lineup of mattresses, pillows, and bed basis has been strategically designed to drive addressable market expansion of Tempur products. The launch is phased over multiple quarters to allow for the customization by region.

Finally, I would point out that our investment in Silicon Valley sleep tech started bright, our partnership with Sleep Data Company, full power technology, and our industry leading R&D team will ensure Tempur Sealy remains at the forefront of sleep innovation. As evidence of our commitment to product quality innovation, our leading brands received a number of recognitions throughout the year.

Notably, Tempur-Pedic ranked Number 1 in customer satisfaction among mattress brands in the J.D. Power 2022 Report for the fourth year in a row for retail mattress category. And for the second year in a row, ranked Number 1 in the online mattress category. A true testament to the customers’ trust of our brand and products.

Turning to our second initiative, which is to promote our brands with compelling marketing worldwide. We supported our brand and products with a record marketing investment of approximately $450 million this year. In addition to generating strong near-term returns and driving outperformance relative to the broader bedding market, these investments also serve to seed the market for our 2023 product launches.

Sealy and Tempur continue to be the Number 1 and Number 2 best-selling mattress brands in America and among the most highly recommended, recognized, and desirable brands in the industry with 95% of shoppers aware of at least one of the TSI brands. In 2022, we leaned into the untapped potential of our Stearns & Foster brand by doubling our presence on national television.

In addition to contributing to growth and awareness and consideration for Stearns, these marketing investments grew our retail support, which combined with the new product lineup is reflected in a significant increase in placements. Our investments in product, brand, and channel successfully drove Stearns & Foster’s website traffic and sales growth in 2022, making clear progress to our goals to make Stearns & Foster our third billion dollar brand.

Last year, we also ceded the market for upcoming international launch with strategic marketing investments in store sales programs and e-commerce initiatives worldwide. Our third initiative is to optimize our powerful omni distribution platform. Evolved, our global omnichannel present in-step with consumer preferences to be wherever they wanted to shop.

The largest pillar in our omnichannel distribution strategy is our more than 26,000 third-party retail doors. This broad footprint ensures that consumers can easily find and experience our products in person. Now, we’re well represented in third-party retailers in the U.S. today. There are opportunities both to increase our balance this year with existing retail partners and to sell to certain retailers who do not currently retail Tempur Sealy products.

Turning to our OEM operations. While we entered the space only a few years ago in 2020, we made significant progress in growing our operations, both within our Sherwood private label Innerspring business and our foam-pouring business. In 2022, we delivered significant growth in our OEM operations as we continued, to charge towards our target of 600 million in OEM sales.

Note that OEM sales growth will decrease the cost per unit for all of our branded products as we spread our fixed cost and drive more advantageous supply agreements on the enhanced volume. In addition to growing our wholesale and OEM business, we are now running in excess of [$1 billion] [ph] in annual sales in our global direct-to-consumer business with a robust five-year compound annual growth rate of over 40%.

Regarding our direct retail store operations, we opened 50 retail stores in 2022 and currently operate over 700 brick-and-mortar storefronts around the world. Our retail network is comprised of both wholly-owned and joint venture locations led by over 200 Tempur retail and multi-branded fleet outfitter stores in the U.S., and are more than 200 Dreams locations in the UK.

In total, including the e-commerce sales they facilitate, our company-owned stores generate an average sale of $2 million per location with the U.S.-based Tempur retail stores averaging a robust $4 million for sales per location. Finally, I should note that in aggregate our U.S. web has grown at a compounded annual growth rate of over 25% since 2017. Our fourth and final key initiative is to drive increased EPS through operational execution and prudent capital deployment.

In 2022, we generated full-year adjusted EPS of $2.66. This represents a five-year compound annual growth rate of 26%. We executed on our balanced capital allocation strategy to return value to shareholders. We allocated approximately $1 billion in capital. First, we reinvested over 300 million in operations. This includes a one-time investment to stand-up our new foam-pouring plant in Crawfordsville, Indiana which is expected to commence operation in 2023, enhancing our ability to service our customers by ensuring product availability to meet increase demand in the premium sector, creating shorter lead times, and reduced per unit logistics cost in the Northeast market.

Second, we invested 10 million in Bright, a technology based mattress company with differentiated new product offering targeted at a different premium customer than we currently serve today. Third, we invested over 665 million in share repurchase to buy back approximately 10% of our shares outstanding at an average price of $33 a share. And finally, we paid $70 million in cash dividend. I should note we announced today a 10% increase in our quarterly dividend bringing it to $0.11 per share.

I’d be remiss if I didn’t mention our ERP transition, which will play a critical part in our ability to deliver on all of our long-term objectives. In 2022, we completed the multi-year journey of transitioning more than 50 of our global subsidiaries from using five different ERP systems into one common system. This investment in consolidating our operations expected to drive long-term efficiencies across our global operations, enhance cyber security, facilitate customer communications regarding order status, and improve our direct-to-consumer capabilities.

Bhaskar Rao

Thank you, Scott. In the fourth quarter of 2022, consolidated sales were approximately $1.2 billion and adjusted earnings per share was $0.54. We had $10 million of pro forma adjustments this quarter, all of which are consistent with the terms of our senior credit facility. Turning to North American results. Net sales decreased 12% in the fourth quarter. On a reported basis, the wholesale channel decreased 13% and the direct channel decreased 5%.

Early indications are that we outperformed the market. When looking at our sales growth, please note our fourth quarter of 2021 was significantly benefited by a Tempur-Pedic backlog reduction of $100 million. North American adjusted gross profit margin declined to 37.9%, primarily driven by operational headwinds and mix related to the prior year Tempur-Pedic backlog reduction, partially offset by pricing actions.

The backlog reduction in the prior year accounted for approximately half of the margin decline. North American adjusted operating margin declined to 15.1%, driven by the decline in gross margin and operating expense deleverage.

Curtis Nagle

Good morning. Thanks very much. Kind of my last question in terms of just breaking out the sales guidance. I think we’re a little better than expected, so that’s good. Maybe just dig a little more into the U.S., Scott over the past, I don’t know, 3 months or 4 months, we’ve been talking about stabilization, right, in the U.S. which sort of started in 4Q. Through where we are right now has that continued? Could we talk a little bit in terms of just how the U.S. is trending at the moment and how you’re feeling about that?

Scott Thompson

Well, I mean, as of 8:00 A.M., I can tell you how we’re doing. Look, it’s very stable. I mean, it feels like from a trend standpoint we’re getting off, we’ll call the COVID trend of people shopping more during the week than they used to and less on the weekend. It’s moved back to more traditional shopping with more shopping on the weekend than during the week. One of the other trends that we saw during COVID was that the holiday periods were not quite as robust and the business was steadier through the calendar.

And now we’re going back to what I think is more of the historical pattern where the trough is a real trough and the peaks are real peaks, i.e. the holiday periods become critical for the industry. But all that would be, what I would call normal, getting back stable. And look, I think our volumes – we haven’t seen anything since year-end that would make us think the industry is anything, but at least stable. And I’ll add that I haven’t seen anything that makes me think that we won’t continue to take a reasonable amount of share in 2023.

Jonathan Matuszewski

Great. Thanks so much for taking my question. I had a question on the competitive landscape. Your largest competitor recently filed for bankruptcy a couple of weeks ago. Just curious if you could give us a sense of how conversations with your retail partners have looked since this news broke and how are conversations progressing regarding potential slot gains for the TSI brand? Thanks so much.

Scott Thompson

Yes. Thanks for the question. Look, I don’t think that particular news was shocking to the industry, I think it was well telegraphed and expected. So, I don’t think it’s fundamentally changed the discussions with our retailers. What the retailers care about is quality products, support with advertising and those kind of items.

I think our chief competitor has strong brands and is a hard, tough competitor. But we continue to work aggressively with our retailers. So, I don’t think the actual filing changed very much in most retailers mines, as long as they provide quality products and service in the marketplace.

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