Tempur Sealy International, Inc. (TPX) Q1 2024 Earnings Call Transcript

May 07, 2024 10:29 AM ETTempur Sealy International, Inc. (TPX) Stock

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Tempur Sealy International, Inc. (NYSE:TPX) Q1 2024 Earnings Conference Call May 7, 2024 8:00 AM ET

Company Participants

Aubrey Moore – Investor Relations
Scott Thompson – Chairman, President & Chief Executive Officer
Bhaskar Rao – Executive Vice President & Chief Financial Officer

Scott Thompson

Thank you, Aubrey. Good morning, everyone, and thank you for joining us on our first quarter 2024 earnings call. I’ll begin with some highlights from the quarter and then turn the call over to Bhaskar to review our financial performance in more detail. After that, I’ll provide an update on our proposed acquisition of Mattress Firm, which we expect to close by the end of the year. Lastly, I’ll open up the call for Q&A.

In the first quarter, net sales were approximately $1.2 billion, and adjusted EPS was $0.50. Our adjusted EBITDA was $198 million, consistent with the same period last year. These results are evidence of our strong competitive position in the market.

Turning to a few highlights. First, we continue to develop and launch high-quality bedding products in all the markets we serve. We are actively refreshing our US Tempur portfolio with our latest Adapt products. These products are designed to address the fundamental consumer need, alleviating aches and pains. They feature our most innovative Tempur material and are engineered to provide an impressive 20% improvement in pressure relief compared to standard material.

When our mattresses are combined with our proven range of smart adjustable basis, the result is a comprehensive advanced sleep system. The rollout of over 60,000 Adapt mattresses to retailers is on schedule and we expect to be substantially rolled out by Memorial Day.\

Early reports from our third-party retailers and our direct-to-consumer operations are strong. We also, to select national retailers, recently rolled out Active Breeze, our most customizable heating and cooling sleep system, priced at approximately $10,000 for queen and base set. This system caters to the discerning ultra-luxury consumer seeking cutting-edge sleep solutions, offering both active climate management and the benefits of Sleep Tracker AI.

Our third party retailers and our company-owned Tempur stores are reporting that the presence of this product on the showroom floors generates a halo effect propelling interest towards the top-tier offering of our Tempur lineup.

Although, still early in the rollout when bundled with additional products, the ACTIVEbreeze is driving some tickets upward of $20,000, while we anticipate modest sales volume for this ultra-premium product, it’s significant live in the elevating the brand perception and foreshadowing the future of bedding innovation.

Please note that even with challenges like reduced brick-and-mortar retail traffic our innovative products are driving momentum in the category.

Excluding the impact of floor models, our US average mattress sales prices across all brand products increased mid-single-digits and our attach rate increased double-digits year-over-year, demonstrating the consumers’ willingness to spend on innovative quality products designed to provide better night sleep.

New products are also building momentum in our International business. Our new product collection features consumer-centric innovation and an expanded price range that meets the needs of a broader spectrum of customers. In the first quarter, we executed the launch of our all-new Tempur mattresses bed bases and pillows in the UK and are now fully rolled out worldwide.

We also optimized the new Tempur mattress beds construction to facilitate a higher level of customization while streamlining the manufacturing process, allowing us to effectively meet the unique demands of consumers across various markets and channels.

Second highlight, we invested in compelling marketing to support our brands and products. We continue to be balanced with our media strategy focusing both on broad-based and targeted digital outlets to meet consumers throughout their purchase journey. In North America, we developed new creative design to drive consumers’ interest in the category and our recently launched Tempur products.

In the first quarter, we introduced a new ad focused on the Tempur-Pedic Ergo ProSmart base and its exclusive SoundScape mode feature, which delivers an immersive relaxation experience designed to help people who have trouble following sleep. These ads are already resonating with consumers in driving attach rate and ASP expansion for our retail partners.

In the second quarter, we continue to support these lineups with our new targeted TV spots and digital assets focused on illustrating how the Adapt collection provides a solution to one of the leading barriers to quality sleep, aches and pains. Our consumer research shows that these new assets are our highest scoring ads to-date and we’re excited to put this new content into the market.

We also continue to invest in advertising to support our Stearns & Foster products with engaging messages that reinforces the superior comfort, quality and craftsmanship is the hallmark of the brand for over 175 years.

As has been the case with our successful Tempur-Pedic advertising, our recent investments in Stearns & Foster have also been successful, helping the brand to achieve excessive year-over-year growth in consumer traffic to stearnsandfoster.com every year since we first introduced the television advertising in 2021.

And in 2023, helping the brand to achieve the industry’s highest year-over-year growth in Google Search. Internationally, we continue to increase our marketing investments to support the positive momentum of our recently launched new Tempur product range. Our creative assets highlight the many benefits of the latest generation of Tempur materials, covers all retail assortments and reaches all relevant media channels.

We continue to see positive results with uplift in awareness, share of search, web sessions and retail traffic. Our market intelligence reaffirms that we are outperforming the market in a challenging retail environment. We recently announced the signing of David Beckham as our newest brand ambassador, for our key markets in the high-growth Asia Pacific region. The campaign consists of television assets, content for our online channels and point-of-sale material for our own stores and retail partners. The campaign launched in March in Australia. We’ll also go log in our other Asia Pacific subsidiaries later this year, and we will host an event with David Beckham and key retail partners in China during the second quarter.

Our advertising efforts worldwide are designed to break through to consumers at all points in their purchase journey, driving near term sales, while also continuing to build long-term support for our brands. Our research shows that our brands continue to be top of mind for consumers seeking high-quality sleep solutions.

Third highlight, we continue to expand and optimize our diverse omni-channel distribution platform to meet the consumer wherever they want to shop. Our brands and private labels continue to gain traction in the Wholesale segment across existing and new distribution channels. In the first quarter, we expanded our OEM relationship with a large specialty betting retailer. And in April, we expanded our products into additional big-box stores with one of the largest U.S. bedding retailers.

Consumers are also engaging with our product through our company-owned stores and e-commerce presence. Our North American direct channel performance was solid in the quarter, delivering a robust 8% sales growth year-over-year driven by strength in our e-commerce business.

Finally, we continue to drive year-over-year improvements in costs through sourcing and operational efficiencies. During the quarter, our operations team focused on enhancing supply contracts, improving labor productivity and optimizing logistics. These efforts, combined with the impact of normalizing commodity prices resulted in a 270 basis point benefit to the North America first quarter adjusted gross margin and 130 basis point benefit to International’s first quarter adjusted gross margin.

Bhaskar Rao

Thank you, Scott. As mentioned, in the first quarter of 2024, consolidated sales were approximately $1.2 billion and adjusted earnings per share was $0.50. There are approximately $18 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 costs incurred in connection with our planned acquisition of Mattress Firm.

Turning to North American results. Net sales declined 2% in the first quarter. On a reported basis, the wholesale channel declined 3% and the direct channel grew 8%. North American adjusted gross margin improved 160 basis points to 39.5% driven by commodities and operational efficiencies partially offset by changeover costs to support new OEM distribution and product launch costs. North American adjusted operating margin was consistent to the prior year at 15.3% driven by improvement in gross margin offset by investments in growth initiatives.

Now turning to international. International net sales were consistent year-over-year on a reported basis and declined 2% on a constant currency basis. As compared to the prior year, our International gross margin improved 140 basis points to 55.4% driven by commodities and operational efficiencies. Our International adjusted operating margin improved 20 basis points to 15.5% driven by the improvement in gross margin partially offset by investments in growth initiatives.

Scott Thompson

Thank you, Bhaskar. Before opening the call for questions, let me provide a brief update on our pending acquisition of Mattress Firm. As previously announced in the fourth quarter of 2023, we certified substantial completion with the Federal Trade Commission’s second request. We continue to work with the FTC to advance the transaction’s approval process and anticipate the FTC to complete its review in the second quarter.

As previously disclosed, we continue to expect the transaction to close in mid to late 2024. In connection with and contingent upon this acquisition, we are proactively pursuing a divestiture plan. We are also engaged with numerous Mattress Firm suppliers on post-merger supply agreements. I’m pleased to share that six of the seven suppliers, we’ve offered post-closing supply agreements, have successfully negotiated and executed a win-win agreement with us.

Lastly, a brief comment on Mattress Firm’s financial performance. Mattress Firm recently made their quarterly results available on their website. We encourage you to review Mattress Firm’s website for more information on their financial performance for the most recent quarter, which we believe was consistent to slightly ahead of the U.S. industry trends.

In summary, we’re making good progress on closing the proposed transaction and we look forward to joining with the Mattress Firm team.

Susan Maklari

Good morning. Scott I wanted to talk a little bit about how you’re thinking of the year coming together. I think coming into 2024 the expectation was that earnings in the first half would be driven more by margin recovery, while the top line was still perhaps a bit soft and then seeing some recovery in the volumes in the second half. I know you mentioned in your prepared remarks you continue to expect that.

I guess can you talk a bit about what gives you the confidence that we will see that second half improvement in the volume? And any thoughts on the puts and takes to how the earnings may come together as we move through the balance of the year now that we’re one quarter in?

Scott Thompson

Sure. Thank you for that very short and simple question. Look when we look at it, the first thing that you asked about the confidence in the back half, quite frankly the comps get easier. That’s probably one of the biggest things is with the comps in the back half are much easier than in the front half. Also, when we look at our products that have been launched, they’re resonating in the marketplace and they should have momentum, both from an international and a domestic standpoint. We also obviously had good margin performance this quarter. I expect that we’re going to have a positive gross margin performance throughout the year.

I guess the last thing I would kind of throw into your question is, if you look at the historical data and where the bedding industry is, I think everyone who had looked at that data and I’ll talk primarily about the US at this point that’s where the data is the easiest to look at is you’d have to say the bedding industry is in a depression and has been in one for a number of quarters. And so, it’s got to normalize at some point whether it’s this quarter or whether it’s a quarter out or two. There’s no reason to believe it wouldn’t normalize. There haven’t been any products or any changes or any structural changes and the need for mattresses. And we may be building up pent-up demand. I don’t know. It’s hard to always tell. But certainly, we’ve been bouncing around the bottom for a long time and it just seems very reasonable that we should begin to normalize into what I’d call relatively minor growth from an industry standpoint. And then quite frankly, even if the industry doesn’t deliver that growth as you know we’ve been a fairly robust market share gainer over a number of quarters. And we don’t see any reason why that won’t continue going into the back half of the year.

Peter Keith

All right. Good morning, everyone. Thank you. Just regarding the FTC decision, I guess I was curious on what gives you confidence on predicting the timing of that by the end of the second quarter?

Scott Thompson

Yeah. If you look at and this goes back to the original disclosure of the transaction and first of all let me say we’re on our original timeline, that we originally disclosed when we started this journey or gauntlet ever how you’d like to describe it.

And it’s based on, we’ve always said, look, if we need to go through litigation, we’ll go through litigation. And we’ve always kind of put that in the budget from a timing standpoint, because we’re very comfortable if that’s the road that we need to take.

We clearly have given the FTC additional time, because those conversations have been constructive and productive. We’re dealing with high-quality people, who are taking their job very seriously and learning more and more about the industry. And we think the more they learn about the industry, that’s more likely that we’ll have the meeting of the minds.

But there’s certainly, no guarantees and we’re certainly not finished yet. But the timing framework has always been we assumed that we would have litigation and win through litigation.

But I think the most important thing when we started the process was, it was important to do this what I’ll call right and get the right answer, as opposed to just maybe do it fast. And we’re using that principle as we work through with the FTC in all areas.

Operator

Thank you. And we will take our next question from Seth Basham with Wedbush.

Seth Basham

Thanks. Two-part questions, if you don’t mind. First a follow-up on your response regarding FTC, if we do need to litigate this do you still expect to be able to close the transaction this year? And then secondly, regarding your sales trends in the quarter, can you give us a little bit of perspective on the cadence and then how the second quarter started off? Thank you.

Scott Thompson

The answer to your first question is, yes. We still would expect to be able to close it within this calendar year. On cadence, I’m going to break up the cadence question in kind of two buckets which I don’t normally do. But this time, I think the two buckets kind of differed a little bit.

There is a cadence of sales at retail okay, call those end user sales. And then there’s a cadence of sales wholesale, on how we get orders. And as I think if you go back and listen to the fourth quarter earnings call in Jan, when we disclosed it last time, we were getting mixed messages.

So if you look at it from a retail perspective, end user there’s no question that January was a tough market in the U.S., so one because January was tough; and two because of weather. Then February was positive. And I think probably comped positive February over February and was obviously a holiday period.

And then I think March was down at retail. Then moving to the beginning of the second quarter, I would say that retail sales were flattish is what it feels like. Again, information is not too precise.

If you’re talking about our orders and our sales, we’ll call it wholesale, we were actually up in January and started the quarter slightly positive as I think probably retailers were stocking up in anticipation of President’s Day, then our orders kind of flattened out we’ll call it, in February as they kind of were working through the stock and they were slightly down in March and then have picked up and are flattish in April, again in a non-promotional period.

And although flat is not a word I particularly like, I like it better than down. I like things that are different than flat to go up. Actually flat in our orders, in a non-promotional period would be better than we’ve experienced over the last call it three or four quarters. Generally the trends have been during non-promotional periods, orders have been slightly negative and then they’ve been positive during promotional periods. So I don’t know if it’s a green shoot or not, but that’s the best information we have as of today.

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