Tempur Sealy Q1 earnings spell out financial position as it enters acquisition mode

Company reports net sales of $1.21 billion, net income of $85.3 million for first quarter ended March 31

LEXINGTON, Ky. — In what probably amounted to the biggest day in its history — with the announcement of its planned $4 billion purchase of bedding retailer Mattress Firm on May 9 — bedding manufacturer Tempur Sealy also released its first-quarter sales and earnings, giving the industry a sense of its financial position as it heads into acquisition mode.

For the quarter ended March 31, it reported net sales of $1.21 billion, down about 2.5% from the $1.24 billion reported the same period last year.

Net income was down about 34.7%, to $85.3 million, or 48 cents per share, from $130.7 million, or 69 cents per share, last year.

Meanwhile, its gross margin was down slightly to 41.4% compared to 42.4% last year.

Company Chairman and CEO Scott Thompson said that the company performed within expectations, particularly given some of the economic challenges in today’s marketplace.

“Our first-quarter performance reflects the strength of our industry-leading business model, as we continue to outperform the broader industry against a challenging operating backdrop,” he said Tuesday as part of the earnings release. “Though the U.S. industry conditions were slightly less favorable than anticipated as a result of heightened economic pressures, we performed largely in line with our first-quarter expectations.”

He added that in the second quarter, the company’s consolidated sales will return to year-over-year growth, which he noted is supported by new products, “encouraging order trends quarter to date and fully lapping the challenging prior-year comps in the first quarter.”

Other highlights of the report were as follows:

+ North America net sales decreased to $919.6 million from $931.4 million, a 1.3% decrease year over year. The company said this was primarily driven by continued macroeconomic behaviors impacting U.S. consumer behavior. Gross margin in this segment was 37.4% compared to 37.8% in the first quarter of 2022. Adjusted gross margin was 37.9% in the first quarter — there were no adjustments to gross margin in the first quarter of 2022.

+ North America net sales through the wholesale channel fell .9% to $804.3 million, compared to $811.3 million last year. North America net sales through the direct sales channel fell 4% to $115.3 million, compared with $120.1 million last year.

+ International net sales decreased to $288.5 million during the first quarter compared to $308.1 million the same period last year, a 6.4% drop. The company said this was primarily driven by unfavorable foreign exchange rates. On a constant currency basis, international net sales increased 1.7% compared to the first quarter of 2022. Gross margin in the segment was 54% compared to 55.3% in the first quarter of 2022.

+ International net sales through the wholesale channel fell to $108.3 million, a 4% decrease from the $112.8 million reported last year, while international net sales through the direct channel decreased to $180.2 million, from $195.3 million, a 7.7% decrease. International gross margin declined 130 basis points compared to the first quarter of 2022, which the company said was driven by product launch costs and offset by pricing actions.

+ The company’s corporate operating expense rose to $36.9 million, compared to $33.6 million in the first quarter of last year. The adjusted operating expense was $31.7 million in the first quarter of 2023 and there were no adjustments to operating expenses in the first quarter of 2022.

+ It ended the first quarter with total debt of $2.9 billion and consolidated indebtedness less netted cash of $2.8 billion.

+ On Tuesday its board of directors declared a quarterly cash dividend of 11 cents per share payable June 6 to shareholders of record as the close of business May 23.

The planned acquisition, expected to be completed in the second half of 2024, pending regulatory approvals, will be funded by about $2.7 billion of cash — that the company said is subject to adjustments including the repayment of Mattress Firm’s debt and other customary items — along with $1.3 billion in stock consideration issued to Mattress Firm shareholders. The $1.3 billion in stock consideration is based on the issuance of 34.2 million shares of Tempur Sealy common stock based on a closing price of $37.62 per share on May 8.

Mattress Firm and Tempur Sealy shareholders will own about 16.6% and 83.4% of the combined company respectively, based on the company’s shares outstanding at the time of the signing of the sales agreement.   

Tempur Sealy added that it plans to fund the cash portion of the transaction using a combination of cash on hand and proceeds from a combination of new secured and unsecured financing. A portion of this will also be used to repay Mattress Firm’s outstanding debt.

Obviously a deal of this magnitude has major implications for the company and its shareholders, particularly considering Tempur Sealy’s aforementioned consolidated indebtedness of $2.8 billion at the end of the first quarter.

But Tempur Sealy also said the planned acquisition is expected to enhance its ability to meet consumers’ needs, expand growth opportunities and streamline operations, with $100 million in anticipated “annual run-rate synergies by the end of year four after closing.” It expects to achieve efficiencies through “logistics, product life cycle management, manufacturing optimization and souring initiatives.”

Other key strategic benefits it identified in its announcement include the following:

+  Expanding consumer touchpoints. Mattress Firm’s and Tempur Sealy’s combined consumer touchpoints “will create opportunities to keep pace with consumers’ evolving preferences. Being closer to the U.S. bedding consumer will also broaden opportunities to develop lifetime relationships with consumers.”

+ Accelerating the combined companies U.S. omnichannel strategy. Officials noted that Mattress Firm’s more than 2,300 brick-and-mortar retail stores, e-commerce capabilities and sleep education and sleep tracking platforms “complement Tempur Sealy’s direct-to-consumer operations, enabling a seamless omnichannel ecosystem that meets the needs of more consumers nationwide.”

+ Simplifying consumers’ path to purchase. The companies said the combination “facilitates targeted marketing efforts to drive incremental brand awareness through blended advertising and share of voice,” with a focus on enhancing consumer understanding of bedding innovation, including health and wellness benefits. “Further, the combination brings together Tempur Sealy’s and Mattress Firm’s highly trained retail sales and customer service teams to expand customer service capabilities, facilitate improved consumer outcomes and simplify the  consumer purchase journey.”

+ Facilitating consumer-centric innovation. The alignment of new product development and testing is expected to create a more targeted, end-to-end innovation approach and also create opportunities to invest in, test and refine new sleep technologies.

+ Streamlining operations and enhancing supply chain management. Enhanced visibility to consumer demand, the company said, “creates opportunities for more agile and fortified supply chain management. Combined scale and vertically integrated infrastructure across the combined company drives operational efficiencies across logistics, transportation, warehousing, supply chain planning, sourcing and product development, streamlining the order-to-delivery process for all customers.”

+ Driving adjusted EPS accretion. The company said the acquisition is expected to be accretive to adjusted EPS before synergies in the first year post close. Adjusted for the impact of run-rate synergies, the company said that the acquisition also is expected to deliver low-double-digit adjusted EPS accretion.

Thus the company laid out its financials and the anticipated benefits of its acquisition in two separate yet related announcements. While the closing of the deal is still a long way off, this major acquisition will likely provide plenty more investor updates and communications — and headlines — in the weeks and months ahead.

Thomas Russell

Home News Now Editor-in-Chief Thomas Russell has covered the furniture industry for 25 years at various daily and weekly consumer and trade publications. He can be reached at tom@homenewsnow.com and at 336-508-4616.

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