TPX - Tempur Sealy International

[PlanMaestro]

Just started to take a look. Collapsed 50% today, and 75% from the top, after they lowered guidance. It is priced at 8x current guidance and less than 1x sales, while capex is well below D&A. Great margins and in theory, there are opportunities for international growth and new product introduction.

 

The big questions are

1. How much of a fad product it is?

2. Do they have a moat?

 

My experience with one of their products bought 6 years ago was excellent, one of the few things where I decided not to be a cheapskate. Tempur Pedic has also outspent their competitors by an order of magnitude in advertising.

 

Covenants should not be much of an issue. Funded debt to EBITDA has to be less than 3x and currently is 1.4x but will increase with the new sales and earning numbers. Also has $130m cash versus the $566M funded debt. Not too bad.

 

Presentation: http://files.shareholder.com/downloads/TPX/1911709582x0x546374/f535a17a-cecf-43b0-be6e-dca947d7b867/Tempur-Pedic_International_-_2012_Investor_Day_Presentation.pdf

[hyten1]

planm

 

i actually own this for a while (i sold it awhile ago) for I thought was pretty rich valuation around 30's. I was kicking myself when it shot up to 80s oh well you cannot time the market perfect. then today happen :)

 

i did a extensive analysis back in 2008/2007 that is when i loaded up (sub $10)

 

i would consider investing in tpx again. however few things to keep in mind.

 

1. fad, i don't think this is a fad. I think foam is here to stay along with traditional spring mattress (unlike waterbed) but then again I cannot say for sure 100%, still some risk here.

2. one of the reason i liked tpx was their pricing power. they actually raise prices on many of their products during 2008 and 2009 (can you believe that)

 

my biggest concern when i did sell all in the 30's was eventually competitor will catch up to them. TPX has build a brand in this space and they are the first mover. however once the competition and wakes up and start offering competiting product of lower price its going to hurt tpx.

 

the funny is, it only in the last month or so that I notice tpx are offering sales in their commercial!!! they never did that before, that was a concern.

 

but i think equilibrium will eventually be reach, competitor will take their share and tpx will defend what they have and the prices of the product will adjust accordingly. I think tpx is just starting to hit that inflection point were finally competiting product are up to snuff

 

for me i am trying to figure what that equilibrium will be and what tpx will be worth under that scenario

 

 

 

hy

 

[PlanMaestro]

my biggest concern when i did sell all in the 30's was eventually competitor will catch up to them. TPX has build a brand in this space and they are the first mover. however once the competition and wakes up and start offering competiting product of lower price its going to hurt tpx.

 

the funny is, it only in the last month or so that I notice tpx are offering sales in their commercial!!! they never did that before, that was a concern.

 

but i think equilibrium will eventually be reach, competitor will take their share and tpx will defend what they have and the prices of the product will adjust accordingly. I think tpx is just starting to hit that inflection point were finally competiting product are up to snuff

 

for me i am trying to figure what that equilibrium will be and what tpx will be worth under that scenario

 

Thanks Hyten, here are a couple of Barron's articles that raise similar issues

 

http://online.barrons.com/article/SB50001424053111904470204577450430680297626.html?mod=BOL_hpp_highlight_top

http://online.barrons.com/article/SB50001424053111903623804577384290642721710.html#articleTabs_article%3D1

 

Tempur-Pedic had recently been benefitting from incremental improvements in the housing sector and spending in the high-end of the market.

 

Still, while the company's offerings aren't the priciest, spending at least $3,000 on a mattress is certainly a splurge for most people. Moreover, competitors like Sealy (ZZ) and Select Comfort (SCSS) have also been entering the arena with their own specialty products, including memory foam and adjustable firmness.

 

In recent trading, Sealy was down 6.7% to $1.59 and Select Comfort was off 17.4% to $21.42.

 

Stephens analyst Eric Hollowaty, in what now looks like a very prescient move, recently downgraded Tempur-Pedic from Overweight to Equal Weight. His caution was due to the Street's overly aggressive earnings estimates, as well as a difficult promotional pricing atmosphere that could potentially spark a "race to the bottom" among memory foam mattress makers: "what price will Tempur-Pedic have to pay to be the last company standing?"

[racemize]

perhaps I cheaped out, but we only spent 1700 for our tempur pedic--not sure where they get the "at least 3000" from.

[PlanMaestro]

Recent presentations where they are very open on the new competition and how they are responding. You almost feel the tension where he stops short of saying that the guidance was too aggressive given current conditions. At the same time, he hints that competitors are suffering in their core mattress business ,with volume under pressure, and that there are economies of scale in the specialty business.

 

https://barclays-r1.alldigital.net/viewer/webcast/RRC/61/1/27/

[hyten1]

like what tpx said, everyone is getting in on it, and everyone is serious and trying to take market share, possibly selling the product at a lower price then they should. this will hurt tpx (so waiting for equilibrium).

 

some question I think about:

 

1. is the fat margin sustainable (could one day foam becomes the norm and spring mattress are the exception, if that is the case will the price remain at a higher level than traditional spring mattresses? hence higher margin). I understand tpx offer varies type of mattress to satisfy different price points. Also if/when foam becomes a commodity, watch out, foam biz will turn out to be like the spring mattress biz, that is why i think the brand is important. will customer always perceive tpx as the premium brand?

 

2. would the competition willing to accept a lower margin (traditional mattress margin are not so great). if the competition is willing to accept lower margin that can permanent hurt this space.

 

3. tpx has an advantage in this space not just because they are known for it (brand) but their supply chain and size and volume gives them an edge.

 

hy

[TheEnterprisingInvestor]

I haven't looked at this one too carefully, but when I read the Barron's article on TPX one or two weeks ago I just had a hard time seeing how this doesn't get commoditized.  I think the competitive landscape could/is also lead/leading to the irrational version of the prisoner's dilemma.  If that's the case it could be trading at a lot higher forward multiple than it appears and this is probably why the whole mattress industry sold off.  Again, I haven't looked at it all that carefully, but I'd think those estimates probably have to come in a lot. 

 

All in, this seems like a still falling knife at this point.  Just my two cents.

[PlanMaestro]

I haven't looked at this one too carefully, but when I read the Barron's article on TPX one or two weeks ago I just had a hard time seeing how this doesn't get commoditized.

 

The question is what is the cost structure for them and their competitors. This is not the first time competitors have made a push, and in all they've backed off. I grant that those tries were mild in comparison but it looks like it is not so simple to reach economies of scale when a process is chemical/bacth not the traditional assembly line.

 

That may also be a barrier to entry for imports: big bulky product with low labor intensity. They are building plants in Mexico and Europe to support the international expansion

 

http://en.wikipedia.org/wiki/Memory_foam

http://www.youtube.com/watch?v=EWe_CUBJlnE&feature=related (what is polyuterane)

(process for insulation panels)

 

Traditional process:

http://www.youtube.com/watch?v=NdfIPa0D_3s&feature=related

[TheEnterprisingInvestor]

I haven't looked at this one too carefully, but when I read the Barron's article on TPX one or two weeks ago I just had a hard time seeing how this doesn't get commoditized.

 

"The question is what is the cost structure for them and their competitors. This is not the first time competitors have made a push, and in all they've backed off. I grant that those tries were mild in comparison but it looks like it is not so simple to reach economies of scale when a process is chemical/bacth not the traditional assembly line. "

 

I can see that.  I guess process/cost structure advantages just seem kind of weak to me, especially if competition is irrational.  If competitors can roll out a comparable product and create a price war, all bets are probably off.  If they compete with each other like Fedex and UPS do, then you feel a lot better about it, but if they behave like automakers and airlines then this probably isn't cheap at all.  Personally, I don't see how one brand over another matters much, the caveat being the product has to be comparable. 

[PlanMaestro]

 

http://www.offwallstreet.com/reports/NEW_TPX_11-20-11.pdf

 

A bigger reason is that Serta introduced the iComfort foam mattress in early 2011, and the rollout of these mattresses nationwide is mostly complete. Prior to the introduction of the iComfort, TPX mattresses were the only high quality premium mattresses widely available. The other available foam alternatives were knockoffs and had subpar quality. In contrast, the iComfort is a well defined alternative to TPX mattresses, in that the mattress stays cool during sleep, unlike TPX’s mattresses, which becomes warmer in areas where body contact is made. Moreover, the iComfort store display is top-notch, and the mattress is backed by a 25-year warranty (compared to 20 years for TPX mattresses). Furthermore, the iComfort costs $500-$700 less than the corresponding TPX mattress, and is backed by national advertising. Customers told us that they prefer the iComfort not just for the lower price, but also because the mattress stays cool during sleep.

 

[Guest notorious546]

I read this article and found it very interesting, thought it might be interesting for you guys.

 

http://www.valuewalk.com/2015/04/tempur-sealy-reinvigorating-leadership-for-long-term-success/.

 

[Morgan]

As for commoditization, I think memory foam mattresses will definitely become a commodity product. I don't know by who, or when. As an example, about 18 months ago I bought a full sized Signature Sleep memory foam mattress on Amazon for $170 with free two day shipping (from prime) and it is the best mattress I've ever had. I learned about it from a friend who got one and loved it too. It's so comfortable and cheap I can't imagine spending $3,000 or even $1,700 on a mattress. Frankly, if Signature Sleep doubled their prices and put all that extra money towards marketing, I can't imagine they wouldn't grow and damage TPX.

 

Just my 2 cents.

[fisch777]

It is an interesting topic.  I had pretty much the opposite experience as Morgan.  I always do alot of product research and feel like I can find the best value on most big purchases, so when we decided to get a new mattress, I was almost positive I would not buy a TP.  After trying out tons and mattresses and learning more about the quality differences, we ended up paying 3K+ for a TP and absolutely love it.  I saw the Amazon and Costco knockoffs that cost 70-80% less.  The name brand memory foam clones like iComfort just didn't have the same feel and memory qualities as the TP, like it or not.  I completely understand that TPX is making massive margins on the TP brand name, but I think it is easier to justify paying the markup b/c TP mattresses are well-known to last so long and due the inconvenience of not enjoying/returning a knock off model. 

 

I wish I had this experience before the Barrons issue, etc as I didn't appreciate the quality of product/power of brand at the time.

[valuefinder0525]

Stock is getting slammed today after the report by Off Wall Street

 

http://seekingalpha.com/news/3036996-tempur-sealy-lower-bearish-report-issued

 

 

TPX is a leading manufacturer of mattresses. It's main product is the Tempur-Pedic, high end mattress. Part of the story is the newly appointed CEO, Scott Thompson. Mr. Thompson has more than two decades of executive leadership experience, most recently as Chairman, President and Chief Executive Officer of Dollar Thrifty Automotive Group, Inc. ("Dollar Thrifty"). Under Mr. Thompson's leadership, Dollar Thrifty achieved best-in-class operating margins and earnings growth resulting in significant returns for shareholders (before selling to Hertz).

[Jurgis]

News flash: Tempur Sealy to rent mattresses instead of selling them!

 

;D  :D

 

Just kidding.

 

I've looked at this when TPX first crashed in 2012. Didn't buy then. I thought Sealy merger was a good idea, but I haven't looked at numbers since. I saw that some guy in Barron's (I think) was very bullish on this because of Scott Thompson (the idea was that great CEOs are the ones who have done well in more than one business, since this presumably indicates CEO quality and not business internal quality; Thompson apparently is one of the few of the breed).

 

Full disclosure: we bought IKEA mattress couple years ago and it's fine for us...

[valuefinder0525]

Yeah it looks interesting. The numbers don't look expensive either. Just wonder what the short thesis is in the Off Wall Street report.