Shareholders in bedding companies are shell-shocked from the mattress wars this morning as Tempur-Pedic, citing increased competition, “aggressive” marketing campaigns and price-slashing, yesterday revised its outlook downward for the year while also projecting a falloff in same-quarter profits, which will be announced June 30. The company’s stock price plunged 49%, dragging down competitors such as Select Comfort (down 21%) and Sealy (5%) in the process.
That, despite the fact that “the overall financial picture for Select Comfort appears different from that of Tempur-Pedic's,” blogged the Minneapolis Star-Tribune’s Janet Moore as she observed the plunges mid-morning yesterday. Select Comfort, which is based in nearby Plymouth, Minn., posted its 13th consecutive quarterly profit in April and last month, COO Shelly Ibach, who has heavy experience in retailing, took over as CEO, Moore points out. But Tempur-Pedic had been on a roll, too.
Reuters’ Mihir Dalal and Juhi Arora writes.
“The company's sales had grown over 27% over the past two years, primarily due to demand from aging Baby Boomers, who have been sold on the health benefits of Tempur-Pedic's high-priced foam-based and other specialty mattresses. But Wednesday's forecast indicated that rivals have finally learned to compete in a market that the company had practically created and owned for most of the past two decades.”
You may remember Tempur-Pedic’s lavish and successful print and television direct marketing campaigns from the past but the battle of the foam mattresses is fully engaged on the retail floor nowadays.
Mia Lamar in the Wall Street Journal points out.
“Major manufacturers like Sealy and privately-held Serta Inc. have all rolled out non-spring offerings over the past couple years.”
Serta's iComfort memory-foam mattresses, launched last year, have been a particular success in part because of their cheaper price, analysts say.
S&P Capital IQ analyst Jim Yin wrote in a note yesterday that’s cited by Barron’s Theresa Revis.
"It appears that competition caught up to Tempur-Pedic much faster than we expected in the specialty bedding segment, which calls into question the company's brand."
In downgrading the stock from Buy to Hold, Yin said,
"We expect Tempur-Pedic to lose market share in the specialty segment."
Indeed, Tempur-Pedic CEO Mark Sarvary told analysts in a conference call after citing in a press release.
"We did not expect the competitive environment to change this fast due to an unprecedented number of new competitive product introductions.”
But, Savary said,
“We remain very confident in our … growth potential and our strong brand, and as a result remain committed to our long-term strategic plan."
Yin writes that a recent downgrading of the stock by Stephens analyst Eric Hollowaty looks “prescient” based, as it was, not only on what he thought were overly aggressive earnings estimates by other analysts but also a
“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?”
Last month, Tempur-Pedic said it that it would discount up to 17% off the suggested retail price of its popular Cloud Supreme mattress set during a sale set to run from May 16 to July 8. Citing the “unusual” nature of the promotion, Raymond James' analyst Budd Bugatch said at the time that,
“It could lend weight to critics who say that competition in the mattress business has gotten tougher while raising questions about demand for Tempur-Pedic's pricier products.”
According to an Associated Press story running in Bloomberg Businessweek. In the past, Tempur-Pedic has been more likely to give away pillows or foundations rather than cut the price on the mattress itself.
While we’re on the subject of discounting, if you grew up in the New York metropolitan area from the Fifties through the Seventies, you probably have a memory or two of E.J. Korvette, which sort of was Walmart before Walmart was Walmart. It even had groceries in some of the larger stores, Wikipedia informs us, (but not at the former Saks it occupied on 34th Street). The founder of the chain, Eugene Ferkauf, died Tuesday in Manhattan at 91.
Douglas Martin’s well-crafted obit in the New York Times this morning reads.
"Ferkauf was one of the first businessmen to grasp the emergence of a new breed of postwar consumer. Seeing a population of Americans financially better off, impatient to get on with their lives after World War II and susceptible to the advertising shown on the latest new thing, their television sets, he concluded that victory belonged to the very bold."
At its peak, there were 58 Korvette stores nationally, according to Wikipedia. Martin says.
“Prices at the nominally membership-only stores were 10 to 40% below more conventional competitors.”
Ferkauf sold his share in the company in 1966 for more than $20 million with much of his fortune later donated to charities. The chain, mismanaged in the face of competition, went out of business in the early 1980s.
Martin also explodes a popular urban –- “or perhaps suburban” –- myth of where the name “E. J. Korvette” came from. It did not stand for “eight Jewish Korean War veterans,” after all.
“The ‘E’ comes from the first letter of his first name, the ‘J’ from that of Joe Swillenberg, an old Tilden [High School] friend who became a top company executive. Korvette is a deliberate misspelling of corvette, a reference to a class of naval ship, not the car.”
COMMENTARY: This is a great example of what happens when a company underestimates its competition or fails to continue to innovate to improve existing products or design new products in order to maintain its competitive edge. Tempur-Pedic appears to have failed on both counts. Tempur-Pedic has dominated the memory foam mattress segment for nearly two decades, but it now appears that this incredible run is about to end.
On Wednesday, June 6, 2012, shares of Tempur-Pedic International Inc (NYSE:TPX) plunged 47% after management slashed the company’s full-year sales and earnings guidance. Due to increasing competitive pressures in the specialty mattress market, the company expects sales to be flat in 2012, coming in at around $1.43 billion versus the company’s prior forecast of $1.6 billion to $1.65 billion. This compares with analyst estimates of $1.64 billion in sales.
Additionally, the company now expects earnings of just $2.70 per share, which falls far below the Street view of $3.93 per share. Since the company’s devastating report, shares of TPX have continued to flounder; it appears that this stock will be treading water for some time while the company rethinks its growth strategy.
The above announcement by Tempur Pedic management that it expected "sales to be flat in 2012" and that sales for the year 2012 are expected to be "coming in at around $1.43 billion instead of the $1.6 billion to $1.65 they forecasted," have severely impacted the price of Tempur Pedic's stock (see above graph).
"On the fundamentals side, Tempur-Pedic does well in terms of cash flow and return on equity, and does decently in terms of sales growth, operating growth and earnings growth."
"However, there is plenty of room for improvement in terms of earnings momentum, earnings surprises as well as analyst earnings revisions. TPX receives a B for its Fundamental Grade and a D for its Quantitative Grade (which indicates the current level of buying pressure for the stock)."
Mr. Navellier did not specifically address the root causes of Tempur Pedic's poor fundamentals, which is finance geek speak for "failure to execute," "poor management decision-making," "not controlling expenses," "not innovating to keep ahead of the competition," and so forth. However, here's my take on what I think is really going on.
- Failure To Innovate - Tempur Pedic has failed to innovate in order to keep ahead of the competition by introducing greatly improved or technologically advanced products. Tempur Pedics' innovations have been primarily incremental like the launch of the TEMPUR-Cloud and TEMPUR-Simplicity collections. These innovations are mostly defensive, because competitors are able to match them in very short order. Tempur Pedic needs a breakthrough innovations that create true value for customers and stakeholders alike.
- Management Blindsided - Tempur Pedic's CEO appears to have been completely caught off-guard when he said, "We did not expect the competitive environment to change this fast due to an unprecedented number of new competitive product introductions.” FACT: There are now over 80 companies offering memory foam mattresses. Did Salvary honestly believe that the onslaught of that many competitors would not eventually peck away at its market share? It just makes one feel like Salvary is a ships captain who fell asleep on the bridge and Tempur Pedic is now sailing without any real direction or final destination.
- Mature Industry - The memory foam mattress segment has reached maturity, is highly fragmented, with too many competitors offering similar mattress choices that are almost indistinguishable from those offered by Tempur Pedic.
- Industry Commodization - The memory foam mattress segment is showing signs of industry commoditization with competitors offering similar products and competing almost entirely on the basis of price. Price discounting has become standard practice in this segment. Discounting maybe necessary as a defensive strategy in the short-term, but if Tempur Pedic continues to resort to regular discounting, customers will expect deals, and this will destroy the company's reputation as a supplier of premium quality mattresses and hurt the company's revenues and earnings in the long-term. This is not a win-win for anybody, and Tempur Pedic, being the market leader in the memory foam segment has the most to lose in this type of competitive environment.
- Outsourcing To China - Tempur Pedic produces all of its mattresses in its plants located in the U.S. and Europe to meet the needs of its customers in North America and Europe. Sales to China were about $5 million or less than 1% of total sales, but the company believes it can increase this to $50 million in 2012. This could be a good time for Tempur Pedic to consider oursourcing production to meet the needs of the huge Chinese market. This would make it less susceptible to foreign currency fluctuations especially in the Eurozone, lower its manufacturing costs, and allow it to distribute its products to the huge local Chinese market.
- Blue Ocean Strategy Needed - The rules of the game that competitors play by in the memory foam mattress market segment have changed since Tempur Pedic pioneered memory foam mattresses due to intense competition, discounting, a lack of product differentiation, and evidence of industry commoditization. Tempur Pedic needs to stop playing by the old rules, and start setting the rules of competition. It needs to lead instead follow the pack. In short, Tempur Pedic needs a Blue Ocean Strategy that ends the practice of trying to beat the competition, but focuses instead on making the competition irrelevant by creating a leap in value for buyers and the company, thereby opening up new and uncontested market space and making the competition irrelevant. In a Blue Ocean Strategy scenario, value innovation is based on the view that market boundaries and industry structure are not 'given' and can be reconstructed by the actions and beliefs of industry players. Tempur Pedic has certain advantages over the vast majority of its competitors: extensive knowledge of memory foam technology, patents, a well known brand name, economies of scale, vast distribution value chain, broad range of product offerings and access to international markets. However, instead of confining itself solely to the bed mattress market, it should expand the market for memory foam products into untapped markets where high quality, comfort, and ergonomics are important to the customers and they are willing to pay premium prices. Potential new markets include:
- Office furniture (ergonomic office chairs).
- Home furnishings (ergonomic chairs and sofas).
- Passenger airlines (ergonomic passenger seats).
- Infant transportation (baby carriers and automobile toddler seats).
- No Bold or Decisive Strategic Moves - The inability of management to pivot or make bold and decisive strategic moves to fend off competition. Tempur Pedic went public in 2003, but it wasn't until 2007 that it made an acquisition (Canadian distributor). Tempur Pedic has made no major leaps in memory foam mattress technology. Most of its moves have been defensive and incremental. It is best known for buying back its own shares in order to propup its stock price. If this is the best that Tempur Pedic can do, it's a pathetic effort.
- Increase Research & Development - Tempur Pedic spent about $10 million or less than 1% of sales on research and development. The company must increase its R&D to at least 5% of sales in order to innovate, execute its Blue Ocean Strategy, leapfrog the competition and create the products of the future. I would rather see it spend capital on R&D where it can contribute to value innovation than buying back its shares.
Tempur-Pedic Company Overview
Tempur-Pedic competes on the basis of technological innovation, high-quality mattresses, premium prices and offering a sleeping experience that is out of this world. Its visco-elastic foam technology was developed by NASA during the 1970s to help cushion astronauts during liftoff. The foam is used to manufacture premium mattresses, pillows, and related products that sell in some 80 countries. The company's TEMPUR and Tempur-Pedic brand names are featured by retailers (furniture, department, specialty stores), direct-response efforts and the Internet, health care channels (chiropractors, medical retailers, hospitals), and third-party distributors.
- Market Positioning - Tempur-Pedic has positioned itself as a world leader in specialty sleep. Focused on developing, manufacturing and marketing advanced sleep surfaces that help improve the quality of life for people around the world.
- Key Business Drivers - Demand for the company's products is driven by significant growth in its core market of Baby Boomers, increased awareness of the health benefits of a superior quality mattress and the broadening appeal of its new products.
- Key Market Differentiators - TEMPUR® material distinguishes the company's products from those of its competitors. Viscoelastic pressure-relieving material was originally developed by NASA in 1971 in an effort to relieve astronauts of the G–force experienced during lift-off and NASA subsequently made this formula publicly available. The key feature of the company's pressure-relieving TEMPUR® material is its high-quality, high-density, temperature sensitivity. It conforms to the body, becoming softer in warmer areas where the body is making the most contact with the pressure-relieving TEMPUR® material and remaining firmer in cooler areas where less body contact is being made. As the material molds to the body’s shape, the body is supported in the correct anatomical position with the neck and spine in complete therapeutic alignment.
- Recognized Global Brand - The company sells its products in approximately 80 countries primarily under the TEMPUR® and Tempur-Pedic® brands. The TEMPUR® brand has been in existence since 1991 and its global awareness is reinforced by its high level of customer satisfaction, as demonstrated by the recognition received by Consumer Reports, the Arthritis Foundation, the NASA Space Foundation, Good Housekeeping and Consumers Digest.
- Vertically Integrated Manufacturing and Supply Chain - The company produces all of its proprietary TEMPUR® material in its own manufacturing facilities in the U.S. and Europe in order to maintain precise product specifications and ensuring a high level of quality and performance that is unmatched by its competition.
- TEMPUR® Mattresses - The company's mattresses are composed of proprietary multi-layer, temperature sensitive, pressure-relieving TEMPUR® material. TEMPUR® mattresses come in four collections:
- TEMPUR-Cloud Collection - Comes in three models (TEMPUR-Cloud Luxe, TEMPUR-Cloud Supreme and TEMPUR-Cloud).
- TEMPUR-HD Collection - Comes in three models (GrandBed, AlluraBed and RhapsodyBed).
- TEMPUR-Contour Collection - Comes in three models (TEMPUR-Contour Signature, TEMPUR-Contour Select and TEMPUR-Contour).
- TEMPUR-Simplicity - Comes in one model currently (TEMPUR-Simplicity) providing affordability. Comes in soft, medium and firm feel.
- Pillows - The company's pillows provide plush and pressure-relieving comfort as the temperature sensitive material molds to the body.
- Other Products - This category includes foundations used to support our mattress products, adjustable beds and many other types of offerings including a variety of cushions and other comfort products.
- TEMPUR® Mattresses - The company's mattresses are composed of proprietary multi-layer, temperature sensitive, pressure-relieving TEMPUR® material. TEMPUR® mattresses come in four collections:
- Distribution Channels - The company primarily sells at wholesale through three distinct channels: Retail, Healthcare and Third party. The company also sells at retail direct-to-consumers.
- Retail - Includes furniture and bedding retailers, specialty stores and department stores, among others.
- Healthcare - Includes medical supply, furniture and equipment retailers serving patients requiring special sleep support due to spinal injuries or chronic ailments.
- Third Party - Includes third party distributors that can serve markets that are currently outside the range of its wholly-owned subsidiaries or distribution channels.
- Direct-To-Consumer - The company sells its mattresses and other products direct-to-consumer utilizing TV infomercials with an toll-free 800 number and inbound call centers to take orders.
- Operating Reporting Segments - The company reports operating results based on two segments: North America and International. These reportable segments are strategic business units that are managed separately based on the fundamental differences in their geographies.
- North American - This segment consists of two U.S. manufacturing facilities and our North American distribution subsidiaries. The North America segment generated 71% of gross revenues at the end of 2011.
- International - This segment consists of our manufacturing facility in Denmark, whose customers include all of our distribution subsidiaries and third party distributors outside the North American operating segment. The International segment generated 29% of gross revenues at the end of 2011.
- Sales by Distribution Channel - The company sells the vast majority of its products through retailers. For the years ending December 31, 2011 and December 31, 2010, sales through retailers were 87.8% and 86.2% respectively. The company's sales by distribution channels for the years ending December 31, 2011 and December 31, 2010 were as as follows:
- Sales by Product - Two-thirds of the company's sales are mattresses. For the years ending December 31, 2011 and December 31, 2010, mattress sales were 66.5% and 66.5% respectively. The company's sales by product for the years ending December 31, 2011 and December 31, 2010 were as follows:
- Financial Performance - The company's Statement of Income for the year ending December 31, 2011 and prior two years and financial highlights are listed below:
- Net Sales - Net sales for the year ended December 31, 2011 increased to $1.4 billion from $1.1 billion, an increase of $312.5 million, or 28.3%.
- Gross Profit - Gross profit for the year ended December 31, 2011 increased to $743.1 million from $555.4 million for the same period in 2010, an increase of $187.7 million, or 33.8%. Gross profit margin for the year ended December 31, 2011 was 52.4%, as compared to 50.2% in the same period of 2010.
- Selling and Marketing Expenses - Sales and marketing expenses increased to $276.9 million for the year ended December 31, 2011 as compared to $199.7 million for the year ended December 31, 2010, an increase of $77.1 million, or 38.6%. Selling and marketing expenses as a percentage of Net sales increased to 19.5% in 2011, compared to 18.1% for 2010. Our advertising expense for the year ended December 31, 2011 was $148.8 million, or 10.5% of Net sales, compared to $96.6 million, or 8.7%, for the same period in 2010, an increase of $52.2 million, or 54.0%.
- General Administrative and Other Expenses - G&A and and other expenses as a percentage of Net sales was 8.9% for the year ended December 31, 2011 as compared to 9.9% for the same period in 2010. G&A and other expenses increased to $125.7 million for the year ended December 31, 2011 as compared to $109.8 million for the year ended December 31, 2010, an increase of $15.9 million, or 14.5%. The increase in G&A and and other expenses are primarily a result of increased salaries and associated expenses of $11.1 million and fees associated with financing programs in our Direct sales channel of $2.3 million, both of which were driven by our strong operating performance.
- Income Befor Income Taxes - Income before income taxes for the year ended December 31, 2011 increased to $328.4 million from $230.9 million for the same period in 2010, an increase of $97.5 million, or 42.2%. North America Income before income taxes for the year ended December 31, 2011 increased to $224.6 million from $137.7 million for the same period in 2010, an increase of $86.9 million, or 63.1%. International Income before income taxes for the year ended December 31, 2011 increased to $103.8 million from $93.2 million for the same period in 2010, an increase of $10.6 million, or 11.4%.
- Net Income - Net income for the year ended December 31, 2011 increased to $219.6 million from $157.1 million for the same period in 2010, an increase of $62.5 million, or 39.8%. Net income for the year ended December 31, 2011 was 15.5%, as compared to 14.2% in the same period of 2010.
State of the Bed Mattress Industry
According to industry research firm IBISWorld, the adjustable bed and mattress manufacturing industry was surprisingly stiff during the five years through the end of 2012. According to the ISPA there are now over 400 bed mattress manufacturers. The threat of substitutes is very high and competition is intense. Manufacturers faced difficult challenges, especially from shifts in residential investment and falling disposable income. New product innovations and increased efficiency slightly sustained revenue during this volatile period. Nevertheless, in the five years up to 2012, IBISWorld estimates that revenue will decline at an average annual rate of 3.0% to $1.6 billion. However, this decline has not been gradual or steady. Like most producers of household goods, adjustable bed and mattress manufacturers experienced revenue growth during the real estate boom, followed by a decline when the housing market collapsed.
Lower income levels hampered demand during the past five years, as consumers were less likely to invest in more-expensive adjustable beds and mattresses. Nevertheless, the improved housing market, higher incomes and new technologies in industry products will support growth over the next five years. In particular, the aging population will aid demand, as these consumers typically demand adjustable beds and mattresses more than the younger demographic
The U.S. bedding industry recorded just a 0.2% unit sales gain last year but saw a 7.7% jump in the value of wholesale bedding shipments, the International Sleep Products Assn. reported.
The highlights and lowlights of ISPA's final report for 2011 were as follows:
- Specialty sleep segment significantly outperformed the innerspring segment.
- Specialty sleep mattress units soared 24.3% in 2011.
- Specialty sleep mattress unit sales market share rose to 13.8% in 2011 from 11.2% in 2010.
- Specialty sleep mattress sales dollars market share rose to 29.4% in 2011 from 25.2% in 2010.
- Innerspring mattress units recorded a 1.9% decline in 2011.
- Specialty mattresses sales jumped 29.5% in 2011.
- Innerspring mattress sales gained only 2.6% in 2011.
The strong growth of the specialty sleep mattress segment was the second year of market share gains.
The ISPA noted that the overall growth last year was not enough to restore all of the ground lost during the bedding recession.
The ISPA said.
"In 2011, the mattress industry continued the upward trend started in 2010, and posted increases in both unit shipments and wholesale dollar value. U.S. mattress producers shipped 34.9 million units in 2011, an increase of just 0.2% over 2010, and the second yearly unit increase since 2005. Remarkably, the value of mattress shipments showed a 7.7% increase in 2011, the second yearly increase in dollar value since 2007."
"Even with the healthy increase in dollar value registered in 2011, this figure was slightly above the 2008 total sales value, and below (7.6%) 2007 sales, which to date is the industry's highest sales year. Unit shipments in 2011 were slightly below the 2008 total shipments, and well below (20.2%) the 2005 figure, which to date is the industry's highest unit shipments year."
Average unit prices for all mattresses and foundations increased by 7.5% from 2010 to 2011. The average unit price for specialty mattresses increased last year by 4.2%, to $559.23, and for innerspring mattresses by 4.7%, to $210.47, ISPA said.
ISPA's final report on 2011 performance is based on the reports of the 18 companies participating in ISPA's monthly Bedding Barometer reports, and a mail and phone survey of other U.S. bedding producers.
The report reveals that the companies participating in the Bedding Barometer surveys had a 10% dollar gain last year and a 2.1% unit gain. Those companies accounted for about 76% of the industry's dollar total and about 66% of the unit total.
In contrast, the other bedding producers, a group generally consisting of smaller bedding makers, posted a dollar gain of just 1.3% last year and saw their units decline by 3.1%, the ISPA report said.
Memory Foam Mattress Market
Memory-foam mattresses are far and away the fastest-growing segment of the $4.6 billion wholesale market for U.S. mattresses. Memory foam's market share has shot up from 14% to nearly 20% in just the past eight years. Mattress shoppers are weighing the risk -- bad sex -- against the promise -- good sleep -- and are voting with their eyelids: They choose to snooze.
Courtesy of an article dated June 7, 2012 appearing in MediaPost Publications Marketing Daily Blog, an article dated May 15, 2012 appearing in Furniture Today, an article dated May 14, 2012 appearing in Barron's, and Tempur-Pedic International Inc's Annual Report 10K