Tempur Sealy International: Second Quarter Meets Expectations With Recovery in Tempur North America

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Top-line upside was driven by a recovery in Tempur North America sales and solid gains for the Sealy and international businesses. More specific, organic sales growth of 8% was aided by significant investment in new products, advertising, and instore marketing support. Still, second-quarter EPS of $0.39 were essentially in line with expectations, as unfavorable product and channel mix, coupled with foreign-exchange headwinds, weighed on gross margin.

Management guided to 2014 sales in the range of $2.925 billion to $2.975 billion ($25 million to $75 million above prior view), adjusted EBITDA of $410 million to $430 million ($5 million below prior), and EPS in the range of $2.60 to $2.85 (same as prior). We maintained our 2014 EPS estimate of $2.80, up 18% year-over-year; however, we raised our 2015 estimate by $0.15, to $3.50 (up 25% yearover- year), to better reflect anticipated margin trends and a lower tax rate. We perceive the risk/reward profile as balanced with improved demand trends for Tempur North America countered by a somewhat softer outlook for the international business.

Tempur reported second-quarter EPS of $0.39, compared with our estimate of $0.40, consensus of $0.41, and $0.36 a year ago. Organic sales increased by 8% (against a -4% comparison), which was above our estimate of 6%. Gross margin was 37.5%, down 180 basis points and 150 basis points below our forecast; selling-and-marketing expense (as a percentage of sales) was 21.7%, up 10 basis points but 90 basis points below our estimate; the general-and-administrative expense ratio was 8.1%, down 40 basis points and 20 basis points below our forecast. Management guided to 2014 sales in the range of $2.925 billion to $2.975 billion ($25 million to $75 million above prior view), adjusted EBITDA of $410 million to $430 million ($5 million below prior), and EPS in the range of $2.60 to $2.85 (same as prior).

We maintained our 2014 EPS estimate of $2.80, up 18% year-over-year; however, we raised our 2015 estimate by $0.15, to $3.50, up 25% year-over-year. Shares trade at 22 times our 2014 EPS estimate and enterprise value is 12.5 times our corresponding EBITDA estimate. We perceive the risk/reward profile as balanced with improved demand trends for Tempur North America countered by somewhat softer outlook for the international business. We maintain our Market Perform rating.