492246

Tempur Sealy (NYSE:TPX) Reports Q4 In Line With Expectations


Full Report / February 08, 2024

Bedding manufacturer Tempur Sealy (NYSE:TPX) reported results in line with analysts' expectations in Q4 FY2023, with revenue down 1.4% year on year to $1.17 billion. It made a non-GAAP profit of $0.53 per share, down from its profit of $0.54 per share in the same quarter last year.

Tempur Sealy (TPX) Q4 FY2023 Highlights:

  • Revenue: $1.17 billion vs analyst estimates of $1.18 billion (small miss)
  • EPS (non-GAAP): $0.53 vs analyst expectations of $0.54 (2.6% miss)
  • Free Cash Flow of $59 million, down 68.6% from the previous quarter
  • Gross Margin (GAAP): 43.8%, up from 42.1% in the same quarter last year
  • Market Capitalization: $8.83 billion

Established through the merger of Tempur-Pedic and Sealy in 2012, Tempur Sealy (NYSE:TPX) is a bedding manufacturer known for its innovative memory foam mattresses and sleep products

This company offers a wide range of mattresses, adjustable bases, pillows, and other sleep and relaxation products. As one of the largest bedding manufacturers in the world, Tempur Sealy has a presence in over 80 countries, with its products sold through various channels including third-party retailers, company-owned stores, and direct-to-consumer online platforms.

At the core of Tempur Sealy’s Tempur-Pedic product line is its innovative TEMPUR material, a proprietary, pressure-relieving memory foam. The TEMPUR material, originally developed by NASA to cushion astronauts during lift-off, provides exceptional support and comfort, adapting to the user’s body shape, weight, and temperature.

Sealy, on the other hand, is known for its innerspring mattresses. These products use spring coils, cooling technology, and hybrid foam/spring designs. The Tempur-Pedic and Sealy brands synergize to cater to a wide range of customer preferences.

Home Furnishings

A healthy housing market is good for furniture demand as more consumers are buying, renting, moving, and renovating. On the other hand, periods of economic weakness or high interest rates discourage home sales and can squelch demand. In addition, home furnishing companies must contend with shifting consumer preferences such as the growing propensity to buy goods online, including big things like mattresses and sofas that were once thought to be immune from e-commerce competition.

Tempur Sealy's primary competitors include Sleep Number (NASDAQ:SNBR), Purple Innovation (NASDAQ:PRPL), Casper Sleep (NYSE:CSPR), and Serta Simmons Bedding.

Sales Growth

A company's long-term performance can indicate its business quality. Any business can enjoy short-lived success, but best-in-class ones sustain growth over many years. Tempur Sealy's annualized revenue growth rate of 12.8% over the last 5 years was decent for a consumer discretionary business. Tempur Sealy Total RevenueWithin consumer discretionary, product cycles are short and revenue can be hit-driven due to rapidly changing trends. That's why we also follow short-term performance. Tempur Sealy's recent history shines a dimmer light on the company, as its revenue was flat over the last 2 years.

We can understand the company's revenue dynamics even better by analyzing its most important segments, Wholesale and Direct, which are 74.3% and 25.7% of revenue. Over the last 2 years, Tempur Sealy's Wholesale revenue (sales to retailers) averaged 3.4% year-on-year declines. On the other hand, its Direct revenue (sales made directly to consumers) averaged 21.3% growth.

This quarter, Tempur Sealy reported a rather uninspiring 1.4% year-on-year revenue decline to $1.17 billion of revenue, in line with Wall Street's estimates. Looking ahead, Wall Street expects sales to grow 3% over the next 12 months, an acceleration from this quarter.

Operating Margin

Operating margin is an important measure of profitability. It’s the portion of revenue left after accounting for all core expenses–everything from the cost of goods sold to advertising and wages. Operating margin is also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

Tempur Sealy has managed its expenses well over the last two years. It's demonstrated solid profitability for a consumer discretionary business, producing an average operating margin of 13%. Tempur Sealy Operating Margin (GAAP)

This quarter, Tempur Sealy generated an operating profit margin of 10.4%, down 2 percentage points year on year. This reduction indicates the company was less efficient with its expenses over the last quarter, spending more money in areas like corporate overhead and advertising.

Over the next 12 months, Wall Street expects Tempur Sealy to become more profitable. Analysts are expecting the company’s LTM operating margin of 12.3% to rise to 15.4%.

EPS

We track long-term historical earnings per share (EPS) growth for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company's growth was profitable. Tempur Sealy EPS (Adjusted)

Over the last 5 years, Tempur Sealy's EPS grew 226%, translating into an astounding 26.7% compounded annual growth rate. This performance is materially higher than its 12.8% annualized revenue growth over the same period. Let's dig into why.

While we mentioned earlier that Tempur Sealy's operating margin has declined over the last year, a 5-year view shows its margin has expanded 1.9 percentage points, leading to higher profitability and earnings. Taxes and interest expenses can also affect EPS growth, but they don't tell us as much about a company's fundamentals.

In Q4, Tempur Sealy reported EPS at $0.53, down from $0.54 in the same quarter a year ago. This print unfortunately missed analysts' estimates, but we care more about long-term EPS growth rather than short-term movements. Over the next 12 months, Wall Street expects Tempur Sealy to grow its earnings. Analysts are projecting its LTM EPS of $2.40 to climb by 15.7% to $2.78.

Cash Is King

If you've followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills.

Over the last two years, Tempur Sealy has shown mediocre cash profitability, putting it in a pinch as it gives the company limited opportunities to reinvest, pay down debt, or return capital to shareholders. Its free cash flow margin has averaged 4.5%, subpar for a consumer discretionary business.

Tempur Sealy Free Cash Flow Margin

Tempur Sealy's free cash flow came in at $59 million in Q4, equivalent to a 5% margin, up 1,129% year on year. Over the next year, analysts predict Tempur Sealy's cash profitability will improve. Their consensus estimates imply its LTM free cash flow margin of 7.8% will increase to 10.1%.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to how much money the business raised (debt and equity).

Although Tempur Sealy hasn't been the highest-quality company lately, it historically did a solid job investing in profitable business initiatives. Its five-year average return on invested capital was 18.3%, higher than most consumer discretionary companies.

The trend in its ROIC, however, is often what surprises the market and drives the stock price. Tempur Sealy's ROIC has stayed the same over the last two years. This is fine because its returns are solid, but if Tempur Sealy wants to become an investable business, it will need to increase its ROIC even more.

Key Takeaways from Tempur Sealy's Q4 Results

We struggled to find many strong positives in these results. Its revenue, operating margin, and EPS missed analysts' expectations, driven by sales declines in North America. The company's international growth clocked in above estimates, but its outperformance wasn't enough to move the needle.

Tempur Sealy also increased its quarterly dividend to $0.13 per share, which will be payable on March 7, 2024 to shareholders of close on February 22, 2024. The company's dividend has roughly doubled since its 2021 initiation. Looking ahead, management's full-year 2024 EPS guidance underwhelmed in light of soft demand within the bedding category.

Overall, this was a mixed quarter for Tempur Sealy. The company is down 2.1% on the results and currently trades at $50.22 per share.

Is Now The Time?

Tempur Sealy may have had a tough quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

Tempur Sealy isn't a bad business, but it probably wouldn't be one of our picks. Although its revenue growth has been decent over the last five years, its low free cash flow margins give it little breathing room.

Tempur Sealy's price-to-earnings ratio based on the next 12 months is 18.5x. We don't really see a big opportunity in the stock at the moment, but in the end, beauty is in the eye of the beholder. If you like Tempur Sealy, it seems to be trading at a reasonable price.

Wall Street analysts covering the company had a one-year price target of $56.63 per share right before these results (compared to the current share price of $50.22).

To get the best start with StockStory, check out our most recent stock picks, and then sign up for our earnings alerts by adding companies to your watchlist here. We typically have the quarterly earnings results analyzed within seconds of the data being released, and especially for companies reporting pre-market, this often gives investors the chance to react to the results before the market has fully absorbed the information.