Parhelion continues to hold a growing short position in TPX. This earnings report reiterates my stance that the company is overvalued. The rebound in the stock post earnings shows that the market continues to shrug off terrible earnings reports. Perhaps this stock is simply in zombie mode for now, providing another chance to jump on the bear case.
Earnings demonstrates continued mismanagement and market vulnerability
The earnings release on November 1st continues to show why Tempur Sealy is primed for a valuation re-rating over the next quarter. The company missed (again) on both revenue and earnings for the second straight quarter. What was most interesting was the company’s response to new market entrants and the seemingly vulnerable position they’ve put themselves into.
TPX missed my estimates by $14M in revenue and $0.16 in GAAP EPS. Management noted that the impact of tariffs on gross margin have been, and will continue to be, a drag on gross margins. The company also states that they believe they will be able to pass along cost increases to consumers which is completely reasonable given their experience in the past.
TPX losing customers in the most competitive segments
However, the company also noted that less expensive products have cannibalized premium offerings and overseas imports sold ‘below cost’ had eaten into product sales. Management specifically highlighted they are losing in the sub-$1,000 price category. The 10-Q filed last week indicated the company is asking the U.S. International Trade Commission to investigate the overseas “dumping”.
I do not know if there is dumping occurring, but I can interpret what the company is saying relative to the economy and industry they operate in.
If consumers are preferring less expensive Sealy products and there is increasing competition in that price band – will TPX be able to upsell consumers into the $2,000+ range? I’m skeptical given the weakness of the U.S. housing market (folks tend to purchase new beds when they move) and the technology that TPX isn’t putting into its product.
A comparable SNBR product offers SleepIQ sleep tracking software that is fancy enough to connect to other fitness apps. The bed-in-a-box company EightSleep offer adjustable heating/cooling, sleep tracking, and free shipping both ways for half the price (and some beds are under $1,000). Perhaps consumers are finding premium values at lower prices elsewhere.
Company remains aloof about the competitive environment
Another big takeaway was the apparent ignorance of where competition lies. When asked about the bed-in-a-box players, Mr. Thompson replied stating “You can’t get good numbers obviously and there’s a lot of puffery in some of the stuff that comes out of that particular segment of the business” and “But it feels like to me that the bed-in-the-box industry’s, what I’ll call rapid growth rate for sure, those days are behind them is my gut feel”.
Sorry, your job is to not rely on gut-feels. At least give us insight into how Sealy bed-in-a-box offering is performing. By not providing this information we can only assume that the internal offerings days of high growth are behind it…
| Q3 2018 | Estimate | Actual | var |
| Revenue ($M) | $743.8 | $729.5 | -$14.3 |
| Gross Margin % | 42.1% | 41.1% | (1.01) |
| GAAP EPS | $0.93 | $0.77 | -$0.16 |
| Q4 2018 Fcst | Prior | New | var |
| Revenue ($M) | $665.4 | $649.6 | -$15.8 |
| Gross Margin % | 42.6% | 41.1% | (1.50) |
| GAAP EPS | $0.72 | $0.48 | -$0.24 |
| Earnings History | Q1 | Q2 | Q3 |
| Street Estimate | $634.3 | $691.9 | |
| Parhelion | $743.8 | ||
| Actual | $647.0 | $669.7 | $729.5 |
| var | $12.7 | -$22.2 | -$14.3 |
| var % | 2.0% | -3.3% | -2.0% |