Tempur Sealy International, Inc.

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Tempur Sealy International is a global manufacturer, marketer, and distributor of bedding products, including mattresses, foundations, adjustable bases, and other sleep-related items.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Tempur Sealy International (TPX) operates within the bedding industry, focusing on designing, manufacturing, marketing, and distributing a variety of sleep products.

  • Products: TPX’s product portfolio primarily consists of mattresses, foundations, and adjustable bases sold under well-known brands such as Tempur, Sealy, and Stearns & Foster.

    • Tempur: Premium memory foam mattresses and bedding products known for advanced technology and high-end pricing.
    • Sealy: Traditional and innerspring mattresses catering to a broad consumer base at a mid-range price point.
    • Stearns & Foster: Luxury mattresses that sit at the high end of TPX’s product spectrum.
  • Distribution Channels: TPX distributes products through wholesale channels, direct-to-consumer e-commerce channels, and company-owned retail stores. Their sales are geographically diverse, with North America accounting for 60% of net sales, International, and also the direct channel.
  • Competitive Landscape: The bedding industry is fairly competitive with other major players, with competition occurring on the basis of price, brand recognition, product innovation, and distribution capabilities. Competitors include major mattress companies, like Sleep Number, Simmons, Serta, and Purple, as well as private-label manufacturers.

The industry is fragmented, with no one brand accounting for a particularly large market share, and there are also multiple smaller players.

  • What Makes TPX Different: TPX differentiates itself primarily through its strong brands, innovative product designs, and a well-established distribution network.

    • Specifically, the company claims 9 patents and 86 trademarks for its technology.
    • It owns and operates the largest network of manufacturing and distribution facilities. This creates economies of scale that help give an advantage.

  • Recent Industry Trends: The mattress industry has been experiencing a greater focus on sleep health and wellness, which has resulted in the increase in demand for technologically advanced and comfortable bedding products, and online selling has grown significantly.

    • The supply chain is strained due to high energy costs and raw material prices, creating a headwind for margins.

Financial Analysis:

  • Revenues: In 2023, Tempur Sealy’s total net sales were $4.9 billion. Net sales have seen an increase of 1.4% between 2021 and 2023. The increase in net sales in 2022 compared to 2021 was 17%. They have however recorded a decrease in sales of 5.6% in the 9 months ended September 30, 2023 when compared to the same period in 2022. The company is experiencing an overall decline in revenue YoY.
  • Margins: In 2023, TPX reported a gross margin of 46.7%, which indicates a drop of 2.1% from 2022 levels, of 48.8%. Operating margins have also shown a similar downward trend, falling from 17.6% in 2021 to 14.1% in 2023. This indicates the pressure on the supply side, as gross margins and operating margins have been hit by increasing costs.

The biggest issue impacting margins is the increase in costs relating to the supply chain, primarily shipping and raw material costs.

  • Earnings Per Share (EPS): Adjusted EPS grew by 23.4% in 2022. Net income in the first 9 months of 2023 decreased by roughly 30%. EPS has also fallen from $2.82 to $2.46. These results indicate that the company has failed to perform as well in 2023 as it did in 2022.
  • Cash Flow:
    • In 2022 cash from operating activities was $809.9 million compared to $476.5 million in 2021. In the nine months ended September 30, 2023 cash from operations was $492.4 compared to $476.2 million in the same period last year.

Moat Rating: 3/5

  • Intangible Assets (Brands and Patents): TPX owns a portfolio of high-quality brands, including Tempur, Sealy, and Stearns & Foster, which are recognized for comfort, quality, and durability. These brands help command a premium price in the market. They also have over 80 registered trademarks that protect their branding. They also have various patents that they hold that can help create differentiation.

  • These are good but not completely insuperable advantages, so I have not rated this higher

  • Cost Advantages: Having an in-house supply and distribution chain does create cost advantages through the economies of scale they can achieve, but it is not impossible for competitors to do this. They also face a higher input cost due to large amounts of transportation necessary for mattresses and related products.

  • Switching Costs: While there can be some switching costs, it’s more of a middle than high level of switching costs.

    • For an industry where consumers have so many options in every price range, the moat is limited due to the ease of switching.
  • Overall: Combining these factors, I would rate the moat at 3/5, as while they do have some moat, there is a lot of room for their moat to be eroded.

Legitimate Risks to Moat:

  • Technological Disruption: The bedding industry is rapidly evolving, with new materials, designs, and technologies frequently being introduced. A competitor introducing a truly revolutionary technology at a better price point could threaten their competitive edge.
    • In their latest earnings call, the CEO mentioned their new technologies and new products which should help them defend their moat.
  • Competition: The bedding industry is competitive with both large players and several smaller entrants. Price pressures from competitors could limit TPX’s ability to raise prices.
    • Their latest earning report notes their struggle with demand and prices. The need to move production of some products overseas should help reduce costs.
  • Customer Concentration: TPX has a relatively concentrated customer base, as sales come through major retail chains. These chains have tremendous bargaining power. Thus, if these chains make use of substitutes or do business with another provider, this could impact TPX’s revenue.
    • Their growing direct to consumer channel may reduce some reliance on these major distribution partners.
  • Economic Downturn: A downturn in the economy could hurt the consumer goods sector which would drastically reduce the demand for TPX’s higher end products.
    • Management has indicated that current economic downturns are impacting the luxury goods market, but that has been offset by growth in the other segments and international markets

Business Resilience

  • Brand Strength: Their well-known brands and focus on high-quality products provide some resilience during down periods.
  • Diversified Distribution: Distribution both through wholesale and a direct to consumer model provides more resilience
  • Financial Stability: Solid financial position helps navigate downturns and strategic issues.

Understandability Rating: 3/5 The business is fairly easy to understand. You can get the gist of the business from the company’s core products (bedding) and the financial metrics are straightforward. Understanding the nuances that truly differentiate TPX’s position among its competitors and fully understanding the industry dynamics is difficult.

  • This also gets more complex due to international operations.

Balance Sheet Health: 4/5

  • Liquidity: The current ratio, at 1.65 indicates that the company is able to cover liabilities with current assets.
  • Leverage: Net debt to equity for TPX sits at 3.08x. This debt has been used to fund acquisitions and share buy backs. The high leverage could be considered risky but the company has historically used capital well.
    • On the earnings call, management have said they expect the debt to gradually reduce over the coming few years.
  • Cash: The company has 250 million in cash reserves which can help them in case of short-term issues.