Tempur Sealy Reports Second Quarter 2020 Results

Tempur Sealy International, Inc. (the “Company”) announced financial results for the second quarter ended June 30, 2020.

Second Quarter 2020 Financial Summary

– Total net sales decreased 8.0% to $665.2 million as compared to $722.8 million in the second quarter of 2019. On a constant currency basis(1), total net sales decreased 7.3%, with a decrease of 2.9% in the North America business segment and a decrease of 26.9% in the International business segment.
– Gross margin was 40.0% as compared to 43.4% in the second quarter of 2019. Adjusted gross margin(1) was 40.6% in the second quarter of 2020. There were no adjustments to gross margin in the second quarter of 2019.
– Operating income decreased 34.1% to $53.4 million as compared to $81.0 million in the second quarter of 2019. Adjusted operating income(1) decreased 16.5% to $70.0 million as compared to $83.8 million in the second quarter of 2019. Operating income and adjusted operating income(1) in the second quarter of 2020 included $7.9 million of costs associated with temporarily closed company-owned retail stores and sales force retention costs as a result of the novel coronavirus (“COVID-19 charges”).
– Net income decreased 44.7% to $23.0 million as compared to $41.6 million in the second quarter of 2019. Adjusted net income(1) decreased 20.8% to $35.1 million as compared to $44.3 million in the second quarter of 2019.
– Earnings before interest, tax, depreciation and amortization (“EBITDA”)(1) decreased 21.8% to $85.2 million as compared to $109.0 million in the second quarter of 2019. Adjusted EBITDA (including COVID-19 charges)(1) decreased 10.0% to $101.7 million and adjusted EBITDA per credit facility(1) decreased 3.0% to $109.6 million as compared to $113.0 million in the second quarter of 2019.
– Adjusted EBITDA per credit facility(1) excluded $24.5 million of asset impairments, incremental operating costs due to the global pandemic, COVID-19 charges and other items in the second quarter of 2020.
– Earnings per diluted share (“EPS”) decreased 40.5% to $0.44 as compared to $0.74 in the second quarter of 2019. Adjusted EPS(1) decreased 13.9% to $0.68 as compared to $0.79 in the second quarter of 2019. Adjusted EPS(1) included $0.11 of COVID-19 charges in the second quarter of 2020.
– For the trailing twelve months ended June 30, 2020, leverage based on the ratio of consolidated indebtedness less netted cash(1) to Adjusted EBITDA per credit facility(1) was 2.83 times as compared to 3.65 times in the corresponding prior year period.
– Net cash provided by operating activities increased to a record $155.4 million as compared to $41.3 million in the second quarter of 2019.

Company Chairman and CEO Scott Thompson commented, “It was definitely a quarter of lows and highs, ending clearly on a high note for the industry and our business. Sales trends through the quarter accelerated each month and have continued to accelerate into July unabated. We believe the category is benefiting from a shift in consumer spend of discretionary dollars into the home category in which our products and brands are well-aligned to meet those consumer needs. We are currently experiencing tremendous order volume in the U.S. that is broad-based with growth across both Tempur and Sealy brands. In fact, our sales have been constrained by our Sealy manufacturing capacity and our suppliers’ capacity to meet this increased demand. Over the past five years, we have worked diligently to strengthen the foundation of our company, and we are now benefiting from our powerful omni-channel presence and strong competitive position in the industry. While a level of uncertainty remains, we expect the industry tailwinds and our sales momentum to continue.”

Business Segment Highlights

The Company’s business segments include North America and International. Corporate operating expenses are not included in either of the business segments and are presented separately as a reconciling item to consolidated results.

North America net sales decreased 3.0% to $570.5 million as compared to $588.1 million in the second quarter of 2019. On a constant currency basis(1), North America net sales decreased 2.9% as compared to the second quarter of 2019. Gross margin was 37.9% as compared to 40.8% in the second quarter of 2019. Adjusted gross margin(1) was 38.6% as compared to 40.8% in the second quarter of 2019. Operating margin was 12.2% as compared to 13.6% in the second quarter of 2019. Adjusted operating margin(1) was 14.3% as compared to 13.9% in the second quarter of 2019. Operating income and adjusted operating income(1) included $6.0 million of COVID-19 charges in the second quarter of 2020.

North America net sales through the wholesale channel decreased $33.9 million, or 6.4%, to $494.6 million as compared to the second quarter of 2019. North America net sales through the direct channel increased $16.3 million, or 27.3%, to $75.9 million, primarily driven by an increase of more than 140% in web sales as compared to the second quarter of 2019.

North America adjusted gross margin(1) declined 220 basis points as compared to the second quarter of 2019. The decline was primarily driven by product and brand mix, partially offset by decreased floor model expenses and lower commodity costs. North America adjusted operating margin(1) improved 40 basis points as compared to the second quarter of 2019. The improvement was primarily driven by the lower operating expenses as a result of cost actions in the quarter, partially offset by the decline in gross margin and COVID-19 charges.

International net sales decreased 29.7% to $94.7 million as compared to $134.7 million in the second quarter of 2019. On a constant currency basis(1), International net sales decreased 26.9% as compared to the second quarter of 2019. Gross margin was 52.5% as compared to 54.5% in the second quarter of 2019. Adjusted gross margin(1) was 53.0% as compared to 54.5% in the second quarter of 2019. Operating margin was 10.1% as compared to 20.3% in the second quarter of 2019. Adjusted operating margin(1) was 14.6% in the second quarter of 2020. There were no adjustments to operating margin in the second quarter of 2019. Operating income and adjusted operating income(1) included $1.9 million of COVID-19 charges in the second quarter of 2020.

International net sales through the wholesale channel decreased $34.6 million, or 33.4%, to $69.1 million as compared to the second quarter of 2019. International net sales through the direct channel decreased $5.4 million, or 17.4%, to $25.6 million as compared to the second quarter of 2019.

International adjusted gross margin(1) declined 150 basis points as compared to the second quarter of 2019. The decline was primarily driven by fixed cost deleverage on lower unit volumes and decreased royalties, partially offset by favorable country mix. International adjusted operating margin(1) declined 570 basis points as compared to the second quarter of 2019. The decline was primarily driven by fixed cost deleverage on operating expenses, increased bad debt expense, COVID-19 charges and the decline in gross margin. These declines were partially offset by the performance of the Asia joint venture.

Corporate operating expense decreased to $25.6 million as compared to $26.5 million in the second quarter of 2019. Corporate adjusted operating expense(1) was $25.4 million in the second quarter of 2019. There were no adjustments to operating expense in the second quarter of 2020.

The Company ended the second quarter of 2020 with total debt of $1.8 billion and consolidated indebtedness less netted cash(1) of $1.6 billion. Leverage based on the ratio of consolidated indebtedness less netted cash(1) to adjusted EBITDA per credit facility(1) was 2.83 times for the trailing twelve months ended June 30, 2020, the lowest in Tempur Sealy history.

Company Chairman and CEO Scott Thompson commented, “We are lowering our target leverage ratio for the second time in the last 12 months. Our new revised target range is 2.0 to 3.0 times. The reduction in our leverage target is not due to any market concerns; it is a strategic move to provide optionality and lower market volatility. We have always seen our financial strength as a competitive advantage and part of our long-term strategy for the Company.”

Consolidated net income decreased 44.7% to $23.0 million as compared to $41.6 million in the second quarter of 2019. Adjusted net income(1) decreased 20.8% to $35.1 million as compared to $44.3 million in the second quarter of 2019. EPS decreased 40.5% to $0.44 as compared to $0.74 in the second quarter of 2019. Adjusted EPS(1), which included $0.11 of COVID-19 charges, decreased 13.9% to $0.68 as compared to $0.79 in the second quarter of 2019.

(1) This is a non-GAAP financial measure. Please refer to “Non-GAAP Financial Measures and Constant Currency Information” below.

Business Update

The Company continues to study, respond and optimize its operations related to the challenges from the COVID-19 crisis. The Company has taken, and continues to take precautionary measures to mitigate health risks during the evolving situation resulting from COVID-19.

The Company experienced a major reduction in total net sales when COVID-19 began materially impacting our North American business in mid-March. Order trends reached their lowest point in the second quarter when they were down 80% for a few days in early April and began to improve thereafter, with orders down approximately 55% for the full month of April as compared to the same month in 2019. The Company experienced significant and accelerating improvement in order trends throughout the remainder of the quarter, and the Company provided market updates in May and June as orders improved from previous expectations. This improvement was primarily due to the reopening of brick-and-mortar stores, the acceleration of e-commerce business trends, and a shift in consumer spending habits towards in-home purchases, including bedding products.

This unexpected and rapid increase in demand for bedding products has challenged the entire bedding industry and supply chain including the Company. The broad-based increase in demand coupled with supply chain constraints has resulted in longer order to delivery times for Sealy products in the second quarter and continue July to-date. The Tempur-Pedic manufacturing process is not as impacted by the current supply chain constraints as it is less labor-dependent and has fewer components than the Sealy process. The Company is in the process of ramping global production capabilities across its entire portfolio of products to meet heightened demand, but expects to continue experiencing capacity constraints on some Sealy bedding products in the U.S. through the third quarter of 2020.

Financial Guidance

As previously announced, the Company has withdrawn its previously-issued full-year financial guidance for 2020 and will not provide updated full-year adjusted EBITDA guidance until there is more visibility into the worldwide operating environment. Management is targeting third quarter 2020 net sales to increase approximately 25 percent from the same period last year.

If the current order trends were to continue and if there are no significant changes in supply chain or manufacturing capacity, it is possible the Company’s third quarter or fourth quarter financial performance could trigger vesting of the Company’s long-term aspirational plan resulting in a non-cash charge as outlined in previous regulatory filings.

For the full second quarter results, click here.

About Tempur Sealy International

Tempur Sealy International, Inc. (NYSE: TPX) develops, manufactures, and markets mattresses, foundations, pillows and other products. The Company’s products are sold worldwide through third party retailers, its own stores, and online. The Company’s brand portfolio includes many highly recognized brands in the industry, including Tempur®, Tempur-Pedic®, Sealy® featuring Posturepedic® Technology, and Stearns & Foster®. World headquarters for Tempur Sealy International is in Lexington, KY. For more information, visit http://www.tempursealy.com or call 800-805-3635.

Contact:

Aubrey Moore – Investor Relations – investor.relations@tempursealy.com – (800) 805-3635

Source: Tempur Sealy International, Inc.