Okay. We are ready to kick off our next meeting with Tempur Seeley. With us today from the company is Aubrey Moore. She's with thank you all for coming and participating first. I'm going to ask Scott to make a few opening comments, then I'm going to nail them with a few questions, and then we're going to open it up to the audience hopefully for questions.
Scott? First of all, thank you for having us. And I can't tell you how thrilled I am to be nailed by some questions after I stop talking. So I'll talk for the complete 29 minutes and not accept any questions. First of all, thank you for your interest in Tempur Sealy.
We're coming off a very strong performance in the Q1 where Tempur revenues grew like 38%. We had positive growth in Sealy. And the company took a lot of momentum into the Q2. We're in the middle of the end of a launch that's taken about a little over a year of new product, the Tempur products, starting at the low end of Tempur and recently moving over to the high end of Tempur, which is the Tempur Breeze. So, we're expecting some ASP benefit as we complete that rollout.
We also did a Stearns and Foster rollout, which is high end Sealy in the Q1 and it's performing well. So, as we sit here today, we really feel good about our competitive position in the world. If we look at our competition in every market, we feel like we're gaining share, especially in North America. Our costs are under control. Our quality is outstanding.
And so right now, we think it's an exciting time to be involved in Tempur Sealy.
Shoot. Okay. We had some recent news. The International Trade Commission with some duties and countermobiling duties and the mandatory respondents, I believe, are averaging 75%, and the others were much higher. Could you comment on how the outcome of that, assuming they go final, fit with where you thought it would be?
And what if any impact you see from that over the next 12, 18 months?
Sure. Just to get everybody kind of help frame the discussion. We're generally talking about low end bedding that where we believe there's been some dumping by the Chinese in low end bedding. Where that would affect us is in our Sealy brand, which is more of a commodity brand. And it's generally Sealy below $1,000 okay?
And in the Sealy below $1,000 that's been a pretty good headwind for us for the last couple of years and we've got some new tariffs in place. There's 25%, we'll call that the Trump tariff and then these new tariffs are 30% to 80% or 90% on top of that, which we expect will mitigate some of the dumping that's been coming in from China. How that affects the industry? So, it's a net positive for sure. The question really is, is it a big positive or a little positive?
It's definitely a positive because it puts the domestic manufacturers on more of a level playing field with the Chinese imports. So, we expect to get some benefit. There, I expect the pricing entry level pricing point probably to move up in bedding because of that. But I don't think it's a game changer. I think it just it's beneficial to Sealy low end.
But in general, Sealy low end and that's not just Sealy, any low end bedding generally doesn't have a high profit margin. And of course, the ASP is not high. So that's not really where the heart of the profitability of the company are. So we're thrilled about it. We think it's a net positive.
We think it was appropriate. It was generally in line with what our expectations were and it should be a minor tailwind to Sealy.
Thank you. And then maybe you could comment on the Tempur Pedic North American brand for a moment, or it seems to me most investor focus is, right or wrong. You've had a tremendous comeback from the divorce from that firm in terms of volume. And I'm wondering if you could forgetting that for the moment and leaving that out of the discussion, how do you feel about the ability? And obviously, the model is different.
You've got some of your own stores. How do you feel about the potential to get back to that previous high watermark and or exceed it without Mattress Firm?
I think if you just look at the trajectory, there's no question that we would get back to a new high watermark with a Tempur product without Mattress Firm. We can argue about the timing of when we do that, but we feel very confident we'd get back to a high watermark. We've changed the distribution platform where we as you mentioned, we are a little more in control of our destiny. We had a 50% unit growth in the Q1, I mean, just as a point of reference. But I think what I'm more excited about is where some of that growth is coming from.
If you look at our direct to consumer business, our online business, which is Tempur only high end web business, it's growing at 30%. So we've clearly demonstrated the ability to enter that market, do it well. And I think what I'm most excited about in that particular channel is not only has it grown 30%, but it's very profitable. It may be the most profitable channel. So we're not over investing in customer acquisition costs like some people.
And in fact, our customer acquisition cost has gone down in the Q1 versus others. Thus, our margin in that business has also gone up. So, I got 30% growth, better margins and a very profitable channel. So, we run that channel for profit, not revenue. And so, that feels really good.
And then we've got another initiative, our direct to consumer retail stores, which are Tempur only flagship stores and they're different than your traditional mattress store. They're very high end. The RSA or the sales associate is a salaried employee, full benefits, so you have a completely different sales experience on the floor. And we're finding that that is resonating very well with customers. We've got 45 of those stores in place, shooting for maybe 60 by the end of the year.
It's a niche strategy of maybe 125 to 150 stores, really strong cash flows and return on investment. Plus, we're matching high end customers with high end product, which is not being done in the marketplace right now and bedding in a lot of ways. So, we feel good about that opportunity to continue to drive. And then a lot of the other retail customers ex Mattress Firm, we got closer to them during the divorce for lack of a better way to say it. And they have found that selling Tempur on their floor is very profitable for them and have leaned in and that's going very well.
And certainly a surprise for me has been seeming resurgence of the Sealy brand. And you've always talked about the success above $1,000 particularly with the hybrids, but it seems a little broader based now. You just established new relationship with Big Lots. What's going on precisely there? Is it something you're doing or something maybe the competition is doing?
I'm going to say it's a blend. We're talking about Sealy North America. And we've got to kind of set it up a little bit. A few years ago, we decided to move Sealy up market a little bit and lean a little higher on ASP quality and innovation. And that's gone very well.
That's the hybrids and what I'll call above 1,000 Sealy. And that strategy has been successful. Same time, as I mentioned before, below 1,000. We've moved away from some of it, plus we lost some of it to the Chinese imports. That's beginning to feel a little bit firmer.
And I think it's because of the quality of the product compared to others in the industry has improved. Our logistics and how we service our customers is outstanding. And that's a big deal in the business because this is a just in time delivery kind of business. And we've recently in the last year or so focused on some channels at the lower end that we didn't focus on before and that would be in Amazon, Wayfair, some of those emerging markets, channels we call them alternative channels. We used to ignore them, I mean completely ignore them.
And I don't know 6, 7 months ago, we set up a separate sales team that just interfaces with Amazon, just interfaces with Wayfair in that marketplace. And we're gaining we have a significant growth rate in that channel, which I don't quote because the base is small and it would be misleading. But we're getting our share beginning to get our share in that marketplace that we ignored. That's certainly part of it. And then our chief competitor in North America, Serta Simmons, has bumped into a couple of things that probably have helped us and we're probably getting some benefit from some issues they've bumped into.
And then maybe a last one for me before I canvas the audience. The bed in the box test, how do you think about a bed in a box product? I have some people I talk with who think half beds sold in 5 years will be in a box. Your test is small, toe dipping, I believe, in Seattle. Are you agnostic as to whether bed in a box works?
Or what's your strategy in approaching it?
Okay. Well, first of all, let me get some definitions because this gets a little confusing, and I find investors really confused about this particular topic, okay? Sort of like there's compressed bedding and that is a bed that is compressed, okay? That's a market, okay? That's byproduct, okay?
Compressed bedding is going to grow in my opinion, okay? And we're actively in compressed bedding. We have Sealy to go, have had it for a decade, been in that market for quite a while. We have Cocoon by Sealy, which is a middle market product that we've been in probably for 3 years. And then we've recently entered with a Tempur Dream Bed, which is a Tempur Bed, which is high end compressed bedding, only in Seattle to test.
So that's compressed bedding, okay? Then you have online bedding. Online bedding is where you buy a bed online and that may be compressed or that may be a regular bed, okay? Online bedding, temper.com, costco.com, sleepoutfitters.com, mattressroom.com, that's a channel, okay? Online bedding also is going to grow, I believe, and that's what we're seeing.
And that is compressed bed and non compressed bed. That's also going to grow. Then the question is bed in the box, okay? And what I call bed in the box is these the Internet companies that are generally very good at marketing, that use contract manufacturing, who generally over invest in customer acquisition costs to drive revenue to raise capital to feed the machine. That's bed in the box, okay?
So, your question is bed in the box. So, I just want to make sure sometimes when I answer the question, I answer it and people don't understand what I'm really saying. Compressed bed is going to grow. Online is going to grow. Now we're talking about bed in the box.
And when I talk about bed in the box, we're talking about generally, I'm going to call them commodity product made a fall, okay? That business in North America in mattresses, I expect is not growing as we sit here today. I can't prove it because there's clearly a lot of puffery around the numbers. But from all indications that I can find, I don't think that particular market is growing.
And you say that because their customer acquisition costs are hit a wall maybe and they can't continue to throw more capital
at it or I think there's some of that, that the customer acquisition cost is going up for them, going down for us. The traditional betting manufacturers, including my friends at Serta Simmons and all of us have gotten sharper on our game and increased our offering in that product. All the retailers, guess what? They've got their own bed in the box, okay? They've gone out and gotten a bed in the box that's not one of the bed in the box guys I was talking about, But they've also got new product, take Ashley's.
And so that market has gotten saturated with competition such that I think it's just become a tough market. They've also because their brand is not very strong, have been more susceptible to the dumping issue of the Chinese. And I think they've lost share to other brands that have gotten on Amazon that are not even as large and known as well as some of the bed in the box people. So, I think they're I just don't think that North America matches as an industry, no, not any individual company is growing at this point. But I should say to be fair and that is why you see them running to retail, okay?
They're running to retail to try to get volume. My perspective on that is it's interesting. But from our perspective in the business, if you can't make money direct to consumer, you're not going to make it going through a 3rd party because that's a more expensive channel. That's been our experience.
Okay. I managed to ask my questions without asking you about Mattress Firm. I want you to give me credit for that. Any questions from the audience for Scott or Baftar?
Shocking. All right. Shocking. He promised me that he wouldn't ask the question. So instead, he filtered it out to the audience, which is expected actually.
Get everybody grounded on Mattress Firm, about a 20% player in North America, used to do business with them, broke up a while back. So we've been playing 80% of the North America market and playing well in that 80%. But look, we're the largest bedding manufacturer in the world. They are by far the largest North American retailer of beds. It only makes sense that ultimately we get together, okay?
I've always said that it would be highly profitable for us and it would be highly profitable for them. We started having discussions with them last November, which is publicly known. And we've been in dialogue with them at the board level and at the management level. We have a lot of confidence in the new board and the new management team. The discussions are positive and we're making progress.
They're taking longer probably than some people would like. My perspective on that is we got to do it right, not fast. It's given us time to watch their performance in the marketplace post bankruptcy. It's given us time to get to know each other. Because one thing I've always said is, if we get back together, it's got to be durable, because I'm not doing this divorce thing again.
And so both parties are getting to know each other, making sure we understand how we're going to operate. And it is a different world as to the way the 2 companies would operate. And I would consider it to be the track we're on to be very durable. And if we get back together, something that will be a win win for both organizations. So I would consider step more progress since the last time I reported, but I don't have anything signed, executed and done at this point.
And Scott, how a relative statement. Obviously, they walked away from a bunch of leases, closed a lot of stores. So relatively, they're in better financial health. I don't know on an absolute basis how much profit they make. And you made a comment we're going to get a chance to watch them here.
Do you worry at all about their long range financial viability and your receivables?
Well, first of all, I worry about everything all the time. So if you ask me if I worry, I'm going to answer that yes, whatever the next topic is. So yes, we worry about everything all the time. They're obviously a private company. We're not going to get into any kind of detail.
But let me but still step
back for a second
and talk about old Mattress Firm, which was a public company. They had a strategy of relative market share that they were wed to, which basically meant open a mattress store every corner in the world, massive distribution everywhere, okay, which created a very expensive real estate proposition for them. And that business model, I believe, was kind of the source of our conflict because relative market share didn't make any sense. That business model broke down. And when their economics didn't work, they then turned to the vendor to fix their strategy problem, okay?
That's kind of my level. I'm sure someone else has got a different story, but that's what I feel was the tension, okay? I didn't like that strategy the first time I saw it from a retail standpoint. It was not customer centric. It was not focused on giving the customer a great experience.
It was weaponized real estate, okay, which I did not understand as a retailer. That failed and that is the source of their financial issues that I think they had. They fixed that in bankruptcy, maybe a little more trimming here or there, I don't know, but they generally fixed that. But more importantly, the new Mattress Firm is customer centric, customer friendly, focused on giving the customer value and giving them a great experience in the box, okay? That strategy, obviously, you have to execute.
That strategy to me is a winning strategy. And we would not be having discussions with them if they were on the old strategy. So to answer your question, we are bullish on their strategy and we think the new management team and the Board are making good long term decisions to put them on sure footing.
Okay. Great. Other questions? The question is how do you handle relationships with existing retailers outside of MatFirm if they come back in the fold?
As part of our operating company, we've got an omnichannel strategy and core competency around the world is managing channel conflict. Let's just kind of start there. That's what we do all over the world. We got channel conflict issues that we manage day to day in every country in the world. So that's a core competency.
In North America, this would be a big change, okay? So we'll call this a big channel conflict that you have to kind of work through. What has happened, when we broke up or they broke up or everyone who broke up together, the industry got disrupted, okay? That disruption was not positive for the other retailers. Mattress Firm became a deep discounter, supply chain was kind of messed up.
If you go do channel checks and ask the other retailers what they think, I think you'd find 9 out of 10 of them would say this hadn't been any fun for them. This has been disruptive in the industry and it's hurt them. That wasn't what we expected, but that's what happened in the industry. Most of them would like to have a stable industry. So, if we get back together with Mattress Firm and it stabilizes the industry, I think you'll we will find the vast majority of the other retailers actually supportive getting back together.
Remember, the reason we broke up with Mattress Firm wasn't because we didn't want to do business with them. It's because they demanded a competitive advantage against the other retailers, not just a volume discount. They demanded a competitive advantage, which would have been so great that it would have put the rest of our customers in disadvantage in the marketplace. That's where we stood up and said no. So everybody knows that if we get back together with Mattress Firm, it's going to be a balanced transaction.
They're going to get a good deal win win situation because they're a large customer, but they are not going to get a competitive advantage over the industry such that the other guys can't play. So I think that's manageable. We may have a little bit of revenue loss there, but I'm not expecting anything significant. Also, I'll tell you, we have the Tempur product. Tempur product, as I mentioned before, was up 50% in units in the Q1.
Our other retailers are doing really well with the Tempur product. And I think that's probably more important than whatever we do with Mattress Firm that our product and services are outstanding to the other customers. Okay.
The question is tariffs and how it affects the online bed in a box operators.
I think like I said before about the tariffs that they're a net positive to us. I think it's also got to be a net positive to the bed in the box industry, probably raises the entry level price point, which might give them a little bit of help from a price point standpoint. So, it probably incrementally does help them and maybe extends. I think what more most likely it extends, though, is just the willingness of investors to invest and generally, we'll say, invest in the future of the companies because companies currently aren't profitable. And I think and what the appetite of generally the West Coast for that is, is probably will extend it.
What we see is when and we track each individual major company. When they are getting close to needing fundraising, they pull back on advertising. And then when they get funded, it's usually a pretty happy period for them afterwards and they're more aggressive in the marketplace. So I think it's all a funding question more than anything else.
Scott or Bhaskar, will we get a quick sort of non U. S. Update on what's happening around the globe? Certainly, I'm seeing a lot of concern about global growth rates in GDP.
Sure. I can do that relatively quickly. I always have to stop and think because there's a hell of a lot of countries. Let's do Asia first. Asia is good.
Asia is growing. Korea is outstanding. It has been a little bit slower in China, but a little bit slower is still positive overall. But the Asian joint venture will probably be flat or down a little bit. So there's a little bit of slowness in Asia.
But overall, Asia, I would still characterize as it's very good, okay? When you go to Europe, Europe's surprisingly pretty good with the exception, I guess, of France, right? Right. That's right. Like U.
K. Is not growing as fast as it was growing, but our U. K. Business is still growing even though the Brexit stuff is going on. Germany recently has been doing a little bit better, but France is a mess, for lack of a better way to say it.
Thank you. Any other questions from the field? Innovation Mattress Solutions, a retailer in the Midwest you bought that was struggling. Maybe you could just refresh the audience on the strategy behind when you bought it. But I'm more interested in how the integration is going and whether there are other examples or situations like this lingering out there.
You'll hear it called IMS. We'll call it Sleep Outfitters because that's its marketing name that's in market. Sleep Outfitters, as you said, it was about 150 stores, got into some financial trouble. They went through bankruptcy, took it down to about 100 stores. We bought it out of bankruptcy.
We bought it out of bankruptcy primarily to protect our distribution in that market the marketplaces they're in. They are generally in small cities where there are not other distributors of our product. When you say West Virginia, Kentucky, Alabama, small cities. So when we looked at it, we said, geez, that's a distribution we like. And if they go away, we're not sure we're going to get that business.
So, we bought them. That's generally what I'll call the strategy. If you look at the profits from the manufacturing and compare it with the retail loss, we still are profitable overall. So the total relationship is profitable. But when we talk about it, we talk about the retail losses.
But I want to make sure everybody understands that the entity itself as we own it is profitable when you count manufacturing profits. What did we say 3 to what's 3 to 5? What do we have in the numbers? 5 to 8. 5 to 8.
We think it's going to lose 5 to 8 this year in retail as we turn it around. So that kind of gets everybody grounded. We brought in some talent to run the business and this talent that I've known for a number of years and it's going well. You asked about the integration. The integration has gone very well.
I mean, it's already a company that we knew quite a bit about because we've been providing embeds for a very long time. We had a good chance to look at the business in detail through bankruptcy because we were the largest lender. And we know those folks, quite frankly, some of the folks that are at that organization used to work for Tipper Sealy. And so the integration has gone well and I would say that they're performing slightly above plan. Now what are we going to do with it?
Look, we want to get it turned around and get the retail profits up to where they should be. Then we'll decide whether or not we want to sell it, whether or not we want to franchise it, whether or not we want to keep it and grow it and just make it a part of our DTC organization long term. And you're going to ask me, well, how are you going to make that decision? Well, quite frankly, it depends on how we perform. If we perform and we're a reasonably good retailer, we're probably going to keep it, okay?
If it looks like we're not a very good retailer, but then we ought to get rid of it. We own and operate stores throughout the world. I mean, this is not it's unusual because it's North America and the size is a little bigger. But we own several stores that are multi branded in Sweden. We run stores in Asia.
And so it's in the core competency. It just happens to be a little bit different. But my perspective is strategy is generally we like to use 3rd party retailers. Return on invested capital is fantastic. And if you have a supportive 3rd party retailer, that is who we want to do business with.
If we can't get the distribution we want the way we want it, then we don't mind owning it and running it. But we have to be able to do it well.
And you say you're worried about everything. Are there other independent retail chains out there you're worried about where you might have to explore the same strategy?
There may be one that we might have to that's working through some financial issues that we're keeping an eye on. But other than one in the portfolio, there's not more than just one. We obviously have also some business with department stores and we keep a close eye on the department stores, but the exposure is relatively minor in the department stores. Those would be the 2 other areas, but you're not talking about more than just one of these types sitting around in North America.
Question? A question about Canada and regions around the U. S.
Mexico? I don't know Mexico off the top of my head. Absolutely. What I would say is that Canada over the recent years has performed very nicely. In prior year, we went through a transition associated with Sears Canada, but it's rebounded back and Canada is performing well.
Mexico was primarily a Sealy business and it's doing well as well. And we're the number one manufacturer in Mexico, right? Absolutely. And regions in the U. S?
I'm sorry, I've seen some, but I can't say there's anything I've seen regionally looks different. I think what
we've seen is that overall with the success
of our Tempur product, we've seen strength in all of our regions.
Yes. I don't think we've had weakness in high end housing, particularly on the West Coast. You haven't seen that influence your business?
No. Tempur was up 50% in units in the Q1. And where we've opened stores, because we have some stores open in the West Coast. They've done very well and they're all high end. So no, we haven't felt or seen anything from the high end customer that look like weakness.
Any other questions? We are at the appointed hour. Thank you, Roger. Thank you, Scott. Thank you, Oliver.
And thank
you for your interest. Appreciate