Okay, we are ready to kick off our next meeting with Tempur Sealy. With us today from the company is Aubrey Moore. 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 him with a few questions, then we're going to open it up to the audience, hopefully, for questions. Scott?
Well, first of all, thank you for having us. I can't tell you how thrilled I am to be nailed by some questions after I stop talking. 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 first quarter, where Tempur revenues grew 38%. We had positive growth in Sealy. The company took a lot of momentum into the second quarter. We're in the middle of the end of a launch that's taken about a little over 1 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. We're expecting some ASP benefit as we complete that rollout.
We also did a Stearns & Foster rollout, which is high-end Sealy, in the first quarter, it's performing well. 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's outstanding. Right now, we think it's an exciting time to be involved in Tempur Sealy. Shoot.
Okay. We had some recent news out of the International Trade Commission with some duties and the countervailing duties. The mandatory respondents, I believe, are averaging 75%. 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 give everybody, kind of help frame the discussion, we're generally talking about low-end bedding, 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. It's generally Sealy below $1,000, okay? 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? 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. We expect to get some benefit. There, I expect the 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's beneficial to Sealy low end. In general, Sealy low end, and that's not just Sealy, any low-end bedding generally doesn't have a high profit margin. Of course, the ASP's not high. That's not really where the heart of the profitability of the company are. 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. It should be a minor tailwind to Sealy.
Thank you. Then maybe you could comment on the Tempur-Pedic North American brand for a moment. Where it seems to me most investor focus is, right or wrong. You've had a tremendous comeback from the divorce from Mattress Firm in terms of volume. I'm wondering if you could, forgetting Mattress Firm for the moment, leaving that out of the discussion, how do you feel about the ability. 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 the Tempur product without Mattress Firm. We can argue about the timing of when we would 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 first quarter, just as a point of reference. 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%.
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, we're not over-investing in customer acquisition costs like some people. In fact, our customer acquisition cost has gone down in the first quarter versus others, thus our margin in that business has also gone up. I got 30% growth, better margins, and a very profitable channel. We run that channel for profit, not revenue, that feels really good. We've got another initiative, our direct-to- consumer retail stores, which are Tempur only flagship stores. 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, you have a completely different sales experience on the floor. We're finding 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 in bedding in a lot of ways. We feel good about that opportunity to continue to drive. 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.
They have found that selling Tempur on their floor is very profitable for them, that's going very well.
Certainly a surprise for me has been seeming resurgence of the Sealy brand. You've always talked about the success above $1,000, particularly with the hybrids, it seems a little broader base now. You just established a new relationship with Big Lots. What's going on precisely there? Is this something you're doing or something maybe the competition's doing?
I'm going to say it's a blend. We're talking about Sealy North America. I've got to set it up a little bit in that, a few years ago, we decided to move Sealy upmarket 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's been successful. Same time, as I mentioned before, below 1,000, we've moved away from some of it, but plus we lost some of it to the Chinese imports. That's beginning to feel a little bit firmer. 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.
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, completely ignore them. I don't know, six, seven months ago, we set up a separate sales team that just interfaces with Amazon, just interfaces with Wayfair in that marketplace. 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 beginning to get our share in that marketplace that we ignored. That's certainly part of it.
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.
Maybe a last one from me before I canvas the audience. The bed-in-a-box test. How do you think about a bed-in-a-box product? I have some people I talk with who think half the beds sold in five 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 and approach?
Well, first of all, let me give some definitions because this gets a little confusing and I find investors really confused about this particular topic. First off, there's compressed bedding. That is a bed that is compressed. That's a market. That's by product. Compressed bedding is going to grow, in my opinion. 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 three years. 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. That's compressed bedding. You have online bedding.
Online bedding is where you buy a bed online. That may be compressed or that may be a regular bed. Online bedding, tempur.com, costco.com, sleepoutfitters.com, mattressfirm.com, that's a channel. 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. The question is bed-in-a-box. What I call bed-in-a-box is these 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-a-box. Your question is bed-in-a-box. 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's going to grow.
Online's going to grow. Now we're talking about bed-in-a-box. When I talk about bed-in-a-box, we're talking about generally, I'm going to call them commodity product made of foam. 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.
You say that because their customer acquisition costs have hit a wall, maybe, and they can't-.
I think
continue to throw more capital at it, or?
I think there's some of that. The customer acquisition cost is going up for them, going down for us. The traditional bedding 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-a-box. Okay? They've gone out and gotten a bed-in-a-box that's not one of the bed-in-a-box guys I was talking about, but they've also got new product. Take Ashley's. 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-a-box people. I just don't think that North America mattress, as an industry, nope, not any individual company, is growing at this point.
Okay.
I should say, to be fair, 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, 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 third 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.
Who?
I want you to give me credit for that. Any questions from the audience for Scott or Buster?
No, they all asked me.
Shocking.
All right.
Shocking. He promised me that he wouldn't ask the question. Instead he filtered it out to the audience, which is expected, actually. To get everybody grounded on Mattress Firm, about a 20% player in North America. Used to do business with them, broke up a while back. We've been playing 80% of the North America market. Playing well in that 80%. 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. 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. 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. Both parties are getting to know each other, making sure we understand how we're going to operate.
It is a different world as to the way the two companies would operate. 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. I would consider it a step. More progress since the last time I reported. I don't have anything signed, executed, and done at this point.
Scott, a relative statement. Obviously, they walked away from a bunch of leases, closed a lot of stores. 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-
Yeah
Your receivables?
Well, first of all, I worry about everything all the time. If you ask me if I worry, I'm going to answer that yes, whatever the next topic is. Yeah, we worry about everything all the time. They're obviously a private company. We're not going to get into any kind of detail. Let's 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 at every corner in the world. Massive distribution everywhere. Okay? Which created a very expensive real estate proposition for them. 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 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.
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. We would not be having discussions with them if they were on the old strategy. 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?
With the places you've really fostered [in the Mattress Firm expert], how do you manage multiple market by market associates
No
to end up trying to do a relationship?
The question is, how do you handle relationships with existing retailers outside of Mattress Firm if they come back in the fold?
As part of our operating the company, we've got an omnichannel strategy and core competency around the world is managing channel conflict. Let's just 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. That's a core competency. In North America, this would be a big change. Okay? We'll call this a big channel conflict that you have to work through. What has happened, when we broke up or they broke up or whatever, 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 nine 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's happened. Most of them would like to have a stable industry. If we get back together with Mattress Firm, and it stabilizes the industry, I think we will find the vast majority of the other retailers actually supportive of 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've been so great that it would've put the rest of our customers in disadvantage in the marketplace. That's where we stood up and said no. 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 as such that the other guys can't play. 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 first quarter. Our other retailers are doing really well with the Tempur product.
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.
Other questions.
With the tariffs or, sorry, the countervailing tariffs with Trump, do they extend the lifeline of the online bed-in-a-box operators?
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-a-box industry. Probably raises the entry-level price point, which might give them a little bit of help from a price point standpoint. It probably incrementally does help them and maybe extends. I think what most likely it extends to us is just the willingness of investors to invest in generally, we'll say invest in the future of the companies because the companies currently aren't profitable. I think what the appetite of generally the West Coast for that is probably will extend it. What we see is when we track each individual major company. When they are getting close to needing fundraising, they pull back on advertising.
When they get funded, it's usually a pretty happy period for them afterwards, and they're more aggressive in the marketplace. I think it's all a funding question more than anything else.
Scott or Buster, can we get a quick sort of non-U.S. update on what's happening around the globe? Certainly have seen.
Sure
a lot of concern about global growth rates recently.
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's good. Asia's growing. Korea's outstanding. It has been a little bit slower in China, but a little bit slower is still positive overall. The Asian joint venture will probably be flatter down a little bit. There's a little bit of slowness in Asia. Overall, Asia, I would still characterize as it's very good.
Okay.
When you go to Europe's surprisingly pretty good. With the exception, I guess, of France, right?
Right.
Bhaskar. The U.K. is not growing as fast as it was growing, but our U.K. business is still growing, even though the Brexit stuff's going on. Germany recently has been doing a little bit better. France is a mess, for lack of a better way to say it.
Thank you. Any other questions from the field? Innovative Mattress Solutions, a retailer in the Midwest you bought that was struggling. Maybe you could just refresh the audience on-
Yeah
the strategy behind why you bought it. I'm more interested in how the integration is going.
Yeah
Whether there are other examples or situations like this lingering out there.
Yeah. 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 marketplaces they're in. They are generally in small cities, where there are not other distributors of our product. What am I going to say? West Virginia, Kentucky, Alabama, small cities. When we looked at it, we said, "Gee, that's some distribution we'd 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. When we talk about it, we talk about the retail losses. I want to make sure everybody understands that the entity itself as we own it is profitable when you count manufacturing profits. What'd we say? $3-$5. What did we have on the numbers? $5-$8. We think it's going to lose $5-$8 this year in retail as we turn it around. 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's gone very well.
It's already a company that we knew quite a bit about because we had been providing them beds 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. We know those folks, quite frankly, some of the folks that are at that organization used to work for Tempur Sealy. 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? Well, look, we want to get it turned around and get the retail profits up to where they should be.
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. 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. If it looks like we're not a very good retailer, we ought to get rid of it. We own and operate stores throughout the world. It's unusual because it's North America, and the size is a little bigger. We own several stores that are multi-branded in Sweden. We run stores in Asia, it's in the core competency.
It just happens to be a little bit different. My perspective is, strategy is, generally, we like to use third-party retailers. Return on invested capital is fantastic, and if you have a supportive third-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, we don't mind owning it and running it. We have to be able to do it well.
When you say you worry about everything, are there other independent retail chains out there you're worried about where you might have to deploy the same strategy?
There may be one that's working through some financial issues, that we're keeping an eye on. 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 two other areas, but you're not talking about more than just one of these types sitting around in North America.
Question.
Just to follow up on your geographic piece, is it possible to give your prediction on how things look in North America, say Canada, and maybe kind of a bit more regional color on the U.S. ones?
Question about Canada and regions around the U.S.
Do you know 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 is doing well as well. We're the number 1 manufacturer in Mexico, right? Absolutely.
Regions in the U.S.?
I've seen some, I can't say there's anything I've seen regionally looks different. I think what we said is that overall, with the success of our Tempur product, we've seen strength in all of our regions. Yeah. I don't think we've seen-
You'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 first quarter. Where we've opened stores, because we have some stores open in the West Coast, they've done very well. They're all high-end. No, we haven't felt or seen anything from the high-end customer that looked like weakness.
Any other questions? We are at the appointed hour. Thank you, Foster.
Thank you.
Thank you, Scott. Thank you, Aubrey.
Thank you for your interest.
Appreciate it.