As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Mark Rupe. Sir, you may begin.
Thanks, Sam, thanks for everyone participating in today's call. Joining me in our Lexington headquarters are Mark Sarvary, President and CEO, and Dale Williams, EVP and CFO. After our prepared remarks, we will open up the call for Q&A. Forward-looking statements that we make during this call are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that forward-looking statements, including the company's expectations regarding sales, earnings, or the proposed transaction with Sealy, involve uncertainties. Actual results may differ due to a variety of factors that could adversely affect the company's business. The factors that could cause actual results to differ materially from those identified include economic, regulatory, competitive, operating, and other factors discussed in the press release issued today.
These factors are also discussed in the company's SEC filings, including, but not limited to, annual reports on Form 10-K under the heading Special Note Regarding Forward-Looking Statements and/or Risk Factors. Any forward-looking statement speaks only as of the date on which it is made. The company undertakes no obligation to update any forward-looking statements. The press release, which contains a reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures, is posted on the company's website at tempurpedic.com and filed with the SEC. With that introduction, I will turn the call over to Mark Sarbury.
Thanks, Mark. Good evening, everyone, thanks for joining us. Today, I'll provide a brief overview of our performance in the fourth quarter, an update on the progress of our recent initiatives, and then outline our strategic focus areas for 2013. Dale will then provide details on the fourth quarter and full-year financial results and 2013 guidance. Our fourth quarter results were in line with our projections, both in North America and internationally. Sales overall declined 7%, with North American sales down 9% and international sales down 4%. In North America, we continued to see signs of stabilization driven by many of the initiatives we launched in the third quarter. The rollouts of our new TEMPUR-Breeze, Weightless, and Cloud Select products are now essentially complete, and we've been pleased with consumer response to these new products. In particular, the response to the TEMPUR-Breeze mattresses has been quite positive.
These mattresses feature phase change material and our proprietary TEMPUR-CM+, They deliver a proven cooler sleeping surface during the night. These mattresses are very different from other products on the sales floor, Especially those that use gel memory foam. Those products are often advertised as being cooler, In fact, the gel technology is ineffective in its claim that it will help consumers sleep cooler than they would on TEMPUR material. As a point of fact, a recent NAD decision has recommended that a competitor withdraw comparative and superiority cooling support and pressure relief advertising claims. Our R&D efforts will continue to be focused on developing innovative products like the TEMPUR-Breeze that are not only differentiated but also are proprietary and consumer valued, That allow retailers to attract new consumers and to improve their average retail selling prices.
In 2013, we will launch several new products that will continue to broaden the appeal of Tempur-Pedic, Some of those will be on display next week at the Las Vegas Market, including a new mattress collection, the TEMPUR-Choice collection. TEMPUR-Choice will initially comprise two mattress models priced at the higher end of our price range. The collection is designed to deliver the superior comfort and pressure relief of our proprietary TEMPUR material while offering the added benefit of adjustable firmness and support across multiple zones on both sides of the bed. Initial retailer feedback has been very positive, We expect that it will not only be incremental to our business, Also to theirs. We'll save the rest of the details on TEMPUR-Choice and the other planned product introductions for the show. Switching now to our international business.
As I said, our fourth quarter sales were down 4%, consistent with recent projections. While we continued to perform well in some of our key European markets, such as Germany, weak economic fundamentals in Europe as a whole pressured our performance. On the other hand, our Asia Pacific business continued to perform well during the period, reflecting solid performance in the key markets of Japan and Korea. New products will also be a major focus for our international business in 2013. We have just begun shipping a new and entirely updated TEMPUR-Original collection to our customers in Northern Europe and will roll it out to other regions during the year. Modest slot gains are expected. There will also be other new product introductions later in the year.
In addition to new products, we remain committed to our other three key strategic initiatives: building awareness, increasing availability, and investing in R&D to ensure we continue to deliver the best sleep. In 2013, we will maintain significant advertising levels in both North America and internationally. As you may have seen, we're now working with a new ad agency here in North America Are working on new and enhanced advertising. Ask Me was an outstanding campaign for us for several years. However, we believe it is now appropriate to evolve our brand communication. Internationally, we will continue to invest in building awareness and driving conversion in our key European and Asia Pacific markets. We expect to gain incremental distribution throughout the world, partially from our new products within existing doors and partially from new customers.
Our R&D investment in 2013 will further increase to ensure that our pipeline of innovative new products remains robust. Before turning the call over to Dale, I want to provide a brief update on our proposed acquisition of Sealy. We are excited about the potential for the combined companies. Tempur and Sealy will have a portfolio of highly complementary brands, products, technologies, and geographic footprints that will provide a robust platform for growth. We have made substantial progress toward achieving the closing, and we expect to close the deal during the first half of 2013. With respect to the HSR antitrust review, Tempur-Pedic and Sealy are continuing to cooperate with the Federal Trade Commission in its review of the proposed acquisition. On January 22, 2013, both the company and Sealy certified to substantial compliance with the FTC's second request for documents and information concerning the acquisition.
By agreement, the FTC will have 45 days following substantial compliance to review the additional materials and information submitted by the parties. As Dale will discuss in more detail, in December, we entered into a new senior credit facility and closed on a senior note offering, so we are also well-positioned from a financing perspective. In addition, with respect to the purported class actions challenging the merger, as described in more detail in the 8-K filed today, Tempur-Pedic and Sealy have entered into a memorandum of understanding with the plaintiffs' lawyers to resolve this litigation in order to avoid the expense and uncertainty associated with litigation. This MoU has no admission of wrongdoing and no change to the deal terms, but there will be an updated disclosure in Sealy's information statement to be circulated to its stockholders. This removes the litigation as a potential impediment to closing.
Finally, we continue to work with Lawrence J. Rogers and the Sealy team to prepare for a very successful integration once the required regulatory approval is received, and we are making very good progress. But I'm sure you understand our constraints in discussing additional details regarding the transaction. We will be sure to provide an update when appropriate. With that, I'll now hand the call over to Dale.
Thanks, Mark. I'll focus my commentary on the fourth quarter and full year 2012 financial results and our 2013 guidance. I will also review the highlights of our recent financing transactions that support our planned acquisition of Sealy. Let's begin with an overview. In total, fourth quarter net sales were $341.1 million, a decrease of 7% over the same period last year. North American net sales were down 9%, and international net sales decreased 4%. Now by channel. In North American retail, net sales were $207.8 million, a decrease of 8%. Internationally, retail sales were down 7% to $87.9 million. On a direct basis, our North American direct channel sales decreased by 17% to $17.5 million, while our direct sales internationally increased 64% to $12.3 million. By product, overall mattress sales were down 5% on a unit decline of 2%.
North American mattress sales decreased 5% on a 2% increase in units. In the international segment, mattress sales decreased 7% on a unit decrease of 8%. Total pillow net sales decreased by 8% on a 10% decrease in units. North American pillow sales decreased 26% on a unit decrease of 21%. International pillow sales were up 11% on a 5% increase in units. Sales of our other products, which include items that are normally sold along with the mattress, were down 11% in total and down 13% in North America and down 8% internationally. Gross margin for the quarter was 50%, down 200 basis points year-over-year and up 80 basis points sequentially. On a year-over-year basis, fourth quarter gross margin declined primarily due to the following: product mix and higher new product costs and the floor models associated with rolling out the new products.
These impacts were partially offset by improved efficiencies in manufacturing and distribution. On a sequential basis, gross margin increased 80 basis points as a result of favorable commodity costs, decreased promotions and discounts, and geographic mix. These benefits were partially offset by product mix and increased manufacturing and distribution costs. Advertising spend in the fourth quarter decreased 14% to $33 million from last year's fourth quarter. As a percentage of sales, advertising spend was 9.8% in the fourth quarter, compared with 10.6% in the fourth quarter last year. Despite the slight reduction in advertising, we've continued to see positive trends in our brand awareness and purchase consideration due to a more effective advertising spend. Excluding transaction and integration costs related to the Sealy transaction and restructuring costs, we maintained G&A expenses relatively comparable to last year's level in the fourth quarter.
We increased R&D expense in the fourth quarter by 69% year-over-year to $4.5 million. Operating income was $51.3 million, or 15% of sales, as compared to $85.8 million, or 23.4% of sales in the fourth quarter of 2011. Operating income in the fourth quarter of 2012 included $7.6 million of transaction and integration costs related to the proposed Sealy acquisition, as well as $1.5 million of restructuring charges. Interest expense was $5.8 million and included approximately $900,000 related to the closing of our recent high-yield bond offering. The tax rate was 48%. The tax rate reflects the provisions for taxes recorded with respect to the anticipated repatriation of foreign earnings, which in total was $6 million in the fourth quarter. Without this tax impact, the normalized tax rate for the quarter would've been approximately 32.5%.
We recorded earnings per share of $0.39 on a GAAP basis for the fourth quarter of 2012. Adjusted earnings per share were $0.60 in the fourth quarter. Now, I'll summarize the income statement for the full year 2012. Sales were down 1% in total. North American sales down 4%, and international sales were up 6%. Operating margins declined to 18% in 2012 from 24% in the prior year. As a reminder, operating income for the full year 2012 included $11.1 million of transaction and integration-related costs and $1.5 million of restructuring charges. GAAP EPS for the full year 2012 was $1.70. Adjusted EPS was $2.61, down 18% as compared to GAAP EPS of $3.18 for the full year 2011. Next, I'll turn to the balance sheet and cash flow for a brief review. Our accounts receivable balance was essentially flat at 34 days.
Inventories were up $2 million year-on-year, or 2%. Inventory days increased two days to 49 versus the prior year. Payables were up nine days, primarily due to timing. During the quarter, we generated $36 million of operating cash flow, and capital expenditures were $12 million. As it relates to our debt position, we were very pleased to have recently announced the closing and signing of several financing transactions necessary to finance the acquisition of Sealy and to pay related fees and expenses. With these, we are now positioned to fund the acquisition. In mid-December, we completed a $375 million offering of six and seven-eight senior notes due in 2020, and also entered in a $1.77 billion senior secured credit facilities comprised of a revolving credit facility of $350 million, a Term A facility of $550 million, and a Term B facility of $870 million.
Total proceeds from the sale of the senior notes have been placed in escrow, pending release upon receipt of regulatory approvals and the satisfaction of other conditions to the completion of the Sealy acquisition. Similarly, the credit facilities are expected to close and fund in connection with the acquisition of Sealy. As a result of these financing activities, we felt it was important to note that we will be incurring certain interest expenses. On the senior notes, we have already pre-funded into escrow $20 million of interest expense and will accrue it as defined under the terms of the notes. We will also be paying ticking and certain other financing-related fees on the $1.77 billion senior secured facilities until the transaction closes. Further, there will be transaction-related costs incurred at closing as well as deal-related financing and transaction closing fees amortized over several years thereafter.
We plan to recognize these transaction-related expense items and adjust for them quarterly in our non-GAAP performance results. As detailed in the press release, our total indebtedness increased to $1.025 billion due to the $375 million bond transaction. Our funded debt was $651 million at the end of the fourth quarter and was relatively comparable to the third quarter level. Our cash balance increased by $28 million to $179 million, primarily driven by our international operations. Now I'd like to address guidance. The full year 2013 guidance we provided today is standalone for Tempur-Pedic. It does not factor in anticipated net sales or earnings from Sealy in 2013. The company plans to issue updated guidance after the closing of the transaction for the combined entity. With that background, we currently expect 2013 net sales to be approximately $1.425 billion, an increase of approximately 2% versus our 2012 total sales.
We currently expect 2013 adjusted EPS to be approximately $2.55. The first quarter is a challenging comparison, but we are expecting mid to high single-digit growth thereafter. It is important to note that our 2013 adjusted EPS guidance does not factor in transaction and integration costs related to the proposed acquisition of Sealy, interest expense costs on the financing transactions just described, or future tax provisions to be provided in connection with the anticipated repatriation of foreign earnings together with the transaction. We project our gross margin to be slightly down for the full year as compared to the 50.9% recorded in 2012. We believe that any anticipated benefits from our productivity programs and the slight fixed cost leverage will be offset by product mix and anticipated slight commodity cost increases.
We project our operating margin, adjusted to exclude Sealy transaction and integration costs, to be approximately 17.5%-18%. We'll be accruing for our equity incentive programs at a more normal level in 2013 as compared to 2012, which benefited from an adjustment of $10 million. We anticipate interest expense for the full year to be approximately $20 million under our current debt facility. We anticipate capital expenditures will be approximately $35 million. We anticipate the full year tax rate, excluding APB 23, to be approximately 32.5%, and we are using a share count of 61.5 million shares for the full year. We do not expect to repurchase any shares due to the pending acquisition of Sealy. Let me give you a little context for our guidance.
The $1.425 billion sales guidance for the full year is consistent with the methodology that we've used for the past couple of quarters, specifically projecting that current trends will continue. Our fourth quarter sales of $341 million annualized with industry seasonality would be approximately $1.425 billion. We believe it remains prudent to plan the year this way. That said, our first quarter is the toughest comparison of the year. We're planning for sales to be flat to slightly down as compared to the fourth quarter 2012 sales of $341 million. We expect our adjusted operating margin to be approximately 17% in the first quarter. Through the first three weeks of January, we are tracking to these projections.
In considering our guidance, it is possible that our actual performance will vary depending on the success of our new initiatives, macroeconomic conditions, and competitive activities, or the consequence of other risk factors we've identified in our press release and SEC filings. As noted in our press release, our guidance and these expectations are based on information available at the time of the release and are subject to changing conditions, many of which are outside the company's control. With that, operator, please open the line for questions.
Thank you. Ladies and gentlemen, if you do have a question at this time, please press star, then the 1 key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from John Baugh of Stifel Nicolaus. Your line is now open.
Good afternoon. Thank you. I wondered if you could just go into the international piece, particularly as it relates to guidance. Maybe give a little more detail about specifically where the pockets in Europe are weak and what the assumptions are going forward in that region of the country. Then walk around the globe. You mentioned Asia Pacific strong, what the outlook there is. Thank you.
Let me give you some commentary, then maybe I'll ask Dale if he'd just give a little bit of the numeric detail. We've been reading obviously a lot about Europe and the weakness in Europe, we have, as we've said in previous calls, seen weakness in pockets of Europe. We've never seen the systemic weakness across the whole of Northern Europe. We've seen pockets of weakness. We've seen, like I said in the prepared comments, some strength for our business, for example, in Germany, despite the fact that we know that the industry in Germany is actually quite struggling. We're seeing pockets of strength and occasional pockets of weakness in Europe. As of yet, we still haven't seen a systemic weakness in Europe, we have been cautious about it, and we continue to keep our eye on that.
Mark, what specifically are you going to be doing in Europe in terms of advertising new products or, if you will, things outside of the macro that may drive the business in 2013 versus 2012? Will it be very similar in terms of what you were trying to do last year?
It's similar, but it's continuation. For example, as again, I've said, in some of the countries like Germany and other of the major European countries, advertising is quite effective, we find that it has really quite good ROI, and we will continue to invest in those countries in doing that and building awareness. Remember that our awareness levels in Europe are still way lower than they are in the U.S. Secondly, we'll continue to introduce new products. I talked about the new TEMPUR-Original, which is essentially a new version of our original line, and it's improved in a variety of ways. What it is a continuation of the intention of broadening the offering in each of the retailers so that they will carry some representation of all three of our collections, the Original, the TEMPUR-Sensation, and the TEMPUR-Cloud.
We know that having that range of offerings is what really makes sales really take off in a given store. Those are both continuation, but there's a lot of road left in that.
I guess my last question is, but beyond advertising, both U.S. as well as outside of U.S., could you tell us, I don't think you gave us what it was as a percentage of revenue for the year just ended, and then rough guidance for those two regions for 2013. Thank you.
For the year, John, I don't know if you're still on. For the full year or?
Full year.
2012 then.
Yeah.
Yeah.
Full year 2012.
For the full year 2012, North America obviously was down 4% in 2012. Our international business was up 6% for the full year 2012. Our Asia Pacific business actually was up more than that 4%. Our Asia Pacific business for the year was up double digit. Our European business was up probably broadly, and I don't have it exactly in front of me, but the European business probably was up in the low single digits, but some countries performed very well. Certainly, Southern Europe was especially weak
As you might expect, there were some pockets of weakness in other parts of Europe that as we experienced through the year, in general, the overall European market got softer. As we're looking at 2013, we are expecting, as I said earlier from a North America standpoint, first quarter continues to be a very difficult comp, but for the balance of the year, we expect North America to be up mid to high single digits. On the international side of the business, we are expecting our international business to be up for the year in the low to mid-single digits.
Great. Thank you.
Thank you. Our next question comes from Budd Bugatch of Raymond James. Your line is now open.
Good afternoon, Mark, Dale, and Mark. This is actually Chad filling in for Budd.
Hey, Chad.
A couple of questions. I was surprised to hear you say that domestic mattress units were up 2% year-over-year, if I heard that correctly.
Yep.
Can you give us a little bit of color on where you saw that growth and what drove that?
Well, first thing I want to say is that it's a little bit colored by the fact that we had floor models. If you take out new floor models, it would probably be down a percent or so.
Okay.
It's still a sign of the stabilization that we've been talking about. It's consistent with what we had expected. Obviously, there is a greater proportion in the fourth quarter of products of the TEMPUR-Simplicity. Well, there is TEMPUR-Simplicity included in the fourth quarter, which wasn't in the fourth quarter of last year, and obviously those retailed at a lower price. That affects the sales, not the units. The units are relatively flat year-on-year.
Okay. If I do the math and domestic mattress AUSP would've been down roughly 7%-ish, and of course, that's affected by the floor models.
Correct
It's affected by TEMPUR-Simplicity as well. Any other major drivers of that, or does that really sum it up?
No, that sums it up.
Okay. Just a housekeeping, Dale, would you repeat what you had said about what your expectation is for Q1 operating margin?
Yes. 17% on an adjusted basis, excluding transaction and the things related to Sealy.
Got you. Talk a little bit about some of the other product categories. It looks like domestic other sales lagged mattresses. Can you talk a little bit about what's going on there? I would've thought maybe around the holidays that would be a better category. Has there been any kind of a change in the adjustable attachment rate or any color you can give us there?
The bottom line is you're right, the adjustables is the key component of that, the adjustable attach rate hasn't changed materially in retail at all. There was a promotion in the prior year in the fourth quarter, last 2012, we had it in the third quarter, so that caused some change of it. Also, the attach rate on TEMPUR-Simplicity, which is our biggest seller on direct, is slightly lower. There's no fundamental change to the attach rates overall.
The floor models impact that as well.
Yeah, of course.
You don't have Ergos on floor models. Technically year-over-year, it was down because of the promotion in the prior year, the floor samples, and the TEMPUR-Simplicity mix issue. Structurally, you don't think there's any major change there. Is that the right interpretation?
That's exactly right. Yes.
Mark, I was very much intrigued by your comments about TEMPUR-Choice and an adjustable firmness product. Can you give us any more hints about it? Are we talking about an adjustable airbed? Any other teasers that you could provide?
We are quite excited about it. As I said, it is first and foremost a Tempur-Pedic bed, and it has TEMPUR material, and it provides the support and the comfort of TEMPUR. It feels like TEMPUR. It does have the ability to adjust. I'm not going to go into great details, but it does use air as a component of its overall structure.
Okay. Well, we look forward to seeing you in Vegas next week and seeing the product. Good luck to you on the rest of the year.
Thanks very much. Thanks.
Thank you. Our next question comes from David MacGregor of Longbow Research. Your line is now open.
Yes, good afternoon. Just to build on the international question, I know historically your European gross margins have been somewhat greater than your North American gross margins. As you put together your guidance for 2013, what are you assuming in terms of change with that relationship?
Actually, David, we do expect the international gross margins to continue to be higher now that as we've talked frequently, there are two components to that. One is the fact that the North American business pays a royalty to our Danish business where the technology was developed, so it's one pocket to another, but it does affect comparatives gross margins. We have the benefit internationally of just slightly higher pricing with thinner mattresses, so there's a little bit less cost in them. From a go-forward standpoint, we would not expect that to change dramatically. Actually, over time, those royalty rates are reducing, so that will squeeze the difference a little bit, but not dramatically in the short term, like a year.
Okay. With respect to the quarter just completed, can you just talk a little bit about variance in unit volumes within the price points in North America?
Yeah. No, we don't break our business down by price point for obvious competitive reasons.
Sure. I just wondered if you could talk qualitatively as sort of bigger scale about mix.
Well, the only thing that I would say is, we had some new products, the TEMPUR-Breeze products, that performed very well. Those are higher priced. The higher price segment was benefited by the strong uptake on the TEMPUR-Breeze. The other new products that we introduced, TEMPUR-Weightless, did well. The TEMPUR-Breeze was the one that was more the shining star right out of the gates.
Okay, great. Final question. Just with, again, back to the guidance. As you talk about your net sales growth for next year, 1.5%-2%, what are you assuming in terms of net sales growth for North America versus net sales growth for international?
Well, as I said earlier, for the balance of the year, for the whole year numbers, what we are looking at is international business being low to mid-single digits and the U.S. business actually for the balance of the year being similarly in a low to mid-single digits. We look at them as potentially having roughly the same growth rate. Over the course of the year now, it won't come out that way. That's why I give a little bit of a range on each, but we do expect both segments to show growth next year.
Okay, one more if I could just quickly. You had talked last quarter about a number of manufacturing issues you were facing with the Breeze and the TEMPUR-Weightless. I'm just wondering if those have been cleared up or whether those conditions would continue to the extent that they might impact shipments around some of the new products you're going to roll out next week.
Well, the issues with the Breeze and the TEMPUR-Weightless have been resolved. As we said on the call last time, we had underestimated the demand. It was a function not so much that we weren't manufacturing, it's just that we didn't realize how many we were going to need. That has been addressed. On the new product, as we do with any product, we're going to make sure we have the amount of inventory and so on that we need. Again, there's always a degree of risk when you're projecting what things are going to be. I think we've made the right preparations. I can't say until we're further down in the path. We've made the same preparations as we normally do.
Thanks very much and good luck.
Thank you.
Thanks.
Thank you. Again, ladies and gentlemen, if you do have a question, please press star then one on your touchtone telephone. Our next question comes from Reza Vahabian of Barclays. Your line is now open.
Good afternoon.
Good afternoon.
Hey, Reza.
Dale, on the gross margin guidance, can you just maybe outline some of the key puts and takes that goes into your thinking, whether it's input costs, sales leverage, mix, anything of that sort?
Yeah. For 2013, as I said earlier, from a gross margin standpoint, we're expecting very slight decrease in gross margin on a year-over-year basis, flat to slightly down. That's really a function of a couple of things. One, we are expecting some slight increases in commodity costs. Number 2, the big negative driver there is product mix. As the Breeze is doing well, TEMPUR-Weightless is doing well. I think one of the things David may have been hinting at earlier but didn't specifically say is, with any new product, you can have some startup costs, but then also these are brand-new technologies that are a little bit more expensive technologies, and anytime you have a completely new technology, you've got a tremendous learning curve to go through to improve the cost.
The mix of those, we've got other new products that we're going to be introducing this year along with Choice and others. Those are the key negative factors that are affecting gross margin this year. Our productivity program is back and fully invigorated. We're looking for good productivity improvements and ideally, a lot of those will come on some of the new technologies to improve those margins over the course of the year.
Got it. Maybe, Mark, if you can just outline some of your assumptions and your comfort around North America sales being up mid-single digits starting in the second quarter. What goes into that thought process?
Well, it's a function of.
Comparison
The comparison. Obviously, we've got a tough, I don't know if you can call it a good compare, but a horrible compare, whatever, from year to year. The other thing, though, is that obviously, the steps that we took in the third quarter, which created the stabilization that we started to see, is going to have the effect going forward. That's one component of it. The effectiveness of our promotions and so on is one component of it. The other component is that we're going to have a full year of Breeze and TEMPUR-Weightless, which are both doing quite well. Whereas that was something that didn't exist in the third quarter of last year, it does this time. Also, we have the new products that we will be launching at Vegas.
Again, we expect that there will be more again in the August Vegas.
Right. The full impact of the new products to be launched in Vegas, you expect them to be realized and impact your sales, I suppose, in the second quarter.
Second half, starting in the second quarter.
Starting in the second quarter.
Yeah. We will start rolling out the new products from the January Vegas show next week. We will start rolling those out in the second quarter.
Then did you outline your new product introduction cost and the inefficiencies that go along with that for 2013?
Reza, we actually have never really broken that out.
Okay.
It's something that is an ongoing component of the business. Probably for three quarters of any given year, we have new products rolling out. The floor model cost associated with that is partly a function of the price of the products and also a function of how broadly distributed it becomes.
Got it. Thank you much.
Thank you.
Thank you. Our next question comes from Keith Hughes of SunTrust. Your line is now open.
Keith?
We'll go ahead and move on to the next question. Our next question comes from Brad Thomas of KeyBanc Capital Markets. Your line's open.
Hey, guys. This is Bhavna Shah in place of Brad. Just going back to the fourth quarter, you had a good improvement sequentially in top-line trends from the third. Could you maybe just talk a little bit about the trends and how they played out intra-quarter? And we would just be interested because, one, it seems like consumer spending was a little bit choppy during the quarter from a macro perspective, and two, you had a lot of initiatives going on, and it sounds like those are gaining traction.
Yeah. The fourth quarter was relatively consistent through the quarter. There was obviously the hit of.
Sandy
Sandy, which did have an impact. Within the bounds of normal volatility that one gets because of when Christmas falls and so forth, it was relatively consistent through the quarter.
Okay.
Except for Sandy, which wasn't consistent.
Sandy impacted a couple of weeks there.
pretty severely.
Okay. Then you just launched the Breeze and Weightless in August of last year. It appears that you're going to be launching a couple more in the coming weeks and months this year. How many models do you think is the right number to be launching each year? Do you think something like two is the right number, or are the company resources being a little stretched?
I think that's a good question, and it's an important question. The critical way to think about this is that we need to be sure that the product range viewed as a whole is optimized obviously from our point of view, but very importantly, from a retailer point of view. We want to make sure that the range of offerings we have in totality satisfy the needs of a broad range of consumers at a premium price point and in a differentiated manner that are effective together for the retailer. Some component of that is adding new products as we find ways to meet the needs of consumers that we, until then, had not been able to meet the needs of, and sometimes it's going to be improving products that exist already.
Overall, it's going to be viewing it from a category management point of view of how do we optimize the collective offering. That is something that will be of increasing importance to us in this year and going forward. Over the last years, we've grown from having a relatively smaller group of offerings to having a large group. It's important that they, and we always think about this, how they fit together. It's not so much as saying we can have one or two new products a year as it is, we are constantly working to optimize the range as a whole.
Okay. Thank you.
Yep.
Thank you. Our next question comes from John Anderson of William Blair. Your line is now open.
Good afternoon, everybody.
Good afternoon.
Hey, John.
Hey. I wanted to just start with gross margin improved sequentially. I think you said 80 basis points. You talked about that one of the reasons for the improvement, I guess, was less promotion, less discounting. Can you talk a little bit about what you're seeing from that standpoint at, I guess, the retail and wholesale level? Do you think we've hit a point where the worst of that is behind us?
Well, what it is, I would say, is more of an efficiency gain. As I said, when we started to modify our approach in light of the competitive environment, that we were going to be working at ways to improve our effectiveness in promotions with retailers, and that some of the things that would work well and some would work less well, but that we would learn, and we would apply what we learn. We are doing just that. I think we're getting a bit smarter and a bit more efficient. On the other hand, I think it's an ongoing process of learning, and we will continue to learn and continue to develop. It's not like we now know the answer, and we're going to apply it. On the other hand, I think we're smarter than we were, and we will continue to get smarter.
That's helpful. Thanks. A point of clarification on your sales guidance for the first quarter I think you had commented earlier that you expected sales to be flat to slightly down year-over-year. Was that accurate? Or flat to slightly down sequentially?
Sequentially.
Okay. Given that, it looks like it implies a double-digit decline on a year-over-year basis, which that would be, I guess, the highest decline over the past year, which is just a little surprising to me given the commentary around some improvement or bottoming in North America. Just any color there would be helpful.
Well, I think from a color standpoint, as we said, we did have benefit in the first quarter this year of Or, I'm sorry, the fourth quarter. From a sequential basis, the TEMPUR-Breeze, the TEMPUR-Weightless were still in. We just started shipping those in September. The bulk of the rollout occurred in the fourth quarter. They're basically substantially complete, and from the rollout of those products by the end of the year, that did have a benefit to the fourth quarter that is not going to be there in the first quarter. On a year-over-year compare, we did have the TEMPUR-Simplicity starting to roll out at the end of the first quarter last year that we are not expecting today to start shipping the new products we will introduce next week until the second quarter.
From an international standpoint, which is also a key component, we are not expecting internationals to turn around on a dime. The international business is hanging in there. Asia Pacific continues to do fairly well. Europe has been a little disappointing with the economic environment, we don't expect that to suddenly substantially get better.
Okay. That's fair. You could see why I would raise the question because-
Yeah
The Q1 compare year-on-year is easier than the compare you had in Q2, 3, and 4 of 2012, it seems like things are getting better on the margin in North America. It just feels like maybe there's some conservatism in that. Maybe that's what I'm trying to get a sense for.
I think as Mark has said before, from your mouth to God's ears. Yeah, we'd love for that to be the case.
Fair enough, guys. I appreciate it, and best of luck in 2013.
Thank you.
Thank you. Our next question comes from Joe Altobello of Oppenheimer. Your line is now open.
Hey, guys. Good afternoon. Just wanted to follow up on John's question. Obviously, I understand the commentary you gave regarding the timing of new product introductions, et cetera. If you look back historically, seasonally, I think it's been probably four years since the financial crisis where you haven't seen a sequential improvement from 4Q to 1Q. Is it all due to timing? Were there certain promotions that might have happened late in the quarter that might have pulled some demand forward?
Yeah. No, Joe, we understand that from a North America standpoint, seasonally, there's usually a little bit of an uptick in the first quarter. Internationally, seasonally, there's a downtick in the first quarter from the fourth quarter performance. Our view is, the way that we're trying to look at this is, we had benefit in the fourth quarter, not from a promotional thing, but from the rollout of the floor models.
Is that going to replace an existing SKU or collection, or is that going to be completely incremental?
That's the new line.
Okay. It's completely incremental. Just lastly, in terms of the advertising, I think you said in the fourth quarter of this year was 9.8% of sales, and I guess full year was 11.8%. What do you think that looks like in 2013, and how much of that is going to go toward the TEMPUR-Choice line? Is that going to be disproportionate behind TEMPUR-Choice, or is it going to be spread out amongst your different new offerings?
The plan is to spend something a little bit less than we spent last year, but still a very healthy amount, in excess of 10.5%. Also in last year, we spent disproportionately in the first half and not so much in the second half. This year, we'll spread it more evenly across the year. As far as how we're going to focus it, in general, we use advertising that applies to The bulk of our advertising will advertise the whole line, and then we'll use some of it to introduce new products. In general, we'll tie them together. We will communicate, obviously, we will advertise the TEMPUR-Choice line, but it will certainly not be the only thing we advertise.
Okay, great.
The bulk of our advertising is about the brand TEMPUR-Pedic.
Okay. The spread amongst the advertising dollars will be relatively normal as we've seen in past years.
Exactly.
Okay, great. Thanks, guys.
Thank you.
Our next question comes from Jessica Skowronski of Barclays. Your line is now open.
Hi, good afternoon.
Hi.
Hey, Jessica.
You talked a little bit about new product introductions at the higher end of your pricing range and investing in R&D to drive innovation and potentially ASP. I was wondering how your assumptions about ASP fit into your guidance for the top line in 2013.
Well, Jessica, ideally, it'd be nice to see some ASP benefit. Certainly in 2012, we saw some ASP reduction. We are shifting the focus a little bit more to the higher end of the line. TEMPUR-Simplicity was an ASP drag in 2012. The change in economics was a bit of an ASP drag in 2012. Those economics will continue. Items like Breeze and some of the other new products that we will have that will be focused a little bit more to the higher end of the line, ideally will start to reverse that trend.
Okay. Thank you. Going back to the comment about the initiatives you've rolled out over the last year and continuing to learn about the impact of different initiatives, as well as the commentary about decreased promotions and discounts in the quarter. Is there anything baked into the guidance for gross margin in 2013 that we should be thinking about any potential further evolution of those initiatives?
No. What I said about gross margin is we expect gross margins to be down slightly in 2013, it really is not a function of changing economics or anything. It's a function of product mix. As I said earlier, some of the newer products, particularly with the brand-new technologies start out at a little bit lower than fleet average gross margin. Ideally, as we build volume and build learning, we learn to make them less expensively, and we're able to improve the margins on those products through lower cost. That's really the expectation that we're looking at there. In our outlook on gross margins, we are not thinking that there's going to be additional further radical change in economics.
Okay, great. Thanks very much.
Thank you. Again, ladies and gentlemen, if you do have a question, please press star then the one key on your touch tone telephone. Our next question comes from Peter Keith of Piper Jaffray. Your line is now open.
Great. Thanks. This is actually John Baugh for Peter tonight. Dale, just a couple of housekeeping questions left from us. The first one is could you give us an update on your domestic and international door counts?
Sure. Let me pull that out here. Door counts. On the international side, the door count is right about 5,700. Last quarter was 56, so about 100 doors added there. On the domestic side, looks like door count is up about 50, so it's right about 8,700. Now, that's a total of North America, so a number that you would more readily recognize that includes Canada. 83 for U.S.
Okay.
That's the number we generally talk about.
Okay, great. Thanks. Then secondly, if you look at your international sales, what were they on a constant currency basis in Q4?
Yeah. Constant currency impacted international. It didn't affect the total business just because of the relative sizes of the business. Constant currency, though, did affect the international negatively about two points in the fourth quarter. Currency was less of an impact than it's been all year, but that was principally because the dollar strengthened late in 2011. The comparison there, and then it weakened a little bit here in the fourth quarter of 2012. The year-over-year compare was much closer in the fourth quarter.
Okay, great. One last one, if I could sneak it in. On the, I apologize I might have missed some of this, but I think you said you were going to be switching away maybe from the Ask Me campaign. I was just curious on, did you mention any timing around that, when that might occur this year?
Our new campaign that we would anticipate going with this for an extended period will launch in the second quarter of this year.
Okay, great. Thanks a lot and good luck.
Thank you.
Thank you. Our next question comes from Keith Hughes of SunTrust. Your line is now open.
Thank you. Most of the questions have been asked, but just on pillows and domestic pillows, could you give us sort of a feel of what's happened there, what you're going to be doing in the future? I know it was down substantially year-over-year.
Yeah. Pillows is a bit lumpy to begin with, and it does get affected by some retailers buy in substantial quantities in one quarter or another, so it can make it move quite a lot. Pillows is something that we are not pleased with, and something that we will continue to focus on.
Okay. We had several questions on the first quarter. When did TEMPUR-Simplicity kind of hit its peak in terms of sales in 2012 so we can consider that comp?
Second quarter, it was substantial throughout the year. It's not like it's gone away. It's still a substantial contributor today.
It hit right the second quarter?
That's what I believe. Yep. That's what I believe.
Second quarter.
It would be second or third, but the point is you wouldn't be right to project it like a spike. It rolled out during the second quarter primarily, and its sales therefore would've been augmented by the floor models. While its sales have slowed, forgive me, I don't have the exact numbers off the top, but don't treat it as a spike. It is throughout the year.
Okay. I guess, finally, on TEMPUR-Choice, we'll see more about it next week. In terms of support for retailers, the adjustable business has always been one that the independent retailers, at least when Select Comfort was an independent retailer, they always struggled with the whole sales process a little bit. It was a little bit different. Is that something you're going to address with your support to retailers? Is there a different plan? Any sort of details on that would be helpful.
Listen, seriously, clearly we've given good consideration to that, but I think it'd be much better and I'd like to address that question when we're standing in front of the collection in Vegas next week.
Okay, fair enough. Thank you.
Okay.
Thank you. Our last question comes from Joan Storms of Wedbush. Your line is now open.
Okay, thank you. I just had a quick question on just with the retailers, and relationships and things there. We know because Mattress Firm is a public company, that they had the specialty beds had increased in their stores from around a 10 count to sort of the low 20s, and it seems to be sort of staying there. Can you comment on still there might be opportunities out there with other retailers that are either up and coming or other large ones that may be playing catch up in the specialty field, or how are you feeling about their addressing the specialty business?
I think it's fair to say that across the board, specialty is growing and I think that what people are recognizing is that it's important as they grow. The retailers are, across the board, I think, recognizing that it's important to make sure that as they grow the specialty business, which is one that not only is growing in aggregate, but also is one that has very good consumer response, is that they want to make sure that they're maintaining their ASPs. I know that a lot of the retailers are making sure that they put a focus not just on specialty per se, but on making sure that they're focused on premium specialty.
That's something obviously that we encourage because we are committed to providing products that are innovative and that can justify a premium price and meet the needs of, deliver a happy consumer who doesn't return the bed. I think that's where retailers are increasingly focusing across the board.
Just briefly, we've seen a couple articles in the trades, I guess, regarding iComfort not being able to compare some of their advertising product to yours. Do you foresee any benefit from that, or if that is the case?
We take very seriously the importance in all of our commercials of making sure that things can be validated and are justified. Obviously, we're very proud of the fact that Tempur-Pedic mattresses sleep frankly cooler than any of the competitive ones, and with our new Breeze products, sleep materially cooler than regular mattresses. We just want to make sure that the right message is getting out to the consumer.
Thank you very much.
Thank you.
Thank you. I would now like to turn the call back over to Mark Sarbury for closing remarks.
Thank you very much. We look forward to talking with you all again in April when we will host the first quarter earnings conference call, and I hope I'll see many of you in Vegas next week. Thanks a lot, everybody.
Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.