Mattress Firm Told Tempur Sealy To Go Sleep On The Couch; Now What?

Wedbush estimates Tempur Sealy International Inc TPX will lose about 55 percent of its Tempur-Pedic business and $100 million plus of earnings following the contract cancellation with Mattress Firm.

Further, the brokerage projects Tempur Sealy to lose about 85 percent of its Sealy business with Mattress Firm, as both the Sealy & Stearns & Foster brands have less cache.

“All in, this equates to a baseline loss of ~15 percent of sales out of the 21 percent total sales to Mattress Firm in 2017. Assuming ~30 percent decremental margins on the lost TP sales and ~20 percent decremental margins on the lost Sealy sales based partly on past precedent, consolidated TPX EBITDA would decline ~19 percent or $105 million in 2017,” analyst Seth Basham wrote in a note.

Mattress Firm Termination: Rating And Price Cut

Besham, who has a Neutral rating on Tempur Sealy shares, has cut his price target by $10 from $55 to $45.

Tempur Sealy had a body blow with the termination of its supply agreement for all of its brands to its largest customer, Mattress Firm, after a “rocky” relationship of at least the past 18 months. The termination is part of Mattress Firm’s efforts to advance its private label strategy.

The termination will severely pressure earnings for Tempur Sealy, while much of the lost volume will be difficult to replace with other retail partners. Needless to say, it is a negative for the already wavering brand value of Tempur Sealy amid new disruptive competition.

“We would not rule out the company’s coming to an eventual agreement, but see that as a low probability particularly in the near term,” Basham highlighted.

Besham also noted that the termination would benefit Select Comfort Corp. SCSS, which may be able to capture some of the displaced Tempur-Pedic share.

Shares of Tempur Sealy plunged 28 percent on Monday to close at $45.49 after setting a new 52-week low of $42.51.