Market Spotlight: Specialty mattresses
September 3rd, 2008
Mattresses have not traditionally been considered a discretionary item _ after all, almost everyone needs at least one.
However, as consumers cut back on discretionary spending amid spiraling food and gas prices, a prolonged housing slump and weak credit markets, specialty mattress makers have been hit hard.
While the average mattress costs about $500, specialty mattresses can cost thousands of dollars.
And in the current environment, “you might hesitate on a $2,000 mattress purchase,” said Morgan Keegan analyst Laura Champine. “For the first time in years, traditional mattress sales are holding up better than specialty.”
Meanwhile, prices for raw materials such as steel for springs and foam have been soaring. As a result, specialty mattress makers reported dismal earnings for the first quarter.
In April, Select Comfort Corp., known for its “Sleep Number” bed, said it swung to a first quarter loss while revenue fell 22 percent.
Tempur-Pedic International Inc. said first-quarter profit fell by more than half as sales fell 7 percent.
At the time, company Chief Executive H. Thomas Bryant said “we believe average selling prices in the industry are trending lower as many consumers defer high-end mattress purchases.”
Sealy Inc.’s first-quarter profit dropped 34 percent, hurt by higher material costs and a dip in wholesale domestic sales. Revenue fell 5 percent.
Share prices have suffered as well. Since the beginning of the year, Tempur-Pedic shares are down 69 percent, Sealy shares have dropped 47 percent and Select Comfort shares are down 77 percent.
However, despite the weakness in the sector, some analysts still believe mattress makers are a good buy.
Champine, for example, rates both Tempur-Pedic and Sealy “Outperform.”
“The stocks have gotten killed, so they’re trading at much more reasonable valuations,” she said. “Sealy and Tempur-Pedic are still generating substantial cash flow.”
SunTrust Robinson Humphrey analyst Keith Hughes said that despite the weak trends, offering lower-price products is not necessarily the answer either.
“Given the brand appeal of Tempur-Pedic, I’m not sure going to the really low end is the answer,” said Hughes, who rates Sealy and Tempur-Pedic “Neutral.”
“I think answer is to wait it out for consumer demand to come back.”
Hughes said that the past three years have been the most difficult for the mattress industry, and added things aren’t likely to improve this year. But he believes conditions will improve eventually.
“I think the reality of this product is consumers like to buy it, they like to get a good night sleep,” he said.
He predicts that mattress sales will improve when consumer renovation sales begin to improve.
“Investors have to understand that this is probably the worst period of time we’re ever going to see in the industry,” he said. “This is not a normal situation.”
