Mattress Stocks Will Make You Toss and Turn

by Dan Burrows | July 19, 2013 6:40 am

You just can’t rest easy with mattress stocks.

Select Comfort (SCSS[1]), the specialty mattress maker known for its Sleep Number line of products, missed Wall Street’s earnings estimate by a wide margin late Wednesday — and the stock fell out of bed.

Last month, Mattress Firm (MFRM[2]) posted better-than-expected quarterly earnings and the stock has risen smartly ever since. But with a beta of 2, the retailer’s stock is twice as volatile as the broader market. So enjoy it while it lasts.

All of which probably has investors in Tempur Sealy International (TPX[3]) — the entity resulting in the merger of Tempur-Pedic and Sealy — tossing and turning ahead of the company’s own earnings release next week. The stock is up 40% this year, but like Select Comfort and Mattress Firm, it moves with astounding volatility.

Indeed, all the mattress stocks trade with betas of 2 or greater, so there’s no gentle rest with these guys.

In addition to fighting the same broader economic trends, they have their own particular challenges. Select Comfort, for instance, posted sharply lower profits and margins because it spent a lot more money on marketing and research & development. It tried a new tack with its TV and radio ads but sales only slumped, so it hotfooted its way back to the old marketing strategy.

As a result, the company’s advertising costs have popped 7% so far this year and are forecast to keep rising substantially.

Select Comfort better get some bang for the marketing buck. Revenue rose just 1% in the most recent quarter, missing Wall Street’s expectations. The company is also plowing money into R&D to stay competitive with rivals, but without a sales acceleration to pay for the added expense, the bottom line will continue to suffer.

Mattress Firm also is struggling with tougher competition trying to get consumers to part with their hard-won dollars. True, earnings per share jumped more than 20% in the most recent quarter, but all-important same-store sales — or receipts from locations open more than a year — plunged 5.2%.

Why is that bad? Because it means the company is growing by opening new stores and by making acquisitions — not by squeezing more sales out of its existing store base. That’s an expensive, inefficient and ultimately margin-killing way to make the top line bigger.

Hey, times are tough for mattress makers and retailers. They sell relatively expensive products with long lifespans. They’re not literally a consumer staple, but let’s face it … you need a bed. But unlike other consumer staples like toothpaste or toilet paper, you only have to buy a mattress every 10 years, or even longer. And because you can keep an old one for a long time and go for a cheap brand, that almost makes getting one a discretionary purchase, even though it’s really not.

Yes, the housing market is getting healthier by the day, but new-household formation — a huge tailwind for mattress sales — is still weak compared with its long-term average. After all, when people buy a house and move from the old one or an apartment or Mom and Dad’s place, they usually bring their old stuff with them. But entirely new households usually need to be furnished with lots of new stuff, including bedding and mattresses.

With macro headwinds and epic share-price volatility, it’s understandable if investors in Tempur Sealy are sweating the sheets ahead of next week’s earnings.

Analysts, on average, expect earnings per share to fall more than 11% to 40 cents from 45 cents a year ago — and it appears a lot of traders are betting on an even bigger decline. Short interest in TPX jumped month-over-month to hit nearly 15% of the float.

As we’ve said before, don’t stuff your cash in mattress stocks[4]; they’re way too volatile to let you rest easy.

As of this writing, Dan Burrows didn’t hold a position in any of the aforementioned securities.

  1. SCSS:
  2. MFRM:
  3. TPX:
  4. don’t stuff your cash in mattress stocks:

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