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Text: tempursealy.com and filed with the SEC.
I'll begin with a few highlights of our record third quarter financial performance.
Bhaskar then will review our financial performance in more detail.
Finally, I will conclude with some comments on our building blocks for future growth.
We're pleased to report robust third quarter results.
The team continues to deliver strong results all around the world.
In the third quarter of 2021, sales grew 20% year-over-year, with strong performances across North America and the International segments and with growth across all brands, channels and price points.
Our strong sales performance was driven by our company initiatives, strong demand for Tempur-Pedic products in the U.S. and a solid bedding industry backdrop worldwide.
Adjusted earnings per share for the third quarter was $0.88, an increase of 19% versus the same period last year.
I should also note that we've grown sales and adjusted earnings per share double digits for nine out of the last 10 quarters.
I'd now like to highlight a couple of items from the quarter.
The addition of Dreams furthers our vertical integration and omnichannel growth strategies.
We are successfully integrating the business, and it is performing well.
It's ahead of its initial expectations, both from a top line and bottom line perspective.
We expect over time to leverage our combined track record of operational excellence to realize unbudgeted synergies, which will further drive profitability.
Second, consistent with our legacy of launching innovative products, we're excited to highlight some of our new products in North America and around the world.
Starting with North America.
We plan to launch a Sealy mattress with a best-in-class pressure-relieving gel grid layer at a consumer-appealing mid-market price point designed to target the niche market of consumers looking for a nontraditional feel at a non-premium price point.
We're also planning to launch a Sealy branded eco-friendly mattress collection made with responsible sourced material.
Furthermore, in early 2022, in addition to the emerging niche markets we plan to address, we are launching a new line of premium Sealy products targeted to a wide variety of customers, which includes a new lineup of industry-leading hybrids.
This new Sealy lineup is intended to extend the brand's leadership in the industry by offering superior support and new proprietary material.
Looking ahead to late 2022, the team is also working on the next line of Stearns & Foster products.
These products are designed to further distinguish our high-end traditional Innerspring brand from the competition, and appeal to consumers that prefer a traditional Innerspring mattress.
While Stearns & Foster is on track to have record sales this year, supported by a record amount of advertising dollars, we see ample opportunity to further expand consumers' awareness of this segment through the introduction of new products and continuing advertising.
As we've previously announced, we are launching a new line of Tempur products in our European and Asia-Pacific markets next year.
These new products will feature the innovative Tempur-Pedic technologies that experienced great success in the U.S. and will be sold at a wider price range compared to legacy Tempur International offerings.
Next, I'd like to highlight our recent capital allocation activities.
During the last 12 months, we've allocated over $1 billion in capital acquiring Dreams, repurchasing shares, paying dividends and investing in our ongoing operations.
At the same time, our robust earnings drove a reduction in our leverage ratio.
In the third quarter, we opportunistically repurchased $190 million of our shares, bringing our total share repurchase over the last 12 months to approximately $700 million at an average price of $36 per share.
Regarding recent investments in the business, over the last 12 months, we've opened three new manufacturing facilities.
Additionally, we recently broke ground on our third domestic foam-pouring plant in Crawfordsville, Indiana, which is planned to be operational in 2023.
And we're also expanding our manufacturing footprint within existing facilities and overall warehousing space in several locations.
We're investing to dramatically reduce our exposure to future supply chain disruptions by expanding our capacity to hold key chemical inputs and expand safety stock of certain products.
The operational investments we are making today are part of a broader strategy to expand our North American manufacturing capacity, which will allow us to service the long-term demand outlook that we see for our industry's leading brands and products.
As you know, Sealy and Tempur brands are currently ranked as number one and number two best-selling mattresses in the United States.
The next highlight is our worldwide wholesale business, which grew a robust 11% this quarter as compared to the same period last year.
We're pleased with these performances, especially given the strong prior year sales comp and the fact that we were unable to ship all of the market demand in the quarter.
As expected, our customers continue to be on allocation, and we exited the quarter with a record backlog.
Post quarter end, the normal market seasonality has allowed us to make significant progress on working down our Sealy backlog.
Thus, we recently took customers off of allocation.
Unfortunately, due to the tremendous demand for Tempur-Pedic products in North America and domestic supply chain issues, the backlog for Tempur-Pedic expanded in the third quarter.
We expect to work down this backlog in the fourth quarter and enter 2022 better positioned to fully meet consumers' demand.
Across both brands, our total backlog has increased from the end of the second quarter by about $100 million as of September 30, 2021.
Turning to the final item I'd like to highlight.
Our direct-to-consumer business had another record quarter, growing 79% over the third quarter of 2020 and growing 17% excluding the Dreams acquisition.
With this quarter's strong performance, our third quarter direct-to-consumer sales has grown a compound annual growth rate of 45% over the last five years.
On an annual run rate basis, our direct channel is now on track to generate over $1 billion of sales.
Our companywide retail stores had a standout performance this quarter.
The Dreams stores and our legacy company-owned stores both drove double-digit same-store sales growth year-over-year.
Our e-commerce operation also performed very well this quarter.
We continue to see robust sales growth driven by double-digit improvement in conversion and average order value.
Our commitment to investing in the online presence of Tempur-Pedic brands is paying off.
While we are pleased with our results, I should once again remind you that both our wholesale and direct sales in North America have been constrained in the quarter.
The supply chain constraints once again forced us to turn away business this quarter.
We estimate that it was about $100 million.
Considering this and the unrealized sales from our increased backlog, our sales could have been higher by over $200 million this period.
Turning to our growth outlook and drivers.
I'm pleased to reaffirm our expectations that 2021 sales will grow approximately 60% over 2019, a period not impacted by COVID.
Our sales and earnings growth over the two-year period has significantly outpaced the overall industry.
So I'd like to take a moment to remind you what we said last quarter about the components of this growth.
We estimate about half of our two-year growth is attributable to our new retail partnerships.
Another 35% of our growth is derived from our M&A activities and share gains from previously untapped addressable markets.
We estimate only about 15% of our expected two-year growth comes from the broader industry.
We attribute our performance to our commitment to driving our four key initiatives: first, to develop the highest-quality bedding products in all the markets that we serve; second, promote worldwide brands with compelling marketing; third, optimize our powerful omnichannel distribution platform; and fourth, drive increased EBITDA and prudently deploy capital.
Our clear long-term initiatives, robust free cash flow and solid balance sheet have supported the explosive growth that we've generated over the last two years.
We expect to drive future double-digit sales and earnings per share growth in 2022 and beyond.
I would like to highlight a few items as compared to the prior year.
Sales increased 20% to over $1.3 billion.
Adjusted EBITDA increased seven percent to $298 million.
And adjusted earnings per share increased 19% to $0.88.
As expected, there were a few transitory items impacting this quarter's margins compared to the records in the same period last year.
These included: price increases to customers without margin benefit; operational inefficiencies to provide the best possible service to our customers while dealing with supply chain issues; and unfavorable brand mix, again, driven by supply chain issues.
As expected, we have been neutralizing the dollar impact to commodities through our pricing actions.
Our gross margin was impacted as sales increased with no change in gross profit dollars.
This accounts for 350 basis points of the year-on-year change in consolidated gross margins for the quarter.
This rate dilution was expected, and the underlying margins for the business remain strong.
I also want to reiterate our belief that driving incremental bottom line profitability is the best way of returning value to shareholders.
Now turning to North America.
Net sales increased 13% in the third quarter.
On a reported basis, the wholesale channel increased 12% and the direct channel increased 20%.
North American adjusted gross profit margin declined 490 basis points to 39.9%.
This decline was driven by the previously mentioned items.
We have implemented several pricing actions over the last 12 months to offset rising input costs.
While we have been neutralizing the dollar impact, commodity prices have increased beyond our prior forecast.
We expect additional pricing actions to offset these headwinds in 2022, although we will feel a bit of cost pressure in the fourth quarter.
North America third quarter adjusted operating margin was 21.2%, a decline of 260 basis points as compared to the prior year.
This is driven by the decline in gross margin I previously discussed, partially offset by operating expense leverage.
Now turning to International.
Net sales increased 73% on a reported basis, inclusive of the acquisition of Dreams.
On a constant currency basis, International sales increased 72%.
As compared to the prior year, our International gross margin declined to 54.6%.
This decline was driven primarily by the acquisition of Dreams and pricing benefit without change in gross profit.
Our International operating margin declined to 22.1%.
This decline, again, was driven by the acquisition of Dreams, the decline in gross margin and operating expense deleverage as costs in the current year have returned to a more normalized level.
As a multi-branded retailer, Dreams sells a variety of products across a range of price points.
Their margin profile is lower than our historical International margins, which is driving the major change in year-over-year margins internationally.
Excluding Dreams, the underlying sales and margin performance internationally was in line with our expectations across both Europe and Asia Pacific.
Now moving on to the balance sheet and cash flow items.
We generated strong third quarter operating cash flows of $285 million.
We are running very light on inventory, and we would expect that our inventory days would increase by the end of the year to support our expected sales growth in 2022.
At the end of the third quarter, consolidated debt less cash was $1.9 billion, and our leverage ratio under our credit facility was 1.7 times.
Our strong financial performance and balance sheet resulted in positive signals from the capital markets.
First, we received multiple rating agency upgrades during the quarter, resulting in the strongest credit ratings in the company's history.
Second, we issued an $800 million three 7/8% 10-year bond, which was significantly oversubscribed by the market.
This bond secures our long-term flexibility at historically low rates and resulted in record liquidity of $1.2 billion at the end of the third quarter.
This transaction will have the near-term impact of an incremental $7 million of interest in Q4 2021.
We are temporarily holding excess cash.
And over time, these funds will be invested to drive incremental EPS.
Now turning to our 2021 guidance.
We have updated our full-year guidance to reflect our third quarter performance, the expectations to reduce our elevated backlog and incremental costs we expect to incur to service our customers through the balance of the year.
We currently expect 2021 sales growth to exceed 35% and adjusted earnings per share to be between $3.20 and $3.30, for a growth rate of 70% at the midpoint.
I want to note that this expectation on adjusted earnings per share includes a headwind of $0.03 from the increase in interest expense I noted before.
Consistent with our prior quarter's commentary, we expect the fourth quarter will be unusually strong as we work off the large backlog we carried over from the third quarter and remove customers off allocations.
We expect this to result in sales and profits being higher in the fourth quarter than in the third quarter.
At the midpoint of our guidance, this implies EBITDA to grow over 30% in the fourth quarter versus the prior year Lastly, I'd like to flag a few modeling items.
For the full year 2021, we currently expect total capex to be between $140 million and $150 million, D&A of about $180 million, interest expense of about $62 million, a tax rate of 25% and a diluted share count of 204 million shares.
I want to provide some additional details about our plans for future growth.
We have complementary building blocks in place that we believe will drive growth in our business for next year and beyond.
The first major building block is the launch of our new line of Tempur products in our European and Asia-Pacific markets.
The new products will have a wider price range with the super premium ASP ceiling maintained and the ASP floor expanding into the premium category.
This will allow us to reach a new segment of customers, substantially increasing our total addressable market internationally.
We will launch and invest in these new products across our international markets in 2022.
Second key building block is the continuation of our initiative to expand into the domestic OEM market.
In 2020, we recognized whitespace opportunity for Tempur Sealy in the OEM market and successfully generated $150 million in sales in our first year.
We believe that we can grow our sales by 400% to $600 million by 2025 due to continuing -- continuation of utilizing our best-in-class manufacturing and logistics capabilities to manufacture non-branded product.
This will allow us to earn our fair share of approximately 20% of the bedding market we believe is serviced by OEM.
This also is expected to decrease our cost per unit for our branded product as we spread fixed costs and drive more advantageous supply agreements.
The third building block of future growth is our expectation that we'll be able to service the entirety with a robust demand for our brands and products through the wholesale channel.
Throughout 2021, because of supply chain issues, we've had to turn away new North American customers opportunities and have had our existing customers, including our e-commerce and retail operations, on allocation.
Beginning in 2022, we anticipate being able to fully service demand and reengage with those new customers who approached us in the past about bringing on our brands and non-branded products.
We also expect to return to a normalized brand mix dynamics as supply chain improves for both Tempur and Sealy operations.
The fourth building block is continued expansion through our direct channel.
As I've said before, we believe that we have one of the fastest growing, most profitable direct-to-consumer bedding businesses in the world.
We expect both our e-commerce and company-owned stores to have robust growth opportunities going forward.
Our e-commerce will continue to focus on converting customers interested in purchasing online directly from a brand, while our retail operations are driving both same-store sales growth and expansion of new store counts.
We currently operate over 600 retail stores worldwide and see opportunities to further increase our store count organically, about double digits annually for the next several years.
The fifth building block that will drive our future growth is continued investment in innovation.
Consumers are growing -- consumers have a growing appreciation for the importance of sleep to overall health and wellness and, as a result, are increasingly searching for new solutions and technology to help improve their sleep.
We have a strong legacy of delivering award-winning products that provide breakthrough sleep solutions to consumers, backed by over a century of knowledge and industry-leading R&D capabilities.
Our planned 2022 product launch simplifies how we will relentlessly drive innovation to continue to bring consumer-centric solutions to market.
Lastly, we expect to continue to execute on our capital allocation strategy.
We run a balanced capital allocation plan, which contemplates supporting the business, returning value to shareholders via share repurchase and dividend and, on opportunistic basis, acquiring businesses that enhance our global competitiveness.
We believe that our execution across these key building blocks will sustain double-digit sales and earnings per share growth in 2022 and position the company very well for sustainable long-term growth.
In closing, I briefly want to touch on ESG.
We've embedded environmental, social and government factors into our core strategy to help deliver long-term value.
For example, our new eco-friendly mattress collection I discussed a moment ago.
We made a responsibly sourced material.
We also expect our new U.S. foam-pouring facility to allow us to hire approximately 300 local employees.
Our average annual salary for our U.S. manufacturing employees is above the national average, and it's about $42,000 a year.
This facility will also include state-of-the-art equipment, which is expected to improve energy efficiency on a per product basis.

user
compname reports q3 adjusted earnings per share $0.88.
q3 adjusted earnings per share $0.88.
q3 sales rose 20 percent to $1.358 billion.
sees fy adjusted earnings per share $3.20 to $3.30.
tempur sealy - for full year, company currently expects net sales growth to exceed 35% over prior year.

assistant