Sealy (ZZ)

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See all Bulls Reasons Bulls: Reasons To Buy Largest maunfacturer of mattresses in the world 0% agree Largest maunfacturer of mattresses in the world Sealy, the largest mattress manufacturer in the world, has Economy of scale advantage in a industry that competes using price. While other manufacturers may break even at the going market price, Sealy could still generate a profit. View or Edit Reason 0 votes 0% agree Sealy is expanding internationally 0% agree Sealy is expanding internationally Sealy is expanding internationally. Sales have increased in Argentina and Mexico, while Europe also demonstrates growth. Sealy exposure to the international realm makes it less susceptible to softeness in the United States. View or Edit Reason 0 votes 0% agree Diversification of products 0% agree Diversification of products Sealy is rapidly expanding its product line into the growing specialty bedding segment. With its large distribution channel, Sealy should be able to compete successfully in the higher-margin segment of mattresses. View or Edit Reason 0 votes 0% agree See all Bears Reasons Bears: Reasons To Sell Sealy runs a highly-leveraged balance sheet 0% agree Sealy runs a highly-leveraged balance sheet Sealy runs a highly-leveraged balance sheet. It's current ratio is barely above 1 and it has a significant amount of long-term debt. Should sales turn south for a prolonged period, Sealy could face bankruptcy. View or Edit Reason 0 votes 0% agree Industry soft and expected to be so 0% agree Industry soft and expected to be so The U.S. bedding industry is soft, and this trend may continue. If so, Sealy's gross margins and profits are likely to suffer. View or Edit Reason 0 votes 0% agree Major revenue segment in a slowing and highly competitive segment 0% agree Major revenue segment in a slowing and highly competitive segment 92% of Sealy sales are generated from the slowing and highly-competitive innerspring mattress segment. Tempur-pedic International (TPX) and Select Comfort (SCSS) may be able to fend their market share in the specialty bedding segment. View or Edit Reason 0 votes 0% agree Send the authors a comment or suggestion Be the first to make a suggestion See All Suggestions

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Sealy is highly susceptible to changes in the U.S. housing market. If subprime lending woes have a prolonged effect on U.S. housing, bedding manufacturers will likely suffer as fewer families upgrade to larger homes (with more bedrooms) and buy second homes, both which drive mattress sales. ^[3] In addition, the company may itself be over-extended with debt. The target of a leveraged buyout in 2004 by a private equity firm, Sealy was saddled with a debt load at a near 1:1 ratio compared to total assets from 2004 to 2006 (the company became publicly traded again in 2006). This unusually large debt makes the company sensitive to changes in interest rates, which make financing more expensive when it rises.

[edit] Business Overview

Sealy does everything from manufacturing to distributing and selling its mattresses, meaning that the company is vertically integrated (it does not operate its own retail stores). Sealy also operates under a just-in-time model that allows the company to avoid warehouse expenses by processing and shipping finished goods with more efficiency.^[4].

Sealy makes generates revenue in two ways. First, the company manufacturers and sells mattresses through its 7,000 retail partner outlets. Second, it gets royalties by licensing its Sealy brands to independent mattress manufacturers ^[6]

Traditional innerspring mattress brands comprised 92% of 2006 sales and include:^[7]

• Sealy
• Sealy Posturpedic
• Stearns & Foster
• Basset

Non-innerspring mattresses that are made from materials such as latex, foam, water and air generated the remaining 8% of 2006 sales and include:^[8]

• True Form
• Spring Free
• Stearns & Foster
• Reflexions
• Carrington Chase
• MirrorForm

[edit] Geographical Distribution of Sales

The United States generated 76% of all sales in 2006, with Canada and Europe account for most of the rest. Mexico and few South American countries contribute approximately 5% to net sales^[9]. The following table shows how 2004-2006 sales break down by geographical location.

(ZZ) Sales by Location (in $millions)^[10]

Between 2005 and 2006, domestic net sales, which account for 76% of total sales, increased by $49 million because of a 7.4% increase in average selling price (though that was tempered by a 2.9% decline in sales volume). The driver of the price increase was the non-innerspring specialty mattresses^[11]. International sales increased $64.3 million, or 20.8%, as Mexico and Argentina showed the greatest growth^[12].

[edit] Using Debt to Finance Business Operations

After being taken private by Kohlberg Kravis Roberts & Co. (KKR) in April of 2004, common shares of Sealy were made public in April of 2006. Private equity companies such as KKR typically use leverage to increase returns on invested capital. It is important to note that as of the end of fiscal 2006, KKR held a majority stake of 51% of Sealy's outstanding shares^[13].

Sealy uses a significant amount of debt to finance its operations. The graph below compares total assets with total debt. Total debt has been about equal to total assets over the past five years.

While this nearly 1:1 ratio could contribute to higher return on equity, it also increases the solvency risk for the company, especially if sales were to decline substantially.

[edit] First Nine Months of Fiscal Year 2007

Comparing First Nine Months of 2007 and 2006^[15]

Comparing 2007 to 2006, Sealy increased unit volume sales by lowering prices. While this boosted U.S. unit sales by 7.6%, the average unit selling price fell 4% and net sales increased as a result while but gross profit decreased. By posting a year over year gain of 70%, specialty bedding drove significant growth. The company also gained from exchange rates due to its European operations during this period^[16].

[edit] Key Trends and Forces

• Specialty Sleep is the fastest growing segment of the estimated $12 billion bedding retail market in the U.S.^[17]. An increasing number of consumers are looking for products to help them get a good night's sleep, and as a result, are buying specialty sleep products, which range from water, foam, air, and visco-elastic bedding (all of which are offered by Sealy). A complementary trend is affecting the pillow segment as well. Should this move away from traditional innerspring mattresses and feather pillows continue, Sealy will likely experience an increase in sales of its more profitable specialty bedding, but could see demand fall for its traditional innerspring mattresses, which generated 92% of all sales in 2006.

• Aging Baby Boomers have increasing demands for Sealy's non-innerspring brands. As baby boomers get older, they will have higher demands for specialty sleeping products to address increases in joints and muscles pains.

• The U.S. Housing Market could affect the overall market for mattresses. If Americans add second homes and buy larger houses, this would likely increase mattress demand. This increased demand would result from a need to buy bedding for a secondary home and an increase in space leads to buying bigger mattresses. On the flip side, if subprime woes depress the housing market, the demand for mattresses will likely fall.

• Rising Commodity Prices could hurt Sealy's gross margins. Sealy depends on steel and petroleum to produce its steel innersprings and polyethylene products used in many of its mattresses^[18].

• A U.S. recession could adversely affect Sealy's sales. With the majority of revenue being generated in the United States, weak consumer spending could hurt Sealy's margins. Sealy's management has shown a price-cutting strategy in a softening market^[19]. If the consumer is overextended, he or she may opt to withhold renewing their mattress or buy the cheaper traditional one. The top end of Sealy's offerings cost as much as $5,000 per mattress.

[edit] Competition and Market Share

The mattress industry consists a few large national players, Serta, Sealy (ZZ), Select Comfort (SCSS), Simmons, Tempur-pedic International (TPX), and Spring Air. These six leaders account for more than 60% of sales for the industry, which is made up of approximately 500 U.S. manufacturers^[20].

Bedding products fall in either traditional and/or specialty sleep products and most companies have developed products in recent years to address the faster growing specialty segment. Sealy (ZZ), is the largest bedding manufacturer in the world by sales and dominates the traditional sleep product market and has made some inroads into the specialty products market (8% of sales in 2006).

According to to the International Sleep Products Association, wholesale bedding manufacturers reported total sales of $6.4 billion in 2005, with a 6.3% increase in 2006^[21]. Wholesale bedding shipments increased at a compound annual growth rate of 6.8%, 7.2%, and 6.8% for the 5-year, 10-year, and 20-year periods ended 2005, respectively^[22]. The market for U.S. bedding retail industry was $12 billion in 2005 and estimated to have been $12.5 billion in 2006^[23].

The following table shows total domestic sales figures, along with the number of retail outlets, for the largest firms in the mattress manufacturing industry.

[edit] U.S. Retail Bedding Market Share

^{[24][25][26][27]}

[edit] References

1. ↑ Sealy Corp Form 10-K, Fiscal Year 2006, "Products", Page 2
2. ↑ Sealy Corp Form 10-K, Fiscal Year 2006, "Customers", Page 2
3. ↑ Select Comfort (SCSS), Fiscal Year 2006, "Risk Factors", Page 12
4. ↑ Sealy Corp Form 10-K, Fiscal Year 2006, "Operations", Page 3
5. ↑ http://www.sealy.com/
6. ↑ Sealy (ZZ) Form 10-K, Fiscal Year 2006, "Business", Page 1
7. ↑ Sealy (ZZ) Form 10-K, Fiscal Year 2006, "Business", Page 1
8. ↑ Sealy (ZZ) Form 10-K, Fiscal Year 2006, "Business", Page 1
9. ↑ Sealy (ZZ) Form-10K, Fiscal Year 2006, "Geographical Distribution of Sales", Page 18
10. ↑ Sealy (ZZ) Form-10K, Fiscal Year 2006, "Geographical Distribution of Sales", Page 18
11. ↑ Sealy (ZZ) Form-10K, Fiscal Year 2006, "Geographical Distribution of Sales in $millions", Page 18
12. ↑ Sealy (ZZ) Form-10K, Fiscal Year 2006, "Geographical Distribution of Sales in $millions", Page 18
13. ↑ Sealy Corp Form 10-K, Fiscal Year 2006, "Business", Page 1
14. ↑ Sealy Corp Form 10-K, Fiscal Year 2006, "Selected Financial Data", Page 23
15. ↑ Sealy (ZZ) Form-10Q, 3Q Fiscal Year 2007, "Results of Operations", Page 32
16. ↑ Sealy (ZZ) Form 10 Q, Fiscal Year 2007 3Q, "Results of Operations", Page 34
17. ↑ Tempur-pedic International (TPX) Form 10-K, Fiscal Year 2006, “Our Market Position”, Page 2
18. ↑ Sealy (ZZ) Form 10 K, Fiscal Year 2006, "Risk Factors", Page 11-16
19. ↑ Sealy (ZZ) Form 10 Q, Fiscal Year 2007 3Q, "Results of Operations", Page 34
20. ↑ Simmons Form 10-K, Fiscal Year 2006, "Competition", Page 5
21. ↑ Simmons Form 10-K, Fiscal Year 2006, "Industry", Page 2
22. ↑ Select Comfort Form 10-K, Fiscal Year 2006, "Industry and Competition", Page 8
23. ↑ Select Comfort Form 10-K, Fiscal Year 2006, "Industry and Competition", Page 8
24. ↑ Sealy From 10-K, Fiscal Year 2006, "Results of Operations", Page 32
25. ↑ Simmons Form 10-K, Fiscal Year 2006, "Customers", Page 4
26. ↑ http://www.selectcomfort.com/corporation/investor_relations/select_comfort_investor_relations.cfm
27. ↑ Tempur-Pedic Form 10-K, Fiscal Year 2006 "Comparing Sales", Page 27