Foolish Forecast: I Dream of Sealy

Mattress maker Sealy (NYSE: ZZ  ) reports third-quarter 2006 earnings results on Wednesday. Want to know what Wall Street expects to see? Read on. Want to know what really matters? Read on a bit more.

What analysts say:

• Buy, sell, or waffle? Seven analysts follow Sealy, giving the firm three buy ratings and four holds.
• Revenues & earnings. Analysts expect Sealy to earn $0.30 per share on $410 million in sales.

What management says:
Reviewing last quarter's results, CEO David McIlquham noted that although the firm's new, higher-priced product introductions (its Posturepedic line in particular) were a primary factor in depressing its U.S. sales, they also acted as a growth driver for profits going forward. Last quarter saw average selling prices rise 9%, and McIlquham is now turning his focus to "driving domestic unit volume." Combined with what he termed "continued operating improvements," McIlquham promised to "increase [Sealy's] annual cash flow and profitability consistently over the long term."

What management does:
Judging from the table below, improving operational efficiency is the right way to go. Sealy has maintained its rolling gross margins at a remarkably consistent 44%-ish level over the last 18 months. It's the operations that are weak, showing three periods of declining operational profitability as selling, general, and administrative costs (SG&A) continue to rise faster than sales (up 12% year over year versus 8% sales gains in the first half of 2006).

Margins %	2/05	5/05	8/05	11/05	2/06	5/06
Gross	44.2	44.4	44.3	44.3	44.4	44.6
Op.	11.8	13.1	13.8	13.3	13.1	13.0
Net	(2.3)	4.2	4.5	4.7	4.7	4.2

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Americans like their mattresses, but unfortunately for Sealy, they seem to prefer the mattresses they already own over buying anything new. In the firm's Q2 earnings report back in July, Sealy reported a modest 2.5% gain in U.S. sales, which came about entirely from rising prices. As far as unit sales went, they declined 6%. Where Sealy came on strong was beyond U.S. borders, where sales grew rapidly at 19%, 12% of which was made up on unit sales gains.

In tomorrow's news, therefore, we'll want to look for two things: continued sales strength abroad, and some reining in of SG&A on the domestic front.

A third item to look for can be found on Sealy's balance sheet. So far this year, Sealy has allowed its inventory picture to deteriorate significantly, with average inventories rising 18% year over year -- more than twice as fast as total sales improvement. Now admittedly, much of the inventory build could be attributed to the new products that McIlquham mentioned, products which were still working their way onto sales floors at last report. Still, this is a number to watch, so on Wednesday, as much as we'd like to see sales rise, we'll be at least as interested in seeing whether inventories fall.

Competitors:

• Select Comfort (Nasdaq: SCSS  )
• Tempur-Pedic (NYSE: TPX  )

Suppliers/Customers:

• Culp (NYSE: CFI  )
• Haverty Furniture (NYSE: HVT  )

Looking for some more bedtime reading? Try:

• Tossing and Turning at Sealy and
• Bedbugs Bite Tempur-Pedic.
• And who could pass up An Astonishingly Cheap Stock?

Fool contributor Rich Smith does not own shares of any company named above. Select Comfort is a Motley Fool Hidden Gems recommendation.