No Sleep for This Mattress Maker

For three quarters of the year, things at Sealy (NYSE: ZZ  ) looked pretty good. But then the fourth quarter knocked the company for a loop -- and turned what had been more than $39 million in profit into a yearly loss of $2.9 million.

Of course, had it not been for one-time impairment charges of about $30 million taken during the fourth quarter, Sealy would have been profitable for the year. Still, even removing the one-time charge from the equation leaves a net income of $27 million ... not much of a margin for a company that did almost $1.5 billion in sales last year. In its conference call, management blamed weak demand and high materials costs for the loss.

I'm sympathetic to Sealy's plight, but that doesn't mean I want to go out and buy shares of the company. This industry just isn't well-positioned for the kind of economy we're in right now.

An uncomfortable place to lie down
I'm realistic. I don't expect strong top-line growth in a recession -- especially in a consumer-driven sector like this. I do, however, expect basic expense control measures to defend my bottom line. In this case, I'm starting to question whether that's even possible.

The following table shows how Tempur-Pedic (NYSE: TPX  ) and Ethan Allen (NYSE: ETH  ) have succeeded in defending profit margins even in a struggling economy. On the flipside, La-Z-Boy (NYSE: LZB  ) and Leggett & Platt (NYSE: LEG  ) seem to have been bitten by the same bedbug that got Sealy.

Company

Operating Margin

Profit Margin

Tempur-Pedic (as of 9/30/08)

17.15%

9.51%

Leggett & Platt (as of 9/30/08)

7.14%

(2.10%)

La-Z-Boy (as of 10/25/08)

(0.69%)

(4.10%)

Ethan Allen (as of 9/30/08)

9.14%

5.12%

Sealy (as of 11/30/08)

7.74%

(0.19%)

Source: Yahoo! Finance. Figures for trailing 12 months as of dates shown.

Unfortunately, Tempur-Pedic and Ethan Allen haven't reported Q4 results yet. Knowing that Ethan Allen's top and bottom lines deteriorated during 2008, I get a sneaking suspicion that its margin numbers may start looking a lot like Sealy's.

In short, Sealy's not suffering alone; most of the industry looks like it's in trouble.

What about stunningly low valuations?
I'm not oblivious to the counter-argument; a price/sales ratio of 0.12 and P/E ratios that were, until recently, incredibly low just screams "value."

But remember, a "value" is only desirable if a company's situation is getting better. Like I said, I just don't see that happening for Sealy -- or the industry -- until we're decisively into an economic recovery. That could be a few quarters from now, if not more.

Further Foolishness:

Fool contributor James Brumley doesn't own any of the companies mentioned above, but he does regrettably own a house with gas heat in a very chilly part of the country right now. La-Z-Boy is a Motley Fool Income Investor pick. Try any of our Foolish newsletter services free for 30 days. The Fool's disclosure policy sleeps like a baby.


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