Sleep Apnea at Sealy

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Sealy (NYSE: ZZ) may be known for its comfy mattresses, but it looks like it's giving its shareholders a case of the night terrors with its most recent quarter, judging by the stock's drop today.

You might suspect there's a problem when a company's earnings press release doesn't provide net income data until the sixth paragraph, which was the case with Sealy. Third-quarter profit fell 27% to $21.5 million or $0.22 per share, and that's including beneficial tax implications; Sealy's tax rate in the quarter was slashed to 19.2% from 28.7%.

Sealy's sales increased 7.5%, so the company focused on having driven volume, but the fact that gross profit dropped to 40.3% of net sales from 44.6% is telling. In its conference call, Sealy spoke optimistically about its increased unit sales and taking market share from rivals like Select Comfort (Nasdaq: SCSS) and Tempur-Pedic (NYSE: TPX), but problems pushing its mattresses profitably are certainly enough to keep shareholders awake at night.

It probably comes as no surprise to anybody that in its conference call, Sealy mentioned the housing slowdown when explaining current softness (and not the good kind of softness, but rather industry softness). Although retailers and consumer goods companies blaming housing for their woes might get old, it's not hard to imagine the situation's going to take its toll on many discretionary purchases (like pricey new mattresses). I don't think I'm the only one who suspects that folks accessing their home equity for cash probably finance many people's big-ticket purchases like beds and mattresses, and that party's over.  

Is Sealy cheap? One could argue that it's trading at just 11 times forward earnings, less than its anticipated growth rate that year, and it has a PEG ratio of just 0.92, for a start. However, not only is there reason to be concerned about weakness in consumer spending, but Sealy's also laden with debt. At the moment, it has just $14.6 million in cash and a whopping $776.1 million in long-term obligations, and debt and interest payments aren't going to help the drag. I'd say investors might sleep easier without Sealy in their portfolios.

Get comfortable with some related Foolishness:

• Here's a Foolish Forecast for Sealy's current quarter: turns out Sealy didn't bounce -- it broke the bed.
• In September, Select Comfort fell out of bed.
• Last winter, one Fool wondered if it was time to sleep on Sealy.