Foolish Forecast: Taking Tempur-Pedic's Temperature

Mattress maker Tempur-Pedic (NYSE: TPX  ) reports its third-quarter 2007 numbers Thursday after close of trading. Will Mr. Market wake up Friday feeling bright-eyed and bushy-tailed, or will the stock fall out of bed?

What analysts say:

  • Buy, sell, or waffle? Thirteen analysts give Tempur-Pedic an unlucky ratio of six buys to seven holds. The CAPS community has mixed feelings, offering it a three-star rating (out of five).
  • Revenue. Yet sales growth is expected to be spectacular, up 15% to $278 million.
  • Earnings. And profits? They're predicted to rise 32% to $0.45 per share.

What management says:
Management gave investors a look inside its business last month by holding its "first annual" analyst day in September. Calling itself the "Worldwide Leader in Premium Sleep" and the "leading producer of premium mattresses and pillows," Tempur-Pedic says it is "pleased with recent business trends." Although the firm says it has had some problems making enough mattresses to keep up with demand, that problem is certainly preferable to the alternative. I expect that fellow broadly-defined-as-"furnishings" companies like Stanley (Nasdaq: STLY  ) or Furniture Brands (NYSE: FBN  ) would agree with me on that point.

What management does:
As sales surge, Tempur-Pedic's margins have ebbed. Both the gross and operating rolling margins have been trending downward. I'm guessing that trend will reverse itself soon, however, based on the striking disconnect between anticipated sales and profits growth for Q3. (But that's not to say there's anything wrong with the margins as they currently stand. Both Sealy (NYSE: ZZ  ) and Select Comfort (Nasdaq: SCSS  ) would kill to get these kinds of profits -- Sealy's operating margin rose to barely more than half the level of Tempur-Pedic's, and Select Comfort is outclassed by a factor of almost three concerning the operating profit.)

Margins

3/06

6/06

9/06

12/06

3/07

6/07

Gross

49.9%

49.3%

48.9%

48.7%

48.5%

48.5%

Operating

22.3%

22.0%

22.3%

22.1%

22.0%

21.9%

Net

11.8%

11.6%

12.4%

11.9%

11.7%

11.9%

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:
Over on the balance sheet, things are much as you'd expect for a firm that, like Tempur-Pedic, says it has a hard time keeping items in stock so as to satisfy demand. Last quarter, accounts receivable growth basically tracked sales growth so far this year. Meanwhile, inventory is up a mere 7.8% -- a far cry from the firm's 17% sales growth rate.

Ordinarily, I would consider such a dynamic a good thing. But based on management's comments, I now understand that this is not a situation to be desired -- and more importantly, one that management aims to change by getting more mattresses built, so that more mattresses can be sold. I would expect this to mean we will see inventory grow in quarters to come. Don't fear that if it happens, though. This is all part of the plan.

Tuck yourself into further Tempur-Pedic news with:


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