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Tempur Sealy International Inc (NYSE:TPX)
Q3 2019 Earnings Call
Oct 31, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen thank you for standing by and welcome to Tempur Sealy Third Quarter 2019 Earnings Conference Call. [Operator Instructions]

I would now like to hand the conference over to your speaker today Aubrey Moore with Investor Relations. Please go ahead ma'am.

Aubrey Moore -- Investor Relations

Thank you operator. Good morning everyone and thank you for participating in today's call. Joining me in our Lexington headquarters are Scott Thompson Chairman President and CEO; and Bhaskar Rao Executive Vice President and Chief Financial Officer. After prepared remarks we will open the call for Q&A. Forward-looking statements that we make during this call are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that these forward-looking statements including the company's expectations regarding sales earnings net income and adjusted EBITDA and anticipated performance for 2019 and subsequent periods involve uncertainties. Actual results may differ due to a variety of factors that could adversely affect the company's business. The factors that could cause actual results to differ materially from those identified include economic regulatory competitive operating and other factors discussed in the press release issued today. These factors are also discussed in the company's SEC filings including but not limited to an annual report on Form 10-K and the company's quarterly reports on Form 10-Q under the heading Special Note Regarding Forward-Looking Statements and/or Risk Factors. Any forward-looking statement speaks only as of the date on which it is made. The company undertakes no obligation to update any forward-looking statements. This morning's commentary will include non-GAAP financial information. The press release contains reconciliations of this non-GAAP financial information to the most directly comparable GAAP information except -- otherwise discussed in the press release as well as information regarding the methodology used in our constant currency presentations. We have posted the press release on the company's investor website at investor.tempursealy.com and have also filed it with the SEC. Our comments will supplement the detailed information provided in the press release.

And now with that introduction it's my pleasure to turn the call over to Scott.

Scott L. Thompson -- Chairman, President and Chief Executive Officer

Thank you Aubrey. Good morning and thank you for joining us on our 2019 third quarter earnings call. I'll start with comments on the quarter's operating performance then Bhaskar will review our financial performance in detail. Finally I will conclude with an overview of our long-term corporate initiatives and some thoughts on capital allocation and current trends. The third quarter of 2019 was outstanding with growth across all 3 of our regions: North America Europe and Asia Pacific. In fact this quarter was the best quarter in the company's history. We are pleased to report as compared to last year sales and earnings grew double digit. Our leverage growth declined and we repurchased 50 million of common stock during the quarter. We had a strong conversion to cash and there were no onetime adjustments in EBITDA. Turning to the reported results for the quarter. Net sales increased 13% adjusted EBITDA increased 17% and adjusted EPS increased a very robust 28%.

This marks the sixth consecutive quarter of adjusted EPS growth. Deposit results were broad-based from a brand channel and geographic perspective demonstrating the strength of the company's competitive position around the world. The last few quarters demonstrate our ability to navigate regional economic uncertainty and take advantage of the changing bedding market. In North America, we're excited to start our new relationship with Big Lots and Mattress Firm. During this quarter, we completed the rollout of Sealy products and pick locks and subsequent to the end of the quarter, we began shipping products to Mattress Firm. During this quarter we completed the rollout of Sealy products at Big Lots and subsequent to the end of the quarter we began shipping products to Mattress Firm. During the third quarter these accounts did not contribute to earnings. And in fact we experienced $5 million of inefficiencies as we ramped up staffing for our new business and expanded our quality control procedures. Both new accounts are expected to positively impact our operations starting in the fourth quarter of 2019. I'd like to highlight 3 items from our third quarter results. First as I mentioned global net sales grew 13% for the third quarter versus the prior period with broad-based increases in demand above our expectations for both Tempur-Pedic and Sealy all around the world. Looking internationally net sales grew 8% on a constant currency basis.

We experienced a degree of market uncertainty in the U.K. France Hong Kong and China which created choppy business conditions. Despite these country-specific issues the international team delivered a solid performance. In North America we grew sales a robust 15% in the quarter with both Tempur-Pedic and Sealy growing double digits. As a reminder this quarter had no new products and no significant changes in distribution for the Tempur-Pedic brand. The rollout of the new Tempur-Pedic product lines were complete in the second quarter and new significant distribution gains for Tempur-Pedic start shipping in the fourth quarter of 2019. We believe can repeat it continues to take market share and the premium price band. I should also note that we improved our product mix. As our high end temper breeze products continue to gain momentum. Turning to see Lee's performance in North America, we're very pleased to see continued sales momentum. But the same time we also successfully expanded our distribution. The combination resulted in outstanding sales growth and the quarter. Our focus on internal initiatives to deliver the highest quality product and the highest level of manufacturing reliability and customer service continues to be the reason that existing retailers lean into our portfolio of products.

We also believe the recently enacted anti-dumping case duties against China manufacturing benefited all U.S. bedding manufacturers. Our North America operations team has evaluated our near and long-term opportunities with Sealy and Stearns & Foster. The results of which are that we expect to open 1 new state-of-the-art Sealy plant in Texas in late 2020. Although we currently have adequate capacity to serve the market we believe we have long-term upside in these brands and this plant will support our higher volume of units we expect across the U.S. network. The second highlight from the quarter was the over 60% growth in our global direct channel. International Direct grew 21% on a constant currency basis with growth both in e-commerce business and our company-owned stores. In North America the direct channel almost doubled year-over-year and grew over 30% excluding the acquired Sleep Outfitters stores. We opened our 50th Tempur-Pedic retail store during the quarter and we expect to open a handful more by the end of the year.

As we said previously we can see the Tempur-Pedic retail stores over the long term being 125- to 150-store opportunity. Stores opened more than a year had very strong same-store sales at over 20%. It's worth noting that same-store sales growth does not include our e-commerce channel. Our direct-to-consumer online channel also had solid double-digit growth. It is clear that our direct-to-consumer business is significantly outperforming the average disruptor brand in the U.S. market both in sales growth and more importantly in real sustainable profits and cash flow. The third highlight for the quarter is that we reported the highest quarterly gross profit in the company's history at $361 million. The cumulative growth from our direct channel a higher product mix due to the success of our premium priced Tempur-Pedic and Stearns & Foster products and unit volume increases resulted in gross margin leverage.

This quarter's reported gross profit is greater than the gross profit we generated back in 2016 when we had higher total sales and our bedding products were sold through a greater number of third-party retail doors including Mattress Firm. Over the past few years we've developed new innovative products invested in our operations and diversified our go-to-market strategy all to deliver healthy gross margin expansion and broad-based sales growth. Our competitive position has never been stronger. On top of this momentum we are thrilled to have improved our wholesale distribution in North America by recently entering into a new win-win supply agreement with Mattress Firm which we believe will benefit both companies and the U.S. bedding business as a whole. Before turning the call over to Bhaskar I want to mention that 2 members of our executive team will be taking on new reduced roles starting in 2020 as a transition toward retirement. Rick Anderson EVP President of North America and Carmen Dabiero SVP of Human Resource. I want to thank them for their many years of contribution to Tempur Sealy. We've been preparing for these transitions for several years and I'm very confident in our succession plan. Both executives have built a strong team and internal leadership is in place to ensure continued performance.

With that I'll turn the call over to Bhaskar to walk you through the financial results in more detail.

Bhaskar Rao -- Executive Vice President and Chief Financial Officer

Thank you Scott. Before going into the details of the quarter I would like to call out a few highlights outside of those previously mentioned. As compared to the prior year adjusted gross margin increased 160 basis points to 43.9%. Adjusted operating margin improved 130 basis points to 14.7%. Adjusted EBITDA increased 17% to $150 million and adjusted earnings per share for the quarter was $1.30 an increase of 28% versus the prior year. This was driven entirely from operating performance versus share buybacks. Turning to North America. First I would like to discuss some financial reporting reclassifications. As previously announced we have acquired Sleep Outfitters which was fully integrated into our North American direct channel during the second quarter. Sleep Outfitters had historically been part of our wholesale channel since they were previously a third-party retailer. Accordingly this impacts our growth rates within both channels. North America net sales increased 15%. On a reported basis the North American wholesale channel increased 9% and the direct channel increased 89%.

Excluding Sleep Outfitters the wholesale channel increased 11% and the direct channel increased 37%. The sell-in of Big Lots contributed several points of growth to our Sealy business in the quarter. North American gross profit margin improved 220 basis points to 42.1% as compared to the prior year. This was primarily driven by improved Tempur merchandising mix pricing benefits and favorable commodities. As expected our gross profit margin was impacted during the quarter. We took incremental steps to ensure the highest product quality and great customer service to all ahead of the expected higher volumes from the new distribution. And as Scott mentioned this resulted in inefficiencies of about $5 million in the third quarter and was not treated as an adjustment to our reported results.

North American operating margin improved 170 basis points to 17.6% as compared to adjusted operating margin in the prior year. This was primarily driven by improved gross margins partially offset by higher variable compensation. Turning to International. Net sales increased 4% on a reported basis. On a constant currency basis International net sales increased 8%. the direct channel increased a robust 21% and the wholesale channel increased slightly. As Scott noted earlier we experienced a degree of market uncertainty in specific geographies and thus we expect sales growth to decelerate in the fourth quarter. As compared to the prior year our International gross margin improved 10 basis points to 53.1% and operating margin was stable to prior year at 19.6%. Turning to the company's global performance. Operating income was $121 million and adjusted EBITDA was $150 million up $22 million from last year. The increase in EBITDA was primarily driven by pricing benefits higher volume and favorable commodities. This was partially offset by higher variable compensation as we are performing a good bit over target inefficiencies as we ramp up the new distribution and innovation investments. Regarding commodities input costs were in line with expectations for the third quarter. However we have seen those trends improve and now stabilize. We now expect a few million dollars of incremental benefit in the fourth quarter. The tax rate was 26% down from 28% in the prior year and interest expense was $21 million also down from the prior year. All of this resulted in adjusted EPS for the quarter of $1.30 up 28%. Now moving to the balance sheet and cash flow items.

We generated record operating cash flows from continuing operations of $156 million in the third quarter. Cash cycle was unfavorable by 11 days compared to the third quarter of '18. This was principally driven by higher inventory levels to support our launch with new distribution. I'm pleased to highlight that we recently completed the amendment of our credit facilities. This refinancing reflects our success in strengthening our global competitive position our successful expansion into direct-to-consumer business and recent market share gains in North America. This transaction increases our operating flexibility extends our debt maturities and represents the lowest interest rate spread on a like-for-like basis in the company's history. This is a direct reflection of our powerful omni-channel strategy and our disciplined capital allocation approach. At the end of the third quarter net debt was $1.5 billion down from the second quarter of '19. Our leverage ratio under our new facilities came in at 3.2x down from 4x reported for the third quarter of last year. I'm pleased to highlight that we lowered our financial leverage a good bit while also buying back stock.

Turning to guidance. We have raised our 2019 guidance. We now estimate our adjusted EBITDA to be between $485 million and $500 million. This raises the midpoint by $28 million. This increase of the midpoint is driven by the overperformance of our North American business during the third quarter and the more favorable outlook and the timing of our launch and back stock sell-in with Mattress Firm. This will be partially offset by increases in variable compensation. The launch with Mattress Firm is ahead of our initial expectations and is expected to result in a sales lift in the fourth quarter partly from discounted floor models. In the first quarter of 2020 we anticipate seeing initial signs of what the steady-state business would look like related to volume and product mix. Lastly I would like to flag a few items for modeling purposes. For the full year '19 we currently expect D&A to be between $115 million and $120 million; total capex to be about $80 million which includes maintenance capex of $60 million and investments in ERP upgrades; interest expense of $85 million to $90 million; a tax rate to be between 27% and 28%; and a diluted share count of 56 million. Please note the above items consider the impact of our announced share repurchase plan.

With that I'll turn the call back over to Scott.

Scott L. Thompson -- Chairman, President and Chief Executive Officer

Thank you Bhaskar. Great job. Now turning to the company's long-term initiatives. I'll start with optimizing our powerful omni distribution platform to be where customers want to shop. Earlier this year we announced 2 material wins in distribution with Big Lots and a new agreement with Mattress Firm. The third quarter was the largest expansion of doors in a single quarter in the company's history which we expect to top with even more doors during the fourth quarter with the launch of Mattress Firm. The integration and coordination with both of these organizations' people has been phenomenal. As we look forward we continue to expect these expansions in distribution to generate in excess of $400 million in incremental sales and $75 million to $100 million in incremental EBITDA. As a complement to our material wins in our wholesale distribution our direct channel continues to expand rapidly. We continue to see robust year-over-year sales growth through online sales growth same-store sales growth and expansion of our company-owned doors.

Let me add a few comments about the online marketplace in general. We find that consumers are more digitally savvy than ever. While the majority of customers want to visit stores to touch and feel the product they frequently start their shopping experience online before entering a retail store. We've made adjustments to our strategy and expanded our reach online in 4 ways to complement our presence in the market. First is our own tempurpedic.com site. We identified this as a strategic opportunity in 2016 which we then grew and expanded sales on tempurpedic.com by over 300%. These sales have driven incremental profit and support material online advertising. The fact that more consumers are willing to purchase a bit online has been a positive trend for this segment of our business. Second is our focus on a web-based third-party retailers. We have a dedicated sales team who focus on e-marketplace sales growth. While still in the very early stages we've experienced significant growth while maintaining stable profit margins similar to the fleet average.

Third is helping our traditional third-party retailers expand their brand presence online. Our Retail Edge program has been a key initiative for our sales organization to connect the findings from millions of hours of consumer research into actionable insights for our dedicated retail partners. These investments are not insignificant and are consistent with our passion to help our third-party retailers be successful. And finally fourth our expanded offerings that can be easily shipped and delivered to consumers' doors. No matter what price point or channel a customer wants to shop we have a compressed product that meets their needs. We do not direct customers toward any particular channel. We just want to be wherever the customer wants to shop. My last comment on our omni-channel approach relates to Sleep Outfitters. I'm pleased to report that Sleep Outfitters which was acquired earlier this year has made significant progress in revitalizing their business and are ahead of plan.

In summary our direct channel is outperforming in the market. Now our next long-term initiative develop the highest quality bedding product in all the markets we serve. Our premium products in North America have gone through a transformation over the last two years. We have new product lines in our Tempur-Pedic and our Stearns & Foster brands which have significantly grown our market share in the most profitable segment of the industry. I'd like to highlight the breadth and depth of our worldwide research development and quality testing departments. We have combined these assets with a modern insight department that mines consumer data to keep Tempur Sealy at the forefront of innovation. Our commitment to relentless focusing on what matters the most to consumers has been recognized. As disclosed yesterday Tempur-Pedic was awarded #1 in customer satisfaction retail mattress segment in J.D. Power's 2019 Mattress Satisfaction Report evidencing the success of our products and delivery on our commitment of exceptional sleep.

Turning to our next initiative promote our worldwide brands with compelling marketing. We invested significant marketing dollars in the third quarter as we supported our retailers and our new product portfolio. In 2020 we anticipate significantly increasing our advertising on a dollar basis. In fact we expect a record amount of advertising spend for Tempur-Pedic and Stearns & Foster brands in 2020. More important than the total spend though we continue to strive for efficiency in reaching customers with the right message at the right time and in the way they want to engage media. I'm sure I'll get a question on this so let me go ahead and address it now. As previously announced we extended our 2019 Labor Day promotion by 1 week. This extension enabled all mattress shoppers nationally to take advantage of our promotion but was targeted at those who are planning to purchase a mattress over the year's largest holiday weekend and were impacted by the weather challenges along a significant portion of East Coast preventing them from successfully shopping and benefiting from Labor Day promotion.

While the result of this extension was immaterial to our business we were happy to successfully support retailers in this unique circumstance a hurricane during the industry's largest promotional period of the year. Our last long-term initiative is drive increased EBITDA. Over the past several years we've been resetting the foundation of the company by investing in many areas of our business including product innovation manufacturing optimization marketing building our direct channel and most importantly investing in our team. We're seeing the benefits of these efforts which we believe will continue to deliver above-market performance. Turning to capital allocation. We remain committed to investing capital and opportunities with the highest return on invested capital while balancing our leverage ratio. Currently we expect to generate cash in excess of our businesses' needs and thus we expect based on current conditions to repurchase approximately $50 million of our shares each quarter in the near term.

Based on today's stock price that is about a 4% return based on our market capitalization. Capital allocation is a topic at every Board meeting. We recognize we have the ability to repurchase stock at a more rapid pace but currently believe our consistent measured repurchase pace is appropriate as we maintain future optionality. We expect to update you on our thinking during future calls. Lastly before opening the call up for questions. I'll turn to current trends. North America's current trends are in line with our expectation and guidance with both brands expected to grow significantly during the fourth quarter. As a reminder Tempur-Pedic U.S. sales had strong growth in the back half of 2018 so we have a difficult comp. But we expect to benefit from new distribution in both Tempur-Pedic and Sealy brands. We are in the process of flooring and selling-in back stock both of which will impact the fourth quarter. International has started the quarter in line with our expectations although slightly less robust than the third quarter we're reporting today.

With that operator please open the call up for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question is from Michael Lasser from UBS. Your line is now open.

Atul Maheswari -- UBS -- Analyst

Morning.This is Atul Maheswari filling in for Michael Lasser. thanks a lot for taking your questions. So you beat consensus EBITDA by $9 million in the third quarter but raised the full year guidance by $28 million. So is it fair to assume that the $20 million-or-so of delta is being driven entirely by favorable expectations on the Mattress Firm launch? And with regards to the timing of the launch can you provide a sense of what's baked in the guidance -- what was baked into the guidance earlier versus what is baked into the guidance now?

Scott L. Thompson -- Chairman, President and Chief Executive Officer

Yes. This is Scott. Let me start and then I'll pass it off to Bhaskar. No. To answer your first question no the raise in guidance has a lot more to do with the underlying demand that we're seeing in the core business. There is some change in the thinking of its launch timing Mattress Firm and that we're a little bit ahead of our expectations originally. But the majority of the raise has to do with the broad-based improvement we're seeing in the business primarily in the U.S. And as we mentioned before we've got double-digit growth in Tempur double-digit growth in Sealy. And we're doing well in wholesale and we're doing well in direct. He had some other questions?

Bhaskar Rao -- Executive Vice President and Chief Financial Officer

Sure. That is a fair way to think about it Scott. Just reiterating some of those. Yes underlying business both Tempur and Sealy very strong. Mattress Firm originally had contemplated 4 models. Now we see a bit of channel fill happening or back stock happening in the fourth quarter. And then we did call out that -- so those are the tailwinds that we're seeing. And then from a headwind standpoint is that we do have International and then some variable compensation.

Operator

Our next question is from Bobby Griffin from Raymond James. Your line is now open

Bobby Griffin -- Raymond James. -- Analyst

good morning everybody. I appreciate you taking my questions and Congrats on good third quarter.

Bhaskar Rao -- Executive Vice President and Chief Financial Officer

Thank you.

Bobby Griffin -- Raymond James. -- Analyst

So my first question is just around North America gross margin pretty impressive performance in the quarter especially with light of the Big Lots rollout. Can you maybe just unpack a little bit of the drivers about what surprised you versus your original expectations? What drove the upside? And then how should we frame gross margin in the fourth quarter given the matches from rollout and some more sell in Big Lots.

Bhaskar Rao -- Executive Vice President and Chief Financial Officer

Great question. So if I deal with the third quarter initially is from the upside standpoint as the volumes came in both on Tempur and Sealy ahead of our expectations. So when we do get more units going through each of those plants we do leverage our fixed costs and we get more productive etc.. So that would be the primary driver. As we mentioned is that we continue to see product mix favorability; pricing we continue to see; commodities were in line with our expectations and then that was offset by the investment that we made to ensure good customer service.

As I think about the fourth quarter if I put it all together the way I think about it is those trends that we saw in the third they should continue. Just unpacking that though a bit is we do have Mattress Firm floor models are going in. Those will become at a discounted rate. We did also call out the fact that we will have some commodities favorability a few million versus where we were previously thinking about. And good call out Bobby is that we will have the Big Lots coming in which will be at a lower margin. But if you put all that together what you'll see is consistent with the third quarter.

Scott L. Thompson -- Chairman, President and Chief Executive Officer

You probably also because I know we talked about earlier Bhaskar that's probably one of the toughest quarters to estimate the gross margin because you've got so many moving parts and a lot of that has to do with also the product mix that we don't have good numbers yet on product mix from Mattress Firm and we're still working through exactly how Big Lots works through the system. So it's a difficult estimate but well done.

Operator

Thank you. Our next question is from William Reuter from Bank of America. Your line is now open

William Reuter -- Bank of America. -- Analyst

I just had a question around the turnaround of Sleep Outfitters. It sounds like that's doing better. I guess is your plan there to ultimately sell that business? And I guess so what would you do with the proceeds? Or do you want to continue to operate it yourself?

Scott L. Thompson -- Chairman, President and Chief Executive Officer

Yes. First of all you're right the turnaround at Sleep Outfitters has gone better than we originally estimated. In fact they're approximately breakeven in the third quarter. Our strategy with that particular entity has not changed which was we're going to turn it around look at the operations and then figure out what the long-term plan is for the company. We may keep it. We may do something else with it. But right now the most important thing is to get it turned around. And the team over there is doing a great job

Thank you.Our next question is from Brad Thomas from KeyBanc Capital Markets. Your line is now open

Brad Thomas . -- KeyBanc Capital Markets -- Analyst

thanks to morning,Let me add my congratulations as well here on some nice trends. I wanted to ask about the outlook for North America maybe squeeze 2 pieces into my question. Hoping we could address the outlook for North America for Q4 obviously a more different comparison by the same token Mattress Firm obviously holds the potential to be pretty significant driver of sales. So just how you're thinking about the outlook for North America? And sort of the underlying trends in the industry ex some of these new partners if you could? And then if you step back as we think about 2020 2021. Scott just maybe your latest thoughts on what the North America business should be growing at ex some of these big account wins?

Scott L. Thompson -- Chairman, President and Chief Executive Officer

Yes. I'll try to unpack some of that. I'm sure I'll mess it up and then let Bhaskar clean it up. I think first of all I tried to say it in the prepared remarks the -- not exclude the new distribution wins because that's actually the part of the business that I'm watching. The fundamentals ex the new distribution are very strong. And we would expect them to continue to be strong in the fourth quarter and would expect them certainly to be positive next year. And I think that was kind of the first part of your question. As it relates to Mattress Firm we're not going to do individual revenue guidance by customer. We have a lot of comments on individual customers out of respect for private companies.

Other than agreed to you look they're very large. And their performance will impact our performance. Right now our team is just focused 100% on providing products for them and quality service. And I think over the next few quarters we'll learn what the right product mix is and volume mix is and it will blend into our numbers. But right now we're just in very early stages. As it relates to 2020 as I've said before based on everything we see today and what we know today we would expect 2020 to clearly be the best financial performance in the company's history. We've got a lot of good tailwinds whether it be new distribution whether it be commodities whether it be the performance of our direct. Quite frankly our international team is dealing with some interesting market and doing very well. We just have a lot of momentum right now.

Operator

Thank you.Our next question comes from Laura Champine from Loop Capital. Your line is now open

Laura Champine -- Loop Capital -- Analyst

Thanks for taking my question On the Mattress Firm transition which is moving ahead faster than we and it sounds like you would have expected what's driving that? How are you getting that business up and running faster than you had previously anticipated?

Scott L. Thompson -- Chairman, President and Chief Executive Officer

The Mattress Firm team is driving that. When it comes to launching product obviously we've got to make the product but who has the heavy lift is actually the retailer. And the Mattress team -- Mattress Firm team is performing very well. And quite frankly they have exceeded our expectations and that's resulted in the timing of the products moving up some.

Operator

Thank you.Our next question is from Karru Martinson from Jefferies. Your line is now open

Karru Martinson -- Jefferies -- Analyst

Good morning.I realized that this doesn't really affect you guys on the high end but what has been the impact on China imports with the antidumping duties in place? Are you seeing prices rising across the board?

Scott L. Thompson -- Chairman, President and Chief Executive Officer

Yes it does affect us although it's not a major driver to profitability. If you look at entry-level pricing beds the entry level that pricing is up and continues to feel like it's firming up at the very low end and that does help us at the low-end Sealy. If I unpack the products by price band and exclude new distribution then we are feeling growth at Sealy below $1000 which we were before the tariffs that was a pressure point for us. So we are gaining some volume. I think it has to do with the tariffs. And as I said in my prepared remarks I think all U.S. bedding manufacturers have been benefited some. But again it's not a big profit driver for us down at that price point.

Bhaskar Rao -- Executive Vice President and Chief Financial Officer

The other side of that is we do have some of our product that comes in from overseas which is subject to tariff. So you take that headwind against the tailwind that we get from the income from below 1000 and I would think about it as a net neutral.

Operator

Thank you. [Operator Instructions] Our next question is from Curtis Nagle from Bank of America. Your line is now open

Curtis Nagle -- Bank of America -- Analyst

Thank you.for taking my question Just maybe a quick one on how feedback has been on the active Breeze? And I guess what's the expectation to roll that out to other distributors besides your outdoors going forward?

Scott L. Thompson -- Chairman, President and Chief Executive Officer

Okay. Thank you. Obviously we've got 2 major product lines: passive Breeze which is distributed to all retailers; and then we've got an active Breeze product that is in limited distribution now only to our stores. Look the sales have been good. The customer acceptance of the product has been outstanding. And we're continuing to study the product and we'll consider rolling it out more broadly in the future. But right now that looks like a winning product from everything we see right now. It's kind of in test market.

Operator

Thank you.Our next question is from Peter Keith from Piper Jaffray. Your Line is now open

Bobby Friedner -- Piper Jaffray -- Analyst

It's Bobby Friedner on for Peter. Nice results. As about the direct business is accelerating nicely can you just give a little more color in terms of how much of that growth excellent versus coming from new stores versus online? And then related what's the balance between higher transactions and higher ASP Tempur mix continues to improve with more Breeze sales?

Scott L. Thompson -- Chairman, President and Chief Executive Officer

Okay. Let me work on some of that. The stores themselves I think the first number that I think I would point you toward as we mentioned in the prepared call same-store sales stores opened more than a year were up 20% which is an outstanding performance and continues to confirm that that concept has some legs. Without Sleep Outfitters the business grew in excess of 30% if I remember correctly.

Bhaskar Rao -- Executive Vice President and Chief Financial Officer

Yes.

Scott L. Thompson -- Chairman, President and Chief Executive Officer

And the web itself grew double digits. So the direct business broad-based growth in stores and the web business. On Sleep Outfitters it's sales -- we're less focused on the actual dollars on Sleep Outfitter sales and more on driving profitability. So we're not monitoring those as much on the same-store sales. But the direct business is doing very well and we continue to be very bullish on call it 125- to 150-store business model ultimately.

Operator

Thank you.Our next question is from John Baugh from Stifel. Your line is now open

John Baugh -- Stifel -- Analyst

Congratulations. I was curious if you could comment around the advertising spend or marketing spend in 2020. Is that a -- the record in terms of percentage as well as gross? And I think you were targeting the Stearns & Foster as well as Tempur brands. But the comment internationally is to what's may be doing with marketing in light of weak conditions?

Scott L. Thompson -- Chairman, President and Chief Executive Officer

It's definitely going to be a record in gross dollars. I probably have to do some homework on percentages because I'd have to go back to the early Tempur days. And I don't know that off the top of my head. But on a gross dollar basis it will be up significantly. We do expect some more support into the Sealy and primarily the Stearns & Foster brands than we've done historically. And then on an international basis it really varies by market. There will be some markets that we'll be leaning into heavily like Japan and there may be some other markets where we're a little more conservative but it really varies by market. I think the key point is that we paused a little bit on advertising as we work through the disruption we had with the change in Mattress Firm and so we were a little bit conservative. And I think that the message for you today is that we're back on with our foot on the accelerator and expect to increase the Tempur-Pedic and Stearns & Foster and Sealy share of voice throughout all markets.

Operator

Thank you.Our next question is from Carla Casella from JPMorgan. Your line is now open

Carla Casella -- JPMorgan -- Analyst

I'm just wondering on the competitive front if you're seeing any change in either type of competition or online discounting given all of the news and transitions at Casper? And I'm also wondering where that line crosses over -- where you crossover most directly with Casper? And is that changing?

Scott L. Thompson -- Chairman, President and Chief Executive Officer

Yes I'll try. And pardon me if you hear some background noise. We're kind of in the middle of a thunderstorm here in Lexington so there's a little bit of a thunderstorm coming through. First of all let me point out that when we look at customer acquisition cost our customer acquisition cost went down again this quarter so that's either the efficiency of our advertising or a less competitive marketplace online. I'm not sure which it is. But again we saw acquisition cost going down. Casper is really not a very big player in the marketplace. And so we don't really feel them anywhere. Obviously we've bumped into them a little bit online and they've got a few stores but they're relatively immaterial to our business. Our primary competitor is Serta Simmons in North America and we see them everywhere we go.

Operator

Thank you.Our next question is from Bob Drbul from Guggenheim. Your Line is now open

Bob Drbul -- Guggenheim -- Analyst

Good morning.Just wondering as you roll out more stores I think you used to give us some metric or you given it at one point just the productivity and profitability of your stores versus wholesale accounts like 30 wholesale accounts for 1 store. Could you give us an update on how that's trending for you?

Scott L. Thompson -- Chairman, President and Chief Executive Officer

Yes. I haven't run the number lately but I remember it at about 21 to 1 off the top of my head.

Bhaskar Rao -- Executive Vice President and Chief Financial Officer

They're going to be in that range.

Scott L. Thompson -- Chairman, President and Chief Executive Officer

It's probably better than that now because the stores have outperformed for a time when we were kind of studying it that way. More importantly than the individual store economics what we're watching closely is when we put a store or 2 in the marketplace what the whole marketplace is doing. And where we put stores and these are a couple of stores in large cities we are seeing that we're not taking business from our wholesalers but in fact the wholesalers are at least doing as well or doing better than they were doing before we opened the stores. So we think we're raising the whole market when we're just putting a couple of stores in the marketplace and these really are somewhat marketing assets and help drive the brand in the marketplace.

Thank you.Our next question is from Judy Merrick from SunTrust. Your Line is now open

Judy Merrick -- SunTrust -- Analyst

Thanks.This is Judy in for Keith Hughes. Just quickly on International you talked about all the top line kind of environmental challenges going on different regions there. Is there anything else -- you had kind of flattish margins is there anything else going on with the margins? Or anything to kind of add on that?

Scott L. Thompson -- Chairman, President and Chief Executive Officer

No. I can't think any in the margins.

Bhaskar Rao -- Executive Vice President and Chief Financial Officer

No from a margin standpoint they're relatively stable. The big driver when you think about international is is you do see some country mix from time to time. But when I think about International broadly speaking is that there does remain an opportunity out there specifically in Asia Pacific whether that be through our own subsidiary or working through our Asian JV but there are certain economies right now they're challenged whether it be Hong Kong or what's happening from a Brexit standpoint.

Operator

Thank you At this time I'm showing no further questions. I would like to turn the call back over to Scott Thompson for closing remarks.

Scott L. Thompson -- Chairman, President and Chief Executive Officer

Thank you to the over 6000 employees worldwide. Thank you for what you do every day to make the company successful. To our retail partners thank you for your outstanding representation of our brands. To our shareholders and lenders thank you for your confidence in Tempur Sealy's leadership team and its Board of Directors. This ends the call for today. Thank you.

Operator

[Operator Closing Remarks]

Duration: 48 minutes

Call participants:

Aubrey Moore -- Investor Relations

Scott L. Thompson -- Chairman, President and Chief Executive Officer

Bhaskar Rao -- Executive Vice President and Chief Financial Officer

Atul Maheswari -- UBS -- Analyst

Bobby Griffin -- Raymond James. -- Analyst

William Reuter -- Bank of America. -- Analyst

Brad Thomas . -- KeyBanc Capital Markets -- Analyst

Laura Champine -- Loop Capital -- Analyst

Karru Martinson -- Jefferies -- Analyst

Curtis Nagle -- Bank of America -- Analyst

Bobby Friedner -- Piper Jaffray -- Analyst

John Baugh -- Stifel -- Analyst

Carla Casella -- JPMorgan -- Analyst

Bob Drbul -- Guggenheim -- Analyst

Judy Merrick -- SunTrust -- Analyst

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