What happened

Shares of Tempur Sealy (NYSE:TPX) were climbing on Thursday after the mattress maker delivered a better-than-expected third-quarter earnings report, beating estimates on the top and bottom lines and raising its guidance. The stock closed up 11.1%.

So what

Revenue rose 12.5% in the quarter, or 13.4% in constant currency, to $821 million, well ahead of estimates at $797.2 million. Sales were strong across the business with North American revenue increasing 14.6% and direct sales in the region nearly doubling.

Profitability also improved as gross margin jumped from 41.1% in the quarter a year ago to 43.9%, and operating income rose 23.3% from an adjusted total a year ago to $120.6 million as the company kept general and administrative expenses in check. 

An elderly couple on a Tempur-Pedic mattress

Image source: Tempur Sealy.

On the bottom line, adjusted earnings per share surged 27.5% to $1.30, easily beating the analyst consensus at $1.14. CEO Scott Thompson said: "We are pleased to report double-digit growth in sales of both Tempur-Pedic and Sealy products, with robust sales growth across geographies, brands, and price points. It is clear that our investments in innovative products, reliable manufacturing, and direct distribution are allowing us to win in the marketplace."

Now what 

Tempur Sealy also sees its momentum continuing into the fourth quarter as it raised its full-year adjusted EBTIDA guidance to a range of $485 million to $500 million, $28 million higher than its prior range and now representing 16% growth from 2018. Management cited better-than-expected performance in North America from its deal with Mattress Firm, the nation's leading mattress retailer, which will give it one third of the floor space at the mattress chain. That deal comes after an earlier dispute that temporarily led the two companies to cease doing business with each other.  

The mattress industry is notoriously fickle, but Tempur Sealy shares have now more than doubled this year as the company has delivered breakout growth. The stock is starting to look expensive at a P/E of 26, especially as mattresses are a slow-growth industry, but its new supply agreement with Mattress Firm and other retailers should give the company a tailwind over the next few quarters.