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:
