It is no surprise that after Tempur-Pedic (TPX) released its Q3 2012 earnings, investors dumped shares in after-hours trading, causing a whopping 20% drop. Tempur-Pedic closed at $25.40 per share on October 26, 2012 – down more than 50% year-to-date – mainly caused by three huge single-day selloffs. The first sell-off happened on April 20, after Tempur-Pedic confirmed its FY 2012 guidance at the lower range of analysts’ estimates. At that moment, we realized the company’s growth was no longer accelerating. The second sell-off happened on June 6, after Tempur-Pedic issued its Q2 2012 guidance below analysts’ estimates, and lowered FY 2012 guidance. We saw that the company was losing the competitive advantage that it once had. The third and most recent sell-off happened on October 23, after Tempur-Pedic reported disappointing quarter results. It is clear now that the company is no longer the high-growth, industry-dominating company it once was.

Sales for Q3 2012 declined 9% (down 7% on a constant currency basis) compared to Q3 2011. North American sales declined 14%, while international sales increased 3% (increased 11% on a constant currency basis). EPS for Q3 2012 was negative $0.03, which is largely caused by one-time charges related to the Sealy (ZZ) acquisition. Adjusted EPS was $0.70, which excludes the tax impact from the repatriation of foreign earnings and the Sealy transaction costs, but includes an after-tax $0.09 per diluted share benefit from the long-term incentive stock compensation adjustment. However, the adjusted EPS is still down 22% compared to an EPS of $0.90 for the same quarter last year.

During Q3 2012, North American direct channel sales decreased by 15% to $17 million. One reason could be that consumers were more cautious before making purchases. Instead of buying directly online, they went to retail stores. The problem is that retail stores often carry competitors’ models that are similar and less expensive. Management stopped mentioning website traffic growth after Q1 2012 earnings call. We believe that even if website traffic is still growing, the conversion rate remains low.

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