Tempur Sealy Left In A Disadvantaged Position

The challenges facing Tempur Sealy International Inc TPX mounted on Monday with the termination of its supply agreement with its largest customer, Mattress Firm Holding Corp.

Wedbush’s Seth Basham maintains a Neutral rating on the company, while lowering the price target from $55 to $45.

Termination Of Agreement

“The termination is not only likely to severely pressure earnings in and of itself because much of the lost volume will be difficult to replace with other retail partners, but also is another blow to the company’s brand value that has already been wavering recently in the face of new disruptive competition,” the analyst mentioned.

Basham noted that the relationship between Tempur Sealy and Mattress Firm had been rocky at least for the last 18 months.

Balance Of Power

While the latter’s rapid growth and success was to some extent driven by the brand power of Tempur-Pedic, the balance of power in the relationship seemed to have shifted toward Mattress Firm when it discontinued the sale of Tempur Flex, while winning the first major exclusive line of Tempur-Pedic mattresses in late 2015/early 2016.

“The power continued to shift following Mattress Firm’s acquisition of its largest competitor, Sleepy’s, in February 2016,” the analyst stated, adding that the acquisition of the firm by Steinhoff added to Mattress Firm’s balance of power, giving it the financial ability to walk away from Tempur Sealy.

Impact

Basham believes that with this development, Tempur Sealy will lose 55 percent of its Tempur-Pedic business and 85 percent of its Sealy business with Mattress Firm.

Tempur Sealy’s margins are also expected to be hit by this loss.