Commentary

Restless Nights In Mattressland

Shareholders in bedding companies are shell-shocked from the mattress wars this morning as Tempur-Pedic, citing increased competition, “aggressive” marketing campaigns and price-slashing, yesterday revised its outlook downward for the year while also projecting a falloff in same-quarter profits, which will be announced June 30. The company’s stock price plunged 49%, dragging down competitors such as Select Comfort (down 21%) and Sealy (5%) in the process.  

That, despite the fact that “the overall financial picture for Select Comfort appears different from that of Tempur-Pedic's,” blogged the Minneapolis Star-Tribune’s Janet Moore as she observed the plunges mid-morning yesterday. Select Comfort, which is based in nearby Plymouth, Minn., posted its 13th consecutive quarterly profit in April and last month, COO Shelly Ibach, who has heavy experience in retailing, took over as CEO, Moore points out. But Tempur-Pedic had been on a roll, too.

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“The company's sales had grown over 27% over the past two years, primarily due to demand from aging Baby Boomers, who have been sold on the health benefits of Tempur-Pedic's high-priced foam-based and other specialty mattresses,” write Reuters’ Mihir Dalal and Juhi Arora. “But Wednesday's forecast indicated that rivals have finally learned to compete in a market that the company had practically created and owned for most of the past two decades.”

You may remember Tempur-Pedic’s lavish and successful print and television direct marketing campaigns from the past but the battle of the foam mattresses is fully engaged on the retail floor nowadays.

“Major manufacturers like Sealy and privately-held Serta Inc. have all rolled out non-spring offerings over the past couple years,” points out Mia Lamar in the Wall Street Journal. Serta's iComfort memory-foam mattresses, launched last year, have been a particular success in part because of their cheaper price, analysts say.

"It appears that competition caught up to Tempur-Pedic much faster than we expected in the specialty bedding segment, which calls into question the company's brand," S&P Capital IQ analyst Jim Yin wrote in a note yesterday that’s cited byBarron’s Theresa Revis. In  downgrading the stock from Buy to Hold, Yin said, "we expect Tempur-Pedic to lose market share in the specialty segment." 

Indeed, "we did not expect the competitive environment to change this fast," Tempur-Pedic CEO Mark Sarvary told analysts in a conference call after citing “an unprecedented number of new competitive product introductions” in a press release. But, Savary said, “we remain very confident in our … growth potential and our strong brand, and as a result remain committed to our long-term strategic plan."

Yin writes that a recent downgrading of the stock by Stephens analyst Eric Hollowaty looks “prescient” based, as it was, not only on what he thought were overly aggressive earnings estimates by other analysts but also a “promotional pricing atmosphere that could potentially spark a ‘race to the bottom’ among memory foam mattress makers. What price will Tempur-Pedic have to pay to be the last company standing?” Hollowaty asked.

Last month, Tempur-Pedic said it that it would discount up to 17% off the suggested retail price of its popular Cloud Supreme mattress set during a sale set to run from May 16 to July 8. Citing the “unusual” nature of the promotion, Raymond James' analyst Budd Bugatch said at the time that that it “could lend weight to critics who say that competition in the mattress business has gotten tougher while raising questions about demand for Tempur-Pedic's pricier products,” according to an Associated Press story running in Bloomberg Businessweek. In the past, Tempur-Pedic has been more likely to give away pillows or foundations rather than cut the price on the mattress itself.

While we’re on the subject of discounting, if you grew up in the New York metropolitan area from the Fifties through the Seventies, you probably have a memory or two of E.J. Korvette, which sort of was Walmart before Walmart was Walmart. It even had groceries in some of the larger stores, Wikipedia informs us, (but not at the former Saks it occupied on 34th Street). The founder of the chain, Eugene Ferkauf, died Tuesday in Manhattan at 91.

"Ferkauf was one of the first businessmen to grasp the emergence of a new breed of postwar consumer,” reads Douglas Martin’s well-crafted obit in the New York Times this morning. “Seeing a population of Americans financially better off, impatient to get on with their lives after World War II and susceptible to the advertising shown on the latest new thing, their television sets, he concluded that victory belonged to the very bold." 

At its peak, there were 58 Korvette stores nationally, according to Wikipedia. “Prices at the nominally membership-only stores were 10 to 40% below more conventional competitors,” Martin says. Ferkauf sold his share in the company in 1966 for more than $20 million with much of his fortune later donated to charities. The chain, mismanaged in the face of competition, went out of business in the early 1980s.

Martin also explodes a popular urban –- “or perhaps suburban” –- myth of where the name “E. J. Korvette” came from. It did not stand for “eight Jewish Korean War veterans,” after all.

“The ‘E’ comes from the first letter of his first name, the ‘J’ from that of Joe Swillenberg, an old Tilden [High School] friend who became a top company executive,” Martin writes. “Korvette is a deliberate misspelling of corvette, a reference to a class of naval ship, not the car.”

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