Highlights From ZZ's Q1 Conference Call; Shares Jump After Q1 Tops Estimates; Company Gaining Market Share

April 1, 2009 11:28 AM EDT

Last night, Sealy (NYSE: ZZ) reported Q1 EPS of $0.04, 7 cents better than estimates. Revenues were $310 million, versus the consensus of $309.54 million. Shares are up over 60% on the news today, however, the stock is still well below its 52-wk high.

Highlights From ZZ's Q1 Conference Call:

• (CEO) We remained focused on making progress in a number of areas, including further expense reductions, providing customers with value-oriented Sealy products to address their current needs, and introducing our new Stearns & Foster line at the Las Vegas market, which enjoyed a very strong reception.
  
• While the market remains challenging, the strength of our product portfolio is growing.
  
• Retail traffic remained weak and ISPA, the mattress industry association, reported that USA bedding industry revenues fell 12% in December and 16% in January.
  
• From a retail perspective, department stores and sleep shops continue to be performing slightly better. We believe this is due in part to their access to consumer credit, along with their ability to still provide advertising.
  
• Moving to Sealy's performance; our first quarter consolidated sales declined 21% from 2008 first quarter, with domestic sales decreasing 16.5% and international sales down 19.2% in constant currency.
  
• We will be rolling out the line during the second quarter and third quarter so that we do not anticipate a positive financial impact starting until the third quarter of 2009.
  
• We believe that we are currently gaining share in several of our markets, including Canada and Mexico.
  
• Finally, we are making every effort to maximize our financial flexibility, including reducing our operating expenses and effectively managing working capital. We made significant progress in both of these areas in 2008, and are aggressively pursuing additional opportunities in 2009.
  
• (CFO)Our Canadian sales were down 13.1% on a local currency basis, due to a 16% decrease in unit volume, which was partially offset by a 3.5% increase in AUSP. While our Canadian business continues to be pressured by weak retail conditions, we believe we continue to gain share in this market.
  
• Our European markets sales were down 30.4% on a local currency basis, with sales of our finished goods products performing relatively better than our OEM products.
  
• We continue to make progress in right sizing our cost structure, as our consolidated SG&A expenses improved by $19.5 million. This reduction in SG&A was principally driven by an $11.1 million decline in variable expenses, and our efforts to aggressively reduce our fixed cost structure, which contributed to a $7.9 million reduction in fixed expenses.
  
• Retail conditions remain challenging. And today we have seen no indication that trends are improving. We will continue to manage the business under the assumption that sales will remain under pressure for the remainder of 2009.
  
• We are actively seeking opportunities to take advantage of the current environment and to gain profitable market share.
  
• (Q&A) And then as far as the operating expenses go, we did a great job in this quarter, what was advertising spend, or can you tell me what that was, and how much of that has to come back eventually?
  A>: Well, TJ, our -- the majority of our advertising spend is really co-op. And so there was not a -- it was not an item that was really that materially different from the prior year, so it wasn't really noteworthy to call out.
  
• Just taking your savings as a whole, it sounds as though you have an opportunity, even with the declines we're seeing in the market, to see gross profit or gross margin year-over-year flat or up as
  we kind of saw in the first quarter. Is that a fair statement, or am I reading too much into your cost reductions? : I would - Keith, it's Larry, good afternoon. I think that that's a fair statement. We have worked particularly hard, Keith, on the expense side of our business, so we're not relying just on one aspect. So clearly, as we - as Jeff has alluded to, we're going to see a little bit of unwinding of that inflationary material cost that hit us last year as we move through the balance of the year.
  
• And the launch of Stearns & Foster seems to come right in the teeth of this downturn at the higher end. How realistic is success there, given this big compression to the lower end of the market? : Keith, that's a great question. About 80% of our Stearns & Foster line is below $2,000. We particularly took a pretty strong look at that, and it was pretty hard to read the market, but neither Jeff for I can see it getting appreciably better in a short period of time. So we have designed and priced this product to compete very actively between, I'll say 1,100 and $2,000.

Sealy Corporation (Sealy) is engaged in manufacturing and marketing of a line of bedding products, including mattresses and mattress foundations.

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