Tempur Sealy International Inc

NYSE:TPX

Earnings Call Transcript 2023-Q1

[Operator]

Good day and thank you for standing by. Welcome to the Tempur Sealy’s First Quarter 2023 Earnings. At this time, all participants are in a listen-only mode. After the speakers' presentation there will be a question-and-answer session. [Operator Instructions] And please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker, Aubrey Moore, Vice President, Investor Relations. The floor is yours.

[Aubrey Moore, Vice President of Investor Relations]

Thank you, operator. Good morning everyone, and thank you for participating in today's call. Joining me today are Scott Thompson, Chairman, President and CEO; and Bhaskar Rao, Executive Vice President and Chief Financial Officer. After prepared remarks, we will open the call for Q&A.

This call includes forward-looking statements that are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve uncertainties and actual results may differ materially due to a variety of factors that could adversely affect the company's business. These factors are discussed in the company's SEC filings, including its annual report on Form 10-K and quarterly report on Form 10-Q under the heading Special Note Regarding Forward-Looking Statements and Risk Factors.

Any forward-looking statement speaks only as of the date on which it is made. The company undertakes no obligation to update any forward-looking statements. This morning's commentary will also include non-GAAP financial information. Reconciliations of the non-GAAP financial information can be found in the accompanying press release, which has been posted on the company's investor website at investor.tempursealy.com and filed with the SEC. Our comments will supplement the detailed information provided in the press release.

And with that introduction, it's my pleasure to turn the call over to Scott.

[Scott Thompson, Chairman, President, and Chief Executive Officer]

Thank you, Aubrey. Good morning, everyone, and thank you for joining us on our 2023 first quarter earnings call. I'll start by sharing some highlights from our first quarter performance, and then Bhaskar will review our financial performance in more detail. After that I will share some closing comments before we open the call up for Q&A.

In the first quarter of 2023 net sales were approximately $1.2 billion and adjusted EPS was $0.53, which represents a 75% growth in sales and approximately 300% growth in adjusted EPS over the first quarter of 2019, a pre-COVID period. Compared to the same period last year, this represents a 3% decline in sales and a 23% decline in adjusted EPS, driven by launch costs to support our new innovative products in a less robust macroeconomic environment.

Our wholesale channel performed well. We reported wholesale sales stable to prior year as our continued global market over performance mitigated the heightened macroeconomic headwinds. Our direct channel performance was more impacted by the current environment. Unfavorable foreign exchange rates presented a challenge to our international operations and cost us $0.03 per share quarter.

As I noted, though industry conditions were less favorable than expected, it is very clear we continue to outperform the market and units appear to be stabilizing at a historical trough level. In the second quarter our expectation is that our sales will return to growth year-over-year, driven by continued global market outperformance and the rollout of our new products. We also anticipate industry demand will slowly improve in the back half of the year as comps ease.

As a reminder, U.S. produced mattresses consumption declined approximately an unprecedented 24% in 2022 representing trough unit production for the last 10 years. Most of the decline was post first quarter of 2022. As we've now fully lapped the challenging prior year comps, we anticipate the industry will slowly recover, resulting in a more stable U.S. bedding environment in the full year 2023 with the back half unit trends stronger than the first half.

Turning to highlights and some key wins in the quarter. First, we continue to see positive momentum in our brands and private label products at wholesale. Our high quality products leading customer service continues to drive third party retailers to lean into our brands and non-branded products. Our third party retail partners in the U.S. are especially supportive of the new Stearns & Foster product.

We are tracking to expand our third-party retail slots of Stearns by approximately 20% compared to the previous collection. We believe these slots will be coming from competitors, enhancing the total presence of Tempur Sealy brands on U.S. retail floors. We continue to make progress towards our goal of making Stearns & Foster our next $1 billion brand more than doubling its current size today.

On the product side, we're well underway with our rollout of the new Stearns & Foster collection in North America. The new products are designed to further differentiate our high-end traditional Innerspring brand, while also offering an extended lineup of products that address the needs and differences of consumers.

The collection's superior innovation, enhanced step-up opportunities, and elevated design together create unprecedented luxury Innerspring product that meets the needs of what we believe is an underserved consumer seeking a premium Innerspring product. Overall, Stearns & Foster performed well relative to the U.S. market in the first quarter, and we believe it's currently the fastest growing major brand in the U.S.

The second highlight of the quarter is the launch of our new TEMPUR-breeze product and our new innovative line of smart adjustable bases in the U.S. These products build on the success of our prior generation of breeze and adjustable bases to provide even greater consumer benefits to America's most highly recommended mattress. The new TEMPUR-breeze product features our latest Tempur material innovation, which delivers greater Tempur yield characteristics and greater cooling benefits.

In our new line of adjustable bases, we enhanced our connected-sleep platform and our continued focus on improving sleep and overall health and wellness of consumers. In addition to our sense and response technology for snoring featured in our previous smart base collection, the new bases also feature lumbar support at the touch of a button and advanced technologies, including our industry first acoustic massage and a range of relaxation features that help prepare customers' bodies and minds with deep rejuvenative sleep.

Exclusive to the top-tier TEMPUR-Ergo ProSmart Base, wind down programs and SoundScape mode offers an immersive and multi-sensory experience. After very positive feedback from consumer studies and retail partner previews, we started shipping the new TEMPUR-breeze and the new TEMPUR-Ergo power bases in late first quarter. The rollout is going according to plan, and we have shipped over 75% of breeze four models to date.

We pre-built inventory to support a seamless transition across our valued Tempur-Pedic retail partners network. Most all retailers will be floored and selling for Memorial Day, which is when our new breeze and smart base advertising campaigns begin. This is the first North America Tempur mattress launch in four years.

The third highlight is that we've significantly fortified our supply chain and we're executing orders within normalized order to delivery times. Our U.S. operating team, plant personnel have worked significant amounts of overtime to get us to the point of normalized order to delivery times The overtime and expediting cost hurt us a bit in gross margin in this quarter, but we're thrilled to be back on normal customer service ahead of the prime selling season of second and third quarter. This is especially positive and we've accomplished this while outperforming the broader market.

The final highlight is that we successfully kicked off the rollout of our new Tempur International product this quarter. This all new lineup of mattresses, pillows, and bed bases have been strategically designed to optimize Tempur's global addressable market. The expanded price points and consumer-centric innovations in the new collection will continue to appeal to our legacy ultra-premium consumers at prices of 3000 and above, while also meeting the needs of consumer shopping for mattresses between 2000 and 3000.

We streamlined the construction of the new products to drive future manufacturing efficiencies and enhance our ability to adapt our products to individual market's needs. This updated process has enabled us to feel confident in unlocking a broader price range without materially altering our margin profile of our Tempur International business. We're manufacturing both the new lines of products and the old line of products as we transition. This is a heavy lift for our overseas team, and after the transition period, we plan to optimize production of the new line, which we expect will be a positive driver for gross margins.

We are launching the new lineup in over 90 markets worldwide, and we're staggering the rollout of these new products to allow for customized approach by region. In the first quarter, we kicked off the launch of our temporary European markets. We expect the rollout to be completed for all of our subsidiary markets in Europe and Asia by the third quarter, and to be completed by the end of the year for our third-party distributors. We expect the total rollout to be completed by the end of 2023, except for the UK, which has some country specific industry fire retardant regulations. We expect the UK to be fully floored by the first quarter of 2024. The early reaction to the new lineup has been very positive.

With that, I'll turn it over to Bhaskar.

[Bhaskar Rao]

Thank you, Scott. In the first quarter of 2023, consolidated sales were approximately $1.2 billion and adjusted earnings per share was $0.53. We have approximately $10 million of pro forma adjustments in the quarter, all of which are consistent with the terms of our senior credit facility. These adjustments are primarily related to cost incurred in connection with the exploration of strategic acquisition initiatives.

Turning to North American results, net sales decreased 1.3% in the first quarter. On a reported basis, the wholesale channel decreased 1% and the direct channel decreased 4%. North American adjusted gross margin improved to 37.9%, driven by pricing actions partially offset by operational headwinds and increased product launch expense. North American adjusted operating margin declined to 15.3%, driven by investments in advertising and product launch initiatives, partially offset by the improvement in gross margin.

Now, turning to International, on a constant currency basis, International sales increased 1.7%, but decreased 6.4% on a reported basis as we experienced $25 million of headwind in the quarter from unfavorable foreign exchange rates. Foreign currency remains volatile, though recently we have seen rates trend favorably. Our current full year expectation for 2023 contemplates a slight FX headwind to both sales and adjusted EBITDA. As compared to the prior year, our International gross margin declined to 54%, driven by product launch expense, partially offset by pricing actions.

Our International operating margin declined to 15.3%, driven by investments in advertising and product launch initiatives, the decline in gross margin, and the agent joint venture performance. Commodities, which we think about as inclusive of raw materials, logistic costs and labor have been highly inflationary across the global bedding industry for more than two years. In the first quarter, global commodity prices largely trended in line with our expectations. We anticipate that commodity prices could continue to ease a bit throughout the year, although we expect commodity prices in 2023 will continue to trend significantly ahead of 2020 levels.

Now, moving on to the balance sheet and cash flow items. At the end of the first quarter, consolidated net debt was $2.8 billion, and our leverage ratio under our credit facility was 3.2 times, slightly ahead of our target range of two to three times. We generated record first quarter operating cash flow of a $100 million and we invested approximately $52 million in CapEx, including investments in our new foam-pouring plant in Crawfordsville, Indiana. We continue to track toward beginning its phased opening in the latter half of this quarter. We will bring the plant online in phases to ensure the highest level of quality while we grow into the incremental capacity.

Now turning to 2023 guidance. Consistent with previous communications, we expect adjusted EPS to be in the range of $2.60 to $2.80. This considers sales growth of mid-single digits, primarily driven by the execution of our key initiatives, and also benefited by the sell-in of discounted floor models and the wraparound impact of pricing. Sales and marketing investments of $20 million to support product launches, and record advertising spend of over $500 million as we continue to support our leading brands and new products, which will result in adjusted EBITDA of approximately $980 million at the midpoint of our EEPs range.

Our guidance also considers the following allocations of capital in 2023 CapEx of approximately $200 million, which includes $90 million of growth CapEx primarily to fund the completion of our Crawfordsville facility and a quarterly dividend of $0.11 representing an increase of 10% relative to 2022. Lastly, I would like to flag a few modeling items. For the full year 2023, we expect D&A of about $200 million to $210 million, interest expense of about $135 million to $140 million, a tax rate of 24% to 25%, and a diluted share count of 178 million shares.

With that, I will turn the call back over to Scott.

[Scott Thompson, Chairman, President, and Chief Executive Officer]

Nice job. Thank you, Bhaskar. I'm excited to share that we have announced this morning that we've signed a definitive agreement acquiring Mattress Firm, the nation's largest mattress specialty retailer. This acquisition aligns with our strategy of acquiring companies that extend our competitive advantages, enable us to move closer to consumers and facilitate continued innovation. This combination will compliment Tempur Sealy's extensive product development and manufacturing capabilities with vertically integrated retail.

First and foremost, Mattress Firm has been a valued retail partner for more than 35 years, and we look forward to welcoming their talented workforce and more than 8,000 employees to the Tempur Sealy family once the deal is closed. The transaction is expected to close in the second half of 2024, subject to satisfactory and customary closing conditions and applicable regulatory approvals. Mattress Firm is expected to operate as a separate business unit within the Tempur Sealy organization and to continue to provide customers with brands and products they desire.

This morning, we released a separate press release and investor presentation related to this transaction. Both can be found on our investor webpage. These documents provide further details on the transaction and the strategic rationale. We see this transaction as being attractive both strategically and financially.

And with that, we'll open up the call for questions. Operator?

[Operator]

[Operator Instructions] And our first question is from Susan Maklari with Goldman Sachs. Please proceed.

[Susan Maklari, Goldman Sachs]

Thank you. Good morning, everyone. My first question…

[Scott Thompson, Chairman, President, and Chief Executive Officer]

Good morning, Susan.

[Susan Maklari, Goldman Sachs]

Good morning. My question is around the acquisition that you announced this morning, appreciating what the synergies are, but how do you think about managing some of the perhaps channel conflicts that are going to come through with this and some of the adjustments that will need to be made in terms of product and offerings and logistics and those types of efforts in there, and just how are you thinking about some of those elements of this deal?

[Scott Thompson, Chairman, President, and Chief Executive Officer]

Wow, five questions in one. Great job. Great question.

[Susan Maklari, Goldman Sachs]

Good start.

[Scott Thompson, Chairman, President, and Chief Executive Officer]

First of all, let me talk about channel conflict. First of all, we consider it -- one of our expertise is the ability to manage omni-channel strategy throughout the world and have been doing it for a number of years. If you look at the most recent acquisition before this Dreams as kind of a maybe a beta test, Dreams is obviously a large retailer in the UK. We're obviously in the UK and we did not have any problems with channel conflict in that acquisition. And we've been working on this, at least this has been in the marketplace where people have thought about this for years, probably five or six years. I doubt there's anybody in bedding that is surprised with this transaction.

And if you move over to the States, we're in retail stores. We've got our Sleep Outfitters operation, which is a direct competitor to Mattress Firm in the marketplace and we've got our Tempur stores. And although years ago, and I'm going to say what, four or five years ago, Bhaskar, yes, there used to be a little bit of noise in the system. I think once retailers saw how we operate our stores that I'm going say we're a good retailer and we're not really trying to steal share from anybody, it hasn't been a problem. Additionally, over the years we have discussed this concept with various of our -- various customers, large and small, and I think we have a good understanding of what their expectations are. And it's, look, it's going to depend on us having quality product, quality service, quality advertising and servicing them correctly, and making sure that they are not put at a competitive disadvantage. And so I'm not expecting any significant channel conflict as long as we deliver quality product at the right price with the proper support around it.

You asked about kind of logistics, and I assume you're kind of moving towards synergies. You know, look, they're both very large companies. We've put a $100 million down on a piece of paper. The kind of stuff you should be thinking about is warehousing and logistics. There are cities where we literally have warehouses within five miles of each other. And on a Tempur product, we would make the product in our plant, put it on a truck, take it to our warehouse, take it off the truck, put it in the rack where it would sit and wait for an order from Mattress Firm. And then we would get another truck, take it down from the rack, put it on the truck, and we would take it to their warehouse. Then they would take it off the truck, put it in their rack, and they would wait for a customer order, of which then they'd get another truck, take it down from the rack, put it in, and take it to the customer's house. I mean that's just the way the systems work. We've never been able to get the two companies to figure out how to clean up some of the logistics. So we think there's good synergies in logistics and warehousing.

The other thing that may not be as evident to the people who aren't in the business is on the manufacturing side and this would be on the Tempur side of the house, not the Mattress side of the house. I think everybody knows we're ordered to delivery on Sealy. And so that means we don't know what beds we're going to make until we get an order from somebody. And I'd generally call it three, four days. And these are in Sealy operations as you know, these are manual manufacturing.

So we whipsaw the workforce. There are some days they show up at work and we've got lots of orders and we expect or would like for them to work overtime. Some days they show up at work and we don't have enough orders, and they only get to work four hours. At most plants we decide on Friday afternoon if they're going to work the weekend and of course there's overtime involved in some of these swings, but it's also just a quality of workforce and be able to hire people because the hours are variable. If we had real committed orders, I and had certainty of distribution, we could pre-build and level out the manufacturing.

So on the days that we don't have specific orders, if we knew for sure we were going to get some orders, we could go ahead and build some product and level it out. And I think that's a big quality improvement for us. It's a workforce issue and there's also, I believe, significant cost savings. We, of course, would have the normal insurance savings we call a little bit of overhead here, kind of savings. I think the other thing that may not be obvious that we're really thrilled about, it's one thing COVID kind of really, really highlighted was the supply chain around the world is not very robust. Okay?

And if you stop and think about it, the reason it's not very robust is a little bit of what I just said. Nobody down in the supply chain knows for sure what their orders are. So everybody's working kind of just in time. And being able to have, we'll call it fully committed distribution, I think will allow us to fortify the supply chain by giving suppliers more certainty and being able to sign long-term contracts, which I think will also have quite frankly, some synergies.

The last one I'll kind of throw up, there's a laundry list here, but we've got your first question is, I think one of the other things that the combination does is, we have very sophisticated labs that test the quality of product. It is the core of Tempur, it is the core of Sealy, best-in-class ability to analyze foam, springs, durability. And so one thing we can do that would help a retailer is we can make sure the products that are put on their floor are the quality that they're supposed to be and continuously test to make sure that we're getting what we're paying for. I think that will make the product sharper at Mattress Firm. I think that's good for the customer, and I suspect we'll find some opportunities from a cost standpoint, once you do the really hard analytics and test the product.

[Operator]

Thank you. One moment for our next question and it comes from the line of Bobby Griffin with Raymond James. Please proceed.

[Bobby Griffin, Raymond James]

Good morning, Bobby. Thanks for taking my question. Scott and Bhaskar, it won't be a five-part, but it's going to be a two-part question at least. So first, Scott, can you maybe just talk about the timing of it? I think the strategic rationale of this acquisition makes a lot of sense and a lot of investors will understand that, but there is some clear economic concerns. Maybe just talk about the timing of it? And then Bhaskar, can you share any financial details for Mattress Firm that's getting used in kind of the accretion analysis, whether it's 2022 or 2023 EBITDA? Anything there would be helpful.

[Bhaskar Rao]

Sure. Let me kind of step back a second. First of all, I would say if you're talking about real timing, the timing has been probably seven years. It's always been on our chalkboard as something that made a lot of sense strategically for some of the reasons I mentioned and others, but it never was right. Both at times we weren't right, at times they weren't right, at times market wasn't right. So we -- it's been on the board, so it's not like a new concept or a new idea. So first of all, it's been a seven-year journey. Okay? Second of all, we've been engaged with the Mattress Firm folks for the last two years as they put the company up for sale or process, and they ran a dual process. So we've been around hanging around the hoop in my terminology for the last two years exchanging some data, getting some price discovery, thinking about it.

We filed an HSR in October of 2022. The two companies filed an HSR, which then gave us access to the FTC folks, and we could get some feedback on some of their thinking. And so that before we would get down to a definitive agreement, both parties would have some data on the FTC process. So that's -- that kind of works through the timing, but I think you're also talking about the economic cycle and that kind of stuff. So I want to make sure that everybody got kind of the timeframe. This has been a long and thorough review by both companies as to what would be in the best interest of both the companies. Now what you're, now you're just looking at is like, okay, this is interesting, Scott, I guess, but man, who knows what the economy is and everything.

And we -- there's different ways to think about it and people agree and disagree, but for where we are and where we're sitting and where we look and the data we look at, it would look like the betting industry, not the macro account, but the bedding industry, go to U.S. units produced are probably the lowest they've been for more than 20 years. I'm looking at Bhaskar, but I'm sure I don't, I think when you and I, you can probably go through some other sources and look at that. So the unit production is at trough numbers that we've never seen as an industry. Of course, we'll point out that both companies are very profitable, even at these trough units. So it would appear to us, it's the trough and it feels like we've been bouncing around the bottom of the bedding industry for the last three quarters or so.

It has not shown a lot of recovery, and we can talk about that, this question or another one, but it clearly doesn't look like another leg is falling and it looks like it's just bouncing around the bottom. So fundamentally you decide, do you want to transact under that basis, or do you want to wait and see green shoots or those kind of things. There's a price to that. There's be a different pricing at that point, a different environment. And look, we feel very confident in our ability and we feel pretty good about the market. And then you lay on top of that, that there's, this is going to take a while. We're not closing this deal next week. So the real economy that you're looking at when you're trying to find the right price and normalized earnings is really 12 to 18 months from now. It's not tomorrow.

So could there be a little more rock and roll in the next few quarters? Yes, maybe so. If there is, it doesn't affect us. We're effectively buying the company in the future. And at that point, we feel pretty good about it, but plus quite frankly, we think we're kind of bouncing around the bottom now. So I think I kind of answered that.

[Bhaskar Rao]

I think so. So when you think about your question about the accretion when one year post acquisition, all those things that Scott mentioned, there is a bit of time between where we are and where we are today and where we're going to be a year or so from now. So the way to think about that is we gave the 435 and the 432 last 12 months. So what we'd anticipate is, whatever the rock and roll happens from a macro standpoint, we get to the other side of that, we see some continued growth from a Mattress Firm perspective. And then so a way to think about the, let's call it the accretion is, from a targeting perspective, again, lots of uncertainty that could happen between now and then. But from a targeting perspective, I would think somewhere between $0.20 to $0.25 of incremental EPS. And then when you get a couple of years out after that with full run rate or synergies, I would anticipate about $1.

[Operator]

Thank you. One moment for our next question, that comes from Peter Keith with Piper Sandler. Please proceed.

[Scott Thompson, Chairman, President, and Chief Executive Officer]

Hi Peter.

[Peter Keith, Piper Sandler]

Thanks. Good morning. Congrats on seeing the big deal after seven years of work.

[Scott Thompson, Chairman, President, and Chief Executive Officer]

Yes. I appreciate it.

[Peter Keith, Piper Sandler]

I'm not sure how much you'll be able to answer this question, but I want to ask because it sounds like you have been engaged with the FTC for a number of months. Has there been any preliminary opinion or any insights that you've gained on getting approval or how this could all look post acquisition?

[Scott Thompson, Chairman, President, and Chief Executive Officer]

Sure. I mean, first, it's early days. We've been engaged with them. But I would say early innings, but it's given us some preliminary information, none of which was particularly surprising. Those folks have a job, all very talented men and women, and we look forward to kind of working with them. But obviously, we wouldn't have moved forward if we didn't think that ultimately, we would be able to clear the process either in the traditional sense or through litigation.

[Operator]

Thank you. One moment for our next question, that comes from Curtis Nagle with Bank of America. Please proceed.

[Curtis Nagle, Bank of America Merrill Lynch]

Great. So maybe I'll just break with the question a little bit. And one question just on the business as it stands now. Just Bhaskar, curious if you could talk to how much of a headwind for models and some of this catch-up and over time to get shipping correct or back to normal, how much that hit gross margin? And then just a quick follow-up in terms of just thinking about with -- first Dreams and now Firm, I mean, it's just kind of, I guess, go forward model in terms of how you guys continue to expand, particularly internationally, do we have the template now, I guess?

[Scott Thompson, Chairman, President, and Chief Executive Officer]

Yes. I'll take the last one, and Bhaskar is flipping the pages, look, now that these are pretty unique transactions. There are only a few large great specialty retailers in bedding in the world, and we've got the two best. There's not really one sitting in every country. We could maybe do some other relatively smaller deals in some countries, but these two would be the lion's share. There's -- there may be hand two or three that we would think about. But again, we don't have to do these, but when the time is right, the price is right and it lines up strategically for that market, we'd certainly -- we'd want to look at them.

[Bhaskar Rao]

From a gross margin perspective is that I was pleased with the performance overall, when you think about year-over-year, a 40 basis point decline. However, in the face of what -- from a floor model launch perspective, as you pointed out, is that we did have some headwinds, again, all driving future growth. So specifically, as it relates to the operations, on a global perspective, I would call out about 100 basis points of a headwind, again, is that we did carry into 2023 a bit of a backlog. So we did prioritize meeting our customers' needs. So we incurred an incremental overtime associated with clearing out that backlog.

And then going to the launch question, on a global perspective, we had about 100 basis points of headwind. So again, what I'd go through or how I look at that is, is that once we get through the floor model launch side of it as well as the operations, the continued improvement there is that the earnings power of the business is very attractive.

[Operator]

Thank you. A little moment for our next question that comes from Atul Maheswari with UBS. Please proceed.

[Atul Maheswari, UBS]

Good morning. Thanks a lot for taking my question. Scott, based on what you know today, what are the biggest risks to this transaction, like a few years from now, if the synergies are less than expected or if there are any revenue dis-synergies, what would be the most likely cause of that? And if I ask this question another way, like what is the biggest risk that exists today based on what you know? And what are you working actively to avoid some of those pitfalls?

[Scott Thompson, Chairman, President, and Chief Executive Officer]

Yes. Great question. Look, the biggest risk is macroeconomic. Where we are in the cycle, what the cycle looks like 18 months from now. But I think by far, what I'll call the factors outside of our control would be the largest. After that, look, it's probably people, culture. As you know, the history of acquisitions can be checkered. Generally, if you study it usually has to do with people, structure, culture, those kind of things.

The kind of synergies that we're talking about, because remember, this is a vertical integration and so they aren't as complicated as some acquisitions to get. We're doing horizontals and lots of people who losing their job and all of that kind of stuff. This is a very clean vertical integration. Again, I use Dreams as an example, just because it was a vertical. But still, you still have people issues, you still have structure issues that you need to work for through.

But other than that, Bhaskar, can you think of any like any other big risks that's keeping you up at night that I think you got to remember, these companies have worked together for 35 years together. We work daily throughout the organization, interfacing with the companies. I think we know each other well. We're -- clearly Tempur Sealy from a manufacturing standpoint in the U.S. is having a great run. New product is doing very well.

Stearns & Foster is probably the fastest-growing major brand in the United States. Tempur is doing well. So you had -- we're coming from a very strong manufacturing base. And if you study Mattress Firm and there's some material that we sent out, Mattress Firm has been eating up a good bit of market share, and we would expect them to continue to outperform the market. So I can't think of anything that comes to mind other than what I just said.

[Bhaskar Rao]

I mean, Scott, what I would say is I sleep on Tempur, so I always sleep well at night. And then specifically, when you think about the synergy number, nothing's ever easy, things are always complicated. However, just to put it in perspective, when you think about the COGS that are available between the two companies, let's talk about $5 billion. And what we're talking about is $100 million on that $5 billion. So again, it's -- I'm not saying it's easy and et cetera, but it seems like there's enough go get that it makes it manageable.

[Scott Thompson, Chairman, President, and Chief Executive Officer]

Yes. Let me give you at least some thoughts on synergies, so we're all on the same page. I think the number, $100 million, I think, is very conservative. But at the same point, I think when you buy a business, especially when you buy a successful business, some people are so focused and so energized on synergies that they take undue risk and break the great asset they bought. And so we'll be slow on implementing synergies, like we've done on all the acquisitions and make sure that the management team that's coming over and the Tempur Sealy team kind of agree on what's worth going forward and how to do it. But the absolute number, as Bhaskar pointed out, is not that big a number to the cost potentials that we have to work with.

[Operator]

Thank you. One moment for our next question that comes from Seth Basham with Wedbush Securities. Please proceed.

[Seth Basham, Wedbush Securities]

Thanks a lot and good morning. Congrats again on the deal. My question is revolving around some of the prior questions. But first, in terms of the time line to close, a year plus is a very long time line. You mentioned that you're going to continue talking with the FTC, but are there concessions that you're expecting to have to make any changes to the current asset base?

And then secondly, in terms of the synergies, what you put on paper and when you talked about a little bit different, dollar in synergies is materially higher than the $100 million of cost synergies you talked to. So are you expecting some revenue synergies or are you just seeing more signs of upside there? Thanks.

[Scott Thompson, Chairman, President, and Chief Executive Officer]

Okay. So let me work through those. First of all, look, we're open. We're talking to the FTC. We'll consider doing things that make the FTC happy with the transaction that may include divesting of some stores. That's something that we would look at. Obviously, we would consider it. And then we would see how that would impact the future financials. So yes, we're going to consider all options because that's what you do when you go to the FTC.

On the revenue side, are we considering synergies on the revenue side? Not really, I mean we're not looking to significantly move the floor or change the floor. If you look at our previous acquisitions, we did not push what I'll call our manufactured products onto the floor. We've let the retailers own the merchandising decision and hold them accountable for their numbers.

Now if you go back and look to generally our floor BOS increase, yes. As we work through some of the quality products that we're retailing sure, and then just naturally because of the quality of our products. But no, we're not baking in this acquisition a huge amount of revenue synergies. In fact, I don't think we're really baking any in. We're not, we're not.

[Bhaskar Rao]

Seth, thanks for the follow-up. Let me clean that up a little bit. So when you think about it a year out or so, what we've indicated that's accretive and then on that same year, just assume $100 million of synergies and with run rate synergies, let's call that low double digits. What I was giving color to previously was, let's think about in a normal economy, et cetera, a couple of years out and then thereafter, we see some growth, meaning Mattress Firm continues to grow and continues growing and if you step back from that is that if you look at the industry over the last 20 or so years, you'd expect let's call it, 4% to 5% growth. We would continue to believe that Mattress Firm has historically captured market share; that would continue. So they would grow ahead of the market. You put some growth on it, improved margin flow-through with those synergies. That's how I got to my high-end number.

[Operator]

Thank you. One moment for our next question that comes from Brad Thomas with KeyBanc Capital Markets. Please proceed.

[Brad Thomas, KeyBanc Capital Markets]

Hi, thanks for taking my question and let me add my congratulations on the deal announcement as well. I wanted to come back to just the current trends in the business and the outlook for this year. And I was hoping, Scott, you could talk a little bit more maybe focused on North America about what you were seeing through 2Q and through 1Q and early 2Q. We've heard about a strong start to the quarter, but then some weakness in March. Just any more color on what you were seeing. And then you -- as we think about the year, you made a comment about units, hopefully getting a point to where they bottom, but this is, of course, happening in an economy that's still been relatively healthy in terms of employment and consumer credit. And so just wondering your latest thinking on potential downside risk…?

[Scott Thompson, Chairman, President, and Chief Executive Officer]

Sure. First of all, just a couple of points. One is there's no question that we've moved back to more traditional seasonality where holiday periods have become much more important than they were during, we'll call it, the COVID era, where business kind of leveled out throughout the month. So you have taller peaks and bigger valleys. That's pretty well the way the industry was pre-COVID and we've pretty well moved back to that. So you make it all kind of in the holiday period. Again, start -- it's probably a fair start out pretty robust during the year, slowed down a little bit in the first quarter. Second quarter started out very order deliveries have started – they're good shipments, they're growing and which gives us strong conviction that it looks like for us, second quarter will be a positive from a sales standpoint.

So we're feeling pretty good on, we'll say at the start of the second quarter, might be we feel good. We feel good about the start of the second quarter. But we share the same concerns and are looking at the same things you are about, okay, what's the state of the macro? How long can the consumers hold in? How much of their savings accounts have they spend, what's unemployment, blah, blah, blah, all the stuff that we all read.

Looks okay to us. Unemployment looks like it's the employment is holding well, the kind of people who buy the products where we make our money, i.e., the high-end stuff, they continue to be very strong. And where you see the real weakness is in entry-level bedding, and entry-level bedding and the retailers who focus on entry-level bedding, you can see it, there's a clear separation between entry-level bedding than the rest of bedding. So we'll watch that. The good news is that not that impactful to our earnings and retailers' earnings.

[Operator]

Thank you. One moment for our next question that comes from Robert Drbul with Guggenheim Partners. Please proceed.

[Robert Drbul, Guggenheim Partners]

Hi, good morning and congrats on the transaction. If I could follow, Brad and just focus on some of the recent trends, can you talk a little bit just about some of the new customer testing you've been doing just within the opportunity down in the value channel a little bit more on what you're seeing with some tougher trends there? Thank you.

[Scott Thompson, Chairman, President, and Chief Executive Officer]

Yes. So we've got to go to -- we are -- we've tested, testing some products at a large big box retailer. That's gone very well. We've done about 100 stores, expecting to run another 100 stores out here shortly. But what I would say is, where we've had new customers and put our Sealy product in and take other product out, the Sealy product has outperformed the product they replaced in every situation that I can think of in the last few years. And so we're doing well in that particular market in what is a relatively tough entry-level market. So no, all is a good sign, and we continue to pick up some incremental distribution not just at the entry level, but we should mention that Stearns & Foster slots, I think, incrementally are going to be up north of 20%. And that's -- those are all from competitors, and we bring that up because Stearns is a very powerful product for us and for the retailers.

[Operator]

Thank you. One moment for our next question, that comes from the line of Laura Champine with Loop Capital. Please proceed.

[Scott Thompson, Chairman, President, and Chief Executive Officer]

Good morning.

[Operator]

Laura, check your mute button. May I take the next question, sir?

[Scott Thompson, Chairman, President, and Chief Executive Officer]

Yes, I clearly answered her question earlier.

[Operator]

All right. And our next question will come, one moment please, from the line of William Reuter with Bank of America. Please proceed.

[William Reuter, Bank of America Merrill Lynch]

Hi, I only have one. You provided the LTM EBITDA for Mattress Firm, I was wondering if they had provided to you their outlook for where the numbers could be this year. And the question is a little bit in light of the fact that historically, you have had such a variable cost structure and I'm sure that they have a much more fixed cost structure. I was wondering if you could speak to how their fixed costs stack up relative to your own to the extent that you have that information at this point.

[Scott Thompson, Chairman, President, and Chief Executive Officer]

Sure. We've got the management's projection of the future, which we're comfortable with. We've stress tested both our numbers and their numbers under various scenarios. I think the interesting thing about the fixed cost comment you made because before we did the analysis and worked through it, I would have said, yes, to your comment. But actually, when we work through the fixed cost, variable cost as part of our stress testing, what are we 75%, Bhaskar, you go to 70? Why don't you give the details. But I was surprised it was -- it's not as impactful as you might think it is.

[Bhaskar Rao]

When you think about the needle mover, we were historically 35%, 65%, let's call it 40-60 now. So Mattress Firm has done a, it's fixed variable, 40% fixed, 60% variable. When you think about what Mattress Firm has done coming out from a bankruptcy process is that they've dramatically improved their footprint, remained in those profitable stores and managed their costs very effectively. So when you look at it from a totality standpoint, the fixed variable nature of our consolidated business does not change that much.

[Scott Thompson, Chairman, President, and Chief Executive Officer]

The other thing that I didn't pick up originally, but as we worked through this thing over the years, if you think about a downturn, you play the downturn scenario, the other thing that doesn't pop immediately is it is really beneficial to have certainty in distribution. And so if there's a downturn, having actual certain distribution of your product is actually maybe even more important than a little bit of change in fixed and variable. So when I kind of think about it in total, I think it -- I don't think it's any harder to go through a downturn with Mattress Firm than it would be to go through it without Mattress Firm in total when I think through all of the variables of a downturn. But on a financial standpoint, yes, it's slightly more fixed cost.

[Bhaskar Rao]

One of the items that we gave in our investor presentation was also a way to think about leverage not only this year but when this transaction is contemplated to be complete, so as we mentioned, the expectation is that it will be complete in the second half of the year -- second half of next year. So when you think about that leverage profile at that point in time, the way we're thinking about it, it would be somewhere between, let's call it, 2.5 [ph] and 3.0.

[Operator]

Thank you. And our next question comes from the line of Carla Casella with JPMorgan. Please proceed.

[Carla Casella, JPMorgan]

Hi, you mentioned you're going to fund the deal with cash, secured and unsecured financing. Is that something we could see sooner rather than later or is that something you just wait until you get closer? What hurdles do you need to see before you're comfortable going out there with financing?

[Scott Thompson, Chairman, President, and Chief Executive Officer]

We probably would be closer in, I mean I don't think there'd be any reason to do it early, but we might not wait until the very end either. We can be opportunistic and we've got a fairly large time period here to work on it. So if the market were to soften up, we have a tendency to do it earlier. If not, we can wait a little while.

[Operator]

Thank you. And our final question comes from the line of Jonathan Matuszewski with Jefferies. Please proceed.

[Jonathan Matuszewski, Jefferies]

Great, good morning and I'll add my congratulations. My question is just on the future of the store base. So I guess there's 2,300 mattress firms today. As you mentioned, Scott, over the next couple of months, maybe we'll hear from the FTC regarding any concessions like divestitures. Added to that, how do you think about go-forward unit growth when the chain is under your ownership? Thanks so much.

[Scott Thompson, Chairman, President, and Chief Executive Officer]

Yes. Look, we'll still -- we'll listen to the current management team in more detail about their thinking as it will be important for them to drive their business plan, but I would say our initial reaction is there are probably still too many stores. So I would expect the store base total number to come down over time and it actually becomes more important as to where the stores are rather than how many there are. So there will be quite a few that might move around to better locations, but the absolute number of stores, I would expect the unit numbers to continue to kind of trickle down a little bit. But there's still quite a bit of opportunity to fill in, but it's more moving around stores as opposed to just closing stores. So I think you'll see activity on both sides, but total number down some.

[Operator]

Thank you. And with that, I will turn the call back to Scott Thompson for any final comments.

[Scott Thompson, Chairman, President, and Chief Executive Officer]

Thank you, operator. To our over 13,000 employees around the world, thank you for what you do every day to make the company successful. To our retail partners, thank you for your outstanding representation of our brands. To our shareholders, lenders, thank you for your confidence in Tempur Sealy's leadership team and its Board of Directors. This ends the call today. Thank you, operator.

[Operator]

Thank you, everybody and you may now disconnect.