Tempur Sealy International Inc

NYSE:TPX

Earnings Call Analysis

Tempur Sealy's Strong Q3 Performance and Future Growth Prospects

In Q3 2024, Tempur Sealy reported a 2% increase in net sales to $1.3 billion and a 14% rise in GAAP EPS to $0.73. Adjusted EBITDA grew by 6% to $275 million, achieving a margin of 21.1%, the highest in ten quarters. The company anticipates growth acceleration through the launch of a reimagined Sealy Posturepedic line in mid-2025. For 2024, adjusted EPS guidance is set between $2.45 and $2.55, indicating a 4% year-over-year increase amid a challenging market, as U.S. bedding volumes are expected to decline by mid-single digits.

Strong Performance Despite Industry Challenges

In the third quarter of 2024, Tempur Sealy reported net sales of $1.3 billion, marking a 2% increase year-over-year. Notably, their adjusted EBITDA grew 6% to $275 million, driven by operational efficiency and a solid performance in international markets. GAAP earnings per share increased by 14% to $0.73, highlighting the company's resilience amidst a bedding industry still struggling with historical volume declines.

Cash Flow and Financial Health

The company exhibited impressive cash generation, recording $240 million in free cash flow, the highest since Q3 2021. Concurrently, their adjusted EBITDA margin reached 21.1%, the strongest in ten quarters. This financial health is reflected in a debt-to-EBITDA ratio of 2.4x, well within the targeted range of 2x to 3x, positioning them favorably for future investments.

Key Product Launches and Innovations

Tempur Sealy is gearing up for significant product launches, particularly the new Sealy Posturepedic lineup set to debut in mid-2025. This refresh aims to cater to the mid to entry-level market segments, addressing a void created by past industry declines. The line promises to incorporate new proprietary coil technologies, bolstered by a national advertising strategy commencing Memorial Day 2025, positioning the brand for potential growth as market conditions improve.

International Growth and Market Share Expansion

The international segment shone brightly with a reported 12% growth in net sales, even amid challenging global market conditions. Tempur Sealy's strategic initiatives to broaden distribution and investment in advertising are paying off, particularly in established markets like the U.K. and Germany. This success indicates a positive trend for sustained international performance going forward, especially as the company continues to capture market share.

Guidance and Industry Outlook

Looking ahead, management has narrowed its adjusted EPS guidance for 2024 to a range between $2.45 and $2.55. At the midpoint, this reflects a 4% growth from the previous year, indicating confidence in overcoming industry challenges. However, the bedding industry is expected to remain subdued, projected to decline by high single digits in unit volumes by year-end, consistent with historical trends. Tempur Sealy is optimistic about a recovery starting in 2025, driven by product innovation and improved consumer sentiment.

Strategic Moves Amid Regulatory Scrutiny

Tempur Sealy is in the process of acquiring Mattress Firm, navigating regulatory challenges with the FTC while also preparing a divestiture of certain retail locations. The ongoing legal discussions could influence the timeline of this $1.6 billion acquisition, which the company sees as a strategic move to enhance its market position. The management believes that the acquisition will support their expansion strategy, contingent on favorable outcomes in the pending litigation.

Conclusion: A Positioned Recovery Ahead

In summary, Tempur Sealy is demonstrating strength in a complex market landscape, showing robust financial results, significant product innovation, and a solid international growth strategy. While facing industry-wide challenges, their proactive approach to new product launches, operational efficiencies, and strategic market positioning strengthens the outlook for recovery starting in 2025, presenting appealing opportunities for value investors.

Earnings Call Transcript 2024-Q3

[Operator]

Good day, everyone, and welcome to the Tempur Sealy Third Quarter 2024 Earnings Call. [Operator Instructions] Please note, today's call will be recorded, and we will be standing by if you should need any assistance.

It is now my pleasure to turn today's conference over to Aubrey Moore with Investor Relations. Please go ahead.

[Aubrey Moore, executive]

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.

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 reports on Form 10-Q.

Any forward-looking statement speaks only as of the date 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 this non-GAAP financial information can be found in the accompanying press release, which is 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 now with that introduction, I will turn the call over to Scott.

[Scott Thompson, executive]

Thank you, Aubrey. Good morning, and thank you for joining us on our third quarter 2024 earnings call. I'll begin with some highlights from the quarter and then turn the call over to Bhaskar to review the financial performance in more detail.

After that, I'll provide some comments on our proposed acquisition of Mattress Firm and then open up the call for Q&A. In the third quarter, net sales grew 2% to $1.3 billion, an adjusted EBITDA grew a solid 6% to $275 million compared to the same period last year. Our GAAP EPS grew 14% to $0.73 per share and our adjusted EPS grew 7% to $0.82 per share compared to the same period last year. The overall bedding industry remains significantly below historical volumes.

However, we are pleased with Tempur Sealy's results in the third quarter with an outstanding international performance and a solid domestic results. Adjusted EBITDA to net debt leverage ratio declined to 2.4x, which is below our midpoint of our targeted range of 2x to 3x. As we've reported previously, we are preparing our financial position for the planned closing of the Mattress Firm transaction.

Cash generation in the quarter was very strong despite the soft market and we delivered $240 million in free cash flow, our strongest quarter of free cash flow since the third quarter of 2021.

Turning to the third quarter highlights. Our first highlight is our adjusted EBITDA margin of 21.1% in the third quarter, which is the strongest margin in 10 quarters, driven by our consolidated growth coupled with our operating efficiency initiatives and diverse business platform. We continue to invest in brand through advertising and best-in-class service levels while also remain agile and responsive to industry conditions.

We expect to see significant upside once the market normalizes, which we estimate to be in 2025 and to be led by the new Sealy Posturepedic product launch, which I'll discuss in a minute.

Turning to our second highlight. Our U.S. business continues to perform well compared to the broader market, driven by the continued success of our newly launched products and recent distribution units. We recently completed the full refresh of our Tempur-Pedic brand starting with the new generation of Breeze products and smart bases launched in 2023, followed by the 2024 rollout of our updated Adapt collection and active Breeze halo product. These newest generation products feature a broad range of innovative solutions, such as industry-leading cooling technology, advanced pressure relief and AI-driven fleet insights to help consumers overcome common barriers to quality sleep.

Our ongoing commitment to and investment in consumer-centric innovation is clearly delivering returns. As we see a growing trend in consumers attaching a smart base to their mattress purchases, which is driving an increase in average transaction value for both our retail partners and our direct-to-consumer business.

Additional, our Sleep Tracker AI app continues to enhance our product value by offering users real-time personalized coaching to help them achieve better sleep. We're particularly pleased to report the app downloads reached a record level in both August and September, demonstrating strong consumer engagement and interest in our innovative solutions.

These results prove that our products are resonating with premium, open wellness-focused customers. Stearns & Foster was our strongest performing brand in the quarter and delivered solid growth through both wholesale and direct-to-consumer channels, driven by last year's new product launch, our rapidly expanding e-commerce platform and our ongoing investments in advertising. Our value products also performed relatively well in a challenging demand environment, aided by recent distribution wins in 2 large U.S. bedding retailers.

Turning to our third highlight. We're excited to share that we'll be launching our all-new collection of U.S. Sealy Posturepedic products at half of 2025. This is a significant remanagement of the Posturepedic product branding and marketing as we work to unit growth in the U.S. bedding market, where Sealy is the largest brand. This new product line is targeted at the mid-to-entry level market where industry volumes have been weak for the last few years. This updated Sealy Posturepedic collection of mattresses as a result of a multiyear R&D cycle and will feature new proprietary coil technologies.

These patent pending precision fit coils were designed in-house by our engineers to provide superior support, which has been a common threat of Posturepedic collection since its inception in 1950. We've also simplified merchandising, provide a clear value proposition and more compelling step-up story. The update will feature a new look thoughtfully designed to operate fresh style while staying connected to Sealy brand legacy.

The launch will be supported with a national advertising campaign beginning Memorial Day 2025. The advertising is designed to reinforce the Sealy Posturepedic difference. This top of the funnel, multimedian campaign will be a national advertising effort to drive excitement for the company's largest brand.

Our messaging will be amplified by an all-new Sealy Posturepedic in-store experience, and we plan to elevate Sealy's brick-and-mortar presence with updated in-store material and training. We're continuing to make high-return investments in brand and product to drive our and our third-party retailers' success.

Shifting to international for our fourth highlight. Both our legacy International business and our Dreams operations performed very well in the third quarter, driving healthy double-digit growth in international sales and 200 basis points of expansion in international operating margins, representing significant momentum relative to the overall subdued international market.

Our newly launched international Tempur collection of mattresses, bed bases and pillows, continuing to drive growth and market outperformance across key markets like the U.K., Germany, China and Australia. Notably, since the collection launched last year, we expanded our wholesale distribution by more than 10%. And see continued opportunities to broaden distribution over the long term.

We're supporting our new international products with strategic investments in advertising. Our continued investments throughout the funnel ensures that we drive both brand awareness and conversion, feeding the market for sustainable long-term growth. Our final highlight for the quarter. Our U.S. Tempur-Pedic brand was recently awarded #1 in customer satisfaction in both the in-store retail mattress and the online mattress segment of J.D. Power's 2024 Mattress Satisfaction Report.

We're honored to achieve this distinction for the last 5 out of 6 years for the retail category and for the fourth consecutive year in the online category. With these recognitions Tempur-Pedic has been named the most awarded brand in the history of the J.D. Power U.S. mattress satisfaction study. This resting mission is a testament to our consumer-centric innovation and our unwavering commitment to product quality and service.

And with that, I'll turn the call over to Bhaskar.

[Bhaskar Rao, executive]

Thank you, Scott. In the third quarter of 2024, consolidated sales were $1.3 billion and adjusted earnings per share was $0.82. There are approximately $22 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 costs incurred in connection with our planned acquisition of Mattress Firm and manufacturing footprint optimization initiatives.

The manufacturing optimization involves the closing of 2 small facilities as we transferred their volume into our full-service manufacturing plant. This shift will allow us to lower our future cost per manufactured unit while continuing to make product to our industry-leading quality standards.

Turning to North American results. Net sales to both our wholesale and direct channel declined approximately 1% in the third quarter. North American adjusted gross margin declined 10 basis points to 43.1% driven by the mix impact of the new distribution win for our OEM business partially offset by commodity costs and operational efficiencies. North American adjusted operating margin declined 20 basis points to 20.1%, driven by the decline in gross margin and operating expense deleverage.

Now turning to international results. International net sales grew a robust 12% on a reported basis and 11% on a constant currency basis. As compared to the same period last year, our international gross margin improved 70 basis points to 57.3% driven by operational efficiencies.

Our International adjusted operating margin improved 200 basis points to 18.2%, driven by operating expense leverage and the improvement in gross margin, partially offset by the Asia joint venture performance. We're pleased to share that our Asian joint venture recently opened our first manufacturing plant in India. Although not expected to be material to our operations in the near term, it is further evidence of the long-term vision and willingness to invest in the future.

Now moving to the balance sheet and cash flow items. At the end of the third quarter, consolidated debt less cash was $2.2 billion. And as Scott mentioned, our leverage ratio under our credit facility was 2.4x, within our historical target range of 2 to 3x. As previously announced, we have executed a $1.6 billion term loan B. We are now positioned to fully fund the Mattress Firm acquisition at close.

Now turning to 2024 guidance. We have narrowed our adjusted EPS outlook to be between $2.45 and $2.55. At the midpoint of the range, this represents a 4% growth year-over-year, a notable expansion of profitability in a prolonged challenged market.

Our guidance at the midpoint is based on the full year sales that are slightly below the prior year, which implies the fourth quarter will it be approximately consistent to the prior year. This also considers our current expectation that the 2024 U.S. bedding industry unit volumes will be down high single digits which implies the industry will be down approximately mid-single digits on dollars in the fourth quarter, consistent with what we saw in [indiscernible] '21.

Our sales outperforming the global industry due to recent distribution wins and with advertising products, resulting in adjusted our guidance considers the volume allocations of capital in 2024. CapEx of approximately $125 billion, down significantly from prior years, as our major capital projects are complete. This level of spend is primarily driven by maintenance CapEx of $110 million and a quarterly dividend of $0.13, an increase of 18% over prior year. Lastly, I would like to flag a few modeling items for the full year 2024, we expect D&A of approximately $200 million to $205 million, interest expense of approximately $125 million to $130 million on a tax rate of 24% with a diluted share count of 179 million shares.

With that, I'll turn the call back to Scott.

[Scott Thompson, executive]

[indiscernible] I'd like to take a moment to share some updates related to our mattress on acquisition.

First, the federal court hearing is scheduled to begin next Tuesday, November 12, 2024. And expected to last about 2 weeks. We continue to believe a successful litigation process and be completed in the coming months, allowing for a potential transaction close in late 2024 or early 2025, in line with our previous expectations. As previously announced, as part of our engagement with the FTC on the proposed acquisition of Mattress Firm, we conducted a divestiture process, which led to an agreement with Mattress Warehouse, a company with extensive mattress retail experience, a strong capital base and a capable leadership team.

The executed purchase agreement provides for the contingent sale of 73 Mattress Firm retail locations and our Sleep Outfitter subsidiary, which includes 103 specialty mattress retail locations and then in distribution centers. We expect the divestiture to close approximately 1 quarter after the closing of the Mattress Firm transaction.

Turning to our recently filed complaint seeking an injunction against the STC commission, administrative proceeding. The actions asked of course, to prevent the FTC some challenging the Mattress Firm merger through its own separate administrative proceeding in addition to the federal court proceeding that starts next week. Effectively giving the FTC to [indiscernible] at us by using 2 different courts. This is an issue of jurisdiction and constitutional law. As the litigation process is ongoing, our comments are limited, and we cannot take questions on pending litigation.

Finally, moving to brief comments on Mattress Firm's financial performance. Mattress Firm recently made their quarterly results available on their website, and they were consistent with our expectations. We believe they are weathering a difficult U.S. market well and we encourage you to review Mattress Firm's website to more information on their financial performance in the most recent quarter.

Before I open up the call for questions, I'd like to take a minute and reflect on the evolution of Tempur Sealy. Over the last 175 years, we have dedicated our efforts and expertise to continuous innovation for the benefit of customers. We have grown to become a leading global betting company with highly recognized brands, advanced manufacturing capabilities and a diverse omnichannel platform.

Our ongoing investments to strengthen and diversify our business have resulted in nearly 60% expansion in sales since 2019 and 80% expansion in adjusted EBITDA over the same period. While we've made significant strides to grow and fortify the business, we believe that significant opportunities lie ahead. Our continued focus on key growth and cost efficiency initiatives, ensure success in a fragmented and evolving marketplace and that we are also optimally positioned to capitalize on a resurgence in demand and the global industry returns to growth.

And with that, I'll open the call up for questions, operator.

[Operator]

[Operator Instructions] And we'll take our first question from Susan Maklari with Goldman Sachs.

[Susan Maklari, analyst]

I want to talk a little bit about demand. And as we get gotten past the election, we think about the potential for the Fed cutting rates. Can you talk a bit about how you think the consumer may react thoughts on how we could see demand trending as we get late this year and early next year and then your ability to respond to that with the utilization rates that you've got across the business and some of the new product introductions that you talked to?

[Scott Thompson, executive]

Sure. Thank you for your question, Susan. As you know, look, the bedding industry has really been in recession. Maybe even depression. It's been a tough 3 years and probably from peak to where we are now, probably down 30%, which is, by historical standards, period we've never seen before.

So we do think we're set for a recovery or normalization. I think we think it will be led by Sealy Posturepedic, which is the largest launch in Sealy's history and probably the largest bedding launch in history. And if you knows Sealy is the #1 brand in the U.S. If you look at kind of the consumer, to be frankly honest, we've gotten through the election. And we've gotten through the election very well.

We've got a peaceful transition of government, maybe a little more stability, certainly retailers may be more confident to advertise. We're going to have lower rates maybe not quite as low as we expected 6 months ago, but clearly, the trends in the right way. And as you know, better than most of us, we're going to have some better housing formation. So all in all, it looks like we should get to some normalization sometime call it in 2025. And we think we're perfectly positioned to take advantage of it. As you know, we've taken market share for probably more quarters than I can remember. I don't see any reason why we won't continue to take market share. And in fact, that probably based on the numbers I see right now, I think we took -- made a step forward as far as our market share capture in the third quarter as compared to probably the first 2 quarters of the year. And we've got the capacity to address the market as it expands. Maybe one other little quick call out because that was all like kind of more U.S. is I think 1 of the real highlights in the quarter is the international team, both what we call legacy and in dreams. Both of them had a fabulous performance, double-digit growth in what is also a very difficult market globally. And they took a good bit of share in their relative markets, and that feels like that's sustainable. It's taken a while to get international rolling, but we think we've got a really good place going forward.

[Operator]

We'll take our next question from Bobby Griffin with Raymond James.

[Robert Griffin, analyst]

Scott, I appreciate the details there on the [ pending ] acquisition. I guess for my question, [indiscernible], I think it's probably more centered on the numbers towards you, but -- can we talk a little bit about the contribution margin of the business today? There's been a lot of changes as you called out manufacturing optimization. New distribution, some growth in the OEM and then obviously, the -- so far, a very successful launch internationally. So -- can you maybe just unpack kind of what your view is on international and North America go-forward contribution margin? And is there anything in 2024 results that we should be mindful of when we think about kind of level setting our model on that going forward, either good guys or bad guys against the P&L?

[Bhaskar Rao, executive]

Absolutely. Let me start with the latter one first. As I think about from a go-forward standpoint, let's just assume status quo, which is the existing new distribution that continues and the mix of the brands. As those continue as well as international perform. So there isn't any transitory items that I would specifically call out onetime good guys or onetime bad guys. We're confident and we're proud of the performance that the business has produced in the third quarter.

As it relates to the contribution profit from a go-forward standpoint, how I would think about it is, again, assuming status quo, and what I mean by that. International business is doing extremely well. That new addressable market that we've been going after for a number of years. We have seen the green shoots. Now we're seeing the grass grow. And internationally, we're growing low double digits.

So as you know, historically, that the contribution profit on that side of the pond is a little bit richer than the U.S., just given the price point they historically play at.

So when I think about the fleet being about 35% from a contribution standpoint, the international should come in a bit higher than that. As I think about from a U.S. standpoint, North America is, let's think about it as, again, assuming that status quo is as I think about it in and around fleet, let's call it, 30% to 35% from an incremental dollar standpoint.

Now the item to come back to is that we do believe that low-end consumer that's been sitting on their hands, they are going to come back. And as Scott pointed out, we've got an exciting new product launch coming in next year, right at that value consumer. So as that mix is in, it will be incremental EBITDA dollars. However, it would be something to be mindful of as that mix is in from a contribution standpoint.

[Scott Thompson, executive]

Yes. So you basically have a product mixed issue that you have to keep an eye on. But as Foster pointed out, incremental EBITDA into the mean of the market. But as we looked in the third quarter, as I mentioned in the prepared remarks, I mean, Tempur grew and actually Stearns & Foster was the best performing brand. So clearly, the weakness has been that lower price point.

[Operator]

And we'll take our next question from Rafe Jadrosich with Bank of America.

[Rafe Jadrosich, analyst]

I was just heading into sort of '25, I was wondering if you could just sort of give a state of the industry, like we've had, as you mentioned, you had 3 years of declines. Mattress industry is depressed, 30% below peak. But we're also -- if you're looking at some of the housing indicators, existing home sales like haven't turned yet still feels like it's under pressure. Just sort of where do you think we are kind of broadly in the market heading into 2025?

[Scott Thompson, executive]

Sure. First of all, let me just talk a little bit about housing market. We've never really thought the housing market was the primary driver for bedding. We've always described it as a slight headwind or a slight tailwind. And it's been a slight headwind, obviously, for a little while. So we expect it to be maybe a slight tailwind. Really, we think more of advertising, innovation, consumer confidence as the bigger drivers. And look, I think if you think about all the stuff that went on, we call it third quarter and into the fourth quarter, particularly in the United States, the U.S. consumer has held up very well.

So if we can get to some more normal, we'll call politics, a little more normal housing. When I look at the bedding industry specifically, the product innovation is very strong. And of course, I'm talking my own book of business, but I -- from an industry standpoint, I would tell you that products that all our competitors are making are also innovative. So the products are really good. Everybody has been very conservative on their advertising. And as I've talked about on previous calls, probably think we ought to spend more money on the top of the funnel, driving customers into stores and thinking about bedding less on the bottom of the funnel, chasing the last 3 customers.

The search ads, but it looks like it's set up pretty well. And we're not going to do 2025 guidance today. But clearly, there's some green shoots out there. And as Bhaskar talked about a second ago, international is really, really doing well. As I mentioned also a little while ago, this Posturepedic launch, I mean, it is it is the entire Sealy Posturepedic brand. It is the reimagining of the brand for the first time and for, I don't know, a decade plus, we're going to put national advertising behind it. It is in the meat of the market that has had problems and we think we've got something here as far as something that will help turn the industry back to normalization, which is, call it, 5% or 6% growth rate and maybe you don't get that in 2025, but you get on the path to getting back to, I'll call it, normal industry. When you look at GE's population growth and everything else, the number of units we're selling today is extremely low, and I'm not a big person on believing in pent-up demand. But you can't stay at these levels based on any staff that you would look at, be sold per person in the country or anything else. So when I look at it, we've been in this decline, not only is it deep, we've been in for a long time. And so we're looking forward to getting back to a normal market.

[Bhaskar Rao, executive]

And just leveraging off, Scott, one of your comments about volumes and what the industry is doing is as this does come back and as Scott mentioned, we're not doing 2025 is the leverage component is going to be extremely powerful from a business standpoint as that goes through its gross margin.

So when you think about the mix that I talked about previously as well as the leverage that will go through those plants, combined with the productivity initiatives that we continue to drive margin expansion in the third quarter. We think all of those items have legs that will be very constructive as it relates to EBITDA margins and profitability.

[Operator]

We will take our next question from Michael Lasser with UBS.

[Michael Lasser, analyst]

It's a 2-parter. First, how does the North American gross margin performance in the third quarter in form how we should think about the gross margin into next year given the mix shift to the Sealy products? And two, how does the prospect of tariffs impact the outlook for Tempur Sealy into 2025 and beyond.

[Scott Thompson, executive]

Great questions. I'll take the easy 1 and make Bhaskar the hard one and the 1 is the last part of the question. We don't think the tariffs impact us much. We don't really buy anything from China directly anymore.

So any additional tariffs on China really don't impact us. As far as overseas about the only thing we import are adjustable basis. They come in through Mexico and Vietnam. Maybe there's a little nick there if there's some tariffs related to those countries. The history of the industry as we pass those tariffs on -- you could do you expect to put some tariffs in, maybe it helps a little bit. But that'd be on the low-end bedding, and I wouldn't expect it to be material really one way or the other is the way we think about we call it the new tariff environment. And then you get the complex question about the mix in the gross margin.

[Bhaskar Rao, executive]

Pretty straightforward. So when I think about North America 3Q margins and how it informs the outlook is, again, we saw on a consolidated basis, we saw a nice gross margin expansion. We did see productivity driving gross margin expansion in the quarter, offset by mix. As you get into the fourth quarter and beyond, that mix will start lapping itself a little bit in the fourth quarter and will start being grandfathered as we get more into 2025.

So as a headwind. I wouldn't think about that on a go-forward standpoint, again, incremental EBITDA, but it is something to think about as it relates to margins. However, when I do think about the productivity, we feel like we feel good about what we've accomplished so far and we do feel like that has legs from a go-forward standpoint. And then overall, is Tempur continues. We have a new product launch and Tempur is relative to the fleet that will be constructive in Stearns & Foster. As Scott pointed out, it was the leading growth driver of the overall business, which will be constructive to the fleet. So when I think about tailwinds to the North American margins is -- there's a nice tailwind. Again, the item to be mindful of is as this low-end consumer come back is that will mix in incremental EBITDA, but it is something to be mindful of from a rate standpoint.

[Operator]

And we'll take our next question from Peter Keith with Piper Sandler.

[Peter Keith, analyst]

I'm going to sneak in a 2-parter here. But just on the advertising spend, we know the importance. It seems like you pulled back on ad spend in Q3 because you saw nice sales and marketing leverage. Could you talk about kind of the ad strategy going from Q3 into Q4? And then on a related basis, just maybe the domestic versus international sales dynamics implied for Q4. Do you think international is going to slow from the strong growth? Does domestically a little worse? How should we think about those two?

[Scott Thompson, executive]

Let me see if I. It's about a 5-point question, but I think I'll tell me Bhaskar if I missed any. First of all, from an advertising spend, that naturally flexes up and down. based on what's going on in the market. If you're talking about the DTC spend, it literally changes daily depending on more performance marketing. Just in general, we were relatively conservative in the fourth quarter considering the election and the noise around the election.

So I would say we've been a little conservative, but we pretty much spent the same percentage of sales. So I would say, consistent. I would expect we'll be a little more aggressive next year with the advertising. As far as momentum internationally, we would expect them to continue to have significant momentum. We don't think this is a 1 quarter bank, whether it's double digits or high singles, I don't know. But what is a market that's clearly down, I expect the international group to continue to have very good performance, both in total numbers, but relatively speaking, outstanding performance. What else is in that question, Bhaskar.

[Bhaskar Rao, executive]

I think that's fair. Just to cover that, let's call it, about 9.2%, 9.3% advertising versus so consistent on a prior year basis. I think specifically, you had a question about growth rates.

[Scott Thompson, executive]

One other thing in average in which may be noteworthy. As other people have pulled back in advertising, quite frankly, we found our advertising to be much more effective because it's not quite as noisy out there. So that's been a big guide to from an effectiveness standpoint.

[Bhaskar Rao, executive]

So as Scott mentioned, consistent on a rate basis have been in total dollars, about $119 million in the third quarter for total advertising. As I think about profiling in the fourth quarter, what we've assumed and we write it into the prepared material, the U.S. industry is kind of chugging along where it is, call it down mid-single digits from a dollar standpoint.

We've assumed that same in the fourth quarter. So when you think about sales from this side of the pond or the other, consistent profile, as Scott said, whether it's high single, low double internationally. And from a North America standpoint, let's call it, consistent, perhaps slightly down a little bit. So similar profiling.

[Operator]

We'll take our next question from Seth Basham with Wedbush Securities.

[Seth Basham, analyst]

My question is regarding the third quarter. Can you just give us some color on the shape of sales through the quarter, how Labor Day performed and your promotional strategy during and after Labor Day? How did that shake out and what the competition do to react?

[Scott Thompson, executive]

Sure. Consistent with what we've seen in previous quarters, the trough is deeper and the peak is higher. So in holiday periods, we would have actual growth and a good bit of growth. And in the trough, we would be negative and then you blend it all together. And that's the trend we've seen for, I don't know, 4, 5 quarters post pandemic.

So that's kind of the shape I don't think our promotional activity was significantly different year-over-year, Oscar. I don't fine-tune it here and there. We did work a little bit on it to match some promotions. that we talked about last quarter, that was what I call Nicole kind of stuff. And then I would say more recently, I would say the promotional environment in general, has gotten less in the marketplace. As it looks like others are being a little less promotional in trying to squeeze out some dollars to advertise, which I would consider to be a net positive for them and the industry.

[Operator]

We'll take our next question from Brad Thomas with KeyBanc Capital Markets.

[Bradley Thomas, analyst]

Scott, you talked a bunch about your industry outlook. We get a lot of questions about how the luxury part of the market is performing. Could you talk a bit more about that and how you think about the luxury in terms of how much it's declined from peak and how you think about it going forward, specifically?

[Scott Thompson, executive]

Yes. Luxury is holding up well. Tempur Sealy. As I mentioned in the prepared remarks, actually Stearns & Foster was the best-performing brand and then temper after that. In both those brands had growth in the third quarter. And for talking terms and no one's numbers are perfect when talking about the industry, and I'm talking U.S. I would guess the U.S. industry was probably down maybe 9% to 10% in sales. And like I said, both those brands were in growth. I've seen other reports of some other public companies that they were down significantly. So it's hard for me to make a general call on the high-end customer. But from what we're seeing on our products, the high end is holding up through very well.

[Operator]

We'll take our next question from Judy Merrick with Truist.

[Judy Merrick, analyst]

This is Judy on for Keith. I was wondering if you can give us a sense of how much the new Sealy Posturepedic launch would be a drag on earnings in the first half of next year, either from the advertising you talked about on the [indiscernible]

[Scott Thompson, executive]

Yes, great question. From a year-over-year standpoint, there really won't be any incremental launch costs when you compare the Sealy Posturepedic launch in 2025 to what we did in 2024. So there will be incremental loss cost. When you go to advertising, advertising would be incremental cost, but we expect to be able to self-fund it through cost reductions initiatives that we're working through. So the way we're thinking about that incremental advertising is it will not be an incremental expense as we offset with other cost reductions.

[Operator]

And we'll take our next question from Laura Champine with Loop Capital.

[Laura Champine, analyst]

And I thought the international growth was impressive, and I hear you, Scott, that you view that as sustainable. Can you put a little more meat on those bones and tell us why growth in international markets should be that sustainable in a pretty tough macro there too?

[Scott Thompson, executive]

Yes. And I know you follow us closely. If you remember, we worked on new products at Tempur for 4 years before we launched this new Tempur product and it was expensive. It was painful. It took us a long time, but we finally got it where we needed to. So the first big driver is the new Tempur product. We got the product right and the market has been receptive and we backed it up with new creative advertising.

So all of that would be execution in a very difficult market on the Tempur side, we've also had a strategy to bring the Tempur product a little closer to, we'll call it, the high end of the market, but not the super premium, free it down just a little bit. And we're working through that. And as I mentioned in the prepared remarks, we've had some expansion in distribution and I don't think we're through from that standpoint. If you go to the Dream side of the ledger, the Dreams team has executed very well in the U.K., taking significant share and being very crisp from an execution standpoint. And the U.K. economy, although not robust, at least has stabilized and it feels like it's beginning to perk up a little bit if they cut interest rates and stuff. So its product on the temper side and execution on both the Dream side and the Tempur side.

[Operator]

And we'll take our last question today from Bobby Griffin with Raymond James again.

[Robert Griffin, analyst]

Scott, I just want to actually I've been a little bit more on Stearns & Foster, you called it out strongest brand during the quarter. I think that's a reversal on maybe some of the prior trends in the past couple of quarters. So can you maybe just unpack that a little did you push a little bit more in advertising? Anything to help us understand the turnaround there because that's pretty encouraging given the opportunity on Stearns over a multiyear basis.

[Scott Thompson, executive]

Yes. I don't have all the numbers in front of me, Bobby. But my perception is Stearns was really hot for a little while. It lasts a couple of quarters. It's been okay, but it certainly it cooled down a little bit. I think it was still in growth. And then in the third quarter, had a very strong third quarter. I think that I'd give credit, first of all, to the sales group because we noticed that it slowed down a little bit in the sales group made it a focus. We also had 1 SKU -- 1 or 2 SKUs of 2 or 1. 1 or 2 SKUs in Stearns that weren't as productive as we would have liked them to be and we tweaked them and brought in new SKUs to replace them and got those floored where we had a couple of underperforming SKUs. And with that, it had a very strong quarter. So no additional promotions and speak of no additional advertising. In fact, I think advertising was a little bit down on Stearns actually.

[Operator]

There are no further questions on the line at this time. I will turn the call to Scott for any additional or closing remarks.

[Scott Thompson, executive]

Thank you, operator. To our 12,000 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 and lenders, thank you for your confidence in the company's leadership and its Board of Directors. This ends the call today, operator. Thank you very much.

[Operator]

Thank you. And thank you, everyone, for your participation today. You may now disconnect.