Disruption in a Sleepy Sector
Simmons' self-adjusting mattress could cause some discomfort among peers.
Wedbush Securities
With one notable exception, we thought the winter edition of the Las Vegas Market furniture and mattress convention was not much to write home about with respect to "game changing" new mattress introductions.
The winter mattress show is where manufacturers typically roll out their biggest new product introductions for the new year. Perhaps reflective of the tremendous innovation which has already taken place in the industry, manufacturers were more focused this time on fine-tuning their current technologies and product lineups. The gel trend appears to have become fully saturated, and manufacturers are now more focused on differentiating themselves from a technology perspective. We see more manufacturers working to integrate climate control and other electronic feedback components, and believe these efforts will culminate in the next big wave of innovation.
At the 2014 Las Vegas World Market, Tempur Sealy International (ticker: TPX) (rated at Neutral) introduced a number of new product innovations across its Tempur and Sealy brands. First of all, for the core Tempur lines, including Contour and Cloud lines, the company has refreshed its product materials with a new "SmartClimate" System with moisture and cooling benefits and a new "EasyRefresh" top cover that is easy to remove and toss in the washing machine.
Tempur Pedic also finally addressed what we have long viewed as the inferior aesthetics of the brand. The new design adds a gray sidewall, as well as an improved (and removable) top cover design. In our opinion, the new aesthetics don't succeed at making these the most attractive beds on the sales floor, but they do at least achieve aesthetic parity with the competition, which we think should actually help drive better conversion. A more subtle, but important, change for the Tempur brand (and approved by Mattress Firm Holding (MFRM) (rated at Outperform) Chief Executive Steve Stagner) was that the company realigned and rationalized its growing number of product lines, which we believe will provide a clearer message and identity to consumers on the sales floor. Tempur also introduced a new Breeze pillow with cooling technology. For Sealy, the company introduced the new "Optimum Collection" with cooling gel featured from top to bottom.
These products utilize exclusive "Outlast" material and "OptiCool" gel memory foam. Lastly, the company introduced an upgrade of its Stearns & Foster line with new material and hybrid concepts, with notable new features such as hand-tufting (reflecting skilled craftsmanship) and air vents. For the first time ever, Stearns & Foster has rolled out a handsome adjustable foundation which was specifically designed to match with the brand's highly attractive mattresses. Overall, we were pleased with the new products, although we thought nothing was quite extraordinary. Thoughts from the show were that the zip-off cover for the Tempur lines were an excellent addition to the product.
Mattress Firm's relative market-share strategy is currently focused on sacrificing gross margins to drive market share gains. The Mattress Firm meeting was very well attended and lasted about one-and-a-half hours. There was a lot of discussion about the company's business, as well as the others in its public peer group. As we learned at the ICR XChange [conference], new sales incentives and promotions have been driving comps, although for fourth quarter (all three months), this will have a small negative impact on gross margin while at the same time gaining market share. Management continued to characterize the current selling environment as one self-inflicted by manufacturers which drastically reduced national advertising. The company was encouraged that manufacturers appear more willing to advertise, but said that it would take time for the momentum to build. In the end, the company's overall goal is to be the leader of U.S. mattress retailers and with that comes significant benefits, including a reversal of power from manufacturer to retailer.
Simmons made a big splash with the introduction of its "self-adjusting" ComforPedic IQ. The most talked-about new mattress product at the winter show this year was from Simmons. Mattress Firm CEO Stagner was upbeat on it as well, hailing it for its "demonstrable" selling proposition. We were unable to see the new product at the show, so we will reserve our judgment for now, but we do believe this new entrant could cause some serious disruption to the other major manufacturers, including Tempur Sealy, Serta and Select Comfort (SCSS) (rated at Neutral).
The product includes what Simmons is calling Smart Response Technology: "a self-calibrating technology that naturally responds and continuously adapts to the body -- without motors, buttons, plugs or electronics." To promote the IQ, Simmons has enlisted the celebrity endorsement of Dr. Andrew Weil.
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