Somnigroup International Inc. (SGI) Q3 2025 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call summary reveals strong international sales growth, improved operating and free cash flows, and a positive outlook for advertising and product innovation. Despite some concerns about guidance clarity and acquisition plans, the overall sentiment remains positive due to robust financial performance and strategic growth opportunities.

Key Financial Performance

Net Sales Net sales were up approximately 63% to $2.1 billion year-over-year. This increase was driven by the acquisition of Mattress Firm, strong performance in international operations, and successful execution of key operating initiatives.

Adjusted EBITDA Adjusted EBITDA was up approximately 52% to $419 million year-over-year. The increase was attributed to synergies from the Mattress Firm acquisition and operational efficiencies.

Adjusted EPS Adjusted EPS was up approximately 16% to $0.95 per share year-over-year. This growth was supported by strong sales performance and cost synergies.

Like-for-Like Sales Growth Aggregate like-for-like sales growth was 5% year-over-year, led by strong performance in international operations and Tempur Sealy North America.

Mattress Firm Same-Store Sales Growth Mattress Firm reported strong same-store sales growth of 5% year-over-year, driven by superior in-store execution and investments in consumer experience.

Tempur International Sales Growth Tempur International sales grew 11% year-over-year, driven by a refreshed product lineup, expanded distribution, and significant advertising investments.

North American Adjusted Gross Margins North American adjusted gross margins increased 1,700 basis points to 58.6%, primarily due to the elimination of intercompany sales to Mattress Firm. On a like-for-like basis, gross margins declined 40 basis points due to merchandising mix.

International Operating Margin International operating margin remained consistent at 18.1% year-over-year, with fixed cost leverage offsetting a decline in gross margins.

Operating Cash Flow Operating cash flow reached a record $408 million, up significantly year-over-year, demonstrating strong cash generation even in a soft market.

Free Cash Flow Free cash flow reached a record $360 million, reflecting the strength of the business model and operational efficiencies.

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Operating Highlights

Sealy Posturepedic products: Solid growth driven by new product launches and $110 million investment in advertising.

Tempur brand walls: Initiative to enhance customer engagement and education, driving higher retail tickets.

Kingsdown investment: Acquired 25% interest in luxury mattress manufacturer to expand product offerings and growth opportunities.

International sales growth: Tempur International sales grew 11%, driven by refreshed product lineup, expanded distribution, and strong local execution.

Dreams (UK-based retailer): Achieved market outperformance through same-store sales growth and new store openings.

Mattress Firm combination synergies: Ahead of expectations with $60 million EBITDA benefit in 2025 and projected $100 million run rate sales synergies.

Operational efficiencies: Improved manufacturing, logistics, and sourcing efficiencies, along with optimized production and product strategies.

Advertising strategy: Launched 'Sleep Easy' campaign, achieving highest performance in Mattress Firm's history and aligning messaging across brands.

Capital allocation strategy: Plan to allocate 50% of free cash flow to dividends and share repurchase starting Q1 2026, while continuing deleveraging.

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Risk or Challenges

U.S. bedding market conditions: The U.S. bedding market remains flat from a sales perspective and is still at trough levels, which could limit growth opportunities.

U.S. housing market: The U.S. housing market has not yet recovered, potentially impacting demand for bedding products.

International market challenges: International markets continue to face numerous challenges, which could hinder growth in these regions.

Tariff headwinds: The company faces $20 million of incremental cost exposure due to evolving tariff landscapes, which could impact profitability.

Competitive U.K. marketplace: The U.K. market remains highly competitive, leading to a decline in international gross margins.

Integration risks: The integration of Mattress Firm and achieving targeted synergies pose execution risks, including the need to align operations and achieve cost savings.

Economic pressures: The bedding industry is expected to be down low to mid-single digits versus the prior year, reflecting broader economic pressures.

Debt levels: Consolidated debt less cash stands at $4.6 billion, with a leverage ratio of 3.3x, which could pose financial risks if market conditions worsen.

Store refresh program costs: The company plans to invest $150 million between 2025 and 2027 to refresh Mattress Firm stores, which could strain financial resources if not managed effectively.

Advertising investments: The company is committing $700 million to advertising in 2025, which, if not effective, could impact ROI and financial performance.

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Guidance & Outlook

Revenue Expectations: The company has raised its adjusted earnings per share guidance to be between $2.60 and $2.75 for 2025, with a sales midpoint of approximately $7.5 billion after intercompany eliminations. This includes expectations for the bedding industry to be down low to mid-single digits versus the prior year.

Margin Projections: Gross margins are expected to be slightly above 44% for 2025. Adjusted EBITDA is projected to be approximately $1.3 billion at the midpoint.

Capital Expenditures: 2025 CapEx is expected to include approximately $150 million of normal recurring CapEx and an additional $25 million to bring acquired Mattress Firm stores up to standards. An additional $125 million will be invested over the next couple of years to refresh these stores. Long-term normalized run rate CapEx is expected to be approximately $200 million.

Market Trends and Recovery: The company expects the U.S. bedding industry to recover gradually, with Mattress Firm sales expected to increase as the market improves. International business is projected to grow low-double digits on a reported and constant currency basis, driven by omnichannel expansion.

Business Segment Performance: Tempur Sealy North America sales are expected to decline low-single digits on a like-for-like basis, while international operations are expected to grow low-double digits. Mattress Firm sales are expected to remain flat, supported by in-store initiatives to grow average order value (AOV) and conversion rates.

Strategic Plans: The company plans to complete the rollout of Tempur brand walls to all 2,200 Mattress Firm store locations by the end of 2026. Additionally, a 3-year program to invest $150 million between 2025 and 2027 to refresh Mattress Firm stores is underway. The company also expects to achieve $100 million in annual run rate net cost synergies by 2027, with $15 million projected for 2025, $50 million in 2026, and $35 million in 2027.

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Shareholder Return Plan

Capital Returns to Shareholders: In the first quarter of 2026, Somnigroup plans to allocate approximately 50% of free cash flow to capital returns to shareholders in the form of dividends and share repurchase.

Share Repurchase Program: Somnigroup intends to allocate a portion of its free cash flow to share repurchase starting in the first quarter of 2026.

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Key Q&A

Q:Can you talk about what is driving the relative divergence in bedding demand compared to the housing market and consumer-related categories?

A:Scott Thompson explained that the bedding industry can succeed independently of the housing market due to factors like innovation and advertising. He highlighted the success of the new Sealy Posturepedic product, revamped advertising strategies at Mattress Firm, and incremental direct advertising for the Sealy brand. He also noted that consumer confidence, while not robust, has not been negative. Sequential industry improvement was observed, with Tempur Sealy outperforming the market.

Q:Where do you see the most opportunities for growth among the different brands, and is there a big unlock to come in enterprise optimization?

A:Scott Thompson identified short-term growth potential in the Sealy Posturepedic brand due to new technology and advertising. He mentioned upcoming opportunities with Stearns and Tempur brands. He also emphasized the ongoing benefits from Mattress Firm's advertising and merchandising changes, cost synergies, and international operations, which have shown consistent double-digit growth despite challenging markets.

Q:What assumptions have changed in the guidance, and what is embedded in terms of like-for-like and underlying industry growth in the fourth quarter?

A:Bhaskar Rao stated that the industry outlook improved from mid-single-digit declines to low-to-mid-single-digit declines. The balance of share for family brands at Mattress Firm increased to mid-50s. For Q4, sales are expected to be slightly above $1.9 billion, with Tempur Sealy like-for-like growth in mid-to-high single digits, North America mid-single digits, and Mattress Firm low-single digits.

Q:How do you think about the fourth quarter given tougher year-on-year comparisons?

A:Scott Thompson clarified that there was no significant bump in business from last year's peaceful government transition, contrary to prior assumptions. He reassured that Q4 performance aligns with Q3 trends, despite slightly tougher comparisons.

Q:What penetration level is reasonable for Mattress Firm's balance of share by 2026 or 2027, and where will Kingsdown fit in the assortment?

A:Scott Thompson stated that a reasonable balance of share for family brands at Mattress Firm is around 62%, with fluctuations based on innovation and advertising strength. Kingsdown will be positioned at the high end, focusing on spring products and differentiated offerings, supported by a passive equity investment.

Q:Any early thoughts on 2026 earnings in light of the longer-term target for 2028?

A:Scott Thompson highlighted the robust flow-through from minimal sales growth and the significant impact of falling interest rates, which could add $0.18 to $0.20 per share or a 7% EPS lift per 100 basis points. He emphasized the potential benefits of lower interest rates on housing recovery and promotional financing costs.

Q:Would you consider purchasing another retailer or manufacturing brand instead of passive investments in brands?

A:Scott Thompson confirmed that the company is open to acquisitions of manufacturers, adjacents, or retailers, depending on the right opportunity and price. He emphasized disciplined capital utilization and the likelihood of future acquisitions, though they are not budgeted or targeted.

Q:Review of Unclear Management Responses

A:Management avoided providing specific guidance or details for 2026 earnings, stating only general observations about flow-through and interest rate impacts. They also did not commit to any specific acquisitions, maintaining a general openness to opportunities without concrete plans.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

SGI Transcript

Somnigroup International Inc. (SGI) Q3 2025 Earnings Call Transcript

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Somnigroup International Inc. (SGI) Q2 2025 Earnings Call Transcript

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The earnings call highlights strong financial metrics, including a 53% increase in net sales and a 26% rise in adjusted EBITDA, alongside improved margins and international growth. Despite some declines in North American sales, optimistic guidance and strategic partnerships, particularly with Mattress Firm, bolster sentiment. The Q&A reveals confidence in consumer recovery and synergies, despite some concerns about long-term targets and market pressures. Overall, the positive financial performance and strategic initiatives suggest a positive stock price movement in the short term.

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