Sealy Corp (ZZ)

CharlieBombay (21.79) Submitted: 7/10/08 3:43 PM : Start Price: $5.72 ZZ Score: 21.59

OK, my score may discount everything I'm about to say. But understand, I just started and jumped into oil. In any case, review trends in the financials, and most importantly the conference call transcript and you will see that this company is going down this year.

Domesitic
Surprise, Surpise. Survey says, people can wait a year to upgrade their mattress, especially when their home equity just had an unprecedented drop, followed by a huge decline in their stock portfolio. Unit sales are down double digits. The execs hinted that this will get worse. This quarters sales were boosted by a one time accounting change along with liquidation of the floor mattresses. Yes, they are making way for their new product that was just launed: $2k to $4k mattresses. That should really do the trick.

International.
Ok, unit sales were up in this arena, but prices were down. Not a good sign, but that wouldn't be all bad, except that management now says they are seeing demand in Europe start to fall off like it has in the U.S. There goes the one bright spot.

Debt.
Their quarterly sales were $375k and dropping. Their debt is about $1.1 billion. Their cash, A/R, inventories, and prepaid expenses, plus property, plant, and equipment, only add up to $560 million. I'll let you calculate the ratios. Also, they increased accounts payable by $24 million (not paying vendors as quickly) and reduced their accounts receivables by $18 million. Some may call this managing your working capital, but this is just an increase in debt, current debt. I doubt they can do this again next quarter. Eventually people want to get paid. Just another sign of this company trying to survive a terrible environment.

Margins.
Gross margins dropped from 42.9% to 39.5%. However, their one time accounting change really distorted the 39.5 margin which would have been 37.7% had the change not been made. Moreover, they pointed to an expected increase in costs next quarter, about 10% to 12%. That will bring the margins down even further, leaving little money to service their debt.

Competition.
Tempurpedic. Enough said.

Bottom Line.
This is just a tuff enviroment for companies that have anything to do with the house. Mortgage companies, Builders, Retailers like HD, Lumber, Toilets, and Mattresses.

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