Tempur Sealy scraps contracts with biggest customer Mattress Firm

By Jessica Kuruthukulangara

(Reuters) – Mattress maker Tempur Sealy International Inc said on Monday it terminated its contracts with Mattress Firm Holdings Corp, its biggest customer, after disagreements over proposed changes that required “significant economic concessions.”

Tempur Sealy’s shares were down 28.5 percent at $45.20 in late afternoon trading, easing slightly after hitting a more-than-three-year low of $42.54.

Tempur Sealy estimated that Mattress Firm accounted for about 21 percent of its sales in 2016. It also estimated that its total sales fell last year, but that excluding the Mattress Firm contract, its sales increased for the year.

However, Mattress Firm is not only Tempur Sealy’s largest, but also its most profitable customer, and the stock is tanking because estimates for future periods must be lowered, ROE Equity Research analyst Laura Champine told Reuters.

The financial impact almost certainly would be meaningful to both companies and “about $750 million in revenues now seems in doubt” for Tempur Sealy, Raymond James analyst Budd Bugatch estimated, downgrading the company’s stock to “underperform.”

Mattress Firm was bought last year by South African retailer Steinhoff International Holdings NV for $3.8 billion. The new ownership could have led to sourcing adjustments, Champine said. [nL8N1AP4A7]

Tempur Sealy said Mattress Firm and Steinhoff notified it last week that it intended to end their contracts if they could not agree on the proposed changes.

After several failed attempts to enter into a mutually agreeable deal, all contracts with Mattress Firm were terminated as of Jan. 27, Tempur Sealy said. [nPn4rlSS6a]

The Lexington, Kentucky-based company declined to disclose the details of the negotiations, citing confidentiality.

Mattress Firm Chief Executive Ken Murphy told Reuters that the company would not publicly comment on its business relationships.

Tempur Sealy estimated that its sales fell about 1 percent to $3.13 billion in the year ended December. Analysts on average were expecting a steeper drop to $3.10 billion, according to according to Thomson Reuters I/B/E/S.

Tempur Sealy estimated its sales rose 2 percent, excluding sales to Mattress Firm and Sleepy’s, a chain it bought in 2015.

(Reporting by Jessica Kuruthukulangara in Bengaluru; Editing by Martina D’Couto and Savio D’Souza)