The Wall Street Journal-20080216-The Buzz -- MarketWatch Weekend Investor- Rivals Won-t Let Tempur-Pedic Rest

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The Buzz -- MarketWatch Weekend Investor: Rivals Won't Let Tempur-Pedic Rest

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Investors in Tempur-Pedic International Inc., the fast-growing bed company, haven't been having sweet dreams lately.

Since the company three weeks ago reported fourth-quarter earnings that were shy of expectations, its shares have slid about 30%. "We still have the best growth in the industry," Chief Financial Officer Dale Williams says.

To be sure, even with the miss, profit was up a perky 31% on a 13% rise in sales for beds, pillows and other products whose claim to fame is that they are made of the same viscoelastic "memory" foam used by astronauts.

But Wall Street being Wall Street, a miss by a company on as fast a track as Tempur-Pedic, with a five-year average earnings growth rate of 53%, results in more than a trip to the woodshed.

Like many companies, Tempur-Pedic has blamed the weaker-than- expected results largely on the economy. Still, Tempur-Pedic investors may have something else to keep them up at night if traditional bed manufacturers, such as Sealy Corp. and Simmons Bedding Co., finally make headway with beds that don't use inner springs.

This isn't the first time Tempur-Pedic has been red-flagged by yours truly because of looming competition from established brands. As recently as three years ago, I pointed out that the big bed makers attempted to ride the success of Tempur-Pedic's marketing with visco knock-offs of their own.

"We thought we could compete by just buying a foam similar to what they bought and putting the Simmons name on it," Simmons Chief Executive Charlie Eitel says. "It failed miserably."

This time, Simmons is using visco manufactured by ComforPedic, a small producer it bought last summer. Mr. Eitel says ComforPedic uses a "next-generation" visco that has better characteristics than Tempur- Pedic's, especially when it comes to heat absorption.

One of the knocks on visco is that it can get too hard if a room is too cool and too mushy if a room is too warm. Mr. Eitel says ComforPedic's visco has been "scientifically proven" to be better. "This is not a gray area that is open to interpretation," he says.

To which Tempur-Pedic's Mr. Williams responds: "Have you ever met any competitor that says their product is worse than the other? Of course they say it's better . . . we'll see if they can validate the claims."

Mr. Eitel is so confident of Simmons's potential that he says "ComforPedic is the company that's going to give Tempur-Pedic competition. We have the distribution, the connected brand to Simmons and, more important, the technology."

And while the ComforPedic visco has only been at Simmons dealers for three months, Mr. Eitel says that when it competes directly with Tempur-Pedic the customer "conversion rate" to ComforPedic, with a nudge from sales people, has been high. "Wall Street isn't recognizing it and won't realize it until a conference call a year from today when we're saying visco is more than 5% of our business."

Sealy, meanwhile, is putting its focus on natural latex, which it claims produces a superior sleep to any kind of visco. And unlike inner-spring beds, latex, which comes from rubber trees, doesn't sag or leave body impressions. It also is virtually indestructible.

Sealy is so serious that last year it built its own latex plant in Pennsylvania that runs 24 hours a day, six days a week. Capacity will be doubled in several months to keep up with sales, which rose 50% last year.

"Latex is exploding," Sealy Chief Executive David McIlquham says. And even though Sealy makes visco beds, Mr. McIlquham concedes, "I hate how they feel," which is why he sleeps on latex. (Disclosure: So do I. And so does Mr. Eitel, whose firm also makes latex beds, at his vacation home.)

Mr. Williams, however, says the word from retailers "is that latex has the highest return rates."

That is news to Sealy's Mr. McIlquham, who says latex returns are on par with other beds sold by his company. He further believes that over the long-term latex could be bigger than visco, which along with other types of noninner-spring bedding accounts for about 29% of the market among leading manufacturers, according to the International Sleep Products Association.

Mr. McIlquham believes so strongly in latex that for the first time his company has hired an advertising agency for the sole purpose of devising a plan to market the product, which has long been popular in Europe.

The obvious question is whether the renewed push for noninner-spring beds by Sealy, Simmons and others will steal more share from among themselves rather than from Tempur-Pedic. Or whether, at the same time, consumer demand for visco beds, which cost hundreds of dollars more than traditional mattresses, will moderate if the economy slumbers.

Mr. Williams reminds me that the last time I suggested his company's growth was vulnerable its annual sales were $830 million. "Now they're $1.1 billion," he scoffs. Touche, but just remember, with companies driven by hot products, hubris has a way of being humbling.

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Herb Greenberg, MarketWatch senior columnist, doesn't own stocks except his employer's-nor sell individual stocks short or invest in hedge funds. MarketWatch is a unit of Wall Street Journal publisher Dow Jones. Email [email protected]