Somnigroup International Inc. 2026 Q2 Earnings Call

Hello, everyone. Thank you for joining us and welcome to the Somnigroup second quarter 2026 earnings call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I'll now hand the conference over to Lauren Averitt, Director of Investor Relations. Lauren, go ahead. Thank you, operator.

Good morning, and thank you for participating in today's call. Joining me today are Scott Thompson, Chairman, President, and CEO, and Bhaskar Rao, Executive Vice President and Chief Financial Officer. This call includes forward-looking statements that are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve uncertainties, actual results may differ materially due to a variety of factors that could adversely affect the company's business. These factors are discussed in the company's SEC filings, including its annual reports on Form 10-K and quarterly reports on Form 10-Q. Any forward-looking statement speaks only as of the date on which it is made. The company undertakes no obligation to update any forward-looking statements. This morning's commentary will also include non-GAAP financial information.

Reconciliations of this non-GAAP financial information can be found in the accompanying press release, which has been posted on the company's website at www.somnigroup.com and filed with the SEC. Our comments will supplement the detailed information provided in the press release. With that, it's my pleasure to turn the call over to Scott.

Good morning, and thank you for joining us on our second quarter 2026 earnings call. I'll begin with a review of our quarterly highlights before turning the call over to Bhaskar, who will discuss our financial results and 2026 earnings outlook in greater detail. I'll then provide you with a brief update on a proposed Leggett & Platt combination, then open the call up for questions. We are pleased to deliver a record second quarter in adjusted earnings per share. Against a cautious consumer background and ongoing macroeconomic uncertainty, we generated net sales of $1.8 billion, adjusted EBITDA of $297 million, adjusted EPS of $0.58, a 9% increase from the prior year. These results reflect our brand strength, a diversified global business model, and consistent, disciplined execution across our operations.

This, in a market that we believe to be down mid to high single digits over prior years. Turning to our first highlight, Mattress Firm delivered results ahead of the broader U.S. market, supported by its industry-leading scale, effective marketing strategy, and broad product assortment that's designed to meet the wide range of consumer needs. We continue to refine our merchandising assortment at Mattress Firm to better align it with customers' preferences. Following very encouraging results from a three-month pilot program of Kingsdown's products in 200 Mattress Firm stores, which demonstrated improved performance versus certain other products, we have expanded our relationship with Kingsdown and expect to meaningfully increase the brand's presence across the floor over the next six months. The collection is expected to be available in nearly 800 stores nationwide and brings customers luxury traditional innerspring options focused on elevated comfort, premium craftsmanship, and lasting support.

Our differentiated sleep expert model, supported by ongoing technology investments and a highly trained sales organization, continues to resonate with customers. We've made steady progress on our store refresh program, on track to be completed in 2027, and on our brand wall program, expected to wrap up this year. Both programs are designed to elevate the in-store shopping experience. The improved store environment, combined with enhanced product training and new technology, are supporting an improved store experience for customers, which we believe over time will drive future sales. Our second highlight is the continued success of our international growth strategy. While the operating environment remains volatile, our international business once again delivered solid results and gained share across many of our key markets. Our legacy Tempur-Pedic international business again outperformed the broader industry, benefiting from the strength of the Tempur-Pedic brand, ongoing marketing investments, and strong local execution.

Dreams continued to strengthen its brand assortment, customer engagement, and its best-in-class operating model while managing through a difficult macro backdrop, a highly promotional competitive landscape, and an ERP implementation that is going well but has created some transitory challenges. Over the past several years, we've advanced our global vertical integration strategy by expanding company-owned retail footprint through expansion of our own Tempur-Pedic retail stores, combined with targeted acquisitions such as Dreams in the U.K., SOVA in Sweden, and our recently announced acquisition of Danish retailer SENG.

Each acquisition deepens our ability to connect directly with consumers, showcase our brands, strengthen our market position. Our third highlight is the execution of our new Stearns & Foster product launch, which remains on track and is expected to strengthen our price architecture across the portfolio and drive higher average selling price. The refreshed collection features an upgraded cooling system, a more robust micro coil support layer, and a new approach to hybrid technology. This redesign positions the brand more distinctly in the premium segment and is designed to expand our footprint. To optimize pricing across our portfolio, we are increasing the entry-level price of Stearns & Foster so that it minimizes the overlap with the high end of our Sealy brand. We're focusing on the higher end products of Stearns & Foster. We've increased the number of high-end models by over 50% in the new collection.

Our planned national advertising campaign will highlight the craftsmanship and heritage of Stearns & Foster brand as the longest tenured mattress brand in America, while also reinforcing the connection between our advanced materials, quality sleep, and overall health and wellness. Our marketing strategy balances investments in broad reach channels with highly targeted digital media. The launch will begin at the end of the third quarter and continue to roll out through early 2027. Most of the expected financial benefit will materialize in 2027 and beyond. Our fourth highlight is the continued resilience of Tempur-Pedic Sealy North America's business, despite softness in the broader bedding market and supply chain disruptions. Our investments in high-quality advertising, disciplined cost management, and increased balance of share at Mattress Firm each contributed to another quarter of solid performance.

We also benefited from the strength of our manufacturing supply chain operations, which effectively navigated a dynamic global environment. The operational discipline remains an important differentiator of our business and supports our ability to execute during complicated market conditions. With that, I'll turn the call over to Bostick.

Thank you, Scott. In the second quarter of 2026, consolidated sales were a solid $1.8 billion and adjusted earnings per share was $0.58, up 9% over prior year. There are approximately $16 million of pro forma adjustments in the quarter, all of which are consistent with the terms of our senior credit facility. As a reminder, we have now fully lapped the Mattress Firm acquisition in the first quarter of this year, and we have lapped the related divestitures of Sleep Outfitters and certain Mattress Firm retail locations in May. We will present like-for-like commentary for Tempur-Pedic Sealy North America on a standalone basis, which will include the intercompany sales to Mattress Firm and adjust for the divestitures. Now turning to Mattress Firm results. Net sales through Mattress Firm were approximately $922 million in the second quarter, and same store sales grew slightly.

Mattress Firm adjusted gross margin decreased 240 basis points to 33.3%, driven by product mix, consumer financing costs, investments in Mattress Firm stores, and deleverage. The impact of product mix on gross margin percentage was primarily driven by the increased balance of share of Tempur Sealy products as Tempur Sealy's supply contract is structured to provide a portion of Mattress Firm economics in the form of cooperative advertising credits. This reduces Mattress Firm's operating expenses but delivers a lower product gross margin percentage versus other products. When looked at on a conforming basis, there is no material impact on operating margin from the product mix change. It is just landscaping within the income statement. Mattress Firm adjusted operating margins declined 130 basis points to 6.5%, driven by consumer financing costs, the investments in store, and deleverage I mentioned a moment ago. Turning to Tempur-Pedic Sealy North America.

Sales were flat on a like-for-like basis, with like-for-like net sales through the wholesale channel also flat. Our sales with third-party retailers decreased 5% after normalizing for floor models, representing continued outperformance relative to an industry we believe was down mid to high single digits. Like-for-like net sales through the direct channel decreased 1% in the second quarter. North American adjusted gross margins increased a robust 680 basis points to 61.8%, driven by the achievement of synergies, operational efficiencies, and mix, partially offset by commodity cost inflation for four pricing actions. We achieved $30 million of net benefit from sales and cost synergies in the second quarter North American adjusted operating margins improved 400 basis points to 26.7% in the quarter, driven by the improvement in gross margin, partially offset by investments in cooperative advertising, as noted a moment ago. Turning to Somnigroup International results.

International net sales grew 2% on a reported basis and 1% on a constant currency basis. Our legacy international business delivered another strong quarter, supported by the continued execution as we broaden our consumer reach. Our Dreams business, as noted by Scott, continues to navigate a difficult environment, given a very tough U.K. market and the recent ERP implementation. Our international gross margins declined 80 basis points to 47.4%, driven by commodity cost inflation before pricing action, partially offset by operational efficiencies. Our international operating margin declined 120 basis points to 12.4%, primarily driven by the decline in gross margin. I'd like to give a brief update on commodity inflation and related pricing actions. We implemented modest pricing actions following the July 4th promotional period to offset higher input and freight costs.