Sealy (NYSE: ZZ) slumps as analyst cuts rating on 4Q results

Palm Beach, FL 1/19/12 (StreetBeat) -- Shares of Sealy Corp. (NYSE: ZZ) slid more than 25 percent in morning trading on Thursday as an analyst cut the mattress maker's rating because its wider fourth-quarter loss surprised Wall Street.

THE SPARK: Sealy reported late Wednesday that it lost 15 cents per share for the quarter. That compares with breakeven per share results in the prior-year period. Analysts polled by FactSet had expected the Trinity, N.C. company to turn a profit of 1 cent per share. Revenue also missed analysts' forecasts, dropping 9 percent to $269.3 million. Wall Street predicted revenue of $307.4 million.

Raymond James' Budd Bugatch said in a client note that the results were "distressingly disappointing." He lowered the company's rating to "Market Perform" from "Outperform."

THE BACKGROUND: Sealy — whose brands include Bassett, Stearns & Foster and its namesake — has struggled with falling sales and increased discounting, especially in its U.S. lineup of lower-priced mattresses, where there is increased competition.

CEO Larry Rogers said in a statement that the industry will likely show higher growth in higher- and lower-priced products this year. He said that Sealy will concentrate on its next generation of Stearns & Foster mattresses and development of a new specialty division for the higher-priced products. It also will try to recapture momentum at the lower price points.

Sealy announced last month that Rogers plans to retire this year. Rogers, 63, joined the company in 1979 as a sales manager and worked his way up through the company, serving in various leadership roles. He was named president and CEO in 2008.

Sealy has hired an executive search firm to help look for a potential successor.

THE ANALYSIS: Bugatch said he'd stuck with his "Outperform" on Sealy — for probably too long — because he holds Rogers in high regard and thought the company would regain market share by revamping products, streamlining its cost structure and taking on new marketing efforts.

"While the timing of our downgrade is admittedly unfortunate, we simply can no longer justify a more optimistic rating given Sealy's deteriorating financial results, highly dilutive capital structure and the strategic uncertainties created by the pending CEO transition," he wrote.

Bugatch slashed his 2012 earnings forecast to 2 cents per share from 16 cents per share.

Bradley Thomas of KeyBanc Capital Markets anticipates that Sealy's gross margins will continue to be squeezed by raw material costs this year, as well as product launch costs related to its new Stearns & Foster mattresses.

The analyst reaffirmed a "Hold" rating. He lowered his 2012 estimate to a loss of 3 cents per share from a profit of 12 cents per share. Thomas provided a 2013 forecast for breakeven per share.

STOCK ACTION: Sealy's stock tumbled 35 cents, or 19.2 percent, to $1.49 in morning trading, rebounding from an intraday low of $1.37. The shares have traded between $1.09 and $2.99 over the past year.

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