Somnigroup International Q2 2026 Earnings Call: Complete Transcript

Somnigroup International (NYSE: SGI ) held its second-quarter earnings conference call on Thursday. Below is the complete transcript from the call. This content is powered APIs. 58, marking a 9% increase from the prior year.

Significant strategic initiatives include the expansion of Kingsdown products in Mattress Firm stores, international growth with acquisitions such as Dreams in the UK and Sing in Denmark, and a new Stearns & Foster product launch expected to drive higher average selling prices. 15 for 2026, despite expectations of a mid-single-digit decline in the global bedding industry. Operational highlights include strong performance from Mattress Firm, ongoing technology investments, and resilience in Tempur Sealy North America's business amidst supply chain disruptions.

Management highlighted progress on the proposed combination with Leggett & Platt, which is expected to close by the end of the third quarter, offering benefits such as vertical integration and EPS accretion. Full Transcript OPERATOR Hello everyone. Thank you for joining us and welcome to the Somnigroup International 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 Avritt, Director of Investor Relations. Lauren, go ahead.

Lauren Avritt, CPA, Director of Investor Relations 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, and 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 and filed with the SEC. Our comments will supplement the detailed information provided in the press release, and with that, it's my pleasure to turn the call over to Scott. Scott Thompson, Chairman, President and CEO 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 and 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. 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 is in a market that we believe to be down mid to high single digits over prior years. S. market, supported by its industry-leading scale, effective marketing strategy, and broad product assortment 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 products in 200 Mattress Firm stores, which demonstrated improved performance versus certain other products, we've 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. Also, 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 International business again outperformed the broader industry, benefiting from the strength of the Tempur 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. , Sova in Sweden, and our recently announced acquisition of Danish retailer Sing. Each acquisition deepens our ability to connect directly with consumers, showcase our brands, and 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, and 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 the 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 Sealy North America's business despite softness in a 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 Bhaskar. Bhaskar Rao, CFO & EVP Thank you, Scott.

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 Somnigroup International 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. 3% driven by product mix, consumer financing costs, and 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 Somnigroup International products, as Somnigroup International'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. 5% driven by consumer financing costs, the investments in store, and deleverage I mentioned a moment ago.

Turning to Somnigroup International North America, sales were flat on a like-for-like basis. Like-for-like net sales to the wholesale channel were also flat. Our sales with third-party retailers decreased 5% after normalizing floor models, representing continued outperformance relative to an industry we believe was down mid- to high-single digits. Like-for-like net sales to the direct channel decreased 1% in the second quarter.

8% driven by the achievement of synergies, operational efficiencies, and mix, partially offset by commodity cost inflation before pricing actions. We achieved $30 million of net benefit from sales and cost synergies in the second quarter. 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 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 UK market and the recent ERP implementation. 4% driven by commodity cost inflation before pricing actions, partially offset by operational efficiencies. 4%, primarily driven by the decline in gross margin.

Now 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. As we discussed last quarter, the timing of the cost increases preceded the implementation of our pricing actions, creating an approximately $10 million one-time headwind to Somnigroup International profits in the second quarter. We expect those impacts to be offset by pricing actions in the second half of the year.

I want to point out we grew earnings in the quarter almost 10% while fully absorbing the inflationary environment. Now moving to Somnigroup International's balance sheet and cash flow items. 99 times, returning to our target leverage range of 2 to 3 times, demonstrating our strong cash flow generation and disciplined capital allocation approach. We also further strengthened our capital structure through the refinancing and upsizing of our credit facility.

The amended facility extends maturities to 2031, increases liquidity, and allowed us to reduce higher-cost debt, lowering future interest expenses. Turning to our cash flow performance, in a muted market we delivered record operating cash flow of $236 million and free cash flow of $182 million. We have reduced our net debt by more than $500 million over the trailing 12 months while fully supporting growth initiatives and returning over $160 million to shareholders in the form of dividends and buybacks. Now turning to 2026 guidance.

As a reminder, our guidance considers the elimination of intercompany sales between Somnigroup International and Mattress Firm, which we expect to represent approximately 24% of global Somnigroup International 2026 sales. Intercompany eliminations in accordance with GAAP will reduce Somnigroup International sales but will be margin accretive and neutral to dollars of operating profitability. 15 for the full year. 6 billion after intercompany elimination.

Our annual guidance also reflects our expectation that the global bedding industry will be down mid-single digits year over year, Somnigroup International North America like-for-like sales growing low single digits, international business growing low single digits, and like-for-like Mattress Firm sales down slightly. We also expect reported gross margin slightly above 45% driven by 100 basis points of net margin expansion from operational efficiencies including synergies and operating leverage, partially offset by the impact of Somnigroup International's pricing actions, which are intended to neutralize commodity inflation but are margin dilutive.

Our 2026 outlook also contemplates our assumption for Somnigroup International brands and private labels to be in the mid-60s percent of Mattress Firm total sales. This represents an incremental $65 million of adjusted EBITDA benefit for 2026 versus 2025 and approximately $690 million of advertising investment. 39 billion at the midpoint of our guidance. Regarding capital expenditures, we expect 2026 CAPEX of approximately $225 million, including CAPEX of $75 million under our Mattress Firm store refreshes and brand wall program.

We expect our CAPEX to normalize to $200 million in future years and for at least 50% of our free cash flow in 2026 to go toward quarterly dividends and share repurchases. Now I'd like to flag a few modeling items. For the full year 2026 we expect D&A of approximately $310 million, interest expense of approximately $230 million, a tax rate of 25%, with diluted share count of 213 million shares. With that, I'll turn the call back over to Scott.

Scott Thompson, Chairman, President and CEO Thank you, Bhaskar. Well done. In closing, our second quarter results reflect the strength and resilience of our business model, the dedication of our teams, and the benefit of a disciplined long-term strategy. We continue to execute well across our global operations, driving growth and creating long-term shareholder value.

Lastly, I'd like to give a brief update on our proposed combination of Leggett & Platt, a leading diversified component manufacturer and longstanding supplier to Somnigroup International. We have made significant progress towards finalizing the combination. We have received nearly all regulatory approvals required to consummate the transaction, and the required Leggett & Platt shareholder vote is scheduled for August 20th. We're expecting to close the transaction before the end of the third quarter.

This timing is considerably ahead of our original expectations. Leggett & Platt will be incorporated into our guidance post closing. We believe the combination will further strengthen our vertical integration framework and enhance consumer-centric innovation. It is expected to expand our addressable market in bedding and into non-bedding industries.

It's going to reduce our financial leverage, drive operating cash flow, and deliver immediate adjusted EPS accretion before synergies, with opportunities for future shareholder value-driving synergies across the combined organization. We look forward to welcoming Leggett & Platt into our portfolio of industry-leading businesses. Operator, that concludes our call. Open the call up for questions.

OPERATOR We will now begin the question-and-answer session.