Tempur-Pedic International Inc (TPX.N) lost nearly half its value on Wednesday after the mattress maker slashed its full-year forecasts and admitted it was losing ground to fast-moving rivals in the specialty market it once dominated.
The company's sales had grown over 27 percent over the past two years, primarily due to demand from aging baby boomers, who have been sold on the health benefits of Tempur-Pedic's high-priced foam-based and other specialty mattresses.
But Wednesday's forecast indicated that rivals have finally learned to compete in a market that the company had practically created and owned for most of the past two decades.
An "unprecedented" number of rival products supported by aggressive marketing and promotion have hit sales in North America, CEO Mark Sarvary said in a statement, prompting selling that wiped out nearly $1.5 billion of the company's market value.
"Right now, you have everybody in the industry going after the specialty space," Sarvary said later on a call with analysts. "We did not expect the competitive environment to change this fast."
Tempur-Pedic now expects flat sales of about $1.43 billion in 2012, down from its previous forecast of $1.6 billion to $1.65 billion.
The company had already warned of slowing sales in April, when it forecast 2012 numbers that fell short of Wall Street's expectations.
However, Wednesday's cut marks a more dramatic downturn at the company, which revolutionized the mattress industry with its foam-based technology, originally developed by NASA.
The specialty market that it helped create now accounts for over 25 percent of all mattress sales.
The business was primarily responsible for the company taking overall market share from privately held Serta Inc and Simmons Bedding Co, as well as from long-term market leader Sealy Corp ZZ.N, all of which get a majority of their sales from the traditional beds containing coil springs.
But since last year, Simmons and Serta have both launched successful foam-based mattresses, while Sealy has increased its presence in that market.
"Serta's iComfort product (has) been building momentum for the last 12 months and there are now other products that are gaining traction as well," Gilford Securities analyst Robert Straus said.
Increased marketing and promotions, including discounts and incentives to retailers, have allowed rivals to get a firmer foothold in the specialty business, mostly at Tempur-Pedic's expense, Straus said.
Oppenheimer analyst Joseph Altobello said this "has forced Tempur-Pedic to rethink its marketing strategy, which will likely include a greater dose of promotion," cutting his rating on the stock to "perform" from "outperform."
DRAG ON MATTRESS STOCKS
Tempur-Pedic, which said it will trim costs to protect margins, now expects to earn $2.70 per share for the year, down from its previous forecast of $3.80 to $3.95.
Analysts on average were expecting full-year earnings of $3.93 per share on revenue of $1.64 billion, according to Thomson Reuters I/B/E/S.
Tempur-Pedic shares, which were trading as high as $87 less than two months ago, closed down 49 percent Wednesday to hit a more than two-year low of $22.39 on the New York Stock Exchange.
Top Tempur-Pedic shareholders that took a hit on the share fall included mutual fund companies Fidelity Management, Wellington Management Co and Vanguard Group as well as hedge fund JAT Capital Management, according to Thomson Reuters data.
Shares of fellow specialty mattress maker Select Comfort Corp (SCSS.O) tumbled 20 percent to close down at $20.61. Retailer Mattress Firm Holding Corp (MFRM.O), whose main suppliers are Tempur-Pedic and Select Comfort, also closed down 21 percent after its quarterly sales missed market estimates.
(Reporting by Mihir Dalal and Juhi Arora in Bangalore; Editing by Maju Samuel, Ted Kerr and Anthony Kurian)