(CN) - Shareholders claim in a class action against Tempur-Pedic International that the mattress company misled investors about falling market share due to increasing competition.
"Rather than disclosing that the company's competitive position was rapidly deteriorating due to the influx into the market of aggressively priced alternative brands, defendants hid that fact by asserting that Tempur-Pedic's competitive position had strengthened," the complaint states. "In the face of evidence that its financial outlook was declining, the company also claimed that it foresaw material growth in net sales and EPS during the course of 2012."
Investors caught a glimpse of the troubles in early May when the company announced the implementation of a "significant strategic shift" that offered huge price reductions on its best-selling products. Tempur-Pedic stocks fell by 14.85 percent on the announcement, followed by an even bigger drop after the company's June 6 admission that its 2012 net sales and EPS (earnings per diluted share) was not just "overly optimistic" but "directionally inaccurate."
"Rather than projected growth in net sales and EPS of 12.67 percent and 19.49 percent, respectively, Tempur-Pedic revealed that it anticipated that net sales would be essentially flat and that EPS would suffer a 15.09 percent decline," the complaint states. "Tempur-Pedic's stock price fell 48.73 percent on the heaviest volume in the company's publicly-traded history."
Stocks had previously traded as high as $87.43 per share and closed at $87.26 on April 18, 2012, but fell to $22.39, a total of 74.34 percent, following a June 6, 2012 press release issued by President and Chief Executive Officer Mark A. Sarvary.
"Sales trends in our North America business during the second quarter have been disappointing and below plan, primarily due to changes in the competitive environment, including an unprecedented number of new competitive product introductions which have been supported by aggressive marketing and promotion," he said.
Shareholders say the company knew its competitive position had drastically changed and that it was already seeing the changing market's negative effects in terms of reduced net sales and EPS. According to the complaint, the company's 2012 outlook was not just "weaker" but actually "negative," and, as a result, "lacked a reasonable basis for the statements made concerning the company's condition, competitive position and outlook.
The class is represented by John Roach, Keith Ransdell and Chad Meredith of Ransdell & Roach, and Christopher Keller, Eric Belfi, Michael Stocker and Rachel Avan of Labaton Sucharow LLP.