The shares of mattress maker Tempur Sealy (TPX) are falling after the company announced that it had terminated its contract with the country's largest mattress retailer, Mattress Firm. Research firm SunTrust called the news "a major hit" to Tempur Sealy's earnings, while several other research firms responded to news of the termination by downgrading the shares.

NEWS: Mattress Firm told Tempur Sealy last week that it intended to cancel all deals between the two companies if major economic adjustments to their agreement were not made, Tempur Sealy stated today. The two companies were not able to make a deal, causing Tempur Sealy to "issue formal termination notices for all of (its) brands to Mattress Firm as of January 27," Tempur Sealy reported. The mattress maker added that it expects to cease all business with Mattress Firm by the end of the current quarter.

ANALYST REACTION: Mattress Firm accounted for about 21% of Tempur Sealy's sales last year, wrote SunTrust analyst Keith Hughes. Moreover, an even higher percentage of Tempur Sealy's Tempur Pedic brand are sold at Mattress Firm stores, and the Tempur Pedic brand has "by far" the highest margins of any of Tempur Sealy's businesses, according to Hughes. Hughes wrote that Mattress Firm "is the only large retailer in the mattress industry with over 20% market share," while no other retailer has much over 5% share. Other retailers will probably seek tough concessions from Tempur Sealy in the wake of today's development, added Hughes, who kept a Hold rating on the shares. Meanwhile, Raymond James analyst Budd Bugatch downgraded his rating on Tempur Sealy two notches, to Underperform from Outperform. Mattress Firm accounted for about 25% of Tempur Sealy's consolidated sales in fiscal 2015, estimated Bugatch. Without Mattress Firm, Tempur Sealy may not meet its goal of generating $650M in adjusted EBITDA in 2017 and it may miss the target in 2018 as well, warned Bugatch. Additionally, Piper Jaffray analyst Peter Keith downgraded Tempur Sealy to Neutral from Overweight and cut his price target for the shares to $50 from $65 following the termination of the company's contracts with Mattress Firm. Tempur Sealy was also downgraded to Hold from Buy at Stifel and to Neutral from Buy at Nomura. However, KeyBanc analyst Bradley Thomas, predicting that Tempur Sealy could offset the negative impact of today's news by selling more of its mattresses through other retailers than previously, estimated that the termination of the deal would only lower the mattress maker's sales by 5%-15%.

WHAT'S NOTABLE: In addition to the contract news, Tempur-Sealy pre-announced better than expected fiscal 2016 revenue today.

PRICE ACTION: In morning trading, Tempur Sealy plunged 27.5% to $45.80, while its competitor, Select Comfort (SCSS), slid 1% to $19.58 per share.