Could Mattress Firm Cushion Your Portfolio?

Source: Thinkstock

Source: Thinkstock

Mattress Firm Holding Corp. (NYSE:MFRM), through its subsidiaries, operates as a specialty retailer of mattresses, and related products and accessories in the United States. It caught my eye after an interesting earnings report. The company primarily offers conventional mattresses, specialty mattresses, such as Tempur-Pedic and viscoelastic foam mattresses as well as furniture and accessories, including bed frames, mattress pads, and pillows. It operates and franchises over 1,300 company-operated and franchised stores across 33 states under the Mattress Firm name. Here in 2014, the stock has traded relatively flat, only gaining a paltry 3 percent year-to-date. However, I question whether the stock is setting up to move significantly in the coming months. Thus, an analysis of its recent performance was warranted.

In its most recent quarter the mattress firm had net sales for the first fiscal quarter increased 20.9 percent to $333.5 million, reflecting comparable-store sales growth of 4.3 percent and incremental sales from new and acquired stores. The company opened fifty-six new stores, closed eight, and acquired ninety-two bringing the total number of company-operated stores to 1,365 as of the end of the fiscal quarter. Income from operations was $15.4 million. Excluding $4.6 million of system implementation costs, acquisition-related costs and debt amendment costs, adjusted income from operations was $20.0 million, as compared with $23.8 million for the comparable prior year period. Adjusted operating income margin was 6.0 percent of net sales as compared to 8.6 percent in the first fiscal quarter of 2013, and included a 170 basis-point decline in gross profit margin, a 130 basis-point decrease from general and administration expense deleverage, offset by a 40 basis-point improvement in sales and marketing expense leverage. Net income was $7.7 million and GAAP earnings per share was $0.22. Excluding items, adjusted net income was $10.5 million and Adjusted EPS was $0.31.

One good thing for the company is that it completed the acquisition of the assets and operations of Yotes, Inc., one of the company’s franchisees, relating to the operation of 34 mattress specialty retail stores located in Colorado and Kansas for a total purchase price of approximately $15 million, subject to customary purchase price adjustments. It also completed the acquisition of the Virginia assets and operations of Southern Max LLC, another of the company’s franchisees, relating to the operations of three mattress specialty retail stores located in Virginia for a total purchase price of approximately $0.5 million.

Further, the company entered into an agreement to acquire substantially all of the mattress specialty retail assets and operations of Mattress Liquidators, Inc., which operates Mattress King retail stores in Colorado and BedMart retail stores in Arizona. This acquisition will add approximately 75 mattress specialty retail stores to the Mattress Firm company-operated store base in markets where the company currently operates, primarily Denver, Colorado, Phoenix, Arizona and Tucson, Arizona, for an aggregate purchase price of approximately $35 million, subject to customary adjustments. The closing of the acquisition, which is conditioned on the prior satisfaction of customary closing conditions, is expected to occur by the end of the second fiscal quarter of 2014 and will be funded by cash reserves and revolver borrowings, as well as a $3.5 million seller note that is payable in quarterly installments over two years.

One thing I do like about the company is its balance sheet. The company had cash and cash equivalents of $11.7 million at the end of the first fiscal quarter of 2014. Net cash provided by operating activities was $7.1 million for the first fiscal quarter of 2014. As of April 29, 2014, there were no borrowings outstanding under the revolving portion of its credit facility and it has and additional borrowing capacity of $98.4 million.

Steve Stagner, Mattress Firms president and chief executive officer, stated, “Our strategy of driving sales during our first fiscal quarter resulted in approximately 21 percent total sales growth and a 4.3 percent comparable-store increase, which represented our third straight quarter of positive same store sales. With an accelerated infrastructure build up to support additional store growth and the recent unprecedented level of condensed product changes to our floor materially behind us, we are focused on improving our EPS performance as we move through the year. Initial consumer acceptance of the new products, coupled with a focused and well-prepared sales team, helped generate strong sales momentum over the Memorial Day holiday. Furthermore, we are excited to have added 148 stores through organic growth and acquisitions during the first quarter, which fortifies our presence in key markets. We believe that our steady growth, together with an increasingly streamlined organization, will continue to enhance our operations and drive margin improvement; further solidifying our position as the nation’s leading bedding specialty retailer.”

So is this stock a buy? It is tough to say that the stock will move higher, but I think it has potential to do so, mostly because of its revised guidance. Although the company lowered its GAAP earnings estimates by 15 cents, it is because of acquisition costs. The company upped its net sales estimates for the year from $1.46 billion in sales to $1.50-$1.56 billion in sales. It expects to open 145 to 165 new stores and will acquire about 168 stores. It reaffirmed its adjusted earnings per share of $1.88 to $2.00.

What I think is prudent is to hold the stock and allow time for the company’s acquisitions to take root and begin to deliver increased sales and revenues, which in turn will drive future earnings higher. If you can get shares under $42, I would consider taking a small position on.

Disclosure: Christopher F. Davis holds no position in the Mattress Firm and has no plans to initiate a position in the next 72 hours. He has a hold rating on the stock and a $45 price target.

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