Tuesday, January 6, 2015

Here’s How Mattress Firm Is Doing So Far This Year

On Dec. 3, mattress and accessory retailer Mattress Firm (NASDAQ: MFRM) came out with its Q3 2014 quarterly statement. The company performed well on the top line front but not so much on the profitability front. Let’s see what’s going on with this company.
Robust top line gains
Mattress Firm’s year-to-date revenue gained $303 million dollars representing a 33.5% year-over-year increase in revenue overall. Mattress’s Firm’s entire product and service portfolio saw gains in revenue (see table below). Conventional mattresses made up the largest percentage (48%) of overall gains with this segment increasing $145.8 million or 35% year-over-year.
Sales by Product

YTD 10/28/14
YTD 10/29/13
Gain as % of Total
YOY Gain
Conventional Mattresses
Specialty Mattresses
Furniture and accessories
Delivery service revenue
Source: SEC filings and author’s calculations
Organic sources contributed 63.1% to Mattress Firm’s overall gains meaning that the company can grow its top line by bringing customers through the door rather than by simply buying other companies (see table below). Established stores contributed a respectable 22% to the overall gain in Mattress Firm’s year-to-date revenue while expansion contributed another 41%. Acquisitions, however, did account for the remaining 42% of year-to-date revenue gains.
Type of Gain
Change in sales
% of Total Gain
Comparable store sales
New stores
Acquired stores
Closed stores
Total YTD YOY Gain in Sales
Source SEC filings and author’s calculations
Net income declined
Mattress Firm’s net income declined 15% year-over-year. Relatively higher general and administrative expenses tied to acquisitions contributed heavily to the decline in net income. Increased interest expense stemming from accumulation of long-term debt also contributed to net income decline.
Free cash flow declined
Mattress Firm’s year-to-date free cash flow also declined 17% vs. the same time last year. Capital expenditures increased 33% due to increased opening of new stores relative to last year. Hopefully, the investment in expansion will pay off in the long run.
How does this fit into the overall picture?
Mattress Firm has grown its revenue, net income, and free cash flow a healthy 207%, 13,000%, and 184% respectively and translating into a total return of 163% vs. 80% for the total return S&P 500 according to Y Charts. The company has expanded at a fast pace going from 487 locations in 2009 to 1,986 locations in the most recent quarter. It should be noted that comparable store sales have declined steadily in the past three years. Hopefully, this trend will reverse itself this year.
Lousy balance sheet
Mattress Firm possesses a lousy balance sheet. Its $5 million cash balance equates to a mere 1% of stockholder’s equity, way below my personal threshold of 20%. Companies that harbor plenty of cash can get themselves through tough times, self-finance acquisitions and invest in product innovation.
Mattress Firm also expanded its long-term debt to finance acquisitions. Long-term debt increased to $750 million vs. $216 million at the start of the year, expanding its long-term debt to equity ratio to 178% vs. 66% which vastly exceeds my personal threshold of 50%. Long-term debt creates interest expense which serves as drag on profitability. So far this year, Mattress Firm’s operating income exceeds interest expense by seven times vs. 10 times the same time last year. The rule of thumb for safety lies at five times or more.
Looking ahead
Mattress Firm’s massive expansion of long-term debt gives indication that the company may be expanding too fast. Also, the company trades at a high P/E ratio of 43 vs. 19 for the S&P 500, according to Morningstar. A market correction could severely impact this company’s stock price. Management lowered its guidance and expects earnings per share to be between $1.44 and $1.50 for its FY 2015. If the companies misses that estimate and clocks in at say $1.43 per share, assigning a normal multiple of 23, puts the company stock price at $32.89 per share which represents a 42% downside from its current price. Even at $1.50 a multiple of 23 would translate into a share price of $34.50, or a 39% downside.

Investors may want to consider more solid companies such as Union Pacific which offers a more reasonable valuation of 22.

DISCLOSURE: STOCKDISSECTOR (William Bias) owns shares of Union Pacific and will not trade the stock for three market days.

No comments: