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Mattress Firm Reports Brisk 3rd Fiscal Quarter Growth. Forecasts Slower Growth For 4th Quarter

Furniture Industry News Update - Furniture World Magazine
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Article Summary: Net sales for the third fiscal quarter increased 51.1% reflecting comparable-store sales growth of 6.6% and an increase in store units from new store openings and acquisitions.


Mattress Firm Holding Corp. (MFRM) announced its financial results for the third fiscal quarter (13 weeks) ended October 30, 2012.

Net sales for the third fiscal quarter increased 51.1% to $277.3 million, reflecting comparable-store sales growth of 6.6% and an increase in store units from new store openings and acquisitions. The Company reported third-quarter GAAP earnings per diluted share (“EPS”) of $0.37. Excluding acquisition-related costs and secondary offering costs, adjusted earnings per diluted share (“Adjusted EPS”) for the third fiscal quarter were $0.47.

“We have continued to drive strong performance as evidenced by our 6.6% and 8.8% comparable-store sales growth in the third fiscal quarter and the first nine months of fiscal 2012, respectively, while adding more than 280 net stores through accretive acquisitions and new store openings since the beginning of this fiscal year,” stated Steve Stagner, Mattress Firm’s president and chief executive officer. “Our core strategy of further penetrating our existing and new markets continues to result in increased market share and profitability, and the acquired stores continue to generate total sales above our initial expectations. We believe we are well positioned to drive revenue and earnings in the coming years through store growth and our relative market share strategy. However, our expectations for the balance of this fiscal year are now below our previous plan in light of recent sales trends that continue to be impacted by ticket pressures and, beginning in early November, lower traffic growth. We expect that targeted initiatives being deployed internally will address many of our sales challenges. It is important to keep in context that in fiscal 2012, even after giving effect to our updated guidance, we expect to achieve impressive full year revenue and operating earnings growth in excess of 40% over the prior year. As we look to fiscal 2013, we remain confident that the execution of our growth strategy and improving operating efficiencies will drive market share and EPS gains.”

Third Quarter Financial Summary

Net sales increased 51.1% to $277.3 million in the third fiscal quarter of 2012, reflecting comparable-store sales growth of 6.6% and growth in store units from new store openings and acquisitions.

Company-operated stores increased to 1,011 as of the end of the third fiscal quarter. During the quarter, the Company opened 31 new stores, closed 11, and added 34 from the acquisition of Mattress X-Press in September 2012.

Income from operations for the third fiscal quarter was $23.0 million. Excluding $5.0 million of acquisition-related and secondary offering costs, adjusted income from operations was $28.0 million, representing an increase of $6.6 million, or 30.9%, over the prior year.

Adjusted operating margin in the third fiscal quarter increased 112 basis-points over the second fiscal quarter of fiscal 2012, and such improvement included a 40 basis-point improvement in gross margin, a 107 basis-point decrease in selling and marketing expense, offset by a 35 basis-point increase in general and administrative expense and other items. Adjusted operating margin in the third fiscal quarter was 10.1% as compared to 11.7% in the same quarter of 2011, and such decrease included a 177 basis-point increase in selling and marketing expense, a 20 basis-point increase in other expense categories, offset by a 41 basis-point decrease in general and administrative expense.

Acquisition-related costs included in income from operations related to the Mattress Giant and Mattress X-Press acquisitions totaled $3.0 million during the third fiscal quarter and consisted of $0.5 million classified as cost of sales attributable to duplicate warehouse facilities and costs of remerchandising the acquired stores, and $2.5 million classified as general and administrative expenses related to direct costs of the transactions, costs of retraining personnel and duplicate costs of the Mattress Giant corporate office.

The Company completed the public offering of 5,435,684 shares of its common stock by certain of its shareholders on October 10, 2012. The Company did not sell any shares of common stock in the offering and did not receive any proceeds from the sale. The Company incurred approximately $1.9 million in costs related to the offering.

Acquisitions

In September 2012, the Company completed the acquisition of the assets and operations of Mattress XPress, Inc. and Mattress XPress of Georgia, Inc. (collectively “Mattress X-Press”), including 29 mattress specialty stores located primarily in South Florida and five stores in Georgia, for approximately $13.2 million. The Company has commenced rebranding of the Mattress X-Press stores as Mattress Firm, with completion anticipated to occur by the end of fiscal 2012.
Subsequent to the end of the third fiscal quarter, in November 2012, the Company entered into an agreement to acquire the assets and operations of Factory Mattress & Water Bed Outlet of Charlotte, Inc. (dba “Mattress Source”), including 28 mattress specialty stores in North Carolina and South Carolina, for approximately $11.2 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 fourth fiscal quarter of 2012 and will be funded by cash reserves and revolver borrowings. The Company intends to rebrand the stores as Mattress Firm subsequent to the closing of the transaction.

Consistent with our core relative market share strategy, the Mattress X-Press and pending Mattress Source acquisitions will add stores in markets where Mattress Firm currently has company-operated stores. The addition of the acquired stores, once rebranded, is expected to drive advertising efficiency and improved market-level profitability in those markets.

The effect of rebranding on the sales per store performance of the former Mattress Giant stores has continued to be positive.

Year-to-Date Financial Summary

Net revenues increased $233.7 million, or 45.4%, to $749.1 million, for the three fiscal quarters (thirty-nine weeks) ended October 30, 2012, from $515.4 million in the comparable prior-year period, reflecting comparable-store sales growth of 8.8% and an increase in store units from new store openings and acquisitions.

The Company opened 88 new stores and acquired 215 stores, while closing 21 stores in the first nine months of fiscal 2012, adding 282 net store units, an increase of 38.7%.

Net income was $32.3 million for the three fiscal quarters ended October 30, 2012 and GAAP EPS was $0.95. Excluding acquisition-related and secondary offering costs, and related tax effects, adjusted net income was $40.4 million for the three fiscal quarters and Adjusted EPS was $1.19. See “Reported to Adjusted Statements of Operations Data” below for a reconciliation of net income as reported to adjusted net income.

Balance Sheet

The Company had cash and cash equivalents of $10.9 million at the end of the third fiscal quarter on October 30, 2012. On November 5, 2012, the Company completed an amendment of its senior credit agreement. As a result of the amendment, the maturity of term borrowings in the aggregate amount of $200 million was extended by two years to January 18, 2016, the maturity of the revolving loan facility was extended by two years to January 18, 2015 and the revolving loan commitment was increased to $100 million from the previous commitment of $35 million. The interest rate on the extended term borrowings was revised to LIBOR plus a margin of 3.5%, representing a 1.25% increase over the previous rate. Furthermore, the annual amount of permitted capital expenditures was increased to $80 million from the previous annual amount of $40 million, beginning with fiscal 2012.

Financial Guidance

The Company expects the pending acquisition of 28 Mattress Source stores to add incremental sales during the fourth fiscal quarter of 2012 of approximately $2.0 million. Such sales estimates anticipate temporary closings of the stores while rebranding efforts are undertaken. The impact on EPS during the fourth fiscal quarter of 2012 is expected to be a reduction of $0.03 that is attributable to acquisition-related costs. The Company expects that these acquired stores will be accretive to EPS for the fiscal year (52 weeks) ending January 28, 2014 (“fiscal 2013”) by $0.05 to $0.06 as a result of expected increases in sales volumes and improvement in operational efficiencies of the rebranded stores.
The Company is updating its outlook for fiscal 2012 to include the anticipated results from the pending acquisition of 28 Mattress Source stores, actual results through the third quarter, and the Company’s expectation of future results based on information currently known. Furthermore, the Company intends to rebrand approximately 20 additional stores to Mattress Firm during the first quarter of fiscal 2013 that were acquired in December 2010 and are currently operated under the name Mattress Discounters, which will have an effect on fiscal 2012 results. The GAAP EPS guidance for fiscal 2012 includes a noncash impairment charge that will be recorded in the fiscal fourth quarter of $2.1 million, before income tax benefit, related to the Mattress Discounters intangible trade name asset.

For the fourth fiscal quarter ending January 29, 2013, the Company expects net sales in a range from $261 million to $266 million, GAAP EPS in a range from $0.23 to $0.26, and Adjusted EPS in the range of $0.30 to $0.33, excluding acquisition-related costs, secondary offering costs and noncash impairment charge. Comparable-store sales are expected to be in the range of flat to an increase of 2.0%.

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