Martoma may have lied to Stanford -- as well as Harvard Martoma may have lied to Stanford -- as well as HarvardFor years, Consumer Reports – which recommends everything from what type of coffee you should drink to the safest cars – had made a conscious decision not to rate mattresses. The non-profit firm said its just impossible to compare mattresses because retailers each have their own brand names so the ones at Sleepy’s can’t be compared to the ones sold at Bedding Barn. However, Consumer Reports did the next best thing, asking its readers to rate their mattresses. And loyal readers came to the rescue, with 17,000 responding in October’s issue. Based on the responses Consumer Reports rated 10 mattress and 14 stores. The $2,400 Tempur-pedic came on top with a reader score of 83 while Spring Air, selling for $1,100 came in 10th place with a 66 rating. Original Mattress, selling for $890, came in second with a 52 rating. The Original Mattress Factory came in as the best retailer with a score of 88, (my favorite company, Costco came in 2nd) and at the end of the line was Sleepy’s, the nation’s largest mattress retailer.
Of course you won’t find this in The Courant because Sleepy’s is one of the largest advertisers at the oldest newspaper of continuous circulation in the nation, and we know how the new Courant management likes to protect its prime advertisers from unfavorable publicity.SummaryMattress Firm's recent acquisition of Sleepy's makes its 6x larger than its next competitor.The company has ample opportunity to take Sleepy's margins from 6% to the company average of 10%.This was the deal Mattress Firm has been waiting for, and it made the deal when it came up for bid.Since my first write-up on Mattress Firm Holding Corp. (NASDAQ:MFRM), the stock is up ~15%. After the company's recent acquisition of Sleepy's, I wanted to provide an update on what I believe is a bullish announcement. Over the past two months, investors have sent shares of Mattress Firm, the nation's largest mattress retailer, down 30% due to a lackluster retail environment. Last week, the company announced the acquisition of Sleepy's, the 2nd-largest mattress retailer in the country, creating a national chain whose size is over 6x its nearest competitor.
The announcement sent the shares up ~10%, but there could be much more upside to go. Above: Mattress Firm has completed 18 acquisitions since 2007. Mattress Firm has been a public company since 2011, and operates a mattress retail roll-up strategy. The company has made 18 acquisitions of mattress retailers since 2007, and has a great track record of improving profitability at the stores it acquires. Its largest acquisition to-date has been Mattress Giant (236 stores) in 2011, and the company was able to significantly improve profitability at those stores since that time. Considering Sleepy's (1,066 stores) currently has EBITDA margins of 6%, there is ample opportunity to increase margins to the Mattress Firm average of 10% over time. Management has guided to approximately $40 million in synergies that could be realized over the next three years. The transaction price also looks reasonable - the company paid ~11x EBITDA ($70 million in EBITDA and a $780 million transaction price).
When we take out the approx. $11 million per year in tax savings that come with the deal (present value $100 million), the multiple looks more like 9.5x. If the company is able to improve operations as it has in other acquisitions, Sleepy's could produce $125 million in EBITDA within three years, taking the transaction to 5.5x EBITDA. The risk associated with this transaction is the debt taken on to complete the deal. Once the deal is closed, the company will have ~1.4 billion in debt (4x debt/EBITDA). Though this is a concern now, Mattress Firm should produce ~$125 million in free cash flow annually to pay down debt. Additionally, the company is acquiring some owned real estate, which it will encumber through sale-leaseback transactions after closing the deal, further reducing the cash flow financing. With the potential growth in EBITDA, the debt/EBITDA ratio could be down to 2x within 2-3 years. There is also the risk that retail stores could see disintermediation by online retails, such as Casper, but no online player currently has significant scale in the mattress category.
Even with these risks, Mattress Firm could still be an interesting stock. Considering the company is currently trading near the bottom of its historical EV/EBITDA multiple range, any normalization of that multiple to around ~10x could produce a price target of $100 within three years. The Actionable Insight Take: This is a transformative acquisition for Mattress Firm, and possibly the best news we could have heard out of the company. Mattress Firm has been looking to make this transaction for some time, and when it came to market in a competitive bid, the company was able to make the deal at what we consider a reasonable price. We expect that market sentiment, which has become increasingly pessimistic over the past few months (now 6 buys and 5 holds, versus 9 buys and 2 holds 3 months ago), will improve with this recent announcement. With a market that is trying to chase returns going into year-end, there could be more upside coming as a result of this announcement. Longer term, considering the stock performance after the Mattress Giant acquisition (+200% over the three years following the deal as a result of margin improvements at Mattress Giant), we think this announcement may create a good entry point for a buy-and-hold strategy.
Disclosure: I am/we are long MFRM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.Sleepy's is now part of Mattress Firm. For up to date information and jobs, please see the Mattress Firm profile. Headquarters Size Part of Mattress Firm Founded Type Industry Revenue Competitors Sleepy's Reviews Dec 15, 2016 Helpful (1) I worked at Sleepy's full-time (More than a year) Pros Great peopleDecent payGrowth OpportunitiesLocationGreat customer service activities/employee appreciationGood floor supportPersonable managers Cons Promote people with little to no experience in upper positionsFinal decisions for customers differ based on what manager you asked Advice to Management there should be class or set training on what a manager and leads learn so that everyone is on the same page See All 331 Reviews Sleepy's Photos Sleepy's Interviews Interview Experience Positive % Neutral % Negative % Getting an Interview Applied Online % Recruiter % Employee Referral 9% Other 4 In-Person 4 Interview Difficulty Average Interview Difficulty Feb 29, 2016 Helpful (5) Interview Application I applied through a recruiter.