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MFRM > SEC Filings for MFRM > Form 10-Q on 6-Jun-2013All Recent SEC Filings

Show all filings for MATTRESS FIRM HOLDING CORP. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for MATTRESS FIRM HOLDING CORP.


6-Jun-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. The discussion in this section contains forward-looking statements that involve risks and uncertainties. See "Cautionary Note Regarding Forward-Looking Statements" included elsewhere in this report for a discussion of important factors that could cause actual results to differ materially from those described or implied by the forward-looking statements contained herein.

Unless the context otherwise requires, the terms "Mattress Firm®," "our company," "the Company," "we," "us," "our" and the like refer to Mattress Firm Holding Corp. and its consolidated subsidiaries. Unless otherwise indicated,
(i) the term "our stores" refers to our company-operated stores and our franchised stores; and (ii) when used in relation to our company, the terms "market" and "markets" refer to the metropolitan statistical area or an aggregation of the metropolitan statistical areas in which we or our franchisees operate.

In this report, we refer to earnings before interest, taxes, depreciation and amortization and other adjustments (such as goodwill impairment charges, loss on store closings and acquisition expenses), or "Adjusted EBITDA." Adjusted EBITDA is not a performance measure under accounting principles generally accepted in the United States, or "U.S. GAAP." See "Adjusted EBITDA to Net Income Reconciliation" below for a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income.

We report on the basis of a 52- or 53-week fiscal year, which ends on the Tuesday closest to January 31. Each fiscal year is described by the period of the calendar year that comprises the majority of the fiscal year period. For example, the fiscal year ending January 28, 2014 is described as "fiscal 2013." Fiscal 2013 contains 52 weeks.

Executive Summary

Net sales during the thirteen weeks ended April 30, 2013 improved $66.2 million from the comparable prior year levels as a result of the addition of new and acquired store units, offset by a decline in comparable-store sales. We believe that our net sales growth is outpacing our competitors in most of the markets in which we operate and is resulting in increased market share. Net income and other profitability measures improved during the thirteen weeks ended April 30, 2013, as a result of the net sales growth and our ability to gain leverage on certain costs. These improvements were partially offset by (i) increases in spending in certain expense categories, including sales and marketing expenses during the period primarily to increase sales, (ii) deleverage over store occupancy and other constant recurring costs due to the decline in comparable-store sales, and (iii) temporary deleverage in store occupancy and other operating expenses related to acquisitions of stores with sales productivity levels that, while improving, remain below the levels of our existing store base. Key results for the thirteen weeks ended April 30, 2013 include:

† Net income increased $2.3 million to $12.0 million for the thirteen weeks ended April 30, 2013, compared to $9.7 million for the comparable prior year period.

† Income from operations for the thirteen weeks ended April 30, 2013 was $22.5 million. Excluding $1.3 million of acquisition-related and enterprise resource planning ("ERP") system implementation costs, adjusted income from operations was $23.8 million, and adjusted operating margin during the thirteen weeks decreased 50 basis points from 9.1% in 2012 to 8.6% in 2013. This operating margin decrease for the thirteen weeks ended April 30, 2013 on an adjusted basis (excluding acquisition-related and ERP system implementation costs) is comprised of a 140 basis-point decline in gross profit margin offset by an 80 basis-point improvement in general and administrative expense leverage, and a 30 basis-point improvement in sales and marketing expense leverage, and a 20 basis-point decline in other categories. Acquisition-related costs for purposes of management's discussion and analysis, which are included in the results of operations, consist of the acquisition-related costs as defined under U.S. GAAP, including advisory, legal, accounting, valuation, and other professional or consulting fees and, in addition, costs of integrating store and warehouse operations and corporate functions that are not expected to recur in future periods. ERP system implementation costs, which are included in the results of operations, consist primarily of training-related costs, related to the roll-out of the Microsoft Dynamics AX for Retail ERP system. (Adjusted income from operations is not a performance measure under U.S. GAAP. See "Reconciliation of Reported (GAAP) to Adjusted Statements of Operations Data" below for a reconciliation of net income as reported to adjusted net income.)

† Net sales increased $66.2 million, or 31.5%, to $276.0 million for the thirteen weeks ended April 30, 2013, compared to $209.8 million for the comparable prior year period. Comparable-store sales decreased 5.2% during the thirteen weeks ended April 30, 2013.


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The components of the net sales increase for the thirteen weeks ended April 30, 2013 as compared to the thirteen weeks ended May 1, 2012 were as follows (in millions):

                            Increase
                          (decrease) in
                            net sales
Comparable-store sales   $         (10.8 )
New stores                          28.9
Acquired stores                     50.3
Closed stores                       (2.2 )
                         $          66.2

The components of net sales by major category of product and services were as follows (in millions):

                                    Thirteen Weeks Ended
                            May 1,    % of     April 30,    % of
                             2012     Total      2013       Total
Specialty mattresses        $ 106.3    50.7 % $     129.8    47.0 %
Conventional mattresses        85.5    40.7 %       121.6    44.0 %
Furniture and accessories      14.0     6.7 %        19.2     7.0 %
Total product sales           205.8    98.1 %       270.6    98.0 %
Delivery service revenues       4.0     1.9 %         5.4     2.0 %
Total net sales             $ 209.8   100.0 % $     276.0   100.0 %

Comparable prior period components of the total net sales have been reclassified between specialty mattresses and conventional mattresses in a manner consistent with the current-year presentation.

† Adjusted EBITDA increased $6.8 million to $32.2 million for the thirteen weeks ended April 30, 2013, compared with $25.4 million for the comparable prior year period. Adjusted EBITDA as a percentage of net sales decreased to 11.7% during the thirteen weeks ended April 30, 2013, compared with 12.1% for the comparable prior year period as a result of deleverage in store occupancy and other primarily fixed expenses related to the decrease in comparable-store sales and to acquisitions of stores with sales productivity levels that, while improving, remain below the levels of our existing store base. See "Adjusted EBITDA to Net Income Reconciliation" below for a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income.

† New and acquired stores, net of stores closed, added $77.0 million in net sales during the thirteen weeks ended April 30, 2013. The activity with respect to the number of company operated store units was as follows:

                                   Thirteen Weeks
                                       Ended
                                     April 30,
                                        2013
Store units, beginning of period            1,057
New stores                                     46
Closed stores                                  (7 )
Store units, end of period                  1,096

† Operating cash flows were $16.0 million during the thirteen weeks ended April 30, 2013, which were a primary funding source for capital expenditures and debt principal payments.


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† At April 30, 2013, there was $8.0 million outstanding in revolver borrowings, $1.4 million outstanding standby letters of credit, and additional borrowing capacity of $90.6 million under the 2012 Senior Credit Facility.

General Definitions for Operating Results

Net sales are recognized upon delivery and acceptance of mattresses and bedding products by our customers and include fees collected for delivery services, and are recorded net of estimated returns. Customer deposits collected prior to the delivery of merchandise are recorded as a liability. Net sales are recognized net of sales tax collected from customers and remitted to various taxing jurisdictions.

Cost of sales consist of the following:

† Costs associated with purchasing and delivering our products to our stores and customers, net of vendor incentives earned on the purchase of products subsequently sold;

† Physical inventory losses;

† Store and warehouse occupancy and depreciation expense of related facilities and equipment;

† Store and warehouse operating costs, including warehouse (i) labor costs, (ii) utilities, (iii) repairs and maintenance, (iv) supplies and
(v) store facilities; and

† Estimated costs to provide for customer returns and exchanges and to service customer warranty claims.

Gross profit from retail operations is net sales minus cost of sales.

Franchise fees and royalty income represents initial franchise fees earned upon the opening of new franchisee stores and ongoing royalties based on a percentage of gross franchisee sales.

Sales and marketing expenses consist of the following:

† Advertising and media production;

† Payroll and benefits for sales associates; and

† Merchant service fees for customer credit and debit card payments, check guarantee fees and promotional financing expense.

General and administrative expenses consist of the following:

† Payroll and benefit costs for corporate office and regional management employees;

† Stock-based compensation costs;

† Occupancy costs of corporate facility;

† Information systems hardware, software and maintenance;

† Depreciation related to corporate assets;

† Management fees;

† Insurance; and

† Other overhead costs.

Loss on store closings and impairment of store assets consists of the following:


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† Estimated future costs to close locations at the time of closing including, as applicable, the difference between future lease obligations and anticipated sublease rentals;

† The write off of unamortized fixed assets related to store leasehold costs on closed stores; and

† Non-cash charges recognized for long-lived assets generally consisting of leasehold costs and related equipment resulting in a reduction of the carrying value to estimated fair value, based on our periodic assessment of whether projected future cash flows of individual stores are sufficient to recover the carrying value of the related assets.

Income from operations consists of gross profit from retail operations plus franchise fees and royalty income, minus (i) sales and marketing expenses,
(ii) general and administrative expenses, (iii) goodwill and intangible asset impairment charges, and (iv) loss (gain) on store closings and impairment of store assets.

Other expense, net includes interest income, interest expense, and gain (loss) on early debt extinguishments. Interest expense includes interest on outstanding debt, amortization of debt discounts, and amortization of financing costs.

Results of Operations



The following table presents the consolidated historical financial operating
data for our business for each period indicated. The historical results are not
necessarily indicative of results to be expected for any future period.



                                                         Thirteen Weeks Ended
                                                 May 1, 2012            April 30, 2013
Net sales                                    $ 209,814      100.0 %  $ 275,957      100.0 %
Costs of sales                                 127,272       60.7 %    171,515       62.2 %
Gross profit from retail operations             82,542       39.3 %    104,442       37.8 %
Franchise fees and royalty income                1,205        0.6 %      1,249        0.5 %
                                                83,747       39.9 %    105,691       38.3 %
Sales and marketing expenses                    49,128       23.4 %     63,731       23.1 %
General and administrative expenses             16,630        7.9 %     19,169        6.9 %
Loss on store closings and impairment of
store assets                                        17        0.0 %        261        0.1 %
Income from operations                          17,972        8.6 %     22,530        8.2 %
Other expense, net                               2,074        1.0 %      2,847        1.1 %
Income before income taxes                      15,898        7.6 %     19,683        7.1 %
Income tax expense                               6,162        3.0 %      7,674        2.7 %
Net income                                   $   9,736        4.6 %  $  12,009        4.4 %

Thirteen Weeks Ended April 30, 2013 Compared to Thirteen Weeks Ended May 1, 2012

Net sales. Net sales increased $66.2 million, or 31.5%, to $276.0 million during the thirteen weeks ended April 30, 2013, compared to $209.8 million during the thirteen weeks ended May 1, 2012. The components of the net sales increase for the thirteen weeks ended April 30, 2013 as compared to the thirteen weeks ended May1, 2012 were as follows (in millions):

                            Increase
                          (decrease) in
                            net sales
Comparable-store sales   $         (10.8 )
New stores                          28.9
Acquired stores                     50.3
Closed stores                       (2.2 )
                         $          66.2


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The decrease in comparable-store net sales represents a 5.2% comparable-store sales decrease, which was primarily the result of a decrease in average unit selling price, partially offset by an increase in mattress units sold. The increase in our net sales from new stores was the result of 134 new stores opened at various times during the twelve fiscal periods ended April 30, 2013, including 46 stores opened during the thirteen week period ended April 30, 2013, prior to their inclusion in the comparable-store sales calculation which begins with the thirteenth full fiscal period of operations. The increase in net sales from acquired stores was the result of the acquisitions of 181 Mattress Giant stores in May 2012, 34 Mattress XPress, Inc. and Mattress Xpress of Georgia, Inc. (collectively, "Mattress X-Press") stores in September 2012 and 27 Factory Mattress & Water Bed Outlet of Charlotte, Inc. ("Mattress Source") stores in December 2012. We closed 35 stores during the twelve fiscal periods ended April 30, 2013, including 7 stores during the thirteen week period ended April 30, 2013. We operated 1,096 stores at April 30, 2013, compared with 755 stores at May 1, 2012.

Cost of sales. Cost of sales increased $44.2 million, or 34.8%, to $171.5 million during the thirteen weeks ended April 30, 2013, compared to $127.3 million during the thirteen weeks ended May 1, 2012. The major components of the increase in cost of sales are discussed below. Cost of sales as a percentage of net sales increased to 62.2% during the thirteen weeks ended April 30, 2013, as compared to 60.7% for the comparable prior year period.

Product costs increased by $22.4 million, or 27.9%, to $102.8 million during the thirteen weeks ended April 30, 2013, compared with $80.4 million during the thirteen weeks ended May 1, 2012. The increase in the amount of product costs is the result of the corresponding increase in net sales. Product costs as a percentage of net sales decreased to 37.2% during the thirteen weeks ended April 30, 2013 from 38.3% during the thirteen weeks ended May 1, 2012. The decrease of product costs as a percentage of net sales is primarily attributable to an improvement in terms with under which we purchase merchandise given our growth.

Store and warehouse occupancy costs, consisting primarily of lease related costs of rented facilities, increased $13.6 million, or 50.0%, to $40.9 million during the thirteen weeks ended April 30, 2013, compared to $27.3 million for the corresponding prior year period. The increase in the amount of store and warehouse occupancy costs during the thirteen weeks ended April 30, 2013 was mainly attributable to the increase in the number of stores we operated and the commencement of warehouse operations in a number of new markets. Store and warehouse occupancy costs as a percentage of net sales increased to 14.8% during the thirteen weeks ended April 30, 2013, compared to 13.0% during the thirteen weeks ended May 1, 2012. The increase in store and warehouse occupancy costs as a percentage of net sales during the thirteen weeks ended April 30, 2013 was mostly attributable (i) deleverage caused by the decrease in comparable-store sales and (ii) to the acquisition of Mattress Giant stores in May 2012, Mattress X-Press stores in September 2012 and Mattress Source stores in December 2012 with lower store occupancy leverage as a result of average sales per store that, while improving, were lower than the average of our existing store base.

Depreciation expense related to leasehold improvements and other fixed assets used in stores and warehouse operations increased $1.2 million, or 27.7%, to $5.4 million, during the thirteen weeks ended April 30, 2013, compared to $4.2 million during the thirteen weeks ended May 1, 2012. The increase in expense was primarily attributable to the increase in the number of stores we operated during the thirteen weeks ended April 30, 2013, as compared with the comparable prior year period.

Other cost of sales, consisting of store and warehouse operating and delivery costs, increased $7.0 million, or 45.7%, to $22.4 million during the thirteen weeks ended April 30, 2013, compared to $15.4 million during the thirteen weeks ended May 1, 2012, primarily as a result of the increase in net sales and in the increased number of stores we operated during the thirteen weeks ended April 30, 2013, as compared with the corresponding prior year period. Other cost of sales for the thirteen weeks ended April 30, 2013 included $0.2 million of acquisition-related costs related to the Mattress Giant, Mattress X-Press and Mattress Source acquisitions, consisting of temporary storage facilities during the integration periods and duplicate costs attributable to certain warehouse facilities that have been consolidated or will have to be consolidated in the future.

Gross profit from retail operations. As a result of the above, gross profit from retail operations increased $21.9 million, or 26.5%, to $104.4 million during the thirteen weeks ended April 30, 2013, compared with $82.5 million during the thirteen weeks ended May 1, 2012. Gross profit from retail operations as a percentage of net sales decreased to 37.8% during the thirteen weeks ended April 30, 2013, as compared to 39.3% during the thirteen weeks ended May 1, 2012, for the reasons discussed above.

Franchise fees and royalty income. Franchise fees and royalty income remained flat at $1.2 million for the thirteen weeks ended April 30, 2013 as compared to the corresponding prior year period. Our franchisees operated 163 stores at April 30, 2013.

Sales and marketing expenses. Sales and marketing expenses increased $14.6 million, or 29.7%, to $63.7 million during the thirteen weeks ended April 30, 2013, compared to $49.1 million during the thirteen weeks ended May 1, 2012. Sales and marketing expenses as a percentage of net sales decreased to 23.1% during the thirteen weeks ended April 30, 2013, compared to 23.4% during the thirteen weeks ended May 1, 2012. The components of sales and marketing expenses are explained below.

Advertising expense increased $3.8 million, or 21.6%, to $21.3 million during the thirteen weeks ended April 30, 2013, from $17.5 million during the thirteen weeks ended May 1, 2012. The increase in the amount of advertising spend was mainly attributable


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to increased spending to enhance our market share in acquisition markets and, to a lesser extent, our expansion into new markets. Advertising expense as a percentage of net sales decreased to 7.7% during the thirteen weeks ended April 30, 2013, compared to 8.4% during the thirteen weeks ended May 1, 2012, primarily due to generating greater leverage from the increase in net sales in certain markets. We expect to maintain or increase advertising expense as a percentage of net sales to help drive sales per store if we continue to gain expense leverage in other operating expense areas. We receive funds from time to time from certain vendors for the advertisement of their products, and we recognize these funds as a direct reduction of advertising expense. The amount of vendor advertising funds that were recognized as a reduction of advertising expense totaled $1.5 million during the thirteen weeks ended April 30, 2013, compared with $0.6 million during the thirteen weeks ended May 1, 2012.

Other sales and marketing expenses, consisting mainly of salesman compensation costs, but also including costs incurred to accept payments from our customers, such as credit card and third party finance fees, increased $10.8 million, or 34.2%, to $42.4 million during the thirteen weeks ended April 30, 2013, compared to $31.6 million during the thirteen weeks ended May 1, 2012, primarily as a result of the increase in net sales during the period mostly driven by an increase in the number of stores in which we operate. Other sales and marketing expenses as a percentage of net sales increased to 15.4% during the thirteen weeks ended April 30, 2013, compared to 15.1% during the thirteen weeks ended May 1, 2012. The increase in expense as a percentage of net sales reflects higher per store staffing levels that occurred in connection with the fiscal 2012 acquisitions and related pre-acquisition hiring efforts. We expect that per store staffing levels will return to normalized levels during the second fiscal quarter primarily through planned store growth.

General and administrative expenses. General and administrative expenses increased $2.6 million, or 15.3%, to $19.2 million for the thirteen weeks ended April 30, 2013, compared to $16.6 million for the thirteen weeks ended May 1, 2012. The increase in general and administrative expenses was primarily a result of our growth, including $2.8 million in wages, benefits and stock-based compensation resulting from employee additions to our corporate office and $0.9 million related to training for our new point-of-sale and supply chain ERP system, partially offset by a $1.1 million decrease in acquisition-related costs associated with fiscal 2012 acquisitions. General and administrative expenses as a percentage of net sales decreased to 6.9% during the thirteen weeks ended April 30, 2013, compared to 7.9% for the comparable prior year period. The decrease in general and administrative expenses as a percentage of net sales is primarily due to the decrease in acquisition-related costs noted above, a decrease in cost of labor as a percentage of net sales and decreases in various other areas, offset by the increase in costs related to our new ERP system noted above. We expect to continue making investments in our corporate infrastructure commensurate with our growth strategy.

Loss on store closings and impairment of store assets. Loss on store closings and impairment of store assets increased $0.2 million during the thirteen weeks ended April 30, 2013. The increase in the loss during the thirteen weeks ended April 30, 2013 was mainly attributable to an increase in the amount of remaining lease commitments on stores that we closed during the thirteen weeks ended April 30, 2013.

Other expense, net. Other expense, net, for both periods consisted primarily of interest expense. Interest expense increased $0.8 million, or 37.3%, to $2.8 million during the thirteen weeks ended April 30, 2013, compared to $2.1 million during the thirteen weeks ended May 1, 2012, primarily as a result of the increase in the borrowing rate in connection with the November 2012 debt amendment and increased utilization of the revolver portion of the 2012 Senior Credit Facility.

Income tax expense. We recognized $7.7 million of income tax expense during the thirteen weeks ended April 30, 2013, compared to $6.2 million of income tax expense during the thirteen weeks ended May 1, 2012. The effective tax rate was 39.0% during the thirteen weeks ended April 30, 2013, compared to 38.8% during the thirteen weeks ended May 1, 2012.

Our estimated full year effective tax rate for Fiscal 2013 is 38.7%, which is above the federal statutory rate of 35.0% primarily due to state income taxes.

Net income. As a result of the above, our net income was $12.0 million during the thirteen weeks ended April 30, 2013 compared to $9.7 million during the thirteen weeks ended May 1, 2012.

Off-Balance Sheet Arrangements

Except for a guarantee of approximately $1.0 million that we have provided with respect to one real estate lease of a franchisee, we do not have any "off-balance sheet arrangements" (as such term is defined in Item 303 of Regulation S-K) that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.


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Liquidity and Capital Resources



The following table summarizes the principal elements of our cash flows (in
thousands):



                                                         Thirteen Weeks Ended
                                                         May 1,       April 30,
                                                          2012           2013
Total cash provided by (used in):
Operating activities                                   $    18,130    $   15,963
Investing activities                                       (13,854 )     (14,377 )
Financing activities                                          (600 )     (14,497 )
Net increase (decrease) in cash and cash equivalents         3,676       (12,911 )
. . .
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