You Can Sleep on This IPO

There are apparently plenty of investors still looking for a good night's sleep.

Shares of Mattress Firm (Nasdaq: MFRM) soared 16% after going public at $19 on Friday. There have only been a handful of IPOs in recent months, so we may as well celebrate better performers.

The specialty mattress retailer -- with 640 company-owned stores and 117 franchised locations -- is making the most of two dynamic trends in the $11.6 billion U.S. mattress market.

The first wrinkle working in the industry's favor is that folks are paying up for high-end foam and air mattresses, pushing wholesale mattress prices higher at a 5% annualized clip over the past two decades. The other welcome trend in that time is that furniture retailers and department stores used to sell roughly two-thirds of all the mattresses in this country. These days, dedicated sleep retailers are selling 43% of the mattresses.

Some of the elite brands have their own stores and direct-marketing initiatives. Surely you've been swept into a late-night infomercial by Sleep Number air-chambered mattress maker Select Comfort (Nasdaq: SCSS) or foam specialist Tempur-Pedic (NYSE: TPX). However, given so many choices these days, it's often smarter to go to a dedicated retailer with a wide selection -- and that's Mattress Firm.

It's more than just a killer name. Mattress Firm stocks Tempur-Pedic, as well as the top traditional mattress brands including Sealy (NYSE: ZZ), Serta, and Simmons. It doesn't stock Select Comfort, which prefers to sell its Sleep Number beds through its namesake outlets.

There is an opportunity in this fragmented realm of geographical retailing favorites. Mattress Firm also points out that pent-up demand during recessionary downturns has led to sharp upticks in sales. History appears to be repeating itself right now. After flat revenue growth in fiscal 2009 -- and posting losses for all of 2008 and 2009 -- Mattress Firm turned a profit last year on a 14% increase in net sales. Fiscal 2011 has been even better. In its most recent quarter, net sales soared 40% on brisk expansion, timely consolidation, and an 18.6% spike in comparable-store sales.

Investors should know that this cuts both ways. Comps fell a staggering 23.7% in 2008. However, Mattress Firm is clearly timing its Wall Street debut at a time when its financials are turning up.

Specializing in one aspect of home-life improvement may be risky. Lumber Liquidators (NYSE: LL) was the darling of hardwood flooring until the crumbling state of home ownership made upgrading a house's flooring to wood planks a gamble. Mattress Firm should be more fortunate, as it follows Lumber Liquidators' path of taking a local specialty national. Folks who are forced to foreclose on their underwater mortgages will just take their bedding to their rented digs.

Now that Mattress Firm is profitable and growing, it appears to be at least a short-term solution to a portfolio that tosses and turns at night.