The specialty-mattress manufacturers, like Tempur Sealy International (NYSE:TPX) and Select Comfort (NASDAQ:SNBR), get most of the sector's publicity due to their innovative products that have been a growth engine for the bedding business. The aging baby-boomer population's need for a better night's sleep, via memory foam and air-supported mattresses, allowed specialty manufacturers to capture nearly one-third of the domestic mattress market in 2012.
However, a potentially unnoticed theme has been the consolidation of the very fragmented retail side of the mattress business by Mattress Firm (NASDAQ:MFRM), a company that has created one of the few chains with national scale. After its big run in 2013, though, should investors still bet on this rising star?
What's the value?
Mattress Firm is a retailer of mattresses across the full gamut of price points through an operating network of more than 1,100 stores that span 29 states. The company has primarily grown by rolling up local operators in its target markets, a process that has netted roughly 330 stores over the past three fiscal years. Post-acquisition, Mattress Firm improves its acquired companies' margins by using its buying power to extract volume discounts from its manufacturing partners, while using its distribution network and brand strength to create operating efficiencies.
In fiscal year 2013, Mattress Firm put up some solid numbers, reporting a 20.7% top-line gain and sharply higher operating income. The company's profitability during the period benefited from significant leverage in the areas of marketing and general overhead, as it continued to drive cost savings from its aggressive acquisition efforts. On the downside, though, the company's comparable-store sales growth has been weak to date in FY 2013, down 0.5%, indicating potentially weakening demand in its existing markets.
Looking at underlying demand
For a good gauge of Mattress Firm's attractiveness, one could look at the mattress manufacturers themselves, starting with industry kingpin Tempur Sealy, of which Mattress Firm is the largest customer. The company is the bellwether of the mattress business, given its participation in all sales channels and its operating footprint in 80 countries around the world. In addition, Tempur Sealy's results are a good data point for both specialty and traditional innerspring-product areas, thanks to its blockbuster purchase of innerspring specialist Sealy in March 2013 for roughly $1.3 billion.
Unfortunately, Tempur Sealy's results paint a mixed picture, as its purchase of Sealy has led to a 68.2% top-line increase in FY 2013, overshadowing a weak performance in its organic Tempurpedic segment. While the segment's international operations performed the poorest during the period, with revenue down 3.6% due to weakness in Europe, its North American business reported only marginal growth, a result that management attributed to a very competitive sales environment.
An even better gauge for Mattress Firm might be Select Comfort, which has similarly built a growing network of retail stores in metro markets around the country. After generating double-digit comparable-store sales gains for the third straight year in 2012, the company's performance has been tepid in FY 2013, with an overall sales volume decline.
Like Tempur Sealy, Select Comfort is seeing more competitors enter the specialty area, requiring it to spend more heavily on marketing expenditures to drive customer traffic into its stores. The future is looking a little cloudy for the company too, as weak sales results during the Christmas season caused the company to recently lower its near-term profit outlook, sending Select Comfort's share price down sharply.
The bottom line
Mattress Firm has years of potential growth ahead of it, as it continues to consolidate an industry where the largest player has roughly 8% of the retail trade. It will likely also benefit from a delayed replacement cycle, estimated at 70% of industry sales, which has been the result of a general retrenchment by consumers in the purchase of big-ticket items, like mattresses, over the past few years.
However, weak organic top-line growth at major supplier Tempur Sealy should give investors some pause, after a big run in Mattress Firm's stock price over the past year. As such, there is definitely good money in the company's mattresses, but investors should wait for a stock price sell-off before taking the plunge.