What: Shares of Mattress Firm Holding Corp. (NASDAQ: MFRM) were up 9.9% as of 11:00 a.m. Tuesday after the mattress retailer announced an acquisition along with better-than-expected preliminary fiscal third-quarter 2015 results.
So what: On the former, Mattress Firm says quarterly net sales climbed 50.7% year over year to $699.5 million, helped by a combination of new and acquired locations and 3.8% comparable-store sales growth. Based on generally accepted accounting principles, that should translate to earnings per share of $0.65 to $0.67. On an adjusted basis, quarterly earnings per share are now expected to be between $0.80 and $0.82.
Analysts, on average, were anticipating adjusted earnings of $0.77 per share on revenue of $647.5 million.
In addition, Mattress Firm announced it will acquire Sleepy's parent HMK Mattress Holdings LLC for an aggregate purchase price of $780 million. As it stands, Sleepy's is the country's second-largest specialty mattress retailer, with more than 1,050 locations in 17 states. The acquisition is expected to close in the first half of Mattress Firm's fiscal 2016.
Now what: Going forward, Mattress Firm expects the acquisition to generate annual synergies of roughly $40 million by the third year after the acquisition closes, as well as future cash income tax benefits of over $11 million annually for the next 10 years. The combined company will operate nearly 3,500 locations, with pro forma trailing-12-month sales of over $3.6 billion, and in the near term, it will maintain both the Mattress Firm and Sleepy's brands. Finally, Mattress Firm expects the purchase to be accretive to earnings per share in the low single digits during the first year, and grow to double-digit adjusted EPS accretion (which excludes one-time costs) by the third year after closing.
In the meantime, Mattress Firm reiterated its fiscal 2015 guidance for revenue in the range of $2.53 billion to $2.55 billion, and it narrowed its ranges for adjusted EBITDA to $255 million to $260 million (from $253 million to $262 million previously), and adjusted EPS to $2.33 to $2.42 (from $2.30 to $2.45 previously).
Analysts, for their part, were anticipating roughly the same fiscal 2015 earnings on revenue at the low end of Mattress Firm's new range.
In the end, with shares still down around 10% so far in 2015, this was an encouraging performance from Mattress Firm as it continues to solidify its dominant industry position through steady organic growth and acquisitions.
While I'm not personally eager to dive in, with shares currently trading around 38 times trailing-12-month earnings, I also wouldn't be surprised if the stock rewards patient, long-term investors willing to watch as the company continues to implement its growth strategies and improve its financial position.