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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the quarterly period ended May 1, 2012

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the transition period from              to             

 

Commission file number 001-35354

 


 

MATTRESS FIRM HOLDING CORP.

(Exact Name of Registrant as Specified in Its Charter)

 


 

Delaware

 

20-8185960

(State or Other Jurisdiction of
Incorporation or Organization)

 

(I.R.S. Employer
Identification No.)

 

5815 Gulf Freeway

Houston, Texas 77023

(Address of Principal Executive Offices) (Zip Code)

 

(713) 923-1090

(Registrants’ Telephone Number, Including Area Code)

 

 

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report.)

 


 

Indicate by check mark whether the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES x  NO o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES x  NO o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer x

 

Smaller Reporting Company o

 

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act)   YES o  NO x

 

As of June 7, 2012, 33,768,828 shares of common stock, par value $0.01 per share, of the registrant were outstanding.

 

 

 



Table of Contents

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of federal securities laws that relate to future events or our future financial performance. In many cases, you can identify forward-looking statements by terminology such as “may,” “would,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “intend,” “potential” or “continue” or the negative of these terms or other comparable terminology. These forward-looking statements are made based on our management’s expectations and beliefs concerning future events affecting us and are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. These uncertainties and other factors could cause our actual results to differ materially from those matters expressed or implied by these forward-looking statements.

 

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Important factors that may cause actual results to differ materially from the results expressed or implied by these forward-looking statements are set forth under “Item 1A. Risk Factors” of Part I of the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2012 filed with the Securities and Exchange Commission (the “SEC”) on April 20, 2012 (as amended on May 30, 2012) (the “Fiscal 2011 Annual Report”) and any additional risk factors identified in our other filings with the SEC. All forward-looking statements in this Quarterly Report on Form 10-Q are based on information available to us on the date of this report. We undertake no obligation, except as may be required by law, to publicly update or revise any of the forward-looking statements, whether as a result of new information, future events or otherwise.

 

Some of the important factors that could cause our actual results, performance or financial condition to differ materially from expectations are:

 

·                  downturns in the economy and a reduction in discretionary spending by consumers;

 

·                  our ability to profitably open and operate new stores;

 

·                  our intent to aggressively open additional stores in our existing markets;

 

·                  our relationship with certain mattress manufacturers as our primary suppliers;

 

·                  our dependence on a few key employees;

 

·                  the possible impairment of our goodwill or other acquired intangible assets;

 

·                  the effect of our planned growth and the integration of our acquisitions, including the recent Mattress Giant Holding Corporation acquisition, on our business infrastructure;

 

·                  the impact of seasonality on our financial results and comparable-store sales;

 

·                  fluctuations in our comparable-store sales from quarter to quarter;

 

·                  our ability to raise adequate capital to support our expansion strategy;

 

·                  our future expansion into new, unfamiliar markets;

 

·                  our success in pursuing strategic acquisitions;

 

·                  the effectiveness and efficiency of our advertising expenditures;

 

·                  our success in keeping warranty claims and comfort exchange return rates within acceptable levels;

 

·                  our ability to deliver our products in a timely manner;

 

·                  our status as a holding company with no business operations;

 

·                  our ability to anticipate consumer trends;

 

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Table of Contents

 

·                  risks related to our controlling stockholder, including the ability of J.W. Childs Associates, L.P. to influence or control all matters affecting us, and the relationships of some of the members of our board of directors with J.W. Childs Associates, L.P.  or its affiliates;

 

·                  heightened competition;

 

·                  changes in applicable regulations;

 

·                  risks related to our franchises, including our lack of control over their operations, their ability to finance and open new stores and our liabilities if they default on note or lease obligations;

 

·                  risks related to our stock; and

 

·                  other factors discussed in “Item 1A. Risk Factors” of Part I of the Fiscal 2011 Annual Report, elsewhere in this report and in our other filings with the SEC.

 

2



Table of Contents

 

MATTRESS FIRM HOLDING CORP.

Table of Contents

 

 

 

Page

PART I. FINANCIAL INFORMATION

4

 

 

 

Item 1.

Financial Statements.

4

 

Condensed Consolidated Balance Sheets as of May 1, 2012 (unaudited) and January 31, 2012

4

 

Unaudited Condensed Consolidated Statements of Operations for the thirteen weeks ended May 1, 2012 and May 3, 2011

5

 

Unaudited Condensed Consolidated Statements of Cash Flows for the thirteen weeks ended May 1, 2012 and May 3, 2011

6

 

Notes to Unaudited Condensed Consolidated Financial Statements

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

12

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

20

Item 4.

Controls and Procedures.

20

 

 

 

PART II. OTHER INFORMATION

21

 

 

 

Item 6.

Exhibits.

21

 

3



Table of Contents

 

PART I
FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

MATTRESS FIRM HOLDING CORP.

Condensed Consolidated Balance Sheets

(Dollars in thousands, except share amounts)

 

 

 

January 31,

 

May 1,

 

 

 

2012

 

2012

 

 

 

 

 

(unaudited)

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

47,946

 

$

51,622

 

Accounts receivable, net

 

18,607

 

15,395

 

Inventories

 

40,961

 

46,979

 

Deferred income taxes

 

12,574

 

10,800

 

Prepaid expenses and other current assets

 

12,054

 

12,918

 

Total current assets

 

132,142

 

137,714

 

Property and equipment, net

 

95,674

 

104,797

 

Intangible assets, net

 

84,795

 

85,112

 

Goodwill

 

291,141

 

291,141

 

Debt issue costs and other, net

 

9,729

 

9,016

 

Total assets

 

$

613,481

 

$

627,780

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Notes payable and current maturities of long-term debt

 

$

2,414

 

$

2,415

 

Accounts payable

 

42,396

 

43,509

 

Accrued liabilities

 

31,780

 

31,898

 

Customer deposits

 

6,294

 

6,845

 

Total current liabilities

 

82,884

 

84,667

 

Long-term debt, net of current maturities

 

225,940

 

225,378

 

Deferred income taxes

 

31,045

 

31,564

 

Other noncurrent liabilities

 

49,353

 

51,667

 

Total liabilities

 

389,222

 

393,276

 

 

 

 

 

 

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock, $0.01 par value; 120,000,000 shares authorized; 33,768,828 shares issued and outstanding at January 31, 2012 and May 1, 2012

 

338

 

338

 

Additional paid-in capital

 

361,717

 

362,226

 

Accumulated deficit

 

(137,796

)

(128,060

)

Total stockholders’ equity

 

224,259

 

234,504

 

Total liabilities and stockholders’ equity

 

$

613,481

 

$

627,780

 

 

The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of these interim financial statements.

 

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Table of Contents

 

MATTRESS FIRM HOLDING CORP.

Unaudited Condensed Consolidated Statements of Operations

(Dollars in thousands, except share and per share amounts)

 

 

 

Thirteen Weeks Ended

 

 

 

May 3,

 

May 1,

 

 

 

2011

 

2012

 

Net sales

 

$

151,924

 

$

209,814

 

Cost of sales

 

95,946

 

127,272

 

Gross profit from retail operations

 

55,978

 

82,542

 

Franchise fees and royalty income

 

987

 

1,205

 

 

 

56,965

 

83,747

 

Operating expenses:

 

 

 

 

 

Sales and marketing expenses

 

35,637

 

49,128

 

General and administrative expenses

 

11,770

 

16,630

 

Loss on store closings and impairment of store assets

 

174

 

17

 

Total operating expenses

 

47,581

 

65,775

 

Income from operations

 

9,384

 

17,972

 

Other expense (income):

 

 

 

 

 

Interest income

 

(2

)

(1

)

Interest expense

 

8,277

 

2,075

 

 

 

8,275

 

2,074

 

Income before income taxes

 

1,109

 

15,898

 

Income tax expense

 

80

 

6,162

 

Net income

 

$

1,029

 

$

9,736

 

 

 

 

 

 

 

Basic net income per common share

 

$

0.05

 

$

0.29

 

Diluted net income per common share

 

$

0.05

 

$

0.29

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

22,399,952

 

33,768,828

 

Diluted weighted average shares outstanding

 

22,399,952

 

33,925,923

 

 

The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of these interim financial statements.

 

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Table of Contents

 

MATTRESS FIRM HOLDING CORP.

Unaudited Condensed Consolidated Statements of Cash Flows

(Dollars in thousands)

 

 

 

Thirteen Weeks Ended

 

 

 

May 3,

 

May 1,

 

 

 

2011

 

2012

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

1,029

 

$

9,736

 

Adjustments to reconcile net income to cash flows provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

4,394

 

4,704

 

Interest expense accrued and paid-in-kind

 

6,072

 

 

Loan fee and other amortization

 

598

 

586

 

Deferred income tax expense

 

 

2,293

 

Stock-based compensation

 

19

 

509

 

Loss on store closings and impairment of store assets

 

(65

)

17

 

Effects of changes in operating assets and liabilities, excluding business acquisitions:

 

 

 

 

 

Accounts receivable

 

458

 

3,212

 

Inventories

 

(1,618

)

(6,018

)

Prepaid expenses and other current assets

 

1,053

 

(864

)

Other assets

 

21

 

(151

)

Accounts payable

 

739

 

1,113

 

Accrued liabilities

 

(522

)

118

 

Customer deposits

 

533

 

551

 

Other noncurrent liabilities

 

819

 

2,324

 

Net cash provided by operating activities

 

13,530

 

18,130

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property and equipment

 

(3,319

)

(13,854

)

Net cash used in investing activities

 

(3,319

)

(13,854

)

Cash flows from financing activities:

 

 

 

 

 

Principal payments of debt

 

(1,384

)

(600

)

Net cash used in financing activities

 

(1,384

)

(600

)

Net increase in cash and cash equivalents

 

8,827

 

3,676

 

Cash and cash equivalents, beginning of period

 

4,445

 

47,946

 

Cash and cash equivalents, end of period

 

$

13,272

 

$

51,622

 

 

The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of these interim financial statements.

 

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Table of Contents

 

MATTRESS FIRM HOLDING CORP.

Notes to Unaudited Condensed Consolidated Financial Statements

 

1. Business and Basis of Presentation

 

Mattress Firm Holding Corp., through its wholly owned subsidiaries, is engaged in the retail sale of mattresses and bedding-related products in various metropolitan markets in the United States through company-operated and franchisee-owned mattress specialty stores that operate primarily under the name Mattress Firm. Mattress Firm Holding Corp. conducts its operations through its indirect, wholly owned subsidiary, Mattress Holding Corp. and its subsidiaries (collectively “Mattress Holding”). Mattress Firm Holding Corp. and Mattress Holding are referred to collectively as the “Company.”

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) and they reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly the Company’s financial position as of January 31, 2012 and May 1, 2012, and the results of operations and cash flows for the periods presented. The Company’s historical and quarterly results of operations may not be indicative of the results that may be achieved for the full year or any future period.

 

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the Company’s most recent audited consolidated financial statements and related notes for the fiscal year ended January 31, 2012, which are included in the Company’s Annual Report on Form 10-K filed with the SEC on April 20, 2012 (as amended on May 30, 2012).

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates that are more susceptible to change in the near term are the accruals for sales returns and exchanges, product warranty costs, impairment, vendor incentives, self-insured liabilities and store closing costs.

 

The Company’s fiscal year consists of 52 or 53 weeks ending on the Tuesday closest to January 31. Each of the fiscal years ended January 31, 2012 (“Fiscal 2011”) and ending January 29, 2013 (“Fiscal 2012”) consists of 52 weeks.

 

2. Fair Value of Financial Instruments

 

The amounts reported in the unaudited condensed consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their respective fair values because of the short-term maturity of these instruments. The table below summarizes the estimated fair values and respective carrying values of the credit agreement among the Company’s directly owned subsidiary Mattress Holding Corp., certain lenders, and UBS Securities LLC, as sole arranger and bookrunner and a lender (the “2007 Senior Credit Facility”) (amounts in millions):

 

 

 

January 31, 2012

 

May 1, 2012

 

 

 

Estimated
Fair Value

 

Carrying
Value

 

Estimated
Fair Value

 

Carrying
Value

 

2007 Senior Credit Facility

 

$

223.0

 

$

228.3

 

$

227.5

 

$

227.8

 

 

The fair value of the 2007 Senior Credit Facility was estimated based on the ask and bid prices quoted from an external source. The carrying amounts of other debt instruments at fixed rates approximated their respective fair values due to the comparability of interest rates for the same or similar issues that are available.

 

The Financial Accounting Standards Board (“FASB”) has issued guidance on the definition of fair value, the framework for using fair value to measure assets and liabilities, and disclosure about fair value measurements. The guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used to measure fair value. These tiers include:

 

·                  Level 1:  Defined as observable inputs such as quoted prices in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

 

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Table of Contents

 

MATTRESS FIRM HOLDING CORP.

Notes to Unaudited Condensed Consolidated Financial Statements (Continued)

 

·                  Level 2:  Defined as pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and current market and contractual prices for the underlying instruments, as well as other relevant economic measures.

 

·                  Level 3:  Defined as pricing inputs that are unobservable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

 

The Company measures its nonqualified deferred compensation plan on a recurring basis. The plan’s assets are valued based on the marketable securities tied to the plan. Additionally, the Company measures goodwill, intangible assets, and property and equipment on a nonrecurring basis, if step 1 of the impairment tests fail. Property and equipment fair value is based on estimated cash flows. Estimated cash flows are primarily based on projected revenues, operating costs and maintenance capital expenditures of individual stores and are discounted based on weighted average cost of capital. There were no assets that required non-recurring fair-value measurements for the thirteen weeks ended May 3, 2011 and May 1, 2012. Assets requiring recurring fair value measurements as previously described consisted of the following (amounts in thousands):

 

 

 

 

 

Fair Value Measurements

 

 

 

May 3, 2011

 

Level 1

 

Level 2

 

Level 3

 

Nonqualified deferred compensation plan

 

$

1,083

 

$

 

$

1,083

 

$

 

 

 

 

 

 

Fair Value Measurements

 

 

 

May 1, 2012

 

Level 1

 

Level 2

 

Level 3

 

Nonqualified deferred compensation plan

 

$

920

 

$

 

$

920

 

$

 

 

3. Goodwill and Intangible Assets

 

The Company tests goodwill and other indefinite lived intangible assets for impairment annually and when events and circumstances indicate that the carrying value of these assets may exceed their current fair values. The Company assigns the carrying value of goodwill to its “reporting units” and applies the test for goodwill at the reporting unit level. A reporting unit is defined as an operating segment or one level below a segment (a “component”) if the component is a business and discrete information is prepared and reviewed regularly by segment management. Each of the Company’s metropolitan markets is an operating segment. The store unit components that comprise each operating segment are aggregated into a reporting unit on the basis that all stores have similar economic characteristics. All of the Company’s goodwill has been allocated to its metropolitan market reporting units for impairment testing.

 

The test for goodwill impairment involves a qualitative evaluation as to whether or not it is more likely than not that the fair value of a reporting unit is less than its carrying value using an assessment of relevant events and circumstances. If any reporting unit is concluded to be more likely impaired than not the following steps are performed for such reporting unit: (1) comparing the fair value of a reporting unit with the carrying value of its net assets and (2) if the carrying value exceeds fair value, the fair value of goodwill is compared with the respective carrying value and an impairment loss is recognized in the amount of the excess. An estimated fair value of the enterprise, which is allocated to each reporting unit for goodwill impairment purposes, would be derived by a combination of an income approach and a market approach, which incorporates both management’s views and those of the market. The income approach provides an estimated fair value based on the Company’s anticipated cash flows that are discounted using a weighted average cost of capital rate. The market approach provides an estimated fair value based on multiples of operating results to enterprise value of comparable publicly-traded entities that are applied to the Company’s historical operating results. The estimated fair values computed using the income approach and the market approach are then weighted and combined into a single fair value. The primary assumptions used in the income approach are estimated cash flows and weighted average cost of capital. Estimated cash flows are primarily based on projected revenues, operating costs and capital expenditures and are discounted based on weighted average cost of capital.

 

The circumstances which impact the valuation of goodwill could also be an indicator of impairment of trade names or trademarks, as could changes in legal circumstances, marketing plans or customer demand. In conjunction with our evaluation of goodwill, the Company also evaluated the carrying value of non-amortizing trade names and trademarks using the relief from royalty method, which values the intangible asset by estimating the savings achieved by ownership as compared to licensing the intangible assets from an independent owner.  The Company did not recognize any impairment losses during the thirteen weeks ended May 3, 2011 or May 1, 2012.

 

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4. Income Taxes

 

Income tax expense during interim periods is based on the estimated annual effective income tax rate plus any discrete items which are recorded in the period in which they occur. Discrete items include such events as changes in estimates due to the finalization of tax returns, tax audit settlements, tax law changes, and increases or decreases in valuation allowances. The Company recognized $6.2 million of income tax expense for the thirteen weeks ended May 1, 2012, compared to $0.1 million of income tax expense for the thirteen weeks ended May 3, 2011. The effective tax rate was 38.8% for the thirteen weeks ended May 1, 2012, compared to 7.0% for the thirteen weeks ended May 3, 2011, and differs primarily due to the fact that the Company had a full valuation allowance recorded against its deferred tax assets during the first thirteen weeks of 2011.  The effective tax rate of 38.8% for the current period differs from the federal statutory rate of 35% primarily due to state income taxes.

 

The Company recognized $6.2 million of income tax expense for the thirteen weeks ended May 1, 2012, compared to $(8.8) million of income tax benefit for the year ended January 31, 2012. The effective tax rate was 38.8% for the thirteen weeks ended May 1, 2012, compared to (34.5)% for the year ended January 31, 2012, and differs primarily due to a tax benefit recorded in Fiscal 2011 for the release of the Company’s valuation allowance against deferred tax assets.

 

5. Reportable Segments

 

The Company’s operations consist primarily of the retail sale of mattresses and bedding-related products in various metropolitan areas in the United States through company-operated and franchisee-operated mattress specialty stores that operate under the name Mattress Firm. The Company also generates sales through its website and special events primarily to customers who reside in the metropolitan markets in which company-operated stores are located. The Company’s chief operating decision maker reviews the aggregated results of company-operated stores at the metropolitan market level, including market-level cost data, consisting primarily of advertising, warehousing and overhead expenses that are directly incurred, managed and reported at the market level. Management focuses on improving the profitability at the market level and, therefore, each company-operated metropolitan market is an operating segment. The company-operated market, website and special events business segments are aggregated into a single reportable segment (“retail segment”) as a result of the similar nature of the products sold and other similar economic characteristics that are expected to continue into future periods. Furthermore, the Company generates franchise fees and royalty income from the operation of franchisee-operated Mattress Firm stores in metropolitan markets in which the Company does not operate. Franchise operations are a separate reportable segment, for which the results of operations, as viewed by management, are fully represented by the franchise fees and royalty income reported on the face of the statements of operations because costs associated with the franchise business are not distinguished from other cost data viewed by management. The Company’s assets are used primarily in the operation of its retail segment and the assets directly attributed to the franchise operations are not separately disclosed because they are not material.

 

The Company’s total net sales are generated from three major categories of products, consisting of (1) conventional mattresses which utilize steel-coil innersprings, (2) specialty mattresses which utilize materials other than steel-coil innersprings and (3) furniture and accessories which include headboards and footboards, bed frames, mattress pads and pillows, and from delivery service revenues. The following table represents the components of the Company’s total net sales (amounts in thousands):

 

 

 

Thirteen Weeks Ended

 

 

 

May 3,

 

May 1,

 

 

 

2011

 

2012

 

Specialty mattresses

 

$

59,423

 

$

100,929

 

Conventional mattresses

 

78,927

 

90,839

 

Furniture and accessories

 

10,156

 

14,216

 

Total product sales

 

148,506

 

205,984

 

Delivery service revenues

 

3,418

 

3,830

 

Total net sales

 

$

151,924

 

$

209,814

 

 

Prior-year components of the Company’s total net sales have been reallocated between specialty mattresses and conventional mattresses to be consistent with the current-year presentation.

 

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Table of Contents

 

6. Earnings Per Share

 

The following table presents a reconciliation of the weighted average shares outstanding used in the earnings per common share calculations:

 

 

 

Thirteen Weeks Ended

 

 

 

May 3,

 

May 1,

 

 

 

2011

 

2012

 

Basic weighted average shares outstanding

 

22,399,952

 

33,768,828

 

Effect of dilutive securities:

 

 

 

 

 

Stock options

 

 

156,385

 

Restricted shares

 

 

710

 

Diluted weighted average shares outstanding

 

22,399,952

 

33,925,923

 

 

One-half of the stock options granted to the Company’s employees are subject to a five-year time-based vesting schedule, while the remaining one-half of the stock options are subject to a four-year market-based vesting schedule, with such vesting based on specified stock price increase targets, as set forth in the option award agreement evidencing the grant of such stock options. The Company includes market-based stock option awards in the dilutive potential common shares when they become contingently issuable and exclude the awards when they are not contingently issuable. Diluted weighted average shares outstanding for the thirteen weeks ended May 1, 2012 excludes stock options for the purchase of 152,979 shares of common stock as the applicable vesting criteria were not satisfied as of May 1, 2012.

 

7. Commitments and Contingencies

 

The Company conducts the majority of its operations from leased store and warehouse facilities pursuant to non-cancellable operating lease agreements with initial terms ranging from one to 15 years. Certain leases include renewal options generally ranging from one to five years and contain certain rent escalation clauses. Most leases require the Company to pay its proportionate share of the property tax, insurance and maintenance expenses of the property. Certain leases provide for contingent rentals based on sales volumes; however, incremental rent expense resulting from such arrangements was immaterial during all periods presented in the accompanying financial statements.

 

The Company is subject to legal proceedings and claims that arise in the ordinary course of business. Management does not believe that the outcome of any of the currently pending matters will have a material adverse effect on the Company’s financial position, results of operations or cash flows.

 

8. Related Party Transactions

 

Management Fees

 

In the thirteen weeks ended May 3, 2011, the Company incurred management fees and other direct expenses from affiliates of its majority owners. Such fees and expenses were billed by an affiliate of J.W. Childs Associates, L.P. Management fees and other direct expenses included in the results of operations were $0.1 million for the thirteen weeks ended May 3, 2011. On November 23, 2011, the management agreement was terminated in connection with the Company’s initial public offering and, as a result, there were no management fees and other expenses incurred thereunder for the thirteen weeks ended May 1, 2012.

 

2009 Loan Facility and PIK Notes

 

As discussed in Note 5 in the Company’s Annual Report on Form 10-K filed with the SEC on April 20, 2012, as of February 1, 2011 the Company had outstanding $109.8 million and $48.9 million under the 2009 Loan Facility and PIK Notes, respectively.  Under the respective terms of the debt agreements, interest payments on the 2009 Loan Facility and PIK Notes were not made in cash, but were instead added to their respective outstanding principal balances.  Interest expense incurred on the 2009 Loan Facility and PIK Notes totaled $6.3 million for the thirteen weeks ended May 3, 2011.  On November 23, 2011, all of the related party debt was extinguished in connection with the Company’s initial public offering and, as a result, there was no related party interest expense incurred for the thirteen weeks ended May 1, 2012.

 

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9. Recently Issued Accounting Standards

 

New Accounting Standards Adopted in this Report— In May 2011, the FASB issued new guidance regarding fair value measurements to ensure consistency between U.S. GAAP and International Financial Reporting Standards. The new guidance applies to all reporting entities that are required or permitted to measure or disclose the fair value of an asset, a liability, or an instrument classified in a reporting entity’s stockholders’ equity in the financial statements. The new guidance applies prospectively effective during periods beginning after December 15, 2011. The Company adopted the provisions of the new guidance effective February 1, 2012 and the adoption of this standard did not have a material impact on the Company’s financial position, results of operations, or cash flows.

 

In June 2011, the FASB issued new guidance to increase the prominence of other comprehensive income in financial statements. This guidance provides the option to present the components of net income and comprehensive income in either one single statement or in two consecutive statements reporting net income and other comprehensive income. This guidance is effective for fiscal years and interim periods beginning after December 15, 2011. The Company adopted the provisions of the new guidance effective February 1, 2012 and the adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

 

New Accounting Standards Not Yet Adopted— In December 2011, the FASB issued Accounting Standards Update No. 2011-11 “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”), which requires disclosures of gross and net information about financial and derivative instruments eligible for offset in the statement of financial position or subject to a master netting agreement. ASU 2011-11 will be effective for the Company in the first quarter of 2013 and is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

 

10. Subsequent Events

 

On May 2, 2012, the Company completed the acquisition of the equity interests in MGHC Holding Corporation (“Mattress Giant”) for approximately $44 million subject to customary post-closing purchase price adjustments.  The closing was funded with existing cash reserves and $10 million of temporary borrowings under the revolving portion of the 2007 Senior Credit Facility.  Due to the timing of the closing of the acquisition the Company is unable to include all of the disclosures required by ASC 805; however, the required disclosures will be included in the quarterly report on Form 10-Q for the second quarter of its 2012 fiscal year.

 

Effective May 15, 2012, the Company increased the borrowing availability under the revolving portion of the 2007 Senior Credit Facility from $25 million to $35 million with no change in the interest rate or other terms.

 

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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 29, 2013 is described as “fiscal 2012.” Fiscal 2012 contains 52 weeks.

 

Executive Summary

 

Net sales during the thirteen weeks ended May 1, 2012 improved $57.9 million from the comparable prior year levels in response to a gradually improving national economy and consumer confidence, as well as our growth through the addition of new and acquired store units. Net income and other profitability measures improved during the thirteen weeks ended May 1, 2012. The improvements resulted from the net sales growth and our ability to gain leverage on certain costs through increasing sales per store, which was partially offset by increases in spending in certain expense categories during such periods. Such expenses included advertising and general and administrative expenses. Key results for the thirteen weeks ended May 1, 2012 include:

 

·                  Net income increased $8.7 million to $9.7 million for the thirteen weeks ended May 1, 2012, compared with net income of $1.0 million for the prior year period.

 

·                  Net sales increased $57.9 million, or 38.1%, to $209.8 million for the thirteen weeks ended May 1, 2012, compared to $151.9 million for the prior year period. Comparable-store sales increased 16.1% during the thirteen weeks ended May 1, 2012.

 

·                  Income from operations for the first quarter was $18.0 million. Excluding $1.2 million of acquisition-related costs, adjusted income from operations was $19.2 million, and adjusted operating margin during the quarter improved 295 basis points from 6.2% in 2011 to 9.1% in 2012. This operating margin growth on an adjusted basis was driven primarily by a 250 basis-point improvement in gross profit margin and a 40 basis-point improvement in general and administrative expenses (excluding acquisition-related costs).

 

·                  Adjusted EBITDA increased $10.7 million to $25.4 million for the thirteen weeks ended May 1, 2012, compared with $14.7 million for the prior year period. Adjusted EBITDA as a percentage of sales increased to 12.1% during the thirteen weeks ended May 1, 2012, compared with 9.6% for the prior year period. See “Adjusted EBITDA to Net Income Reconciliation” below for a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income.

 

 

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·                  The components of the net sales increase were as follows (amounts in millions):

 

 

 

Increase
(decrease) in
net sales

 

 

 

Thirteen Weeks

 

 

 

Ended

 

 

 

May 1,

 

 

 

2012

 

Comparable-store sales

 

$

24.0

 

New stores

 

28.0

 

Acquired stores

 

8.0

 

Closed stores

 

(2.1

)

 

 

$

57.9

 

 

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

 

 

 

Thirteen Weeks Ended

 

 

 

May 3,

 

% of

 

May 1,

 

% of

 

 

 

2011

 

Total

 

2012

 

Total

 

Specialty mattresses

 

$

59.4

 

39.1

%

$

100.9

 

48.1

%

Conventional mattresses

 

78.9

 

51.9

%

90.9

 

43.3

%

Furniture and accessories

 

10.2

 

6.7

%

14.2

 

6.8

%

Total product sales

 

148.5

 

97.8

%

206.0

 

98.2

%

Delivery service revenues

 

3.4

 

2.2

%

3.8

 

1.8

%

Total net sales

 

$

151.9

 

100.0

%

$

209.8

 

100.0

%

 

·                  The activity with respect to the number of company-operated store units was as follows:

 

 

 

Thirteen Weeks

 

 

 

Ended

 

 

 

May 1,

 

 

 

2012

 

Store units, beginning of period

 

729

 

New stores

 

30

 

Acquired stores

 

 

Closed stores

 

(4

)

Store units, end of period

 

755

 

 

·                  Operating cash flows were $18.1 million during the thirteen weeks ended May 1, 2012, which were the primary funding source for capital expenditures and debt principal payment requirements.

 

·                  On May 2, 2012, we completed the acquisition of the equity interests in MGHC Holding Corporation (“Mattress Giant”) for approximately $44 million subject to customary post-closing purchase price adjustments.  The closing was funded with existing cash reserves and $10 million of temporary borrowings under the revolving portion of the 2007 Senior Credit Facility (as defined below).

 

The acquisition is expected to advance our market-level profitability model that is centered on the benefits of increasing our “relative market share” in a given market. We believe that the incremental sales and store-level contribution attributable to the acquired stores will support our ability to increase the advertising spend in each of the markets, which is expected to drive sales increases in both the acquired and existing stores.  This strategy is expected to provide sales increases, greater leverage over market-level costs and improved market-level profitability.

 

·                  We ended the thirteen weeks ended May 1, 2012  with no outstanding borrowings, and total borrowing capacity of $24.0 million, under the revolving credit line portion of the credit agreement among our directly owned subsidiary Mattress Holding Corp. (“Mattress Holding”), certain lenders, and UBS Securities LLC, as sole arranger and bookrunner and a lender (the “2007 Senior Credit Facility”). We increased our revolver capacity under the 2007 Senior Credit Facility by $10 million to $35 million with no change in the interest rate or other terms. We used the increased capacity to fund, in part, the Mattress Giant acquisition.  We expect that we will repay these additional borrowings at some point during the second quarter of fiscal 2012.

 

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Table of Contents

 

General Definitions for Operating Results

 

Net sales includes fees collected for delivery services and is recognized upon delivery and acceptance of mattresses and bedding products by our customers and is 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;

 

·                  Physical inventory losses;

 

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

 

·                  Store and warehouse operating costs, including warehouse labor costs and utilities, repairs and maintenance and supplies costs of warehouse and store facilities; and

 

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

 

Gross profit from retail operations represents 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 consists 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 (gain) on store closings and impairment of store assets consists of the following:

 

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

 

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

 

·                  Non-cash charges recognized for long-lived assets, consistently primarily of store leasehold costs and related equipment, to reduce 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 (loss) from operations consists of gross profit from retail operations plus franchise fees and royalty income, minus the sum of sales and market expenses, general and administrative expenses, goodwill and intangible asset impairment charges, and loss (gain) on store closings and impairment of store assets.

 

Total other expense 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 expressed as a percentage of net revenues for each period indicated. Certain percentages presented are calculated using actual results prior to rounding. The historical results are not necessarily indicative of results to be expected for any future period.

 

 

 

Thirteen Weeks Ended

 

 

 

May 3,

 

May 1,

 

 

 

2011

 

2012

 

Net sales

 

100.0

%

100.0

%

Costs of sales

 

63.2

%

60.7

%

Gross profit from retail operations

 

36.8

%

39.3

%

Franchise fees and royalty income

 

0.6

%

0.6

%

Sales and marketing expenses

 

23.5

%

23.4

%

General and administrative expenses

 

7.7

%

7.9

%

Loss on store closings and impairment of store assets

 

0.1

%

0.0

%

Income from operations

 

6.2

%

8.6

%

Other expense, net

 

5.4

%

1.0

%

Income before income taxes

 

0.7

%

7.6

%

Income tax expense

 

0.1

%

2.9

%

Net income

 

0.7

%

4.6

%

 

Thirteen Weeks Ended May 1, 2012 Compared to Thirteen Weeks Ended May 3, 2011

 

Net sales. Net sales increased $57.9 million, or 38.1%, to $209.8 million for the thirteen weeks ended May 1, 2012, compared to $151.9 million for the thirteen weeks ended May 3, 2011. The components of the net sales increase were as follows (amounts in millions):

 

 

 

Increase
(decrease) in
net sales

 

 

 

Thirteen Weeks

 

 

 

Ended

 

 

 

May 1,

 

 

 

2012

 

Comparable-store sales

 

$

24.0

 

New stores

 

28.0

 

Acquired stores

 

8.0

 

Closed stores

 

(2.1

)

 

 

$

57.9

 

 

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The increase in comparable-store net sales represents a 16.1% comparable-store sales increase, which was primarily the result of an increase in the number of customer transactions and in the average net sales per transaction. The increase in our net sales from new stores was the result of 119 new stores opened at various times during the twelve fiscal periods ended May 1, 2012, including 30 stores opened during the thirteen-week period ended May 1, 2012, prior to their inclusion in the comparable-store calculation beginning with the thirteenth full fiscal period of operations. The expected increase in net sales for acquired stores was the result of the acquisition of 55 stores in November 2011. We closed 23 stores during the twelve fiscal periods ended May 1, 2012, including four stores during the thirteen-week period ended May 1, 2012, and the reduction in sales during the thirteen-week period ended May 1, 2012 from these closings totaled $2.1 million. We operated 755 stores at May 1, 2012, compared with 604 stores at May 3, 2011.

 

Cost of sales.  Cost of sales increased $31.3 million, or 32.7%, to $127.3 million during the thirteen weeks ended May 1, 2012, compared to $95.9 million for the thirteen weeks ended May 3, 2011. The major components of the increase in cost of sales are discussed below. Cost of sales as a percentage of net sales decreased to 60.7% for the thirteen weeks ended May 1, 2012, as compared to 63.2% for the thirteen weeks ended May 3, 2011.

 

Product costs increased by $21.8 million, or 37.2%, to $80.4 million for the thirteen weeks ended May 1, 2012, compared with $58.6 million for the thirteen weeks ended May 3, 2011. Product costs as a percentage of sales decreased to 38.3% for the thirteen weeks ended May 1, 2012 from 38.6% for the thirteen weeks ended May 3, 2011. The increase in the amount of product costs is the result of the corresponding increase in net sales. The decrease of this expense as a percentage of net sales for the thirteen weeks ended May 1, 2012 is primarily the result of an increase in the mix of products with lower product costs.

 

Store and warehouse occupancy costs, consisting primarily of lease-related costs of rented facilities, increased $4.8 million, or 21.6%, to $27.3 million during the thirteen weeks ended May 1, 2012, compared to $22.5 million for the thirteen weeks ended May 3, 2011. Store and warehouse occupancy costs as a percentage of net sales decreased to 13.0% during the thirteen weeks ended May 1, 2012, compared to 14.8% in the thirteen weeks ended May 3, 2011. The increase in the amount of expense during the thirteen weeks ended May 1, 2012 was mainly attributable to the increase in the number of stores we operated. The reduction of expense as a percentage of net sales was primarily attributable to comparable-store sales growth during the thirteen weeks ended May 1, 2012.

 

Depreciation expense of leasehold improvement and other fixed assets used in stores and warehouse operations increased $0.3 million, or 6.8%, to $4.2 million, for the thirteen weeks ended May 1, 2012, compared to $3.9 million for the thirteen weeks ended May 3, 2011. The increase in expense was primarily attributable to the increase in the number of stores we operated during the thirteen weeks ended May 1, 2012, as compared with the prior year period.

 

Other cost of sales, consisting of store and warehouse operating and delivery costs, increased $4.4 million during the thirteen weeks ended May 1, 2012 compared with the prior year period, primarily as a result of the increase in net sales and in the number of stores we operated during the thirteen weeks ended May 1, 2012, as compared with the prior year period.

 

Gross profit from retail operations.  As a result of the foregoing, gross profit from retail operations increased $26.5 million or 47.5%, to $82.5 million, during the thirteen weeks ended May 1, 2012, compared with $56.0 million during the thirteen weeks ended May 3, 2011. Gross profit from retail operations as a percentage of net sales increased to 39.3% for the thirteen weeks ended May 1, 2012, compared to 36.8% for the thirteen weeks ended May 3, 2011.

 

Franchise fees and royalty income.  Franchise fees and royalty income increased $0.2 million, or 22.1%, to $1.2 million for the thirteen weeks ended May 1, 2012, compared to $1.0 million during the thirteen weeks ended May 3, 2011. The increase in income was comprised of a $0.1 million decrease in initial fees, which was attributable to an decrease in the number of new franchisee stores opened during the thirteen weeks ended May 1, 2012 as compared with the prior year period, and a $0.3 million increase in royalty income, which was mainly attributable to an increase in gross sales per store and total sales results for franchisee stores as compared with the prior year period.  Our franchisees operated 137 stores at May 1, 2012.

 

Sales and marketing expenses.  Sales and marketing expenses increased $13.5 million, or 37.9%, to $49.1 million for the thirteen weeks ended May 1, 2012, compared to $35.6 million for the thirteen weeks ended May 3, 2011. Sales and marketing expense as a percentage of net sales decreased to 23.4% for the thirteen weeks ended May 1, 2012, compared to 23.5% for the thirteen weeks ended May 3, 2011. The components of sales and marketing expenses are explained below.

 

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Advertising expense increased $4.7 million, or 37.3% to $17.5 million for the thirteen weeks ended May 1, 2012, from $12.8 million for the thirteen weeks ended May 3, 2011. Advertising expense as a percentage of net sales was substantially unchanged at 8.4% for the thirteen weeks ended May 1, 2012 and May 3, 2011. The increase in the amount of advertising spending was mainly attributable to our efforts to increase the number of customers shopping in our stores and, to a lesser extent, to increase the number of markets in which we operate as a result of new store growth and acquisitions. We expect to maintain or increase advertising expense as a percentage of sales if we continue to experience sales per store and comparable-store sales growth and gain expense leverage in other operating expense areas. We receive funds from time to time from certain vendors to advertise their products that are recognized as a direct reduction of advertising expense. The amount of vendor advertising funds that were recognized as a reduction of advertising expense totaled $0.6 million for the thirteen weeks ended May 1, 2012, compared with $0.4 million for the thirteen weeks ended May 3, 2011.

 

Other sales and marketing expenses, consisting mainly of salesman compensation costs, increased $8.7 million, or 38.0%, to $31.6 million for the thirteen weeks ended May 1, 2012, compared to $22.9 million for the thirteen weeks ended May 3, 2011, primarily as a result of the increase in net sales during the period. Other sales and marketing expenses as a percentage of net sales was substantially unchanged at 15.1% for the thirteen weeks ended May 1, 2012 and May 3, 2011.

 

General and administrative expenses.  General and administrative expenses increased $4.9 million, or 41.3%, to $16.6 million for the thirteen weeks ended May 1, 2012, compared to $11.8 million for the thirteen weeks ended May 3, 2011. General and administrative expense as a percentage of net sales increased to 7.9% for the thirteen weeks ended May 1, 2012, compared to 7.7% for the thirteen weeks ended May 3, 2011. General and administrative expenses increased primarily as a result of our growth, including a $2.2 million increase in wages and benefits resulting from employee additions to our corporate office, $1.2 million of direct acquisition-related costs and an aggregate increase of $1.5 million in various other general and administrative expense categories. We expect to continue making investments in our corporate infrastructure commensurate with our growth strategy.

 

Other expense, net.  Other expense, net, for both periods consists primarily of interest expense. Interest expense decreased $6.2 million, or 74.9%, to $2.1 million for the thirteen weeks ended May 1, 2012, compared to $8.3 million during the thirteen weeks ended May 3, 2011, primarily as a result of the repayment of related-party debt in conjunction with the initial public offering in November 2011.

 

Income tax (benefit) expense.  We recognized $6.2 million of income tax expense for the thirteen weeks ended May 1, 2012, compared to $0.1 million of income tax expense for the thirteen weeks ended May 3, 2011. The effective tax rate was 38.8% for the thirteen weeks ended May 1, 2012, compared to 7.0% for the thirteen weeks ended May 3, 2011, and differs primarily due to the fact that we had a full valuation allowance recorded against our deferred tax assets during the first thirteen weeks of fiscal 2011.  The effective tax rate of 38.8% for the current period differs from the federal statutory rate of 35% primarily due to state income taxes.

 

We recognized $6.2 million of income tax expense for the thirteen weeks ended May 1, 2012, compared to $(8.8) million of income tax benefit for the year ended January 31, 2012. The effective tax rate was 38.8% for the thirteen weeks ended May 1, 2012, compared to (34.5)% for the year ended January 31, 2012, differs primarily due to the fact that we released all of our valuation allowance during fiscal 2011.

 

Net income (loss).  As a result of the foregoing, our net income was $9.7 million for the thirteen weeks ended May 1, 2012 compared to $1.0 million for the thirteen weeks ended May 3, 2011.

 

Off-Balance Sheet Arrangements

 

Except for a guarantee of approximately $1.2 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 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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Table of Contents

 

Liquidity and Capital Resources

 

As of May 1, 2012, we had cash and cash equivalents of $51.6 million compared with $13.3 million as of May 3, 2011. The following table summarizes our cash flows (amounts in thousands):

 

 

 

Thirteen Weeks Ended

 

 

 

May 3,

 

May 1,

 

 

 

2011

 

2012

 

Total cash provided by (used in):

 

 

 

 

 

Operating activities

 

$

13,530

 

$

18,130

 

Investing activities

 

(3,319

)

(13,854

)

Financing activities

 

(1,384

)

(600

)

Net increase in cash and cash equivalents

 

8,827

 

3,676

 

Cash and cash equivalents, beginning of period

 

4,445

 

47,946

 

Cash and cash equivalents, end of period

 

$

13,272

 

$

51,622

 

 

Net cash provided by operating activities was $18.1 million for the thirteen weeks ended May 1, 2012, compared to cash provided of $13.5 million for the thirteen weeks ended May 3, 2011. The $4.6 million increase in cash flows from operating is primarily due to the following differences as compared to the prior year :

 

·      $8.7 million improvement in our net income for the thirteen weeks ended May 1, 2012;

 

·      Increase of $2.3 million in non-cash deferred tax expense;

 

·      Decrease of $6.1 in non-cash paid-in-kind interest due to the 2011 extinguishment of the related debt;

 

·      Decrease in cash from operating to fund $4.4 million higher investment in inventory; and

 

·      $4.1 million increase in cash flows from operating due to other changes in operating assets and liabilities.

 

Our investing cash flows consist of our capital expenditures. Capital expenditures for the first quarter were $13.9 million compared with $3.3 million during the prior year.  The increase reflects new store openings, renovations of the stores acquired in November of last year from Mattress Giant, and the ongoing design and implementation of our new enterprise resource planning system.  The renovations of Mattress Giant stores were substantially completed during the first quarter and resulted in $2.3 million in capital expenditures.

 

Our financing cash flows consist of proceeds from the issuance of debt, borrowings, and repayments for scheduled debt service payments, and prepayments of other debt. Net cash used in financing activities decreased to $0.6 million for the thirteen weeks ended May 1, 2012 from $1.4 million for the prior year period. The $0.8 million decrease was the result of a reduction in debt repayments primarily as a result of the repayment of related-party debt in conjunction with the initial public offering in November 2011.

 

Covenant Compliance

 

The 2007 Senior Credit Facility requires us to comply on a quarterly basis with financial covenants, including a maximum total leverage ratio and a minimum interest coverage ratio.  These financial covenants are measured using, among other things, Adjusted EBITDA of Mattress Holding and its subsidiaries, as adjusted to include pro forma results of acquisitions.  The 2007 Senior Credit Facility limits the permitted capital expenditures of Mattress Holding and its subsidiaries to $35 million for fiscal 2012.  The agreements governing the indebtedness under the 2009 Loan Facility, PIK Notes and Convertible Notes did not contain any financial covenants.  Such agreements were terminated following repayment in full or conversion into our common stock of all indebtedness outstanding thereunder in connection with our initial public offering.

 

We were in compliance with all of the covenants required under the 2007 Senior Credit Facility and our other indebtedness as of May 1, 2012. We believe that we will be able to maintain compliance with the various covenants required under our debt facilities for the next twelve months without amending any of the credit facilities or requesting waivers from the lenders that are party to the agreements.

 

Seasonality

 

Our business is subject to seasonal fluctuations.  We generally have experienced more sales and a greater portion of income during the second and third quarters of our fiscal year due to a concentration of summer season holidays, including Memorial Day, the Fourth of July and Labor Day and other seasonal factors. We expect this trend to continue for the foreseeable future.

 

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Recent Accounting Pronouncements

 

In May 2011, the FASB issued new guidance regarding fair value measurements to ensure consistency between U.S. GAAP and International Financial Reporting Standards. The new guidance applies to all reporting entities that are required or permitted to measure or disclose the fair value of an asset, a liability, or an instrument classified in a reporting entity’s stockholders’ equity in the financial statements. The new guidance applies prospectively to periods beginning after December 15, 2011. The Company adopted the provisions of the new guidance effective February 1, 2012 and the adoption of this standard did not have a material impact on the Company’s financial position, results of operation, or cash flows.

 

In June 2011, the FASB issued new guidance to increase the prominence of other comprehensive income in financial statements. This guidance provides the option to present the components of net income and comprehensive income in either one single statement or in two consecutive statements reporting net income and other comprehensive income. This guidance is effective for fiscal years and interim periods beginning after December 15, 2011. The Company adopted the provisions of the new guidance effective February 1, 2012 and the adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

 

In December 2011, the FASB issued Accounting Standards Update No. 2011-11 “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”), which requires disclosures of gross and net information about financial and derivative instruments eligible for offset in the statement of financial position or subject to a master netting agreement. ASU 2011-11 will be effective for the Company in the first quarter of 2013 and is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

 

Adjusted EBITDA to Net Income Reconciliation

 

Adjusted EBITDA is defined as net income before income tax expense, interest income, interest expense, depreciation and amortization (“EBITDA”), without giving effect to non-cash goodwill and intangible asset impairment charges, gains or losses on store closings and impairment of store assets, gains or losses related to the early extinguishment of debt, financial sponsor fees and expenses, non-cash charges related to stock-based awards and other items that are excluded by management in reviewing the results of operations. We have presented Adjusted EBITDA because we believe that the exclusion of these items is appropriate to provide additional information to investors about our ongoing operating performance excluding certain non-cash and other items and to provide additional information with respect to our ability to comply with various covenants in documents governing our indebtedness and as a means to evaluate our period-to-period results. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed to imply that our future results will be unaffected by any such adjustments. We have provided this information to analysts, investors and other third parties to enable them to perform more meaningful comparisons of past, present and future operating results and as a means to evaluate the results of our ongoing operations. Management also uses Adjusted EBITDA to determine executive incentive compensation payment levels. In addition, our compliance with certain covenants under our 2007 Senior Credit Facility are calculated based on similar measures, which differ from Adjusted EBITDA primarily by the inclusion of pro forma results for acquired businesses in those similar measures. Other companies in our industry may calculate Adjusted EBITDA differently than we do. Adjusted EBITDA is not a measure of performance under U.S. GAAP and should not be considered as a substitute for net income prepared in accordance with U.S. GAAP. Adjusted EBITDA has significant limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. Some of the limitations to the use of Adjusted EBITDA are:

 

·                  Adjusted EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;

 

·                  Adjusted EBITDA does not reflect interest expense or the cash requirements necessary to service interest or principal payments on our debt;

 

·                  Adjusted EBITDA does not reflect tax expense or the cash requirements necessary to pay for tax obligations;

 

·                  Although depreciation and amortization are non-cash charges, the asset being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements;

 

·                  Adjusted EBITDA does not reflect the cash requirements of closing underperforming stores;

 

·                  Adjusted EBITDA does not reflect costs related to management services that were historically provided by J.W. Childs Associates, L.P.; and

 

·                  Adjusted EBITDA does not reflect certain other costs that may recur in future periods.

 

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We compensate for these limitations by relying primarily on our U.S. GAAP results and using Adjusted EBITDA only as a supplemental measure. The following table contains a reconciliation of our net income determined in accordance with U.S. GAAP to EBITDA and Adjusted EBITDA for the periods indicated (amounts in thousands):

 

 

 

Thirteen Weeks Ended

 

 

 

May 3,

 

May 1,

 

 

 

2011

 

2012

 

Net income

 

$

1,029

 

$

9,736

 

Income tax expense

 

80

 

6,162

 

Interest income

 

(2

)

(1

)

Interest expense

 

8,277

 

2,075

 

Depreciation and amortization

 

4,394

 

4,704

 

Intangible assets and other amortization

 

387

 

580

 

EBITDA

 

14,165

 

23,256

 

Loss on store closings and impairment of store assets

 

174

 

17

 

Financial sponsor fees and expenses

 

90

 

 

Stock-based compensation

 

19

 

509

 

Vendor new store funds(a)

 

4

 

383

 

Acquisition related expenses(b)

 

79

 

1,179

 

Other (various)(c)

 

125

 

69

 

Adjusted EBITDA

 

$

14,656

 

$

25,413

 

 


(a)                                  Adjustment to recognize vendor funds received upon the opening of a new store in the period opened, rather than over 36-months as presented in our financial statements, which is consistent with how management has historically reviewed its results of operations.

 

(b)                                 Noncash effect included in net income related to purchase accounting adjustments made to inventories resulting from acquisitions and other acquisition-related cash costs included in net income, such as direct acquisition costs and costs related to training and integration of acquired businesses.

 

(c)                                  Consists of various items that management excludes in reviewing the results of operations.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

 

There have been no material changes in the interest rate risk and inflation risk discussed in “ Item 7A. Quantitative and Qualitative Disclosures About Market Risk” included in the Fiscal 2011 Annual Report.

 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures.  Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.  Based on the evaluation of our disclosure controls and procedures as of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.

 

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Changes in Internal Control

 

During the thirteen weeks ended May 1, 2012, there were no changes in the Company’s internal controls over financial reporting that have materially affected or are reasonably likely to affect the Company’s internal control over financial reporting.

 

Part II.
OTHER INFORMATION

 

Item 6. Exhibits.

 

(a) Exhibits: Reference is made to the Exhibit List filed as a part of this report beginning on page E-1. Each of such exhibits is incorporated by reference herein.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

MATTRESS FIRM HOLDING CORP.

 

 

 

 

 

Date: June 8, 2012

By

/s/ James R. Black

 

 

James R. Black

 

 

Executive Vice President and Chief Financial Officer

 

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EXHIBIT LIST

 

Exhibit

 

 

Number

 

Exhibit Title

 

2.1

 

Stock Purchase Agreement, dated as of April 9, 2012, by and among Mattress Firm, Inc., the sellers party thereto and FS Equity Partners V, L.P., as seller representative (incorporated by reference to Exhibit 2.1 to Mattress Firm Holding Corp’s Report on Form 8-K (File No. 001-35354) filed April 10, 2012).

 

 

 

 

 

31.1

 

Principal Executive Officer Certification Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to the Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

31.2

 

Principal Financial Officer Certification Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to the Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

32.1

 

Principal Executive Officer Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

32.2

 

Principal Financial Officer Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

 

101.INS*

 

XBRL Instance Document

 

 

 

 

 

101.SCH*

 

XBRL Taxonomy Extension Schema Document

 

 

 

 

 

101.CAL*

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

 

 

101.LAB*

 

XBRL Taxonomy Extension Labels Linkbase Document

 

 

 

 

 

101.PRE*

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

 

 

101.DEF*

 

XBRL Taxonomy Extension Definition Linkbase Document

 


*                 Pursuant to Rule 406T of Regulation S-T of the SEC, and subject to the conditions set forth therein, the interactive data files furnished on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purpose of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

E-1