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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One)

 

 

 

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

 

For the quarterly period ended July 29, 2014

 

OR

 

 

 

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

(Registrant’s 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   NO 

 

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   NO 

 

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 

Accelerated filer 

 

 

Non-accelerated filer 

Smaller Reporting Company 

 

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

 

As of September 3, 2014, 34,178,408 shares of common stock, par value $0.01 per share, of the registrant were outstanding.

 

 

 

 


 

 

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 28, 2014 filed with the Securities and Exchange Commission (the “SEC”) on March 27, 2014 (the “Fiscal 2013 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 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:

 

·

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 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;

1


 

 

·

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 2013 Annual Report, elsewhere in this report and in our other filings with the SEC.

 

2


 

 

MATTRESS FIRM HOLDING CORP.

Table of Contents

 

 

 

 

 

 

Page

PART I. FINANCIAL INFORMATION 

 

 

 

Item 1. 

Financial Statements (unaudited)

 

Condensed Consolidated Balance Sheets as of January 28, 2014 and July 29, 2014

 

Condensed Consolidated Statements of Operations for the thirteen weeks ended July 30, 2013 and July 29, 2014 and twenty-six weeks ended July 30, 2013 and July 29, 2014

 

Condensed Consolidated Statements of Cash Flows for the twenty-six weeks ended July 30, 2013 and July 29, 2014

 

Notes to Condensed Consolidated Financial Statements

Item 2. 

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

19 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

33 

Item 4. 

Controls and Procedures

33 

 

 

 

PART II. OTHER INFORMATION 

33 

 

 

 

Item 6. 

Exhibits

33 

 

Signatures

34 

 

 

3


 

 

PART I

FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

MATTRESS FIRM HOLDING CORP.

Condensed Consolidated Balance Sheets

(In thousands, except share amounts)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 28,

 

July 29,

 

   

2014

   

2014

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

22,878 

 

$

18,143 

Accounts receivable, net

 

 

20,812 

 

 

36,469 

Inventories

 

 

81,507 

 

 

104,845 

Deferred income tax asset

 

 

4,729 

 

 

4,090 

Prepaid expenses and other current assets

 

 

16,348 

 

 

27,367 

Total current assets

 

 

146,274 

 

 

190,914 

Property and equipment, net

 

 

174,770 

 

 

199,831 

Intangible assets, net

 

 

84,391 

 

 

91,796 

Goodwill

 

 

366,647 

 

 

468,530 

Debt issue costs and other, net

 

 

12,549 

 

 

13,765 

Total assets

 

$

784,631 

 

$

964,836 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Notes payable and current maturities of long-term debt

 

$

3,621 

 

$

8,877 

Accounts payable

 

 

72,165 

 

 

100,338 

Accrued liabilities

 

 

42,435 

 

 

71,004 

Customer deposits

 

 

9,318 

 

 

15,492 

Total current liabilities

 

 

127,539 

 

 

195,711 

Long-term debt, net of current maturities

 

 

217,587 

 

 

292,983 

Deferred income tax liability

 

 

37,921 

 

 

37,563 

Other noncurrent liabilities

 

 

73,092 

 

 

79,242 

Total liabilities

 

 

456,139 

 

 

605,499 

 

 

 

 

 

 

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

Common stock, $0.01 par value; 120,000,000 shares authorized; 34,002,981 and 33,990,381 shares issued and outstanding at January 28, 2014; and 34,183,133 and 34,170,533 shares issued and outstanding at July 29, 2014, respectively

 

 

340 

 

 

342 

Additional paid-in capital

 

 

373,153 

 

 

381,977 

Accumulated deficit

 

 

(45,001)

 

 

(22,982)

Total stockholders’ equity

 

 

328,492 

 

 

359,337 

Total liabilities and stockholders’ equity

 

$

784,631 

 

$

964,836 

 

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

 

4


 

 

MATTRESS FIRM HOLDING CORP.

Condensed Consolidated Statements of Operations

(In thousands, except share and per share amounts)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Thirteen Weeks Ended

 

Twenty-Six Weeks Ended

 

 

July 30,

 

July 29,

 

 

July 30,

 

July 29,

 

    

2013

    

2014

    

 

2013

    

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

302,541 

 

$

409,951 

 

$

578,498 

 

$

743,453 

Cost of sales

 

 

182,096 

 

 

246,547 

 

 

353,611 

 

 

459,199 

Gross profit from retail operations

 

 

120,445 

 

 

163,404 

 

 

224,887 

 

 

284,254 

Franchise fees and royalty income

 

 

1,438 

 

 

1,092 

 

 

2,687 

 

 

2,278 

Total gross profit

 

 

121,883 

 

 

164,496 

 

 

227,574 

 

 

286,532 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing expenses

 

 

75,768 

 

 

99,998 

 

 

139,499 

 

 

175,663 

General and administrative expenses

 

 

19,749 

 

 

36,888 

 

 

38,918 

 

 

67,574 

Loss on store closings and impairment of store assets

 

 

483 

 

 

648 

 

 

744 

 

 

906 

Total operating expenses

 

 

96,000 

 

 

137,534 

 

 

179,161 

 

 

244,143 

Income from operations

 

 

25,883 

 

 

26,962 

 

 

48,413 

 

 

42,389 

Other expense:

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

2,795 

 

 

3,469 

 

 

5,642 

 

 

6,285 

Income before income taxes

 

 

23,088 

 

 

23,493 

 

 

42,771 

 

 

36,104 

Income tax expense

 

 

8,965 

 

 

9,194 

 

 

16,639 

 

 

14,085 

Net income

 

$

14,123 

 

$

14,299 

 

$

26,132 

 

$

22,019 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income per common share

 

$

0.42 

 

$

0.42 

 

$

0.77 

 

$

0.65 

Diluted net income per common share

 

$

0.41 

 

$

0.41 

 

$

0.77 

 

$

0.64 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

 

33,853,733 

 

 

34,135,060 

 

 

33,832,928 

 

 

34,081,500 

Diluted weighted average shares outstanding

 

 

34,149,640 

 

 

34,523,620 

 

 

34,076,567 

 

 

34,464,038 

 

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

 

5


 

 

MATTRESS FIRM HOLDING CORP.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Twenty-Six Weeks Ended

 

 

July 30,

 

July 29,

 

    

2013

    

2014

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

26,132 

 

$

22,019 

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

 

 

 

 

 

 

Depreciation and amortization

 

 

13,441 

 

 

18,201 

Loan fee and other amortization

 

 

1,050 

 

 

2,239 

Deferred income tax expense

 

 

1,842 

 

 

1,711 

Stock-based compensation

 

 

1,854 

 

 

2,556 

Loss on store closings and impairment of store assets

 

 

744 

 

 

906 

Construction allowances from landlords

 

 

2,765 

 

 

2,988 

Excess tax benefits associated with stock-based awards

 

 

(230)

 

 

(761)

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

 

 

 

 

 

 

Accounts receivable

 

 

1,475 

 

 

(14,136)

Inventories

 

 

(14,699)

 

 

(14,784)

Prepaid expenses and other current assets

 

 

(1,268)

 

 

(9,497)

Other assets

 

 

(2,074)

 

 

(1,730)

Accounts payable

 

 

2,130 

 

 

19,473 

Accrued liabilities

 

 

1,049 

 

 

24,557 

Customer deposits

 

 

3,181 

 

 

4,943 

Other noncurrent liabilities

 

 

3,272 

 

 

(416)

Net cash provided by operating activities

 

 

40,664 

 

 

58,269 

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of property and equipment

 

 

(27,886)

 

 

(34,658)

Business acquisitions, net of cash acquired

 

 

(2,042)

 

 

(106,908)

Net cash used in investing activities

 

 

(29,928)

 

 

(141,566)

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from issuance of debt

 

 

25,000 

 

 

169,000 

Principal payments of debt

 

 

(45,424)

 

 

(93,268)

Proceeds from exercise of common stock options

 

 

1,272 

 

 

2,069 

Excess tax benefits associated with stock-based awards

 

 

230 

 

 

761 

Net cash (used in) provided by financing activities

 

 

(18,922)

 

 

78,562 

Net decrease in cash and cash equivalents

 

 

(8,186)

 

 

(4,735)

Cash and cash equivalents, beginning of period

 

 

14,556 

 

 

22,878 

Cash and cash equivalents, end of period

 

$

6,370 

 

$

18,143 

Cash paid for:

 

 

 

 

 

 

Interest

 

$

5,641 

 

$

6,620 

Income taxes

 

$

11,637 

 

$

2,175 

Supplemental disclosure of noncash investing activity:

 

 

 

 

 

 

Capital expenditures included in accounts payable and accruals at end of period

 

$

3,823 

 

$

5,929 

 

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

 

 

6


 

Table of Contents 

MATTRESS FIRM HOLDING CORP.

Notes to the Unaudited Condensed Consolidated Financial Statements

 

1. Business and Basis of Presentation

 

Mattress Firm Holding Corp., through its direct and indirect 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. and its subsidiaries are referred to collectively as the “Company” or “Mattress Firm.”

 

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X 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 July 29, 2014, 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 28, 2014, which are included in the Company’s Annual Report on Form 10-K filed with the SEC on March 27, 2014 (the “Fiscal 2013 Annual Report”).

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of (i) assets and liabilities, (ii) disclosure of contingent assets and liabilities at the date of the financial statements and (iii) the reported amounts of revenues and expenses during the reporting periods. 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, asset impairments, vendor incentives, self-insured liabilities, store closing costs and acquisition accounting fair values.

 

The Company is in the process of implementing a new computer system that provides sales tracking, inventory management, financial reporting and warehouse management capabilities (“new ERP system”) to enhance functionality and to support the Company’s growth strategy. The new ERP system utilizes the weighted average cost flow method for determining inventory cost (“Weighted Average”) and, as the new ERP system is rolled out across the Company’s markets, will replace the First-In, First-Out cost flow method (“FIFO”) utilized by our legacy system. The Weighted Average and FIFO methods are both allowable under U.S. GAAP. The Financial Accounting Standards Board (“FASB”) has issued guidance that when there are two allowable alternative accounting principles, a company must determine which one is preferable. The adoption of the Weighted Average method is considered preferable by the Company due to the fact that it aligns with the functionality of the new ERP system. The Company also considered other factors that support preferability of the Weighted Average method, including closer alignment with the physical flow of the Company’s inventories and prevalence among industry peers. Consistent with FASB requirements, if a change in accounting principle is determined to be preferable, the change shall be reported through retrospective application to the financial statements of all prior periods, unless the effects are not material. The Company determined that the effects of adopting the Weighted Average method are not material to its financial statements. This determination is supported by certain inherent characteristics of the Company’s business, including the ability to hold low inventories relative to sales levels, continuous product replenishment, the relatively short life cycles of most mattress product lines and the infrequency of vendor price changes during the life cycle of the majority of products that are carried. Therefore, the change in accounting principle has not been retrospectively applied to prior periods.

 

Certain reclassifications have been made to the prior year condensed consolidated statements of cash flows to segregate the cash proceeds related to construction allowances from landlords from the previously reported cash activity that was included as components of the changes in accounts receivable and noncurrent liabilities to conform to the current period financial statement presentation with no effect on the Company’s previously reported net cash provided by operating activities.

 

The Company’s fiscal year consists of 52 or 53 weeks ending on the Tuesday closest to January 31. The fiscal year ended January 28, 2014 (“Fiscal 2013”) consisted of 52 weeks. The fiscal year ending February 3, 2015 (“Fiscal 2014”) consists of 53 weeks.

 

7


 

Table of Contents 

MATTRESS FIRM HOLDING CORP.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

2. Acquisitions

 

The Company completed a number of acquisitions of the equity interests or operating assets of specialty mattress retailers during the first six months of fiscal 2014. These acquisitions: (i) increase the Company’s store locations and market share in markets in which the Company currently operates, which generally results in expense synergies and improved leverage over market-level costs, such as advertising and warehousing, or (ii) provide an efficient way to enter new markets in which the Company did not previously operate and which provide a platform for further growth. Results of operations of the acquired businesses are included in the Company’s results of operations from the respective effective dates of the acquisitions.

 

Effective March 3, 2014, the Company acquired certain leasehold interests, store assets, distribution center assets and related inventories, and assumed certain liabilities of Yotes, Inc. (“Yotes”), a franchisee of the Company, relating to the operation of 34 mattress specialty retail stores located in Colorado and Kansas for a total purchase price of approximately $14.3 million, including working capital adjustments, subject to customary post-closing adjustments.

 

Effective March 3, 2014, the Company acquired the leasehold interests and store assets, and assumed certain liabilities, of Southern Max LLC (“Southern Max”), a franchisee of the Company, relating to the operations of three mattress specialty retail stores located in Virginia for a total purchase price of approximately $0.5 million, including working capital adjustments, subject to customary post-closing adjustments.

 

Effective April 3, 2014, the Company acquired one hundred percent of the outstanding partnership interests in Sleep Experts Partners, L.P. (“Sleep Experts”), related to the operation of 55 mattress specialty retail stores in Texas under the brand Sleep Experts, for a total purchase price of approximately $67.8 million, including working capital adjustments. The initial purchase price consisted of cash of $62.8 million (net of $1.6 million of cash acquired), and $3.4 million delivered in the form of 71,619 shares of common stock, par value $0.01 per share, of Mattress Firm Holding Corp. common stock as calculated in accordance with the terms of the purchase agreement.

 

The Company funded the cash requirements of the Yotes and Southern Max acquisitions using cash reserves and revolver borrowings. The Company raised $100 million of incremental term borrowings under the 2012 Senior Credit Facility (defined in Note 4 below) to fund the cash requirements of the Sleep Experts acquisition and to pay down outstanding revolver borrowings. The new incremental term borrowings mature in January 2016 and are subject to the same interest rate as the existing outstanding incremental borrowings under the 2012 Senior Credit Facility.

 

Effective June 4, 2014, the Company acquired substantially all of the mattress specialty retail assets and operations of Mattress Liquidators, Inc. (“Mattress Liquidators”), which operated Mattress King retail stores in Colorado and BedMart retail stores in Arizona, related to the operation of 67 mattress specialty retail stores, for a total purchase price of approximately $32.9 million, giving effect to certain preliminary adjustments, and is subject to further customary adjustments. The purchase price consisted of cash of $29.4 million funded by cash reserves and revolver borrowings, as well as a $3.5 million seller note, payable in quarterly installments over two years.

 

8


 

Table of Contents 

MATTRESS FIRM HOLDING CORP.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

The allocation of the purchase price to the acquired assets and liabilities, based on management’s estimate of their fair values on the acquisition date, is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Yotes

 

Southern
Max

 

Sleep
Experts

 

Mattress Liquidators

 

Total

Cash

    

$

 —

    

$

 —

    

$

1,637 

    

$

    

$

1,642 

Accounts receivable

 

 

504 

 

 

 —

 

 

533 

 

 

181 

 

 

1,218 

Inventories

 

 

1,765 

 

 

54 

 

 

5,233 

 

 

1,501 

 

 

8,553 

Prepaid expenses and other current assets

 

 

380 

 

 

 —

 

 

1,116 

 

 

28 

 

 

1,524 

Property and equipment

 

 

1,275 

 

 

232 

 

 

6,743 

 

 

1,681 

 

 

9,931 

Intangible assets

 

 

3,980 

 

 

 —

 

 

2,575 

 

 

1,791 

 

 

8,346 

Goodwill

 

 

10,585 

 

 

174 

 

 

58,414 

 

 

32,142 

 

 

101,315 

Deferred income tax asset

 

 

 —

 

 

 —

 

 

548 

 

 

187 

 

 

735 

Other assets

 

 

143 

 

 

14 

 

 

346 

 

 

283 

 

 

786 

Accounts payable

 

 

(3,334)

 

 

 —

 

 

(2,349)

 

 

(2,779)

 

 

(8,462)

Accrued liabilities

 

 

(470)

 

 

 —

 

 

(5,388)

 

 

(1,808)

 

 

(7,666)

Customer deposits

 

 

(391)

 

 

 —

 

 

(651)

 

 

(189)

 

 

(1,231)

Deferred rent liabilities

 

 

(139)

 

 

 —

 

 

(917)

 

 

(106)

 

 

(1,162)

Deferred income tax liability

 

 

(16)

 

 

(22)

 

 

 —

 

 

 —

 

 

(38)

Fair value of assets and liabilities acquired

 

 

14,282 

 

 

452 

 

 

67,840 

 

 

32,917 

 

 

115,491 

Reconciliation to cash used in acquisitions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Seller note issued

 

 

 —

 

 

 —

 

 

 —

 

 

(3,500)

 

 

(3,500)

Fair value of equity consideration transferred

 

 

 —

 

 

 —

 

 

(3,441)

 

 

 —

 

 

(3,441)

Cash of acquired businesses

 

 

 —

 

 

 —

 

 

(1,637)

 

 

(5)

 

 

(1,642)

Cash used in acquisitions, net of cash acquired

 

$

14,282 

 

$

452 

 

$

62,762 

 

$

29,412 

 

$

106,908 

 

The acquisitions resulted in $101.3 million of goodwill based on management’s estimate on the acquisition closing dates, of which $100.3 million will be deductible for income tax purposes over 15 years.

 

The net sales included in the Company’s condensed consolidated statement of operations derived from the Yotes, Southern Max, Sleep Experts and Mattress Liquidators acquisitions from the respective acquisition dates to July 29, 2014 were $12.8 million, $0.4 million, $24.2 million and $6.1 million, respectively.

 

Acquisition-related costs for U.S. GAAP purposes are costs the acquirer incurs to effect a business combination, including advisory, legal, accounting, valuation, and other professional or consulting fees. The Company incurred a total of approximately $2.8 million and $4.4 million of acquisition-related costs charged to general and administrative expenses during the thirteen and twenty-six weeks ended July 29, 2014. See “Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for an additional discussion of acquisition-related costs.

 

The following table presents the selected consolidated financial information of the Company on a pro forma basis, assuming the acquisitions described above had occurred as of January 28, 2014.  The historical financial information has been adjusted to give effect to the pro forma items that are directly attributable to the acquisition and are expected to have a continuing impact on the consolidated results.

 

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Table of Contents 

MATTRESS FIRM HOLDING CORP.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

The unaudited financial information set forth below has been compiled from the historical financial statements and other information, but is not necessarily indicative of the results that actually would have been achieved had the transactions occurred on the dates indicated or that may be achieved in the future (amounts in thousands, except per share amounts):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Thirteen Weeks Ended July 29, 2014

    

Twenty-Six Weeks Ended July 29, 2014

 

    

As Reported

    

Pro Forma Adjustments

    

Pro Forma

    

As Reported

    

Pro Forma Adjustments

        

Pro Forma

Net sales

 

$

409,951 

 

$

5,628 

 

$

415,579 

 

$

743,453 

 

$

38,882 

 

$

782,335 

Net income

 

 

14,299 

 

 

84 

 

 

14,383 

 

 

22,019 

 

 

402 

 

 

22,421 

Diluted net income per common share

 

$

0.41 

 

$

0.01 

 

$

0.42 

 

$

0.64 

 

$

0.01 

 

$

0.65 

 

Goodwill represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. The Company’s goodwill is primarily related to the increase in the Company’s store locations and market share with expectations of expense synergies and leverage over costs, such as advertising and warehousing.  The measurement periods for purchase price allocations end as soon as information on the facts and circumstances become available, but do not exceed 12 months.  Adjustments in purchase price allocations may require a recasting of the amounts allocated to goodwill.

 

The Company is continuing to evaluate the fair values of the assets and liabilities acquired, and as a result, adjustments to the values presented above may be modified over the next several quarters. In the thirteen weeks ended April 29, 2014, the Company adjusted the deferred tax balance related to the fiscal 2013 acquisition of the assets and operations of Perfect Mattress of Wisconsin, LLC (“Perfect Mattress”) resulting in $0.6 million of additional goodwill. The Company is continuing to evaluate working capital adjustments, related to the Mattress Liquidators acquisition, which may impact the values presented above.

 

A summary of the changes in the carrying amounts of goodwill for the twenty-six weeks ended July 29, 2014 is as follows (in thousands):

 

 

 

 

 

 

   

 

 

Balance at January 28, 2014

   

$

366,647 

Prior year business acquisition adjustment

 

 

568 

Current period business acquisitions

 

 

101,315 

Balance at July 29, 2014

 

$

468,530 

 

 

3. Fair Value of Financial Instruments

 

The amounts reported in the condensed consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their respective fair values due to the short-term maturity of these instruments.

 

The FASB has issued guidance on the definition of fair value, the framework for using fair value to measure assets and liabilities, and disclosure regarding 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.

 

·

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.

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Table of Contents 

MATTRESS FIRM HOLDING CORP.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

 

·

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 the fair value of 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 the fair values of goodwill, intangible assets, and property and equipment on a nonrecurring basis if required by impairment tests applicable to these assets. Assets requiring recurring or non-recurring fair value measurements consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Book

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Value as of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 28,

 

Fair Value Measurements

 

Fiscal 2013

 

 

2014

 

Level 1

 

Level 2

 

Level 3

 

Impairments

Nonqualified deferred compensation plan

    

$

1,353 

    

$

 —

    

$

1,353 

    

$

 —

    

$

 —

Property and equipment requiring impairment review

 

 

321 

 

 

 —

 

 

 —

 

 

321 

 

 

464 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Book

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Value as of

 

 

 

 

 

 

 

 

July 29,

 

Fair Value Measurements

 

Fiscal 2014

 

 

2014

 

Level 1

 

Level 2

 

Level 3

 

Impairments

Nonqualified deferred compensation plan

    

$

1,159 

    

$

 —

    

$

1,159 

    

$

 —

    

 

 —

Property and equipment requiring impairment review

 

$

597 

 

$

 —

 

$

 —

 

$

597 

 

 

482 

 

The significant Level 3 unobservable input used in the fair value measurement of the Company’s property and equipment was the weighted average cost of capital (“WACC”). Increases (decreases) in WACC inputs in isolation would result in a lower (higher) fair value measurement.

 

The following tables are not intended to be all-inclusive, but rather provide a summary of the significant unobservable inputs used in the fair value measurement of the Company’s Level 3 assets in which impairment testing was performed.

 

Impairment testing performed as of January 28, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unobservable

Valuation Technique

 

Significant Unobservable Inputs

 

Input Range

Property and Equipment Impairment Testing

    

 

    

 

Income approach

 

WACC(1)

 

13.5%

 

Impairment testing performed as of July 29, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unobservable

Valuation Technique

 

Significant Unobservable Inputs

 

Input Range

Property and Equipment Impairment Testing

    

 

    

 

Income approach

 

WACC(1)

 

13.5%

 


(1)

Weighted Average Cost of Capital

 

The fair value of the 2012 Senior Credit Facility term loans was estimated based on the ask and bid prices quoted from an external source. The carrying values of the 2012 Senior Credit Facility term loans  other debt instruments at fixed rates are not materially different than their face value.

 

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Table of Contents 

MATTRESS FIRM HOLDING CORP.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

4. Notes Payable and Long-term Debt

 

Notes payable and long-term debt consists of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 28,

 

July 29,

 

   

2014

   

2014

2012 Senior Credit Facility - term loans

    

$

198,098 

    

$

296,795 

2012 Senior Credit Facility - revolver borrowings

 

 

21,000 

 

 

 —

Equipment financing and other notes payable

 

 

2,110 

 

 

5,065 

Total long-term debt

 

 

221,208 

 

 

301,860 

Current maturities of long-term debt

 

 

3,621 

 

 

8,877 

Long-term debt, net of current maturities

 

$

217,587 

 

$

292,983 

 

2012 Senior Credit Facility—On January 18, 2007, Mattress Holding Corp., an indirect consolidated subsidiary of the Company, entered into a credit agreement with UBS Securities LLC and certain of its affiliates and other lenders for a senior secured term loan and revolving credit facility, which was amended and restated on November 5, 2012 and further amended on February 27, 2014 (as amended, the “2012 Senior Credit Facility”). The November 2012 amendment and restatement, among other things, (i) increased the revolving loan commitment from $35 million to $100 million, (ii) extended the maturity date of the revolving credit facility by two years to January 2015, (iii) extended the maturity date of outstanding term loans having an aggregate principal amount of $200 million by two years to January 2016 (“extended term loans”), (iv) increased the interest rate applicable to amounts outstanding under the extended term loans and revolving loans by 1.25%, (v) increased the amount of permitted capital expenditures to $80 million on an annual basis, beginning with capital expenditures incurred during fiscal 2012, and (vi) increased the maximum cumulative amount that Mattress Holding Corp. and its subsidiary guarantors may incur for permitted acquisitions through the extended maturity date.

 

On February 27, 2014, the Company entered into an amendment of the 2012 Senior Credit Facility. The amendment, among other things, (a) extended the maturity date of the revolving loan by one year to January 2016, (b) increased the incremental term loan facility by $150 million to $200 million, which allowed for a total term loan facility of $400 million, (c) increased the maximum amount the borrower and its subsidiary guarantors may spend in respect of acquisitions, on a per acquisition basis, from $50 million to $75 million, and (d) increased the maximum amount the borrower and its subsidiary guarantors may spend in respect of acquisitions, on an aggregate basis, from $200 million to $350 million. The Company incurred fees in connection with the amendment of approximately $0.6 million, of which $0.2 million was expensed in the thirteen weeks ended April 29, 2014 and $0.4 million was capitalized and will be amortized over the term of the loan facility.

 

Borrowings under the 2012 Senior Credit Facility bear interest at a rate equal to an applicable margin plus, at the Company’s operation, either (i) a base rate determined by reference to the highest of (a) the corporate base rate of interest established by the administrative agent and (b) the federal funds effective rate from time to time plus 0.50%, or (ii) the period relevant to such borrowing adjusted for certain additional costs. The applicable margin percentages for extended term loans are 2.50% for base rate loans and 3.50% for LIBOR loans. The applicable margin percentages for revolving loans are 2.50% for base rate loans and 3.50% for LIBOR loans. The weighted average interest rate applicable to outstanding borrowings under the 2012 Senior Credit Facility was 3.8% for both the twenty-six weeks ended July 30, 2013 and July 29, 2014.

 

Outstanding term borrowings under the 2012 Senior Credit Facility are payable in quarterly principal installments of $0.8 million in fiscal 2014 and fiscal 2015. Accrued interest on outstanding borrowings is payable from time to time and no less frequently than quarterly.

 

The revolving credit facility portion of the 2012 Senior Credit Facility provides Mattress Holding Corp. with up to $100.0 million in outstanding revolving borrowings, with up to $15.0 million of that amount available for the issuance of letters of credit. Outstanding revolving borrowings were $21.0 million and none at January 28, 2014 and July 29, 2014, respectively. Outstanding letters of credit on the revolving facility were $1.6 million at July 29, 2014, resulting in $98.4 million of availability for revolving borrowings and up to $13.4 million of that amount available for the issuance of letters of credit.

 

12


 

Table of Contents 

MATTRESS FIRM HOLDING CORP.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

The 2012 Senior Credit Facility, subject to certain exceptions, is guaranteed by Mattress Holding Corp.’s immediate parent entity, Mattress Holdco, Inc., and by each of the existing and future subsidiaries of Mattress Holding Corp. All obligations under the 2012 Senior Credit Facility, and the guarantees of those obligations, are secured by substantially all of the existing and future property and assets of Mattress Holding Corp. and the subsidiary guarantors under the 2012 Senior Credit Facility, and by a pledge of Mattress Holding Corp.’s capital stock and the capital stock of each of its subsidiary guarantors. Mattress Holding Corp. is subject to certain financial covenants under the agreement principally consisting of maximum debt leverage and minimum interest coverage ratios. Subject to certain restrictions, Mattress Holding Corp. has the ability to exercise equity cure rights, which allow the inclusion of capital contributions received from the Company in the results of operations for the purpose of measuring the maximum debt leverage and minimum interest coverage ratios. In addition, the 2012 Senior Credit Facility places limits on the amounts of annual capital expenditures and contains restrictions on certain transactions with affiliates; prepaying subordinated debt; incurring indebtedness and liens; declaring dividends or redeeming or repurchasing capital stock; making loans and investments; and engaging in mergers, acquisitions, consolidations and asset sales. Mattress Holding Corp. was in compliance with all financial covenants at July 29, 2014.

 

Equipment Financing and Other Short-Term Notes Payable—A subsidiary of the Company has an outstanding note payable related to the purchase of mattress specialty retail stores formerly operated by our franchisee, Perfect Mattress, in the aggregate principal amount of $1.0 million that bears interest at 7.75% with quarterly principal and interest payments through fiscal 2014. A subsidiary of the Company has an outstanding note payable related to the purchase of mattress specialty retail stores formerly operated by Mattress Liquidators, in the aggregate principal amount of $3.4 million that bears interest at 6.00% with quarterly principal and interest payments through fiscal 2016.

 

A subsidiary of the Company has financed property and casualty insurance premiums payable in the amount of $0.7 million payable in fiscal 2014.

 

5. 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 related to prior year estimates. The determination of the consolidated provision for income taxes, deferred tax assets and liabilities and related valuation allowance requires management to make judgments and estimates. Although management believes that its tax estimates are reasonable, the ultimate tax determination involves significant judgments that could become subject to audit by tax authorities in the ordinary course of business, as well as the generation of sufficient future taxable income.

 

The Company recognized $14.1 million of income tax expense for the twenty-six weeks ended July 29, 2014, compared to $16.6 million of income tax expense for the twenty-six weeks ended July 30, 2013. The effective tax rate was 39.0% for the twenty-six weeks ended July 29, 2014, compared to 38.9% for the twenty-six weeks ended July 30, 2013. The effective tax rate of 39.0% for the current period differs from the federal statutory rate of 35.0% primarily due to state income taxes.

 

The Company and its subsidiaries are included in a consolidated income tax return in the U.S. federal jurisdiction and file separate income tax returns in several states. As of July 29, 2014, open tax years in federal and some state jurisdictions date back to October 2002 due to the taxing authorities’ ability to adjust operating loss carryforwards.

 

As of January 28, 2014, the Company had approximately $9.1 million of net operating loss carryforwards that begin expiring in fiscal 2029, if not utilized to offset future taxable income. These net operating loss carryforwards arose from the acquisition of MGHC Holding Corporation (“Mattress Giant”) during fiscal 2012, and after application of Section 382 of the Internal Revenue Code of 1986, as amended, are limited to an average use of $2.8 million per year over the next four years.

 

The Company has established a cumulative liability for unrecognized tax benefits of $0.4 million as of July 29, 2014 and January 28, 2014. Management does not anticipate there will be a material change in the total amount of unrecognized tax benefits within the next twelve months. Management accrued less than $0.1 million of interest on these unrecognized tax benefits as of July 29, 2014.

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Table of Contents 

MATTRESS FIRM HOLDING CORP.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

 

 

6. Earnings Per Share

 

Basic net income per common share is computed by dividing the net income applicable to common shares by the weighted average number of common shares outstanding during the period. Diluted net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period, adjusted to reflect potentially dilutive securities using the treasury stock method for stock option awards. Diluted net income per common share adjusts basic net income per common share for the effects of stock options and other potentially dilutive financial instruments only in the periods in which such effect is dilutive.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Thirteen Weeks Ended

 

Twenty-Six Weeks Ended

 

 

July 30,

 

July 29,

 

 

July 30,

 

July 29,

 

   

2013

   

2014

   

 

2013

   

2014

Basic weighted average shares outstanding

    

 

33,853,733 

    

 

34,135,060 

    

 

33,832,928 

    

 

34,081,500 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

 

248,451 

 

 

321,740 

 

 

206,826 

 

 

321,054 

Restricted shares

 

 

47,456 

 

 

66,820 

 

 

36,813 

 

 

61,484 

Diluted weighted average shares outstanding

 

 

34,149,640 

 

 

34,523,620 

 

 

34,076,567 

 

 

34,464,038 

 

Diluted net income per common share for the thirteen and twenty-six weeks ended July 29, 2014, excludes stock options for the purchase of 117,337 and 120,837 shares of common stock, respectively, as their inclusion would be anti-dilutive. Diluted net income per common share for the thirteen and twenty-six weeks ended July 30, 2013, excludes stock options for the purchase of 232,004 shares of common stock as their inclusion would be anti-dilutive.

 

Certain stock option and restricted stock awards contain vesting conditions based on specified stock price targets for the Company’s common stock as measured at each of the annual vesting dates (“market-based awards”). The Company includes such market-based awards in the determination of dilutive weighted average shares outstanding under the treasury stock method when, as of the date of determination, the specified stock price targets are met and the common stock shares pursuant to those awards become contingently issuable. Accordingly, the determination of diluted weighted average shares outstanding excludes, as of the date of determination, stock options for the purchase of 13,276 and 141,687 shares of common stock for the thirteen and twenty-six weeks ended July 29, 2014 and July 30, 2013, respectively, and excludes 48,990 shares of non-vested restricted stock for the thirteen and twenty-six weeks ended July 29, 2014.

 

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 general ranging from 1 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 volume: however, incremental rent expense resulting from such arrangements are accrued for those stores expected to surpass the sales threshold subject to their respective lease agreements.

 

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 those matters will have a material adverse effect on the Company’s financial position, results of operations or cash flows.

8. Stock-Based Compensation

 

2011 Omnibus Incentive Plan—On November 3, 2011, the Company’s board of directors and shareholders adopted the Mattress Firm Holding Corp. 2011 Omnibus Incentive Plan to provide for the grant of equity-based awards to Company

14


 

Table of Contents 

MATTRESS FIRM HOLDING CORP.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

employees, directors and other service providers. A total of 4,206,000 shares of the Company’s common stock were reserved for grants under the 2011 Omnibus Incentive Plan. There were 2,568,039 shares available for future grants under the stock incentive plan as of July 29, 2014.

 

Stock Options—A portion of the stock options granted to the Company’s employees are subject to time-based vesting schedules, while the remaining portion of the stock options are subject to market-based vesting schedules, with such vesting based on specified stock price targets. The exercise price of the options is based upon the closing market price per share of the Company’s common stock on the date of grant, and the options have a term of 10 years.

 

The following table summarizes the stock option grants, exercises, and forfeitures for the twenty-six weeks ended July 29, 2014 (in thousands, except per share amounts):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

Average

 

 

Stock

 

Exercise Price

 

 

Options

 

Per Share

Outstanding, as of January 28, 2014

    

1,291 

    

$

23.32 

Granted (a)

 

 

$

45.37 

Exercised (b)

 

(95)

 

$

22.58 

Forfeited

 

(144)

 

$

34.32 

Outstanding, as of July 29, 2014 (c)

 

1,058 

 

$

22.02 

Exercisable, as of July 29, 2014 (d)

 

298 

 

$

20.14 

 


(a)

The weighted average grant date fair value of stock options granted during the twenty-six weeks ended July 29, 2014 was $26.13.

 

(b)

The aggregate intrinsic value of stock options exercised during the twenty-six weeks ended July 29, 2014 was $2.3 million. The weighted average market price of shares exercised during the twenty-six weeks ended July 29, 2014 was $46.97.

 

(c)

Stock options outstanding as of July 29, 2014 have a weighted average remaining contractual term of 7.42 years and an aggregate intrinsic value of $27.3 million based on the market value of the Company’s common stock on July 29, 2014.

 

(d)

Stock options exercisable as of July 29, 2014 have a weighted average remaining contractual term of 7.17 years and an aggregate intrinsic value of $8.2 million based on the market value of the Company’s common stock on July 29, 2014.

 

 

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Table of Contents 

MATTRESS FIRM HOLDING CORP.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

Future vesting dates on the stock options range from August 13, 2014 to April 29, 2018, and expiration dates range from November 17, 2021 to April 29, 2024 at exercise prices and average contractual lives as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Range of Exercise Prices

 

Outstanding as of July 29, 2014 (in thousands)

 

 

Weighted Average Remaining Contractual Life (in years)

 

Weighted Average Exercise Price

 

Exercisable as of July 29, 2014 (in thousands)

 

Weighted Average Remaining Contractual Life (in years)

 

Weighted Average Exercise Price

Time Based

    

 

    

 

 

    

 

 

    

 

    

 

    

 

 

$19.00 - $29.26

 

470 

 

 

7.35 

 

$

19.55 

 

124 

 

7.33 

 

$

19.34 

$36.84 - $45.37

 

108 

 

 

8.79 

 

$

40.60 

 

 

4.39 

 

$

36.84 

Market Based

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$19.00 - $29.26

 

458 

 

 

7.19 

 

$

19.48 

 

158 

 

7.32 

 

$

19.10 

$36.84 - $45.37

 

22 

 

 

7.00 

 

$

36.84 

 

 

4.39 

 

$

36.84 

 

The Company accounts for employee stock options under the fair value method of accounting using a Black Scholes methodology to measure time based option fair value at the date of grant and a Monte Carlo Simulation approach to measure market-based option fair value at the date of grant. The fair value of the stock options at the date of grant is recognized as expense over the vesting term, which represents the requisite service period.

 

The following assumptions were used to calculate the fair value of the Company’s time-based stock options on the date of grant utilizing the Black- Scholes option pricing model:

 

 

 

 

 

 

 

 

 

 

 

Twenty‑Six Weeks
Ended
July 29, 2014

 

Weighted average expected life (in years)

    

6.25 

 

Volatility factor

 

60 

%

Dividend yield

 

%

Risk-free interest rate

 

2.08 

%

 

 

The Company bases its expected option life on the expected exercise and termination behavior of the option holders and an appropriate model of the Company’s future stock price. The expected volatility assumption is derived from the historical volatility of similar companies’ common stock over the most recent period commensurate with the estimated expected life of the Company’s stock options, combined with other relevant factors. The dividend yield is the annual rate of dividends per share over the exercise price of the option as of the grant date.

 

For the thirteen and twenty-six weeks ended July 29, 2014, the Company recognized $0.4 million and $1.2 million, respectively, of compensation expense associated with stock option awards in general and administrative expenses in the consolidated statement of operations compared to $0.7 million and $1.2 million for the thirteen and twenty-six weeks ended July 30, 2013, respectively. The Company did not capitalize any equity-based compensation costs related to stock options during the thirteen and twenty-six weeks ended July 29, 2014 and July 30, 2013.

 

As of July 29, 2014, the Company estimates that a total of approximately $5.7 million of currently unrecognized forfeiture adjusted compensation expense will be recognized over a weighted average period of 2.33 years for unvested stock option awards issued and outstanding.

 

Restricted Stock—The Company grants restricted stock to certain employees and to non-employee independent directors. A portion of the restricted stock granted to the Company’s employees is subject to time-based vesting schedules, while the remaining portion of the restricted stock is subject to market-based vesting schedules, with such vesting based on specified stock price targets.

 

16


 

Table of Contents 

MATTRESS FIRM HOLDING CORP.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

The following table summarizes the restricted stock grants, vesting, and forfeitures for the twenty-six weeks ended July 29, 2014 (in thousands, except per share amounts):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

Average

 

 

Restricted

 

Fair

 

    

Shares

    

Value

Outstanding, as of January 28, 2014

    

249 

    

$

29.93 

Granted (a)

 

10 

 

$

37.83 

Vested (b)

 

(14)

 

$

32.65 

Forfeited

 

(14)

 

$

24.68 

Unvested, as of July 29, 2014

 

231 

 

$

30.44 

 


(a)

The total grant-date fair value of restricted stock awards granted during the period was $0.4 million.

(b)

The total fair value of awards vested during the twenty-six weeks ended July 29, 2014 was $0.6 million.

 

The Company accounts for restricted stock under the fair value method of accounting using the closing market price per share of the Company’s stock to measure time based restricted stock fair value at the date of grant and a Monte Carlo Simulation approach to measure market-based restricted stock fair value at the date of grant. The fair value of the restricted stock at the date of grant is recognized as expense over the vesting term, which represents the requisite service period.

 

The following assumptions were used to calculate the fair value of the Company’s market-based restricted stock on the grant date utilizing a Monte Carlo Simulation approach:

 

 

 

 

 

 

 

 

 

 

 

Twenty‑Six Weeks
Ended
July 29, 2014

 

Weighted average expected life (in years)

    

 

Volatility factor

 

40 

%

Dividend yield

 

%

Risk-free interest rate

 

1.33 

%

 

 

For the thirteen and twenty-six weeks ended July 29, 2014, the Company recognized $0.8 million and $1.4 million, respectively, of compensation expense associated with restricted stock awards in general and administrative expenses in the condensed consolidated statement of operations compared to $0.3 million and $0.7 million for the thirteen and twenty-six weeks ended July 30, 2013, respectively. The Company did not capitalize any equity-based compensation costs related to restricted stock awards during the thirteen and twenty-six weeks ended July 29, 2014 and July 30, 2013.

 

As of July 29, 2014, the Company estimates that a total of approximately $5.2 million of currently unrecognized forfeiture adjusted compensation expense will be recognized over a weighted average period of 2.07 years for unvested restricted stock awards.

 

17


 

Table of Contents 

MATTRESS FIRM HOLDING CORP.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

 

9. Subsequent Events

 

On August 18, 2014, the Company entered into an agreement to acquire substantially all of the mattress specialty retail assets and operations of Best Mattress Co., Inc., which operates retail stores in Pennsylvania.  The Company anticipates this transaction will close in the third fiscal quarter of 2014.  The acquisition will add approximately 15 mattress specialty retail stores to the Mattress Firm company-operated store base for an aggregate purchase price of approximately $6.0 million, subject to customary adjustments.  The Company intends to rebrand these acquired stores as Mattress Firm after the transaction closes.

 

On August 28, 2014, the Company entered into an agreement to acquire substantially all of the mattress specialty retail assets and operations of Back to Bed Inc., M World Mattress LLC, TBE Orlando LLC and MCStores, which collectively operate Back to Bed, Bedding Experts and Mattress Barn retail stores in Illinois, Indiana, Wisconsin and Florida, primarily in the Chicago and Orlando metropolitan areas. The Company anticipates this transaction will close in the third fiscal quarter of 2014.  The acquisition will add approximately 135 mattress specialty retail stores to the Mattress Firm company-operated store base for an aggregate purchase price of approximately $60.0 million, subject to customary adjustments.  The Company intends to rebrand these acquired stores as Mattress Firm after the transaction closes.

 

On September 3, 2014, the Company entered into an agreement to acquire all of the outstanding equity interests in The Sleep Train, Inc., which operates stores in California, Oregon, Washington, Nevada, Idaho and Hawaii.  The Company anticipates this transaction will close in the fourth quarter of 2014.  The acquisition will add approximately 310 mattress specialty retail stores to the Mattress Firm company-operated store base for an aggregate purchase price of approximately $425.0 million, subject to customary adjustments. Ten percent of the adjusted purchase price is payable in the form of shares of common stock of the Company, having an equivalent aggregate value as calculated in accordance with the purchase agreement. As further consideration, the Company has agreed to assume certain additional liabilities totaling approximately $15 million.

 

 

 

18


 

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” on page 30 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 February 3, 2015 is described as “fiscal 2014.” Fiscal 2014 contains 53 weeks.

 

Executive Summary

 

Net sales during the thirteen and twenty-six weeks ended July 29, 2014 improved $107.5 million and $165.0 million, respectively, from the comparable prior year levels as a result of the addition of new and acquired store units and an increase 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. Key results for the thirteen and twenty-six weeks ended July 29, 2014 include:

 

·

Net income increased $0.2 million to $14.3 million for the thirteen weeks ended July 29, 2014, compared to $14.1 million for the comparable prior year period. Net income decreased $4.1 million to $22.0 million for the twenty-six weeks ended July 29, 2014, compared to $26.1 million for the comparable prior year period.

 

·

Income from operations for the thirteen weeks ended July 29, 2014 was $27.0 million. Excluding $11.0 million of acquisition-related expenses, enterprise resource planning (“ERP”) system implementation costs and impairment and severance charges, adjusted income from operations was $38.0 million, and adjusted operating margin during the thirteen weeks ended July 29, 2014 increased 40 basis-points from 8.9% during the thirteen weeks ended July 30, 2013 to 9.3% during the thirteen weeks ended July 29, 2014. This operating margin increase on an adjusted basis (excluding acquisition-related, ERP system implementation costs and impairment and severance charges) is comprised of a ten basis-point increase in gross margin, a 70 basis-point improvement in sales and marketing expense leverage, offset by a 20 basis-point decrease from general and administration expense deleverage, and 20 basis-points of combined operating margin declines in other areas. Income from operations for the twenty-six weeks ended July 29, 2014 was $42.4 million. Excluding $15.6 million of acquisition-related expenses, ERP system implementation costs and impairment and severance charges, adjusted income from operations was $58.0 million, and adjusted operating margin during the twenty-six weeks ended July 29, 2014 decreased 100 basis-points from 8.8% during the twenty-six weeks ended July 30, 2013 to 7.8% during the twenty-six weeks ended July 29, 2014. This operating margin decrease on an adjusted basis (excluding acquisition-related, ERP system implementation costs and impairment and severance charges) is comprised of a 70 basis-point decline in gross margin, a  70 basis-point decrease from general and administration expense deleverage, offset by a 50 basis-point improvement in sales and marketing expense leverage,  and ten basis-points of combined operating margin declines in other areas. 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,

19


 

legal, accounting, valuation, and other professional or consulting fees and, in addition, costs of integrating store and warehouse operations and corporate functions. ERP system implementation costs, which are included in the results of operations, consist primarily of training costs related to the roll-out of the Microsoft Dynamics AX for Retail ERP system. Impairment charges, which are included in results of operations, consist of an impairment of store assets. Severance expense, which is included in the results of operations, resulted from our realignment of our management structure at the beginning of the second fiscal quarter of fiscal 2014. (Adjusted income from operations is not a performance measure under U.S. GAAP. See “Reconciliation of Reported (U.S. GAAP) to Adjusted Statements of Operations Data” on page 32 for a reconciliation of net income as reported to adjusted net income.)

 

·

Adjusted EBITDA increased $13.2 million to $49.2 million for the thirteen weeks ended July 29, 2014, compared with $36.0 million for the comparable prior year period. Adjusted EBITDA as a percentage of net sales increased to 12.0% during the thirteen weeks ended July 29, 2014, compared with 11.9% for the comparable prior year period. Adjusted EBITDA increased $11.7 million to $79.9 million for the twenty-six weeks ended July 29, 2014, compared with $68.2 million for the comparable prior year period. Adjusted EBITDA as a percentage of net sales decreased to 10.8% during the twenty-six weeks ended July 29, 2014, compared with 11.8% for the comparable prior year period. See “Adjusted EBITDA to Net Income Reconciliation” on page 30 for a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income.

 

·

Net sales increased $107.5 million, or 35.5%, to $410.0 million for the thirteen weeks ended July 29, 2014, compared to $302.5 million for the comparable prior year period primarily as the result of an increase in the number of stores we operated and an increase in comparable-store sales. Comparable-store sales increased 9.7% during the thirteen weeks ended July 29, 2014. Net sales increased $165.0 million, or 28.5%, to $743.5 million for the twenty-six weeks ended July 29, 2014, compared to $578.5 million for the comparable prior year period primarily as the result of an increase in the number of stores we operated and an increase in comparable-store sales. Comparable-store sales increased 7.1% during the twenty-six weeks ended July 29, 2014.

 

The components of the net sales increase for the thirteen and twenty-six weeks ended July 29, 2014 as compared to the thirteen and twenty-six weeks ended July 30, 2013 were as follows (in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Progression in Net Sales

 

 

Thirteen Weeks Ended July 29, 2014

 

Twenty-Six Weeks Ended July 29, 2014

Net sales for prior year period

    

$

302.5 

    

$

578.5 

Increase (decrease) in net sales:

 

 

 

 

 

 

Comparable-store sales

 

 

28.8 

 

 

40.3 

New stores

 

 

40.4 

 

 

75.8 

Acquired stores

 

 

43.1 

 

 

58.9 

Closed stores

 

 

(4.8)

 

 

(10.0)

Increase in net sales, net

 

 

107.5 

 

 

165.0 

Net sales for current year period

 

$

410.0 

 

$

743.5 

% increase

 

 

35.5% 

 

 

28.5% 

 

20


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Thirteen Weeks Ended

 

Twenty-Six Weeks Ended

 

 

July 30,

 

% of

 

 

July 29,

 

% of

 

 

July 30,

 

% of

 

 

July 29,

 

% of

 

 

 

2013

 

Total

 

 

2014

 

Total

 

 

2013

 

Total

 

 

2014

 

Total

 

Conventional mattresses

    

$

148.5 

    

49.1 

%

    

$

195.6 

    

47.7 

%

    

$

270.1 

    

46.7 

%

    

$

359.3 

    

48.3 

%

Specialty mattresses

 

 

129.2 

 

42.7 

%

 

 

177.5 

 

43.3 

%

 

 

259.0 

 

44.8 

%

 

 

313.8 

 

42.2 

%

Furniture and accessories

 

 

19.1 

 

6.3 

%

 

 

28.7 

 

7.0 

%

 

 

38.3 

 

6.6 

%

 

 

55.7 

 

7.5 

%

Total product sales

 

 

296.8 

 

98.1 

%

 

 

401.8 

 

98.0 

%

 

 

567.4 

 

98.1 

%

 

 

728.8 

 

98.0 

%

Delivery service revenues

 

 

5.7 

 

1.9 

%

 

 

8.2 

 

2.0 

%

 

 

11.1 

 

1.9 

%

 

 

14.7 

 

2.0 

%

Total net sales

 

$

302.5 

 

100.0 

%

 

$

410.0 

 

100.0 

%

 

$

578.5 

 

100.0 

%

 

$

743.5 

 

100.0 

%

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

   

Thirteen Weeks Ended July 29, 2014

   

Twenty-Six Weeks Ended July 29, 2014

Store units, beginning of period

    

1,365 

    

1,225 

New stores

 

53 

 

109 

Acquired stores

 

67 

 

159 

Closed stores

 

(5)

 

(13)

Store units, end of period

 

1,480 

 

1,480 

 

Operating cash flows were $51.2 million and $58.3 million during the thirteen and twenty-six weeks ended July 29, 2014.

 

On March 3, 2014, we acquired the leasehold interests, store assets, distribution center assets and related inventories, and assumed certain liabilities of Yotes, a franchisee of ours, relating to the operation of 34 mattress specialty retail stores located in Colorado and Kansas for a total purchase price of approximately $14.3 million, including working capital adjustments.

 

On March 3, 2014, we acquired the Virginia leasehold interests and store assets, and assumed certain liabilities, of Southern Max, a franchisee of ours, relating to the operations of three mattress specialty retail stores located in Virginia for a total purchase price of approximately $0.5 million, including working capital adjustments.

 

On April 3, 2014, we acquired one hundred percent of the outstanding partnership interests in Sleep Experts, related to the operations of 55 mattress specialty retail stores in Texas under the brand Sleep Experts, for a total purchase price of approximately $67.8 million, including working capital adjustments, subject to customary post-closing adjustments.  The purchase price consisted of cash of $62.8 million (net of $1.6 million of cash acquired), and $3.4 million delivered in the form of 71,619 shares of common stock, par value $0.01 per share, of Mattress Firm Holding Corp. common stock as calculated in accordance with the terms of the purchase agreement.

 

We funded the cash requirements of the Yotes and Southern Max acquisitions using cash reserves and revolver borrowings. We raised $100 million of incremental term borrowings under the 2012 Senior Credit Facility to fund the cash requirements of the Sleep Experts acquisition and to pay down outstanding revolver borrowings. The new incremental term borrowings mature in January 2016 and are subject to the same interest rate as the existing outstanding incremental borrowings under the 2012 Senior Credit Facility.

 

On June 4, 2014, we acquired substantially all of the mattress specialty retail assets and operations of Mattress Liquidators, Inc., which operated Mattress King retail stores in Colorado and BedMart retail stores

21


 

in Arizona. The acquisition was for an aggregate purchase price of approximately $32.9 million, giving effect to certain preliminary adjustments, and is subject to further customary adjustments, and relates to the operations of approximately 67 mattress specialty retail stores primarily in Denver, Colorado, Phoenix, Arizona and Tucson, Arizona. The purchase price consisted of cash of  $29.4 million funded by cash reserves and revolver borrowings, as well as a $3.5 million seller note, payable in quarterly installments over two years. We currently operate Mattress Firm stores in these markets and intend to complete the rebranding of the acquired stores during the third fiscal quarter.

 

·

At July 29, 2014, there were no outstanding revolver borrowings, $1.6 million outstanding standby letters of credit, and additional borrowing capacity of $98.4 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;

 

22


 

·

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:

 

·

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 and (iii) loss (gain) on store closings and impairment of store assets.

 

Other expense, net includes interest income and interest expense.  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 (amounts in thousands). The historical results are not necessarily indicative of results to be expected for any future period.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Thirteen Weeks Ended

 

Twenty-Six Weeks Ended

 

 

July 30,

 

% of

 

 

July 29,

 

% of

 

 

July 30,

 

% of

 

 

July 29,

 

% of

 

 

 

2013

 

Sales

 

 

2014

 

Sales

 

 

2013

 

Sales

 

 

2014

 

Sales

 

Net sales

    

$

302,541 

    

100.0 

%

    

$

409,951 

    

100.0 

%

    

$

578,498 

    

100.0 

%

    

$

743,453 

    

100.0 

%

Costs of sales

 

 

182,096 

 

60.2 

%

 

 

246,547 

 

60.1 

%

 

 

353,611 

 

61.1 

%

 

 

459,199 

 

61.8 

%

Gross profit from retail operations

 

 

120,445 

 

39.8 

%

 

 

163,404 

 

39.9 

%

 

 

224,887 

 

38.9 

%

 

 

284,254 

 

38.2 

%

Franchise fees and royalty income

 

 

1,438 

 

0.5 

%

 

 

1,092 

 

0.2 

%

 

 

2,687 

 

0.4 

%

 

 

2,278 

 

0.3 

%

Total gross profit

 

 

121,883 

 

40.3 

%

 

 

164,496 

 

40.1 

%

 

 

227,574 

 

39.3 

%

 

 

286,532 

 

38.5 

%

Sales and marketing expenses

 

 

75,768 

 

25.0 

%

 

 

99,998 

 

24.3 

%

 

 

139,499 

 

24.1 

%

 

 

175,663 

 

23.6 

%

General and administrative expenses

 

 

19,749 

 

6.5 

%

 

 

36,888 

 

9.0 

%

 

 

38,918 

 

6.7 

%

 

 

67,574 

 

9.1 

%

Loss on store closings and impairment of store assets

 

 

483 

 

0.2 

%

 

 

648 

 

0.2 

%

 

 

744 

 

0.1 

%

 

 

906 

 

0.1 

%

Income from operations

 

 

25,883 

 

8.6 

%

 

 

26,962 

 

6.6 

%

 

 

48,413 

 

8.4 

%

 

 

42,389 

 

5.7 

%

Other expense, net

 

 

2,795 

 

1.0 

%

 

 

3,469 

 

0.9 

%

 

 

5,642 

 

1.0 

%

 

 

6,285 

 

0.8 

%

Income before income taxes

 

 

23,088 

 

7.6 

%

 

 

23,493 

 

5.7 

%

 

 

42,771 

 

7.4 

%

 

 

36,104 

 

4.9 

%

Income tax expense

 

 

8,965 

 

2.9 

%

 

 

9,194 

 

2.2 

%

 

 

16,639 

 

2.9 

%

 

 

14,085 

 

1.9 

%

Net income

 

$

14,123 

 

4.7 

%

 

$

14,299 

 

3.5 

%

 

$

26,132 

 

4.5 

%

 

$

22,019 

 

3.0 

%

 

23


 

Thirteen Weeks Ended July 29, 2014 Compared to Thirteen Weeks Ended July 30, 2013

 

Net sales.  Net sales increased $107.5 million, or 35.5%, to $410.0 million during the thirteen weeks ended July 29, 2014, compared to $302.5 million during the thirteen weeks ended July 30, 2013 primarily as a result of an increase in the number of stores we operated and an increase in comparable-store sales. The components of the net sales increase for the thirteen weeks ended July 29, 2014 as compared to the thirteen weeks ended July 30, 2013 were as follows (in millions): 

 

 

 

 

 

 

 

 

 

Progression in Net Sales

 

 

Thirteen Weeks Ended
July 29, 2014

Net sales for prior year period

    

$

302.5 

Increase (decrease) in net sales:

 

 

 

Comparable-store sales

 

 

28.8 

New stores

 

 

40.4 

Acquired stores

 

 

43.1 

Closed stores

 

 

(4.8)

Increase in net sales, net

 

 

107.5 

Net sales for current year period

 

$

410.0 

% increase

 

 

35.5% 

 

Comparable-store net sales increased 9.7%, which was primarily the result of a combination of an increase in unit sales, particularly driven by conventional mattress sales and a focus on keeping stock in the stores, and an increase in average ticket, driven primarily by specialty mattress sales. The increase in our net sales from new stores was the result of 182 new stores opened at various times during the fifty-two week period ended July 29, 2014, including 53 stores opened during the thirteen week period ended July 29, 2014, 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 five former Mattress People stores in November 2013, 39 stores formerly operated by Perfect Mattress in December 2013, two former Mattress Expo stores in December 2013, 34 stores formerly operated by Yotes in March 2014, three stores formerly operated by Southern Max in March 2014, 55 Sleep Experts stores in April 2014 and 67 Mattress Liquidators, Inc. stores in June 2014. We closed 28 stores during the fifty-two week period ended July 29, 2014, including five stores during the thirteen week period ended July 29, 2014. We operated 1,480 stores at July 29, 2014, compared with 1,121 stores at July 30, 2013.

 

Cost of sales.  Cost of sales increased $64.5 million, or 35.4%, to $246.6 million during the thirteen weeks ended July 29, 2014, compared to $182.1 million during the thirteen weeks ended July 30, 2013. The major components of the increase in cost of sales are discussed below. Cost of sales as a percentage of net sales decreased to 60.1% during the thirteen weeks ended July 29, 2014, as compared to 60.2% for the comparable prior year period.

 

Product costs increased by $41.9 million, or 37.6%, to $153.5 million during the thirteen weeks ended July 29, 2014, compared with $111.6 million during the thirteen weeks ended July 30, 2013. The increase in the amount of product costs is primarily the result of the corresponding increase in net sales. Product costs as a percentage of net sales increased to 37.5% during the thirteen weeks ended July 29, 2014 from 36.9% during the thirteen weeks ended July 30, 2013. The increase in product costs as a percentage of net sales is largely the result of the recent acquisitions which are experiencing higher product costs during the period of transitioning to the Company’s typical product mix.  In addition, some tightening of margins was seen in the specialty mattress lines.

 

Store and warehouse occupancy costs, consisting primarily of lease related costs of rented facilities, increased $13.8 million, or 33.1%, to $55.7 million during the thirteen weeks ended July 29, 2014, compared to $41.9 million for the corresponding prior year period. The increase in the amount of store and warehouse occupancy costs during the thirteen weeks ended July 29, 2014 was mainly attributable to the increase in the number of stores we operated and the warehouse operations in a number of new markets opened or acquired. Store and warehouse occupancy costs as a percentage of net sales decreased to 13.6% during the thirteen weeks ended July 29, 2014, compared to 13.8% during the thirteen weeks ended July 30, 2013. The decrease in store and warehouse occupancy costs as a percentage of net sales during the thirteen weeks ended July 29, 2014 was primarily attributable to the leverage generated by comparable-store sales growth.

24


 

 

Depreciation expense related to leasehold improvements and other fixed assets used in stores and warehouse operations increased $1.8 million, or 28.8%, to $8.2 million, during the thirteen weeks ended July 29, 2014, compared to $6.4 million during the thirteen weeks ended July 30, 2013. The increase in expense was primarily attributable to the increase in the number of stores we operated during the thirteen weeks ended July 29, 2014, as compared with the comparable prior year period.

 

Other cost of sales, consisting of store and warehouse operating and delivery costs, increased $6.8 million, or 30.5%, to $29.1 million during the thirteen weeks ended July 29, 2014, compared to $22.3 million during the thirteen weeks ended July 30, 2013, primarily as a result of the increase in net sales and in the increased number of stores we operated during the thirteen weeks ended July 29, 2014, as compared with the corresponding prior year period.

 

Gross profit from retail operations.  As a result of the above, gross profit from retail operations increased $43.0 million, or 35.7%, to $163.4 million during the thirteen weeks ended July 29, 2014, compared with $120.4 million during the thirteen weeks ended July 30, 2013. Gross profit from retail operations as a percentage of net sales increased to 39.9% during the thirteen weeks ended July 29, 2014, as compared to 39.8% during the thirteen weeks ended July 30, 2013, for the reasons discussed above.

 

Franchise fees and royalty income.  Franchise fees and royalty income decreased $0.3 million, or 24.1%, to $1.1 million during the thirteen weeks ended July 29, 2014, compared to $1.4 million during the thirteen weeks ended July 30, 2013, primarily as a result of our acquisitions of certain formerly franchised operations, as described above. Our franchisees operated 107 stores at July 29, 2014, compared with 167 stores at July 30, 2013.

 

Sales and marketing expenses.  Sales and marketing expenses increased $24.2 million, or 32.0%, to $100.0 million during the thirteen weeks ended July 29, 2014, compared to $75.8 million during the thirteen weeks ended July 30, 2013. Sales and marketing expenses as a percentage of net sales decreased to 24.3% during the thirteen weeks ended July 29, 2014, compared to 25.0% during the thirteen weeks ended July 30, 2013. The components of sales and marketing expenses are explained below.

 

Advertising expense increased $8.0 million, or 26.3%, to $38.8 million during the thirteen weeks ended July 29, 2014, from $30.8 million during the thirteen weeks ended July 30, 2013. The increase in the amount of advertising spend was a result of our expansion into new markets from acquisitions and new store additionsAdvertising expense as a percentage of net sales decreased to 9.5% during the thirteen weeks ended July 29, 2014, compared to 10.2% during the thirteen weeks ended July 30, 2013, primarily due to generating greater leverage from the increase in net sales in certain markets. 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 $1.7 million during the thirteen weeks ended July 29, 2014, compared with $2.2 million during the thirteen weeks ended July 30, 2013.

 

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 $16.2 million, or 35.9%, to $61.2 million during the thirteen weeks ended July 29, 2014, compared to $45.0 million during the thirteen weeks ended July 30, 2013, 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 flat at 14.9% during the thirteen weeks ended July 29, 2014 and the thirteen weeks ended July 30, 2013.

 

General and administrative expenses.  General and administrative expenses increased $17.2 million, or 86.7%, to $36.9 million for the thirteen weeks ended July 29, 2014, compared to $19.7 million for the thirteen weeks ended July 30, 2013. The increase in general and administrative expenses was primarily a result of our growth, including a $7.7 million increase in wages, benefits and stock-based compensation resulting from employee additions to our corporate office, a $7.6 million increase in acquisition-related costs, a $0.8 million increase in ERP implementation training costs and a $1.1 million increase in various other general and administrative expense categories. General and administrative expenses as a percentage of net sales increased to 9.0% during the thirteen weeks ended July 29, 2014, compared to 6.5% for the comparable prior year period. The increase in general and administrative expenses as a percentage of net sales is primarily due to the increase in acquisition-related costs noted above, an increase in cost of administrative labor as a percentage of net sales and increases in various other areas.  General and administrative expenses for the thirteen weeks ended July 29,

25


 

2014 and July 30, 2013 included $10.6 million and $1.0 million, respectively, of primarily acquisition-related costs, ERP implementation training costs, and impairment and severance charges. 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 $0.1 million, or 34.2%, to $0.6 million for the thirteen weeks ended July 29, 2014, compared to $0.5 million for the thirteen weeks ended July 30, 2013, primarily as a result of an increase of $0.5 million in store-level fixed asset impairment charges over the prior year period, offset by a decrease of $0.4 million in the amount of remaining lease commitments on stores that we closed during the respective periods.

 

Other expense, net.  Other expense, net, for both periods consisted primarily of interest expense. Interest expense, net increased $0.7 million, or 24.2%, to $3.5 million for the thirteen weeks ended July 29, 2014, compared to $2.8 million for the thirteen weeks ended July 30, 2013, primarily as a result of an increase in term and revolver borrowings as compared to the prior year period.

 

Income tax expense.  We recognized $9.2 million of income tax expense during the thirteen weeks ended July 29, 2014, compared to $9.0 million of income tax expense during the thirteen weeks ended July 30, 2013. The effective tax rate was 39.1% during the thirteen weeks ended July 29, 2014 and 38.8% during the thirteen weeks ended July 30, 2013.

 

Net income.  As a result of the above, our net income was $14.3 million during the thirteen weeks ended July 29, 2014 compared to $14.1 million during the thirteen weeks ended July 30, 2013.

 

Twenty-Six Weeks Ended July 29, 2014 Compared to Twenty-Six Weeks Ended July 30, 2013

 

Net sales.  Net sales increased $165.0 million, or 28.5%, to $743.5 million during the twenty-six weeks ended July 29, 2014, compared to $578.5 million during the twenty-six weeks ended July 30, 2013 primarily as a result of an increase in the number of stores we operated and an increase in comparable-store sales. The components of the net sales increase for the twenty-six weeks ended July 29, 2014 as compared to the twenty-six weeks ended July 30, 2013 were as follows (in millions):

 

 

 

 

 

 

 

Progression in Net Sales

 

 

Twenty‑Six Weeks Ended
July 29, 2014

Net sales for prior year period

    

$

578.5 

Increase (decrease) in net sales:

 

 

 

Comparable-store sales

 

 

40.3 

New stores

 

 

75.8 

Acquired stores

 

 

58.9 

Closed stores

 

 

(10.0)

Increase in net sales, net

 

 

165.0 

Net sales for current year period

 

$

743.5 

% increase

 

 

28.5% 

 

Comparable-store net sales increased 7.1%, which was primarily the result of an increase in unit sales driven by sales initiatives implemented during the second half of fiscal 2013 that encouraged our sales associates to improve sales productivity and an increase in average ticket for specialty mattress sales. The increase in our net sales from new stores was the result of 182 new stores opened at various times during the fifty-two week period ended July 29, 2014, including 109 stores opened during the twenty-six week period ended July 29, 2014, 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 five former Mattress People stores in November 2013, 39 stores formerly operated by Perfect Mattress in December 2013, two former Mattress Expo stores in December 2013, 34 stores formerly operated by Yotes in March 2014, three stores formerly operated by Southern Max in March 2014, 55 Sleep Experts stores in April 2014 and 67 Mattress Liquidators, Inc. stores in June 2014. We closed 28 stores during the fifty-two week period ended July 29, 2014, including 13 stores during the thirteen week period ended July 29, 2014.

 

26


 

Cost of sales.  Cost of sales increased $105.6 million, or 29.9%, to $459.2 million during the twenty-six weeks ended July 29, 2014, compared to $353.6 million during the twenty-six weeks ended July 30, 2013. The major components of the increase in cost of sales are discussed below. Cost of sales as a percentage of net sales increased to 61.8% during the twenty-six weeks ended July 29, 2014, as compared to 61.1% for the comparable prior year period.

 

Product costs increased by $65.1 million, or 30.4%, to $279.4 million during the twenty-six weeks ended July 29, 2014, compared with $214.3 million during the twenty-six weeks ended July 30, 2013. The increase in the amount of product costs was the result of the corresponding increase in net sales. Product costs as a percentage of net sales increased to 37.6% during the twenty-six weeks ended July 29, 2014 from 37.0% during the twenty-six weeks ended July 30, 2013. The increase of product costs as a percentage of net sales is largely the result of the significant product close-outs that occurred during the first quarter and the impact of the recent acquisitions experiencing higher product costs as the transition is made to the Company’s typical product mix.

 

Store and warehouse occupancy costs, consisting primarily of lease related costs of rented facilities, increased $22.8 million, or 27.6%, to $105.6 million during the twenty-six weeks ended July 29, 2014, compared to $82.8 million for the corresponding prior year period. The increase in the amount of store and warehouse occupancy costs during the twenty-six weeks ended July 29, 2014 was mainly attributable to the increase in the number of stores we operated and the warehouse operations in a number of new markets opened during the previous fifty-two week period. Store and warehouse occupancy costs as a percentage of net sales decreased to 14.2% during the twenty-six weeks ended July 29, 2014, compared to 14.3% during the twenty-six weeks ended July 30, 2013. The decrease in store and warehouse occupancy costs as a percentage of net sales during the twenty-six weeks ended July 29, 2014 was mostly attributable to leverage generated from comparable-store sales growth in our established markets, which was partially offset by less scale in some of our newer markets.

 

Depreciation expense related to leasehold improvements and other fixed assets used in stores and warehouse operations increased $4.0 million, or 33.7%, to $15.8 million, during the twenty-six weeks ended July 29, 2014, compared to $11.8 million during the twenty-six weeks ended July 30, 2013. The increase in expense was primarily attributable to the increase in the number of stores we operated during the twenty-six weeks ended July 29, 2014, as compared to the comparable prior year period.

 

Other cost of sales, consisting of store and warehouse operating and delivery costs, increased $13.7 million, or 30.5%, to $58.4 million during the twenty-six weeks ended July 29, 2014, compared to $44.7 million during the twenty-six weeks ended July 30, 2013, primarily as a result of the increase in net sales and in the increase in the number of stores we operated during the twenty-six weeks ended July 29, 2014, as compared to the corresponding prior year period.

 

Gross profit from retail operations.  As a result of the above, gross profit from retail operations increased $59.4 million, or 26.4%, to $284.3 million during the twenty-six weeks ended July 29, 2014, compared with $224.9 million during the twenty-six weeks ended July 30, 2013. Gross profit from retail operations as a percentage of net sales decreased to 38.2% during the twenty-six weeks ended July 29, 2014, as compared to 38.9% during the twenty-six weeks ended July 30, 2013, for the reasons discussed above.

 

Franchise fees and royalty income.  Franchise fees and royalty income decreased $0.4 million, or 15.2%, to $2.3 million for the twenty-six weeks ended July 29, 2014, compared to $2.7 million during the corresponding prior year period. The decrease in income was primarily a result of our acquisitions of certain formerly franchised operations, as described above.

 

Sales and marketing expenses.  Sales and marketing expenses increased $36.2 million, or 25.9%, to $175.7 million during the twenty-six weeks ended July 29, 2014, compared to $139.5 million during the twenty-six weeks ended July 30, 2013. Sales and marketing expenses as a percentage of net sales decreased to 23.6% during the twenty-six weeks ended July 29, 2014, compared to 24.1% during the twenty-six weeks ended July 30, 2013. The components of sales and marketing expenses are explained below.

 

Advertising expense increased $11.2 million, or 21.6%, to $63.3 million during the twenty-six weeks ended July 29, 2014, from $52.1 million during the twenty-six weeks ended July 30, 2013. The increase in the amount of advertising spend was mainly attributable to increased spending to enhance our market share in many of our established markets and, to a lesser extent, our expansion into new markets. Advertising expense as a percentage of net sales decreased to 8.5%

27


 

during the twenty-six weeks ended July 29, 2014, compared to 9.0% during the twenty-six weeks ended July 30, 2013, primarily due to generating greater leverage from the increase in net sales in certain markets. 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 $4.6 million during the twenty-six weeks ended July 29, 2014, compared with $3.6 million during the twenty-six weeks ended July 30, 2013.

 

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 $24.9 million, or 28.5%, to $112.3 million during the twenty-six weeks ended July 29, 2014, compared to $87.4 million during the twenty-six weeks ended July 30, 2013, primarily as a result of the increase in net sales during the period. Other sales and marketing expenses as a percentage of net sales remained flat at 15.1% during both the twenty-six weeks ended July 29, 2014 and July 30, 2013.

 

General and administrative expenses.    General and administrative expenses increased $28.7 million, or 73.6%, to $67.6 million for the twenty-six weeks ended July 29, 2014, compared to $38.9 million for the twenty-six weeks ended July 30, 2013. The increase in general and administrative expenses was primarily a result of our growth, including a $13.5 million increase in wages, benefits and stock-based compensation resulting from employee additions to our corporate office, a $10.3 million increase in acquisition-related costs, a $1.2 million increase in ERP implementation training costs and a $3.7 million increase in various other general and administrative expense categories. General and administrative expenses as a percentage of net sales increased to 9.1% during the twenty-six weeks ended July 29, 2014, compared to 6.7% for the comparable prior year period. The increase in general and administrative expenses as a percentage of net sales is primarily due to the increase in acquisition-related costs noted above, an increase in cost of administrative labor as a percentage of net sales and increases in various other areas.  General and administrative expenses for the twenty-six weeks ended July 29, 2014 and July 30, 2013 included $15.1 million and $2.3 million, respectively, of acquisition-related costs, ERP implementation training costs, and impairment and severance charges. 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 to $0.9 million during the twenty-six weeks ended July 29, 2014, compared to $0.7 million for the thirteen weeks ended July 30, 2013, primarily as a result of an increase of $0.5 million in store-level fixed asset impairment charges over the prior year period, offset by a decrease of $0.3 million in the amount of remaining lease commitments on stores that we closed during respective periods.

 

Other expense, net.  Other expense, net, for both periods consisted primarily of interest expense. Interest expense increased $0.7 million, or 11.4%, to $6.3 million during the twenty-six weeks ended July 29, 2014, compared to $5.6 million during the twenty-six weeks ended July 30, 2013,  primarily as a result of an increase in term and revolver borrowings as compared to the prior year period.

 

Income tax expense.  We recognized $14.1 million of income tax expense during the twenty-six weeks ended July 29, 2014, compared to $16.6 million of income tax expense during the twenty-six weeks ended July 30, 2013. The effective tax rate was 39.0% during the twenty-six weeks ended July 29, 2014, compared to 38.9% during the twenty-six weeks ended July 30, 2013.

 

Our estimated full year effective tax rate for Fiscal 2013 is 39.0%, 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 $22.0 million during the twenty-six weeks ended July 29, 2014 compared to $26.1 million during the twenty-six weeks ended July 30, 2013.

 

Off-Balance Sheet Arrangements

 

Except for a guarantee of approximately $0.7 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.

28


 

 

Liquidity and Capital Resources

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Twenty-Six Weeks Ended

 

 

July 30,

 

July 29,

 

   

2013

   

2014

Total cash provided by (used in):

    

 

 

    

 

 

Operating activities

 

$

40,664 

 

$

58,269 

Investing activities

 

 

(29,928)

 

 

(141,566)

Financing activities

 

 

(18,922)

 

 

78,562 

Net decrease in cash and cash equivalents

 

 

(8,186)

 

 

(4,735)

Cash and cash equivalents, beginning of period

 

 

14,556 

 

 

22,878 

Cash and cash equivalents, end of period

 

$

6,370 

 

$

18,143 

 

Operating cash flows.  Net cash provided by operating activities was $58.3 million for the twenty-six weeks ended July 29, 2014, compared to $40.7 million for the twenty-six weeks ended July 30, 2013. The $17.6 million increase in cash flows from operating activities as compared to the prior year period was primarily due to changes in operating assets and liabilities related to normal fluctuations in the timing of cash collections and cash requirements which generated an additional $15.8 million in cash.  Although net income decreased by $4.1 million from the twenty-six weeks ended July 29, 2014 compared to the twenty-six weeks ended July 30, 2013, the add-back of non-cash charges such as depreciation expense resulted in an additional $5.9 million increase resulting in a net increase to cash of $1.8 million.

 

Investing cash flows.  Net cash used in investing activities was $141.6 million for the twenty-six weeks ended July 29, 2014, compared to net cash used of $29.9 million for the twenty-six weeks ended July 30, 2013.  The $111.7 million increase was primarily due to a $104.9 million increase in cash used for acquisitions during the twenty-six weeks ended July 29, 2014.  In addition, capital expenditures increased $6.8 million primarily due to new store openings. We opened 109 new stores during the twenty-six weeks ended July 29, 2014, compared to 81 new stores in the twenty-six weeks ended July 30, 2013.

 

Financing cash flows.  Net cash provided by financing activities was $78.6 million for the twenty-six weeks ended July 29, 2014, compared to net cash used of $18.9 million for the twenty-six weeks ended July 30, 2013. The $97.5 million increase in cash provided by financing activities was primarily the result of net increased borrowings under the 2012 Senior Credit Facility of $96.2 million which were used to finance acquisitions, an increase of $0.8 million of cash provided by the exercise of common stock options, and a $0.5 million increase of cash provided by the excess tax benefits associated with stock-based awards.

 

Covenant Compliance

 

The 2012 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 Corp. and its subsidiaries, as adjusted to include pro forma results of acquisitions.

 

At July 29, 2014, there were no outstanding revolver borrowings under the 2012 Senior Credit Facility. There were standby letters of credit outstanding in the amount of $1.6 million and additional borrowing capacity of $98.4 million.

 

For more information about the restrictive covenants imposed on us by the 2012 Senior Credit Facility, please see “Risk Factors” in our Fiscal 2013 Annual Report.

 

We were in compliance with all of the financial covenants required under the 2012 Senior Credit Facility as of July 29, 2014. 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 the credit facility or requesting waivers from the lenders that are party to the agreement.

29


 

 

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.

 

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 2012 Senior Credit Facility that are calculated based on similar measures and 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 additional 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; and

 

·

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

 

30


 

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 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Thirteen Weeks Ended

 

Twenty-Six Weeks Ended

 

 

July 30,

 

 

July 29,

 

July 30,

 

July 29,

 

   

2013

   

2014

   

2013

   

2014

Net income

    

$

14,123 

    

$

14,299 

    

$

26,132 

    

$

22,019 

Income tax expense

 

 

8,965 

 

 

9,194 

 

 

16,639 

 

 

14,085 

Interest expense, net

 

 

2,795 

 

 

3,469 

 

 

5,642 

 

 

6,285 

Depreciation and amortization

 

 

7,231 

 

 

9,509 

 

 

13,441 

 

 

18,201 

Intangible assets and other amortization

 

 

612 

 

 

848 

 

 

1,153 

 

 

1,611 

EBITDA

 

 

33,726 

 

 

37,319 

 

 

63,007 

 

 

62,201 

Loss on store closings and impairment of store assets

 

 

483 

 

 

648 

 

 

744 

 

 

906 

Stock-based compensation

 

 

967 

 

 

1,198 

 

 

1,854 

 

 

2,556 

Vendor new store funds(a)

 

 

96 

 

 

(346)

 

 

983 

 

 

(443)

Acquisition-related expenses(b)

 

 

124 

 

 

7,193 

 

 

450 

 

 

9,757 

Other(c)

 

 

607 

 

 

3,184 

 

 

1,188 

 

 

4,970 

Adjusted EBITDA

 

$

36,003 

 

$

49,196 

 

$

68,226 

 

$

79,947 

 


(a)

We receive cash payments from certain vendors for each new incremental store that we open (“new store funds”). New store funds are initially recorded in other noncurrent liabilities when received and are then amortized as a reduction of cost of sales over 36 months in our financial statements. Historically, we have considered new store funds as a component of Adjusted EBITDA when received since new store funds are included in cash provided from operations. The adjustment includes the amount of new store funds received during the period presented and eliminates the non-cash reduction in cost of sales included in our results of operations.

 

(b)

Reflects both non-cash effects included in net income related to acquisition accounting adjustments made to inventories and other acquisition-related cash costs included in net income, such as direct acquisition costs and costs related to integration of acquired businesses.

 

(c)

Consists of various items that management excludes in reviewing the results of operations, including $1.6 million and $0.6 million of ERP system implementation costs incurred during the thirteen weeks ended July 29, 2014 and July 30, 2013, respectively, and $2.9 million and $1.2 million of cost incurred during the twenty-six weeks ended July 29, 2014 and July 30, 2013, respectively.

 

31


 

Reconciliation of Reported (U.S. GAAP) to Adjusted Statements of Operations Data

(In thousands, except share and per share amounts)

 

The following table provides a reconciliation of our “As Adjusted” statements of operations data for the thirteen and twenty-six weeks ended July 30, 2013 and July 29, 2014 with the most directly comparable financial measures in our “As Reported”, or U.S. GAAP, statements of operations data. Our “As Adjusted” data is considered a non-U.S. GAAP financial measure and is not in accordance with, or preferable to, “As Reported,” or U.S. GAAP, financial data. However, we are providing this information as we believe it may enhance year-over-year comparisons for investors and financial analysts.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Thirteen Weeks Ended

 

 

July 30, 2013

 

 

July 29, 2014

 

 

Income From Operations

 

Income Before Income
 Taxes

 

 

Net
Income

 

Diluted Weighted Shares

 

Diluted EPS*

    

    

Income From Operations

 

Income Before Income
 Taxes

 

Net
Income

 

Diluted Weighted Shares

 

Diluted EPS*

As Reported

    

$

25,883 

 

    

$

23,088 

 

    

$

14,123 

 

    

34,149,640 

    

$

0.41 

 

 

$

26,962 

 

    

$

23,493 

 

    

$

14,299 

 

    

34,523,620 

    

$

0.41 

% of sales

 

 

8.6 

%

 

 

7.6 

%

 

 

4.7 

%

 

 

 

 

 

 

 

 

6.6 

%

 

 

5.7 

%

 

 

3.5 

%

 

 

 

 

 

Acquisition-related costs (1) 

 

 

124 

 

 

 

124 

 

 

 

75 

 

 

 

 

 

 —

 

 

 

7,691 

 

 

 

7,691 

 

 

 

4,695 

 

 

 

 

 

0.14 

ERP system implementation costs (2)

 

 

894 

 

 

 

894 

 

 

 

547 

 

 

 

 

 

0.02 

 

 

 

1,738 

 

 

 

1,738 

 

 

 

1,060 

 

 

 

 

 

0.03 

Other (3)

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 

 

 —

 

 

 

1,636 

 

 

 

1,636 

 

 

 

999 

 

 

 

 

 

0.03 

Total adjustments

 

 

1,018 

 

 

 

1,018 

 

 

 

622 

 

 

 —

 

 

0.02 

 

 

 

11,065 

 

 

 

11,065 

 

 

 

6,754 

 

 

 —

 

 

0.20 

As Adjusted

 

$

26,901 

 

 

$

24,106 

 

 

$

14,745 

 

 

34,149,640 

 

$

0.43 

 

 

$

38,027 

 

 

$

34,558 

 

 

$

21,053 

 

 

34,523,620 

 

$

0.61 

% of sales

 

 

8.9 

%

 

 

8.0 

%

 

 

4.9 

%

 

 

 

 

 

 

 

 

9.3 

%

 

 

8.4 

%

 

 

5.1 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Twenty-Six Weeks Ended

 

 

July 30, 2013

 

 

July 29, 2014

 

 

Income From Operations

 

Income Before Income
 Taxes

 

 

Net
Income

 

Diluted Weighted Shares

 

Diluted EPS*

    

 

Income From Operations

 

Income Before Income
 Taxes

 

Net
Income

 

Diluted Weighted Shares

 

Diluted EPS*

As Reported

    

$

48,413 

 

    

$

42,771 

 

    

$

26,132 

 

    

34,076,567 

    

$

0.77 

 

 

$

42,389 

 

    

$

36,104 

 

    

$

22,019 

 

    

34,464,038 

    

$

0.64 

% of sales

 

 

8.4 

%

 

 

7.4 

%

 

 

4.5 

%

 

 

 

 

 

 

 

 

5.7 

%

 

 

4.9 

%

 

 

3.0 

%

 

 

 

 

 

Acquisition-related costs (1)

 

 

450 

 

 

 

450 

 

 

 

276 

 

 

 

 

 

0.01 

 

 

 

10,701 

 

 

 

10,701 

 

 

 

6,540 

 

 

 

 

 

0.19 

ERP system implementation costs (2)

 

 

1,845 

 

 

 

1,845 

 

 

 

1,131 

 

 

 

 

 

0.03 

 

 

 

3,089 

 

 

 

3,089 

 

 

 

1,888 

 

 

 

 

 

0.05 

Other (3)

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 

 

 —

 

 

 

1,833 

 

 

 

1,833 

 

 

 

1,120 

 

 

 

 

 

0.03 

Total adjustments

 

 

2,295 

 

 

 

2,295 

 

 

 

1,407 

 

 

 —

 

 

0.04 

 

 

 

15,623 

 

 

 

15,623 

 

 

 

9,548 

 

 

 —

 

 

0.28 

As Adjusted

 

$

50,708 

 

 

$

45,066 

 

 

$

27,539 

 

 

34,076,567 

 

$

0.81 

 

 

$

58,012 

 

 

$

51,727 

 

 

$

31,567 

 

 

34,464,038 

 

$

0.92 

% of sales

 

 

8.8 

%

 

 

7.8 

%

 

 

4.8 

%

 

 

 

 

 

 

 

 

7.8 

%

 

 

7.0 

%

 

 

4.2 

%

 

 

 

 

 

 

 


*Due to rounding to the nearest cent, totals may not equal the sum of the lines in the table above.

 

(1)             Acquisition-related costs, which are included in the “As Reported” results of operations, consist of 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 as acquisitions are absorbed. On May 2, 2012, we acquired all of the equity interests of MGHC Holding Corporation (“Mattress Giant”), including 181 mattress specialty retail stores. On September 25, 2012, we acquired the assets and operations of Mattress XPress, Inc. and Mattress XPress of Georgia, Inc. (collectively, “Mattress X-Press”), including 34 mattress specialty retail stores. On December 11, 2012, we acquired the assets and operations of Factory Mattress & Water Bed Outlet of Charlotte, Inc. (“Mattress Source”), including 27 mattress specialty retail stores. On June 14, 2013, we acquired the assets and operations of Olejo, Inc., an online retailer primarily focused on mattresses and bedding-related products. On November 13, 2013, we acquired the equity interests of NE Mattress People, LLC (“Mattress People”), including five mattress specialty retail stores. On December 10, 2013, we acquired the assets and operations of Perfect Mattress of Wisconsin, LLC (“Perfect Mattress”), including 39 mattress specialty retail stores. On December 31, 2013, we acquired the assets and operations of two mattress specialty retail stores in Houston, Texas (“Mattress Expo”). On March 3, 2014, we acquired the assets and operations of  Yotes, Inc. (“Yotes”), including 34 mattress specialty retail stores. On March 3, 2014, we acquired the Virginia assets and operations of Southern Max LLC (“Southern Max”), including three mattress specialty retail stores. On April 3, 2014, we acquired the outstanding partnership interests in Sleep Experts Partners, L.P. (“Sleep Experts”), including 55 mattress specialty retail stores. On June 4, 2014, we acquired substantially all of the mattress specialty retail assets and operations of Mattress Liquidators, Inc., including 67 mattress specialty retail stores, which operated Mattress King retail stores in Colorado and BedMart retail stores in Arizona.  Acquisition-related costs, consisting of direct transaction costs and integration cost,s are included in the results of operations as incurred. We incurred approximately $7.7 million and $0.1 million of acquisition-related costs during the thirteen weeks ended July 29, 2014 and July 30, 2013, respectively. We incurred approximately $10.7 million and $0.5 million of acquisition-related costs during the twenty-six weeks ended July 29, 2014 and July 30, 2013, respectively.

 

(2)             Reflects implementation costs included in the results of operations as incurred, consisting primarily of training-related costs, related to the roll-out of the Microsoft Dynamics AX for Retail ERP system. During the thirteen weeks ended July 29, 2014 and July 30, 2013, we incurred approximately $1.7 million and $0.9 million, respectively, of ERP system implementation costs. During the twenty-six weeks ended July 29, 2014 and July 30, 2013, we incurred approximately $3.1 million and $1.8 million, respectively, of ERP system implementation costs.

 

(3)             Reflects expensed legal fees relating to our February 2014 debt amendment and extension recorded in the thirteen weeks ended April 29, 2014, and an impairment of store assets and severance expense resulting from the Company's realignment of its management structure at the beginning of the second fiscal quarter recorded in the thirteen weeks ended July 29, 2014.

.

32


 

 

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 2013 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.

 

Changes in Internal Control

 

During the thirteen weeks ended July 29, 2014, there were no changes in the Company’s internal controls over financial reporting that materially affected or are reasonably likely to materially 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.

 

33


 

 

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: September 5, 2014

By: 

/s/ R. Stephen Stagner

 

 

R. Stephen Stagner

 

 

President and Chief Executive Officer
(principal executive officer)

 

 

 

 

Date: September 5, 2014

By: 

/s/ Alex Weiss

 

 

Alex Weiss

 

 

Executive Vice President and Chief Financial Officer
(principal financial officer)

 

 

 

 

Date: September 5, 2014

By: 

/s/ Cathy Hauslein

 

 

Cathy Hauslein

 

 

Senior Vice President and Chief Accounting Officer
(principal accounting officer)

 

 

 

34


 

EXHIBIT LIST

 

 

 

 

Exhibit

 

 

Number

 

Exhibit Title

 

 

 

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

 

E-1