Mattress Firm IPO: is the US retailer’s share a good buy?
US mattress retailer Mattress Firm plans to go public to raise $100m. It filed for an initial public offering (IPO) in January.
According to Mattress Firm’s preliminary prospectus of 7 January 2022, the Houston, Texas-based group plans to list its common stock on the New York Stock exchange (NYSE) under the symbol MFRM.
The IPO is subject to completion. The US Security and Exchange Commission (SEC) filing did not indicate Mattress Firm IPO price, date and the number of shares it’s offering to the market. The common stock on offer will be sold by existing stockholders. The group will not receive any proceeds from the IPO.
Although Mattress Firm’s revenue grew in 2020, the group is heavily indebted and demand for its products could be dependent on the overall macroeconomic outlook in the US.
Analyst Donovan Jones said on Seeking Alpha:
The company was acquired by integrated furniture supplier Steinhoff International in 2016, which put the Mattress Firm valuation at $2.4bn.
Ahead of the Mattress Firm IPO date 2022, let’s analyse the group’s business model, revenue, growth strategy and risk factors to help you navigate the launch of MFRM stock.
Mattress Firm Group Inc IPO 2022: what you need to know
Mattress Firm business overview
Mattress Firm claims to be “the largest omni-channel mattress specialty retailer in the US (based on US retail mattress revenue)”. Its sales channels are the 2,353 retail stores it has throughout the country and digital platforms, including MattressFirm.com and Sleep.com.
The group has developed a digital proprietary, machine-learning enabled tool that helps match customers to their ideal mattress, and other sleeping products. According to Mattress Firm, it is the number one retailer for Tempur-Pedic, Serta, Sealy, Purple, Stearns & Foster and Beautyrest brands (based on the number of purchased units from US vendors in 2020).
MFRM claims to be “the clear market leader in the large and growing US retail mattress and foundations industry”, with an estimated market share of approximately 20% as of the end of 2020.
Strategy and scale
Mattress Firm believes its wide range of products and price points is one of its strengths. The range of products it offers are conventional mattresses, specialty mattresses, adjustable bases and box springs, and accessories (bed linens, pillows and other sleep products).
According to the group, its widespread stores in strategic locations in the US with concentrated population have helped to maintain the retailer’s profitability:
Its corporate headquarters is in Houston, Texas. An estimated 82% of the US population lives within 10 miles of a MFRM store.
Mattress Firm determined the locations of its stores based on a complex algorithm with criteria including market rents, population, population density, average household income and other demographics. As a result, the group does not set up stores in areas “without enough of a concentrated population to profitably support a store, thereby excluding approximately 28 million people in fiscal 2021”.
However, the group has rationalised and optimised its store footprint to increase profitability since November 2018. To maximise real estate efficiency, eliminate duplicative and cannibalistic stores and reduce lease exposure, MFRM closed 972 stores in fiscal years 2019, 2020 and 2021 and opened 80 new stores.
Nearly all MFRM stores are leased – most contain multiple five-year renewal options and rent escalation provisions. During the temporary store closures when the US imposed Covid-19 lockdown measures, Mattress Firm negotiated favourable lease term modifications across its entire portfolio.
Growing revenue amid heavy debt in 2021
Mattress Firm’s revenue grew strongly during the Covid-19 pandemic as the group “pivot[ed] sharply towards digital offerings” to counter the effect of store closures in lockdown. But debt repayment led to a net loss in fiscal year 2021.
In connection with its emergence from bankruptcy in November 2018, the group entered into the 2018 Loans and a $125m asset-based lending (ABL) revolving credit facility. In November 2020, the company entered into a new $550m loan (the 2020 Term Loan) and the 2021 Term Loan for $1.25bn in September 2021. It also agreed to the 2021 ABL Facility, which gave it credit of $125m.
Source: Mattress Firm SEC filing
Rising mattress demand supported by growing US GDP
Mattress Firm expects that the growing awareness of high-quality sleep as a crucial factor to health and wellness will support sales.
Citing a 2021 report by the Better Sleep Council, the group stated that “consumers rate sleep as the single most important factor for their health and wellbeing, ahead of diet, exercise and mental health”. In addition: “The 2016 study from the Better Sleep Council found that the price that consumers expect to pay for a quality mattress had increased by 19% from 2007 to 2016.”
According to the 2016 study, the mattress replacement cycle in the US accelerated by 14% from 2007 to 2016. Mattress Firm said this “consistent replacement cycle of sleep products helps create a stable, resilient market.” The group believes its mattress market growth will be supported by the forecast rise in US GDP in 2022, as “historically, mattress sales growth has closely followed US GDP growth.”
Citing the International Monetary Fund forecast, US GDP is expected to grow at 4.9% in 2022.
Risk factors
Following this offering, the Steinhoff Group will indirectly hold a significant stake in the newly listed retailer. As a result, “the Steinhoff Group and its lenders may have interests that differ from those of our other stockholders,” said MFRM.
Investors who purchase shares in this offering “will suffer immediate and substantial dilution” as the group plans to issue more shares in fiscal year 2023.
Mattress Firm “expects to retain all future earnings for use in the operation and expansion of [its] business and do not anticipate paying dividends on [its] common stock for the foreseeable future”. Investors may not receive any return on investment, unless they sell their shares for a greater price than their purchased value.
Meanwhile, Mattress Firm’s primary operating subsidiary, Mattress Firm, Inc., and its subsidiaries are currently subject to certain restrictions and covenants under the credit agreements governing the Senior Credit Facilities, including limits on amounts of leverage, affiliate transactions, dividends to us and other restricted payments.
Additionally, the impact of Covid-19 has adversely affected and may continue to adversely affect Mattress Firm’s business, results of operations and financial condition.
When considering whether to invest in the company’s stock, you should always do your own research, considering the outlook and relevant market conditions. A number of factors dictate whether stock prices rise or fall, including the company’s fundamentals and broader macro-economic factors. There are no guarantees. Markets are volatile. You should conduct your own analysis, taking in such things as the environment in which it trades and your risk tolerance. And never invest money that you cannot afford to lose.
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