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Mattress Firm Focusing on Driving Relative Market Share

Mattress Firm Focusing on Driving Relative Market Share

From our standpoint, Mattress Firm s competitive strengths include, among other things, its unique Comfort by Color merchandise layout that addresses comfort first and finances second; its Happiness Guarantee ; an intense focus on driving relative market share (via organic store growth and/or acquisitions) to achieve sales synergies and market-level cost savings; a nationwide $79 red-carpet delivery promise with 40% of markets currently having same-day delivery capability and a goal of nationwide same-day service by 2016; and an emphasis on manager and associate hiring, training, and retention.

Management formally updated its five-year and longer-term growth targets. The company expects the following average annual growth factors over the next five years (i.e., by 2018), excluding any future acquisitions or new store concepts: 2%-5% comp sales growth, 8%-10% organic store growth (70% in existing markets; 30% new markets), 10%-15% total revenue growth, operating margin expansion (with a goal of exceeding 10% over the longer term), and 20% or better adjusted EPS growth. By 2018, management expects the company to reach 2,125 stores, $2.45 billion in revenues, and $315 million in adjusted EBITDA. In addition, as we had anticipated, the company officially established an ultimate store target of 3,000-plus locations, which management characterized as a very achievable goal.

The presentation highlighted the company s proprietary Scoop real estate site selection analysis tool that makes extensive use of trade-area data on customer demographics, mattress purchases, and competitive factors to determine total store potential within a given market. Regarding the 2%-5% five-year comp sales target, the company expects it to come from a fairly even split between units and average price (primarily from mix). Factors that could cause comps to exceed this target would be an improvement in broader consumer traffic patterns (relative to roughly flat trends over the past one or two years), enhanced product innovation, and more concerted and coordinated advertising/messaging among manufacturers and retailers.

As it relates to general advertising in the industry and building awareness of the importance of good sleep, key manufacturers appear to be starting to increase their advertising spending from depressed levels, which should also benefit retailers. This is coinciding with a sharp increase in product introductions this year. There is increasing buzz from the industry around the importance of sleep, and we note that Ellen DeGeneres has been highlighting this in general and Mattress Firm in particular on her highly successful show.

Also, a third-party study commissioned by Mattress Firm indicates that 65% of the mattresses being replaced are older than the suggested 8-year replacement cycle, with roughly 40% of these aged mattresses older than 15 years. While historical data is not available, this may suggest that there is pent-up demand that could be realized in a stronger consumer environment and/or with increased education/marketing on the part of industry players.

Mattress Firm Focusing on Driving Relative Market Share