Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Alex Weiss

R. Stephen Stagner - Chief Executive Officer, President, Director and Member of Proxy Committee

James R. Black - Chief Financial Officer, Executive Vice President, Treasurer and Member of Proxy Committee

Analysts

Joshua Borstein - Longbow Research LLC

Michael Lasser - UBS Investment Bank, Research Division

Kate McShane - Citigroup Inc, Research Division

Keith B. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

Peter J. Keith - Piper Jaffray Companies, Research Division

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

Mattress Firm Holding (MFRM) Q3 2013 Earnings Call December 4, 2013 5:00 PM ET

Operator

Greetings, and welcome to the Mattress Firm Third Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Alex Weiss, Senior Vice President of Finance at Mattress Firm. Thank you, Mr. Weiss, you may begin.

Alex Weiss

Thank you, operator. Good morning, everyone, and thank you for joining us today for Mattress Firm's Third Quarter 2013 Fiscal Financial Results Conference Call. Let me remind you that certain comments made during the call today may constitute forward-looking statements made in and pursuant to and within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. Those risks and uncertainties are described in the press release and Mattress Firm's latest filings with the Securities and Exchange Commission. The forward-looking statements made today are as of the date of this call, and the company does not undertake any obligation to update these forward-looking statements.

Also during the call today, the company may be discussing adjusted EBITDA or EBITDA, which are non-GAAP financial measures. Please see the company's press release for a reconciliation to net income, the most comparable GAAP measure. If you do not have a copy of today's press release, you may obtain one by linking to the Investor Relations page of the company's website at www.mattressfirm.com. Additionally, please note that in today's earnings release, there is one graph that will be referenced on the call today.

I would now like to introduce the management team at Mattress Firm. Steve Stagner, Chief Executive Officer; and Jim Black, Chief Financial Officer. Management will make some comments, and then will be available for your questions.

With that, I will turn the call over to Mr. Steve Stagner. Steve?

R. Stephen Stagner

Thank you, Alex. Good afternoon, everybody, and thank you for joining us on our earnings call. Today, I will briefly highlight our third quarter results, give you an update on the integration of our acquired stores and recent acquisition activity, and then provide perspective on the business. Jim Black will provide a more detailed review of the past quarter's financial results and discuss our revised outlook for the rest of fiscal year 2013.

To begin, we would like to emphasize the continued success of our relative market share model, which has allowed us to grow both total and comparable store sales along with adjusted operating income in the third quarter of 2013 despite the ongoing pressure in consumer spending trends. We are pleased with our third quarter results, which were highlighted by a net sales increase of 18% to $326 million and comparable store sales growth of 2.9%, growing earnings per share by 18%, while opening 40 stores which increased our company-operated store base to over 1,150 units.

In response to the ongoing pressure from consumer spending trends, we put in place a number of sales initiatives. This, when combined with the early effects of increased manufacturer advertising, helped us drive increased unit sales and market share growth starting late in the third quarter and continuing into November. These initiatives include: number one, an enhanced emphasis on unit capture and market share gain through increased transactions; secondly, taking a more aggressive approach on a handful of select price points; and finally, broadening the availability of third-party consumer financing. We are confident that we can build on these recent trends and continue to drive unit sales performance because of the following factors. To begin with, we have softer prior year sales comparisons in the fourth quarter of fiscal 2013. Secondly, we anticipate -- the anticipated ongoing advertising media spend by manufacturers focused on the higher-end specialty category; and finally, ongoing improvement in acquired stores, albeit with a smaller impact from the former Mattress Giant stores, given that they are now comping against improved results. While we are excited about the improvement in sales trends that we have started to achieve from these initiatives, we made a deliberate decision to capture additional units, which has resulted, as expected, in a trade-off in margins. Given the ongoing consumer environment, we feel that this trade-off has been effective in allowing us to grow our bottom line while driving same-store unit growth. While we don't view this as a long-term shift in strategy, we will remain focused on driving same-store sales and units, so long as this choppy retail environment persists.

Now let me provide some additional color on our third quarter results. Our acquired stores continue to perform well. In particular, the former Mattress Giant stores we acquired in May of 2012 delivered approximately 15% comparable store sales growth and contributed approximately 200 basis points of comparable store sales improvement for the quarter. The strong performance in our markets where we acquired the former Mattress Giant stores continue to validate the strength of our relative market share strategy. We drove same-store unit growth of 4.2% in the quarter as a result of these sales initiatives, and from strong sales performance at an annual state fair event. Same-store unit growth was also driven by improved conversion and an uptick in traffic once all of our initiatives were executed and the early effects of increased manufacturer advertising begin to take hold. As we chose to capture a greater number of the units available, we deliberately traded off some average unit price or AUP and product gross margin. During the quarter, AUP decreased 130 basis points and product gross margin decreased 110 basis points. However, with this AUP decline, there was an AUP increase in the specialty category on a like-for-like basis.

The 2.9% increase in our comparable store sales was driven by a 4.2% increase in same-store units, partially offset by a 1.3% decrease in AUP. The improvement in our comparable store sales began to gain traction in October as a result of these initiatives. Looking forward, we are optimistic that the pullback in the industry level advertising directed towards the high-end consumer is now largely behind us, which helps explain our sequential gain in specialty mattress sales mix from the second quarter to the third quarter. We are pleased that our sales initiatives and the early effects of increased manufacturer advertising helped us improve upon our first half comparable store sales trends, allowing us to achieve, as expected, positive comparable store sales in the third quarter. We will continue to concentrate on the basic pillars of our business in the areas of selling intensity, merchandising assortment, real estate quality and advertising effectiveness that are intended to maintain an excellent buying experience for our customers.

Now let me give you an update on the Mattress Giant acquisition that happened in May of 2012 and other recent acquisition activities. As highlighted in the chart included in today's earnings release, the former Mattress Giant stores continue to outperform the balance of the chain, albeit at a lower percentage than prior quarters due to the fact that their productivity is getting closer to that of the overall chain average and the stores have anniversary-ed their rebranding as Mattress Firm. The increased advertising spend in the markets where the former Mattress Giant stores are located continued to drive significant sales and market share increases, and has helped offset cannibalization of our legacy stores. As these acquired stores have continued to ramp up their sales, we have achieved expense leverage and operating margin expansion. This is further evidence that our core relative market share strategy is working. Now that our organization has had a chance to fully integrate our previous acquisitions, we are excited to update you on the progress of 2 recent additions that we have pursued following the third quarter. Once completed, these acquisitions will add 44 stores to the chain, primarily in Wisconsin and Nebraska. Jim will provide additional details.

Due to the strength of our new sales initiative and ability to open a large number of productive stores, we are increasing our sales and new store guidance for the remainder of the year. It's important to keep in mind that our deliberate effort to capture additional units came with a trade-off in margin. And as a result, we expect to remain within the previously stated earnings per share range, the details of which will be provided by Jim.

In closing, despite a weak overall bedding environment, the company achieved strong growth during the third quarter of 2013 from organic new store openings, continued strong performance from our previous acquisitions and comparable store sales growth. As a leader in our industry, we continue to believe in our relative market share model. We are optimistic for the remainder of the year and look forward to creating additional value for our shareholders.

I will now turn the call over to our CFO, Jim Black.

James R. Black

Thanks, Steve, and good afternoon. I'll focus my commentary on the fiscal third quarter that ended October 29, and then our fiscal 2013 guidance. During the third quarter, we reported adjusted EPS of $0.55, an increase of 18.1% over adjusted EPS of the prior year quarter. Adjusted EPS for the current quarter excludes costs of our ongoing ERP implementation project that are included in our GAAP results. Diluted earnings per share on a GAAP basis, including these costs, were $0.53 based on weighted outstanding diluted shares of 34.1 million.

Net sales in the third quarter were $326 million, an increase of $49 million or 18% over the same period of the prior year. The increase in sales included comparable store sales growth of 2.9%, adding $7.9 million in sales during the quarter. Stores we opened and acquired added incremental net sales of $45.1 million, and stores we closed reduced net sales by $4.1 million during the quarter.

Comparable store sales growth of 2.9% was comprised of a 4.2% increase in unit sales, offset partially by a 1.3% decrease in AUP, which was related to the sales initiatives that Steve described. As for the cadence of comparable store sales results during the third quarter, we experienced a continuation of the relatively flat growth of the fiscal second quarter through the end of September.

As we entered October, the sales initiatives that Steve mentioned took effect and drove a significant amount of comparable store sales growth throughout the chain through the end of the third quarter. Furthermore, the 2.9% total comparable store sales increase for the quarter included approximately 200 basis points from the former Mattress Giant stores acquired in May 2012, and approximately 150 basis points from sales generated at a large annual state fair event that occurred over 3 weeks in late September and early October.

During the third quarter, sales of Specialty Mattress products comprised 44.3% of our net sales, compared with 52.2% during the prior year quarter, while sales of conventional mattresses comprised 46.5% of our net sales compared with 39.4% during the prior year quarter. While we continue to experience a higher mix of conventional mattress products sales versus the prior year, reflecting the industry's resurgence in innerspring and hybrid products, the mix of specialty mattress sales increased sequentially by 160 basis points during the third quarter. The company opened 40 stores during the third quarter while closing 6, bringing the total number of company-operated stores to 1,155 at the end of the third quarter. Year-to-date, the company has opened 121 stores while closing 23.

Gross profit increased 14.4% to $126 million in the third quarter compared to the same period of the prior year. As a percentage of sales, gross profit decreased 110 basis points to 38.6% over the prior year. On an adjusted basis, excluding acquisition-related costs incurred in the prior year, the decrease was 130 basis points. This adjusted decrease has several significant components:

First, product gross margins decreased 110 basis points from the prior year. There was no significant change in the term under which we purchased merchandise, and the decline was a result of sales initiatives described by Steve that successfully drove unit sales during the latter part of the third quarter.

Second, comparable store sales growth drove leverage over store occupancy and other constant recurring costs, resulting in gross margin expansion of 30 basis points during the third quarter. The anniversary of the Mattress Giant acquisition, which occurred at the beginning of the second quarter, continues to drive year-over-year expense leverage as we expected, and the 30-basis-point increase in overall gross margin included 50 basis points of improvement attributable to the acquired stores. Third, our entrance into new markets, which results in lower leverage over store occupancy, warehousing and other operating costs while we ramp up sales, resulted in 40 basis points of expense deleverage. And finally, there was a combined net decrease in gross margin of 10 basis points across several smaller categories due primarily to normal fluctuations.

Sales and marketing expense was $74.6 million for the quarter, an increase of $7.1 million over the prior year. Sales and marketing expense as a percentage of net sales improved by 150 basis points to 22.9% compared to the prior year period. The advertising expense component of sales and marketing increased $3.8 million to $26.8 million for the third quarter. Advertising as a percentage of net sales improved by 10 basis points during the third quarter to 8.2%.

The non-advertising components of sales and marketing expense, consisting mainly of salesman compensation, increased $3.3 million to $47.8 million for the quarter, primarily as a result of the increase in net sales. This expense, as a percentage of net sales, improved by 140 basis points over the prior year to 14.7%. As a reminder, we reported 100 basis points of expense deleverage in this category during our third quarter earnings call of last year that was attributed to the temporary inefficiencies in salesman staffing levels resulting from the Mattress Giant acquisition.

General and administrative expense on a GAAP basis increased $0.3 million to $21.2 million for the third quarter as compared with the prior year period. This expense as a percentage of net sales improved by 100 basis points to 6.5% compared to the prior year period on a GAAP basis. On an adjusted basis, general and administrative expense increased 30 basis points to 6.2%, excluding $1 million of the ERP implementation cost in the current year and $4.4 million of acquisition-related cost in the prior year. The increase in expense in this category over the prior year reflects ongoing investment in our corporate infrastructure to support our growth initiatives and higher ongoing costs related to our new ERP system.

On a GAAP basis, operating margin was 9.7% in the third quarter. On an adjusted basis, operating margin declined 10 basis points compared to the prior year to 10.0%. In summary, the significant changes in adjusted operating margin are comprised of a 130-basis-point decline in gross margin, a 150-basis-point increase from selling and marketing expense leverage and a 30-basis-point decrease from general and administrative expense deleverage.

Total other expense for the third quarter, consisting mainly of interest expense, was $2.5 million, an increase of $0.4 million from the prior year due primarily to the 150-basis-point increase in the interest rate on approximately $200 million of outstanding term borrowings under our credit agreement amendment completed in November of 2012. The effective income tax rate was 38.0% for the third quarter, which was slightly below our expected full year effective rate of 38.6%.

I'll now turn to the balance sheet and statement of cash flows for a brief review. During the third quarter of 2013, we generated $30.3 million in operating cash flows, incurred $13.5 million in capital expenditures and reduced outstanding debt $7.5 million. At the end of the third quarter, cash was $15.2 million, an increase of $8.9 million during the quarter, with approximately $98 million of availability under our revolving credit facility. Total debt was $225 million, with no outstanding revolver borrowings, and net debt leverage was approximately 1.48x.

Now I'll provide more detail on our recent acquisition activities mentioned earlier by Steve. On November 13 of this year, the company completed the acquisition of a small mattress retailer operating under the name Mattress People. The acquired business consists of 5 mattress specialty stores located in Nebraska and Iowa for a total cash purchase price of approximately $1.8 million subject to customary post-close adjustments. The company intends to rebrand the acquired stores as Mattress Firm.

On November 26 of this year, the company entered into an agreement to acquire the assets and operations of Perfect Mattress of Wisconsin, LLC, a Mattress Firm franchisee, for a total purchase price of $6.3 million, subject to customary adjustments. The purchase price consideration will consist of cash and a $2.0 million seller note that is payable in quarterly installments over 1 year.

Perfect Mattress began its operations as a Mattress Firm franchisee in 2009 and currently operates 39 stores located in Wisconsin and Illinois. The closing of the asset purchase is expected to occur in the fourth fiscal quarter of 2013 and remains subject to the prior satisfaction of customary closing conditions. Both acquisitions occurred after the conclusion of our fiscal third quarter and, aside from subsequent event disclosures, are not reflected or reported in our third quarter financial statements.

Now I'll address our updated financial guidance for fiscal 2013, which is comprised of the 52 weeks ended January 28, 2014. We currently expect full year sales in the range of $1.217 billion to $1.221 billion (sic) [$1.224 billion], an increase of approximately 21% as compared with fiscal 2012. The sales estimate includes $2 million to $4 million of incremental sales in the fourth quarter of 2013 from the acquired and to be acquired stores I previously discussed. We currently expect full year adjusted EPS in the range of $1.75 to $1.83, which is unchanged from our previous guidance. Our adjusted EPS estimate excludes incremental expenses directly related to our ERP system rollout and a small amount of acquisition-related cost from recent acquisitions. EPS on a GAAP basis, including these incremental expenses, is expected to be in the range of $1.65 to $1.73.

As we have discussed, the company has experienced an improvement in traffic and unit sales in recent weeks and our guidance includes our expectation that those trends will continue through the remainder of the fourth quarter based on information currently available to us. With these improvements, along with the anniversary of comparable store sales declines in the prior year, our sales guidance anticipates mid- to high-single digit comparable store sales growth for the fourth quarter of 2013, resulting in flat to low-single digit comparable store growth for the full fiscal year, including approximately 200 to 250 basis points of comp store growth resulting from fiscal 2012 acquisitions.

Our guidance anticipates 140 to 150 new organic stores. Net of closures, we expect net organic store unit increase in the range of 110 to 150 -- 115. This is an increase of 5 net store units from our previous guidance, the majority of which will be added late in the fourth fiscal quarter of 2013, with very little effect on estimated sales for the full year. With the anticipated addition of 44 stores during the fourth quarter from the acquisitions I previously discussed, we expect to end fiscal 2013 with approximately 1,215 company-operated stores.

Finally, the company has experienced product margin declines since the beginning of October, and we expect those effects to be present throughout the remainder of the fourth quarter as we remain focused on our efforts to drive traffic and unit sales. In addition, the acquisitions that I previously discussed are expected to have a slight drag of approximately $0.02 on adjusted EPS in the fourth quarter before turning accretive in fiscal 2014. As a result, although we have raised our estimated sales range, we are maintaining our previously estimated adjusted EPS range.

This concludes our prepared remarks. And at this point, the operator will open the call for questions.

However, before we begin, taking questions, I want to clarify that our revised sales guidance range for fiscal 2013 is $1.217 billion to $1.224 billion.

With that operator, please open the call to questions.

Question-and-Answer Session

Operator

Our first question comes from the line of Budd Bugatch with Raymond James Financial.

Unknown Analyst

This is Bobby [ph] filling in for Budd. My question -- my first question comes -- if you can provide any color on Black Friday. First, your expectations? Any traffic trends and any sort of color that could be helpful.

R. Stephen Stagner

Yes, Bobby [ph], this is Steve. Typically, as we've talked before, we don't like to give any specific comments on holidays. What we can mention is that the trends that we saw -- the positive trends that we saw in October, carried over into November. And we saw those trends through the Black Friday holiday.

Unknown Analyst

All right. And then secondly, I guess, was there any change in the floor mix of products this quarter that might have led to some of the improvements in sales and whatnot?

R. Stephen Stagner

Bobby [ph], there was no direct change in the floor mix that would drive the sales. It was more or less the initiatives that we discussed, which were the way we merchandise and price during the quarter.

Operator

Our next question comes from the line of Josh Borstein with Longbow Research.

Joshua Borstein - Longbow Research LLC

You had mentioned within the specialty category, you saw, I think, an increase in ASP. I was just wondering if that was correct and maybe if you can provide a little more detail on that.

R. Stephen Stagner

Yes, certainly, Josh. We did see an increase in AUP in the specialty category, and that was largely driven by what we would say would be a direct relationship with the advertising that specifically Tempur-Pedic did in the category. We started to see those trends emerge as that advertising came back. And that helped fuel the overall increase we saw year-over-year and sequentially in specialty category.

Joshua Borstein - Longbow Research LLC

Okay, and given the resurgence in advertising for the specialty premium category was, was the mix of conventional versus specialty mattresses, was it surprising to you at all, or did it kind of come in within expectations?

R. Stephen Stagner

I think, it -- Josh, it came in within expectation that we have been talking about for many quarters here that advertising, it's a very important component to the specialty sales. We've gone 4 consecutive quarters with reduced levels of advertising. We're starting to see the manufacturers, in particular Tempur-Pedic, get -- renew their commitment to the advertising with focused messaging. And we're starting to see the early signs of improvement there and that's as expected.

Joshua Borstein - Longbow Research LLC

Okay. And then just one more for me, based on the previews you've seen so far from the vendors, what they have in store for 2014, and I realize you can't speak to anything in particular, but on the whole, on the spectrum of incrementally better to transformational, how would you describe the new lineup you've seen so far for 2014?

R. Stephen Stagner

I think we're very optimistic about most of what we've seen.

Joshua Borstein - Longbow Research LLC

Okay, any more detail you may offer, is it...

R. Stephen Stagner

Josh, I appreciate that. I don't think it would be fair to the manufacturers to highlight any details, particularly because they haven't had the opportunity to show those at market. So we're optimistic about a lot of the lines that we've seen and there will be a little more work on some of the lines, and we're very optimistic and I think that we'll stick there.

Operator

Our next question comes from the line of Michael Lasser with UBS.

Michael Lasser - UBS Investment Bank, Research Division

I'm curious about, how long you think you'll have to undertake some of the initiatives, especially trading margin for units? You suggested at the beginning of the call that you don't think it's an open ended strategy. So I'm wondering how long you might think it persists.

R. Stephen Stagner

Yes, it's a great question, Michael. And I think from our perspective, as we go back and look at the last couple of quarters, we've certainly seen a choppy environment. Consumer confidence has trended downward, unemployment, still not better. And there's just some choppiness in the overall category, and we wanted to take, as I talked about on the last call, we wanted to take matters into our own hands, and we have certainly wanted to communicate to the marketplace and our staff that we wanted to win at retail. And that's why we put the measures in place that I talked about last quarter and now I'm revealing what we did. And I think that we're going to keep the throttle down to try to maintain some consistent momentum in growing the top line. And as we demonstrated, with growing our EPS, we feel like it was a very efficient trade-off and as long as we can maintain that trade-off until trends start reversing in the macro, I think we're going to keep the throttle down.

Michael Lasser - UBS Investment Bank, Research Division

What'll you be looking forward to give you a sign that you can reverse those -- the initiatives?

R. Stephen Stagner

Well, I think we're seeing some positive signs overall, Michael. But, I mean, with seeing the consistency that we've been seeing over the past couple of months. But at the same time, until we start seeing some turns in the macro. That's going to be one of the signs. And then, it's nice to see the renewed commitment in advertising, but I want to point out that the industry is still kind of flat-ish to last year, as a whole, despite the fact that Tempur-Pedic is doing a great job and they're showing some nice gains over prior year and their commitment to advertising. But as a whole, in our third-party research, we're seeing the industry as flat-ish. Until we start seeing levels that we saw a few years ago, I don't think that -- it's a little early to say that we're going to pull back on our focus on winning at retail while driving up our gross margin dollars.

Michael Lasser - UBS Investment Bank, Research Division

I mean, on the product breakdown, it looks like -- well, was it an intentional strategy to aim some of these initiatives on the conventional side or is that an outcome of both the market dynamics and what you're doing?

R. Stephen Stagner

Well, I think, Michael, last quarter, I talked about the fact that our promotional units were behind prior year on a per-store basis. We recognized in the macro that the consumer making less than $50,000, as you've seen in other retailers, have struggled a little bit to get out. So we took a deliberate approach on, like I talked about on the last call, on the things that we knew that we could control. And we wanted to grab some units back, we wanted to do that in an effort and in a methodical way that we felt could be accretive to the bottom line. And so that was the backdrop as to why we needed to, in short, sell more mattresses to more humans. And that's what wasn't happening. We weren't getting the units growth or the traffic growth that we needed in the first half of the year, and it's as basic as let's go after that. And I think what we've demonstrated and continue to demonstrate is there's a lot of levers in our business that we can pull on from quarter-to-quarter, and we try to pull on the ones that will give us the best return to the best of our ability.

Michael Lasser - UBS Investment Bank, Research Division

Okay. My final question, just pushing that point a little bit further, why haven't you seen a rebound in specialty?

R. Stephen Stagner

We did see a rebound in specialty. Our scope specialty was up. Is that -- was that your question or not?

Michael Lasser - UBS Investment Bank, Research Division

Well, I mean, we're looking at specialty dollars. They were down $300,000 year-over-year in the third quarter. So -- then you saw a $40 million gain in conventional mattresses.

R. Stephen Stagner

Yes, it goes back to -- it's driven -- Tempur-Pedic is doing well, and they have supported it with advertising. And I think that the rest of the specialty category hasn't been supporting the advertising as well. And so that's part of the answer.

Operator

Our next question comes from the line of Kate McShane with Citi.

Kate McShane - Citigroup Inc, Research Division

I was wondering if you could give a little bit more detail with regards to how you communicated the promotions in your store during the quarter. Will this change as we go into fourth quarter?

R. Stephen Stagner

So Kate, can I clarify the question again? So you wanted to get a little more detail on the initiatives?

Kate McShane - Citigroup Inc, Research Division

Or how it was communicated to the customer?

R. Stephen Stagner

Okay, great question. So Kate, it was a combination of efforts. It wasn't any one specific effort. So part of the communication to the customers was through advertising and certain different price messaging that we had. And secondly, we had some lower price points on a small handful of beds that were at point of sale. And so the combination of the invitation with the advertising and the execution in store is what helped communicate the message to both the consumer and our sales associates that we're going to win at retail and that we're going to have competitive pricing on very price leader-type shop-able items.

Kate McShane - Citigroup Inc, Research Division

Okay, great. That's helpful. And then my second question is a little bit broader. It does appear that the furniture retailers, the more traditional furniture, sofas, et cetera, seem to be comping maybe a little bit better than what we've seen out of mattresses. I just wondered if you had an opinion on how much you think maybe has been pulled forward because of the amount of innovation that we saw earlier in the cycle and do you think that's flat to up slightly is what we could come to expect or is there still an acceleration on the horizon?

R. Stephen Stagner

Yes, I think broadly, the Furniture category is coming off of different compares on a stack basis. We're comping up on a stack basis around 10%. And I think that as far as furniture players also trying to focus as mattresses being a good draw card for their category, it might be helping their business a little bit. As far as whether or not it's a draw forward, I still fundamentally believe that we have gone 4 consecutive quarters with very significant drops in advertising and/or inviting the consumer to come out in this category. Units are in the neighborhood of a year behind their peak in terms of -- there's probably about a year of units that are pent up. So I think we're very far from pulling forward anything in this category until consumer confidence comes back and unemployment improves, and we support that with a sustained level of advertising as amended [ph].

Operator

[Operator Instructions] Our next question comes from the line of Keith Hughes with SunTrust.

Keith B. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

Steve, back to the 3 elements you put to getting the unit moving forward. You did mention third-party financing, did you change the interest rate there? What kind of changes did you make to help that out?

James R. Black

Keith, this is Jim. So what we've done with financing and when we say broadening, we have some more offerings in terms of the secondary and tertiary finance providers that complement our primary financing provider. So that's what he means -- so those who -- those folks who would otherwise be declined from our primary provider, we now have -- we have second chances for them that they now -- that we're picking up some business from our ability to get them approved with a secondary or tertiary financing option.

Keith B. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

Okay, and to the second point brought up, Steve, about pushing the selective price points, does that -- do you do that by how you compensate the salespeople or what's the levers you can pull as a management team to make that happen?

R. Stephen Stagner

Yes, great question, Keith. It's a combination of both. The first thing is just identifying kind of some bellwether price points, some price points that we know are going to be highly shopped, making sure that we have shopped our competition and we are competitively priced. Secondly is, as we mentioned before, Keith, we have levers in our comp plan that without changing our comp plan, we can tweak the focus of our comp plan towards units or margin. And so we put a little heavier emphasis on unit productivity, and as a result of that, we were able to get the sales associates more focused on pulling on that unit lever, capturing those sales and capturing that consumer, and we saw that in our conversion increases.

Keith B. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

And you had referred in your guidance to mid- to high single digit same-store sale expectation for the fourth quarter. Will you see a similar mix of the total [ph] units and tickets down flat something like that? Is that going to be -- what the quarter is going to look like at this point?

James R. Black

I think what we expect, Keith, is that increase will be primarily unit driven.

Operator

Our next question comes from the line of Peter Keith with Piper Jaffray.

Peter J. Keith - Piper Jaffray Companies, Research Division

Was probably an obvious question, but I just wanted to clarify that state fair benefit that you got of a 150 basis points, would that have fallen into the -- primarily in the month of October for you?

R. Stephen Stagner

It kind of splits both September and October. The event runs towards the end of September and carries over into October. But it's all within the third -- it was all within the third quarter.

Peter J. Keith - Piper Jaffray Companies, Research Division

And so obviously, that's probably more of a shorter-term lift, so you're kind of -- you're anticipating that the sales trends are continuing, excluding the -- what you saw from the state fair lift or is just sort of all-in what you saw in October would be continuing through Q4?

James R. Black

Yes, the momentum that we're talking about that we've seen beginning in October and continuing really was without that event being a part of that increase.

Peter J. Keith - Piper Jaffray Companies, Research Division

Right, got you. Okay. And then if you can isolate this, too, you guys historically have had very good product margin expansion. I guess, on kind of like-for-like products, were you still getting some modest margin expansion if we were to kind of strip out the promotional cadence that you had?

R. Stephen Stagner

We got aggressive in a couple of different areas. Definitely, there was a handful of products in the promotional category and even in the premium category, we also got aggressive as a result of our focus on units in our incentive plan. And so I think it was a combination of a couple of different price ranges. We certainly saw some expansion in other areas, but our focus during the quarter was on units.

Peter J. Keith - Piper Jaffray Companies, Research Division

Okay. And then just lastly, Steve, so it was obviously a real nice story. So clearly, your promotional cadence is working. Would you give any thought to yourself as Mattress Firm is increasing your own advertising to broaden that message out and perhaps fuel the fire that's out there?

R. Stephen Stagner

Yes, so Peter, we -- during the quarter, I think you can see we increased our advertising in the dollars, very consistent with our sales increase and did so in such a manner -- we had a 17% increase in dollars. And so we ended up with a slight bit of leverage over our advertising. So we did it in a more efficient way. But we feel like we're going to continue through the fourth quarter with a healthy increase in advertising in the absolute dollars. What's nice about our model is with our increase in store counts, we can do that while maintaining or gaining a little bit of leverage over the expense as a percentage. So we're continuing to increase the ad dollars for sure.

Operator

Our last question comes from the line of John Baugh with Stifel.

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

Just quickly, was that the Texas State Fair? And is there a contract on that? Would you plan to do it again next year? How did that overall work for you?

R. Stephen Stagner

So that is the Texas State Fair. We've done that state fair. I think this is our sixth year. We definitely have contracts on that state fair. We do quite a few state fairs across the country. That happens to be one of the larger ones, and it's obviously a pretty productive one for us.

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

Is there anything you did, Steve, in particular this year that you didn't do in prior years that really worked? That can I presume be repeated again next year?

R. Stephen Stagner

Nothing I would talk about on this call but you can go to the state fair and see. But in short, John, we have gotten continually better. We've used a continuous improvement process for our fair event, and we candidly have been continually executing better year after year. If you look at the increase we had this year, you could say the same thing for the past 6 years. It's just the numbers are starting to make a bigger impact on the company. So it's starting to bubble up. But we're highly committed to events like this. We see it as an opportunity to get in front of a lot of consumers in a marketplace where we're the market leader, and we certainly enjoy seeing a couple million people over a 25-day period in Texas.

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

Got it. And then I can't recall, do you have traffic count or do you have any feel? If you don't, did your traffic go up, as well as your close ratio or was it all the latter, any feel for that on the promotions you were running?

R. Stephen Stagner

Yes, so sequentially as we talked about the cadence of sales, Jim talked about the cadence of sales in the back half of the quarter. You would say the traffic followed the same trend. We went from kind of being pressured on traffic to positive. We do have traffic counters, and we've seen that trend continue through period 10, and we've also seen a very similar relationship to conversion increase as these initiatives took hold.

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

And then lastly, quickly on the acquisition as you've announced, any feel relative to sales or earnings? What you paid consistent with prior acquisitions? Were these good performers, bad performers, et cetera?

James R. Black

I think that what we paid is fairly consistent with some of the recent acquisitions that we talked about. The big one particularly the franchisee, we think it's a great opportunity. It's a -- the franchisee has grown a very good business up in the Wisconsin area, but there's a lot of growth potential, a lot of room for us to run a relative market share model in those markets that they've already begun a foothold in and we think there's a lot of upside in that business down the road.

Operator

Mr. Stagner, there are no further questions at this time. I will turn the floor back over to you for closing comments.

R. Stephen Stagner

Thank you. So I would just like to close with thank you for joining us today on our call. We look forward to speaking with you on the next call, and I would like to wish you a great holiday season and hope you have a great evening.

Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Mattress Firm Holding Management Discusses Q3 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts