Mattress Firm: Still A Short

| About: Mattress Firm (MFRM)

I would have updated this writeup sooner, but I have been too busy hiding under my desk. Mattress Firm Holding Corp. (NASDAQ:MFRM) is up 42% since I recommended shorting it. Shame on me.

I thought MFRM was a short at $23. At $33, this has got to be one of the best shorts in the world now. Short sellers have been squeezed, and the nervous ones are willing to cover at any price. The twist is that J.W. Childs is about to exit its 64% stake, and they are willing to sell at any price. I have not talked to any J.W. Childs' employees, but an industry source tells me that they were surprised when the IPO priced at the high end of the range. They weren’t expecting so much enthusiasm for the stock. That’s the technical view I have.

What could fundamentally justify MFRM’s $1.1 billion valuation?

There has been a rebound in mattress sales from a cyclical low, but it is bifurcated. Tempurpedic reported a quarterly sales increase of 25%, but Sealy reported a 9% decline. Consumers appear to be shifting their purchases away from traditional mattresses to specialty mattresses. Mattress Firm says in the 10-K that this shift in product mix is good for them. About two-thirds of their business is traditional and the rest is specialty; and using TPX and Sealy as proxies, there would be a net gain in sales of about 2.5% [(.66 x .25) - (.33 x .09)]. BFD! We’ll have to wait and see what the actual total result looks like.

For what it’s worth, an employee at Mattress Giant told me this:

Profit margins on Tempurpedic are NOT very high. knock off foam products have much higher margins to them but lower success rates. All retailers need Tempurpedic for the name recognition but many try to sell off of them. Corsicana makes their Hampton and Rhoades line which is a really cheap product. Serta is always a cheap product. Been selling against them for 10 years.. I have no faith in the Serta product. Off brands can be marked up as much as possible provided you choose something that cannot be shopped down the street. That’s why most retailers do not use major brands for their low end. Those DO have low profit margins.

If you’re paying $1.1 billion to own the equity of a mattress retail chain, your major concern isn’t what’s going to happen over the next quarter or the next two quarters. The main question is whether there is any ongoing value to this business. What is the ongoing value of a very cyclical business with volatile earning power and low barriers to entry? Add to this concerns about underpaying workers and oversaturation. Add to this the fact that the economy still sucks and the average American is broke ass.

This company made $15 million in fiscal 2011. It is now trading at 75x that. It might make sense to pay 75x trough earnings for this business, but fiscal 2011 definitely wasn’t a trough year for earnings. There is almost no tangible equity in this business either, so the market is REALLY optimistic about the earning power.

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