Mattress Firm Holding's (MFRM) CEO Ken Murphy on Q1 2016 Results - Earnings Call Transcript

| About: Mattress Firm (MFRM)

Mattress Firm Holding Corporation (NASDAQ:MFRM)

Q1 2016 Earnings Conference Call

June 09, 2016 05:00 PM ET

Executives

Scott McKinney - VP, IR

Steve Stagner - Executive Chairman and Chairman of the Board

Ken Murphy - President and CEO

Alex Weiss - CFO

Analysts

Michael Lasser - UBS

Peter Keith - Piper Jaffray

Bobby Griffin - Raymond James

Keith Hughes - SunTrust Robinson Humphrey

Jessica Mace - Nomura Securities

John Baugh - Stifel, Nicolaus

Brad Thomas - KeyBanc Capital Markets

Curtis Nagle - Bank of America Merrill Lynch

Mark Rupe - Longbow Research

Seth Basham - Wedbush Securities

Brian Nagel - Oppenheimer

Operator

Greetings and welcome to the Mattress Firm First Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host Mr. Scott McKinney. Thank you. You may begin.

Scott McKinney

Thank you, operator. Good afternoon. Thank you for joining us today for Mattress Firm’s first quarter 2016 financial results conference call. I want to 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 provision 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 which could cause actual results to differ materially from such statements. Those risks and uncertainties include without limitation those described in today's 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 those forward-looking statements.

Also during the call today, the company will be discussing adjusted EPS, adjusted EBITDA and EBITDA, which are non-GAAP financial measures. Please see the company’s press release for a reconciliation to the most comparable GAAP measures. If you do not have a copy of today’s press release, you may obtain one from the Investor Relations page of the company’s Web site at ir.mattressfirm.com.

Leading our call today will be Steve Stagner, our Executive Chairman and Chairman of the Board. After Steve’s remarks, Ken Murphy, President and Chief Executive Officer will discuss our key initiatives and strategies. Then Alex Weiss, Chief Financial Officer, will provide greater detail on our results and outlook before opening up the call for Q&A.

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

Steve Stagner

Thank you, Scott and good afternoon everyone. Welcome to our first quarter fiscal 2016 earnings call. Joining me today are Ken Murphy, our President and Chief Executive Officer and Alex Weiss, our Chief Financial Officer.

First I will review our recent performance and revised outlook for the remainder of the year and then discuss our decision to move to one national brand for all of our nearly 3,500 stores. Next, Ken will provide a more detail on our performance to-date and discuss our strategies and initiatives to drive continued growth. Finally, Alex will take you through the financial results and expectations in more detail before we open it up for Q&A.

To begin our first quarter results were clearly disappointing, as we encountered prolific and unanticipated challenges in three distinct areas of the business, which I will discuss momentarily. The good news however is that we believe we have resolved and largely moved past each of these three issues, after mitigating these challenges our trends have now begun to return to positive territory as reflected in low single-digit comps over the Memorial Day holiday and the day since. However the impact of these challenges that began in Q1 and continued into early Q2 is both clear and profound. As a result we are revising our guidance for the full year.

While difficult to precisely quantify the sales impact we believe the challenges were due to three primary factors that Ken will take you through in more detail. One, a systems upgrade that caused an extended disruption to the business; two, an elongated and painful new product rollout that resulted in back orders, lost sales and frustrated consumers and sales associates alike; and three, challenges during the ramp-up period with a new primary financing provider in our Mattress Firm stores. To illustrate the impact of these three unrelated factors our comparable sales trends were positive in the first period of the quarter and a reverse, as we encounter these temporarily challenges.

In the second and third periods of Q1, our same-store sales declined to negative low single-digits, and remained pressured until Memorial Day. Since Memorial Day, our trends have been positive and in line with our revised same-store sales guidance for the remainder of the year. This gives us additional confidence that we have put these challenges behind us. We believe these three compounding challenges accounted for approximately two-thirds of our shortfall to plan. We are also in the midst of a soft industry backdrop and saw continued pressure in our oil effected markets, which we believe accounted for the remaining one-third of the shortfall.

Our Q1 GAAP loss per share was $3.22 and our adjusted EPS excluding Tradename amortization was a negative $0.10, which was below our Q1 guidance for a loss of $0.07 to flat adjusted EPS. For the year we now expect adjusted earnings excluding Tradename amortization of $2.25 to $2.35 per share. This revised guidance reflects the impact of a pre-Memorial Day sales mix as discussed, the contemplation of potential temporary choppiness during the Sleepy’s brand conversion, and a continued expectation for a slightly softer retail environment.

The Q1 challenges we have discussed primarily impacted the Mattress Firm branded business and so I would like to give some color on the performance of Sleepy’s. Sleepy’s have larger than a very good story during our first four months of ownership. We had a dignified and accelerated path to a long-term expected synergy capture inside the business. Sleepy’s legacy store base outside of the overall markets comped slightly positive in Q1 and beginning in Q2 we have now started to convert the overlapping Sleepy’s stores in the Carolinas and in Chicago through the Mattress Firm banner.

To this end we now expect to convert substantially all of Sleepy’s stores to the Mattress Firm banner during fiscal 2016. This decision aligns with our long established national roll out strategy and positions us to begin realizing the numerous benefits of a national chain in 2017. After converting the highest return overlapping markets we plan to bring these to smaller Sleepy’s markets in a measured approach that will allow us to incorporate real time earnings, which should lead to better execution. We continue to find new opportunities with Sleepy’s and believe we can achieve many of the cost synergies faster than we first expected. We will continue to update you on our progress in future quarters.

Finally, I want to talk about the decision to move to one brand nationwide. Over the last few years we have announced many best practices from the best specialty retailers and talent in our industry. We now have nearly 3,500 company operated stores in 48 states, and are the largest and only national specialty Mattress chain. Behind is upon us to begin activating and unlocking the true power of all of these assets, to better focus the organization, recognize the full potential of the national chain and become the preferred choice for better sleep in this country. We have made the decision to consolidate all of our stores under the Mattress Firm brand, this is not a decision we took wisely and we engaged a top consulting firm to help make the right decision. Together we analyzed the branding decision through consumer, employee and financial lending and are confident that this is the best brand to roll out nationally.

We believe that presenting one unified brand experience to the consumer across all geographies and channels will provide meaningful benefits to consumers and shareholders alike in the realms of national advertising, sourcing, distribution, overhead and strategic focus. We look forward to rolling out a national offence reflective of the meaning accumulated best practices as expeditiously as possible. We have already begun the process of converting the overlapping market and expect to begin converting a legacy Sleepy’s markets primarily in fiscal 2016, followed by Sleep Train in 2017. Within approximately 18 months, we anticipate having nearly all that of the 3,500 stores under the Mattress Firm banner border-to-border and coast-to-coast.

Before turning the call over to Ken, I want to conclude by saying that as a long-term shareholder in Mattress Firm, no one is more disappointed in our results than I am. However, despite the Q1 results, I am proud to say that our team has worked tirelessly to move the organization past these challenges. And we are now better positioned to execute on our strategy. Many of you have heard me say this before the industry has never had a national chain and has long been our vision to build the first one. We are the largest and only national specialty retailer in an attractive and growing industry. Our focus now that we have assembled all the pieces is on activating them all for a continuously improving total guest experience across all touch points. With our scale and resources, we are best positioned to realize this vision. I look forward to working side-by-side with Ken and Alex and the entire organization as we build on our momentum.

Now I’ll turn it over the Ken to talk about our initiatives in more detail. Ken?

Ken Murphy

Thank you, Steve and thank you everyone for joining us today. I would like to start by going into a little more detail around the three issues that Steve highlighted. To begin, mid way to the first quarter, we underwent a software version change to our ERP system that supports the Mattress Firm brand. Prior to this change, we were essentially operating on an over version of the platform that lacked some of the functionality needed to achieve our long-term goals, including the consolidation of Sleepy's and Sleep Train banners under one national brand. Despite what was a multi month planning process that even included scheduling the change over on Easter Sunday when stores were stores were closed, we encountered a set of issues that resulted in significant downtime.

These primary issues continued into the week following Easter and we then experienced even subsequent smaller outages beyond that first week. This challenge disrupted sales and was highly frustrating for both gas and retail sales associates. I am pleased to report, however that we have now resolved these version change issue and the new software performed well over the key Memorial Day selling period. All told, despite what was a very painful short-term disruption upgrading to the current version was irrefutably a necessary step, one that enabled us to integrate Sleepy's and Sleep Train onto one system, one that allowed us to enhance our foundational capabilities for our omni-channel strategy and one that allows us to openly realize significant synergies as one national chain.

The second unique challenge that we encountered in Q1 was associated with the volume of significant new product introductions this year. Unfortunately some of the most important new products introduced in Q1 had an elongated and rocky roll out from a supply chain perspective manifesting an expensive shortages and back orders over multiple weeks. These issues affected the shipment of both floor samples and stock level inventory, tendering our ability to fulfill orders and ultimately the lacking momentum with these higher AUP products. That said, those issues are now clearly behind us and we are very excited about the innovations that we are seeing inside the new product lines. We are gaining nice traction with both the new version of our legacy bestsellers and with our new exclusive products.

And finally as many of you know, we transitioned into a new primary financing provider for our Mattress Firm branded stores on April 1st, effectively consolidating all of our stores with the same first look financing partner and enabling us to begin and join a meaningful synergy inside this space. During the seven week post transition ramp-up period, we experienced challenges that had an impact on our financing business. However I am pleased to report that our new partner has worked tirelessly with us to resolve those issues in an expedient manner and as of Memorial Day week we have now returned to pre-transition performance levels.

Collectedly, the factors Steve and I have discussed serve to result in Q1 same-store sales of negative 1.1%, notably below our expectations. Comprising this mix were units that declined by 0.9% and AUP that was essentially flat at negative 0.2%, largely driven by the sell-through of discontinued floor samples in our financing ramp up this year as discussed. In the past two weeks however, as Steve has shared with you, we have seen our trends begin to improve. And while it will clearly take some time for our associates to fully ramp backup from the effects of this factor of challenge. I can tell you definitively that optimism inside this organization is high and those obstacles are now behind us and our sights are squarely focused on the fundamentals of running this business.

Before turning more fully to those ongoing focused areas, let me take a brief moment to touch on Sleep Train’s performance during the quarter. Although starting slow in the quarter as this brand based both a strong comparison in the prior year period and faced some unique to the West Coast challenges. Their performance during the quarter accelerated and has continued through the Memorial Day holiday. In contrast, the Mattress Firm’s Sleep Train was not impacted by either the systems upgrade or the change in financing provider. And the cadence of their performance improvement further attest to the unique nature of what we saw inside the Mattress Firm brand.

In summary, we believe we are well positioned to drive continued profitable growth at Sleep Train and realize the synergies that we have initially laid out. And finally, while off a small base we are quite pleased with the significant growth we continue to see in our e-commerce business. As the only national chain, we are ideally positioned to leverage the strategic advantages we have with our nationwide presence and our nationwide distribution. And we look to further exploit this advantage by continued investment in our omni-channel capabilities in the months ahead.

On a go forward basis, I can tell you that this organization is squarely focused on one thing, the fundamentals of execution. Against the recent multi-year backdrop of frenetic growth and intensive M&A activity and against the reach it multi-months backdrop of the challenges previously discussed. I couldn’t be more excited about the opportunity to turn our sights fully on to activating all of which we’ve now amassed.

Our focus on the fundamentals during this next chapter includes among other things some exciting enhancements to associate incentive programs that are now underway. Continuing to build momentum with our new product introductions, securing improved systems connectivity speed now that we have moved pass the software version change over. Integrating the over 1,700 stores, we recently acquired and continuing to work on optimizing our real estate portfolio in many recent M&A markets to drive profitability and a concerted investment in enhancing our omni-channel capabilities.

What I and Steve alluded towards continued improvement of the guest experience across all plus points, online, in-store and inside home delivery. And as a subset of this effort, we are expanding the scope of our in-store offering of the Dream Bed our proprietary bed in a box offering that with every sale made provides a new bed to a child or family in need. The results of our initial in test markets, our in-market tests, excuse me have been very positive with customer feedback highly affirming of the opportunity to try before they buy. We recognize that we are uniquely equipped to provide consumers with true choice across the dimensions of saving, selection and service and across whatever product spectrum and whatever purchase channel they may prefer. Moving forward, we intend to begin more aggressively leveraging our unique position here and I look forward to discussing these efforts more fully with you in the quarters to come.

In closing and in summary, while the results of the first quarter clearly, were not indicative of what we expect of ourselves during this next chapter. The challenges we face our primary behind us and we are encouraged by the improving trends in the business and we are excited about the opportunity to be fully focused on execution and on integration. 75 days into my new role of CEO, I can tell you, I have now even greater conviction and the opportunities inside this great company. And I want to thank all of our associates for their incredibly hard work during this challenging period. Ours is a team fiercely committed to becoming the preferred choice for Better Sleep and I look forward to showing shareholders exactly what we can accomplish in terms of long-term value creation when we’re focused on the fundamentals of this business.

Now I will turn the call over to Alex Weiss. Alex?

Alex Weiss

Thank you Ken and good afternoon everyone. Today, I’m going to cover two primary topics with you before we open it up for Q&A. First, I will take you through an overview of our results for the first fiscal quarter of 2016 including the adjustments to Q1 earning as a result of our acquisition. Second, I will discuss our revised outlook for fiscal 2016 including the influence is that Sleepy’s is expected to have on our consolidated financials in Q2 earnings.

Now beginning with the fiscal first quarter that ended May 03, 2016. Our net sales increased 49.2% compared to the same period of the prior year to 839.4 million. This reflected incremental sales from acquired in new stores partially offset by a comparable store sales decline of 1.1%. This comparable store figure included approximately 250 basis points of benefits from the inclusion of Sleepy’s e-commerce sales into our comparable store base.

Looking now at gross profit, gross profit dollars increased by 32% compared to the same period of the prior year to 265.8 million in the first quarter. As a percentage of sales, gross profit margin decreased more than 10 basis points compared to the same period of the prior year to 31.7%. On an adjusted basis gross profit decreased 280 basis points to 33% of sales for the current year quarter compared to the prior year. This decline was primarily the result of four main drivers, first, 255 basis points of occupancy deleverage, approximately 100 basis points of this deleverage was due to the increase in Sleepy's operations in our consolidated results.

Sleepy's stores currently have higher rents as a percentage of sales and we've multiple initiatives to bring this down overtime as we increase store volumes and reposition other stores. The remainder of the occupancy deleverage was the result of the decrease in same-store sales and the opening of new stores at Mattress Firm. Second, 75 basis points of deleveraging warehouse, delivery expense and other store expenses due to the inclusion of the Sleepy's operations which delivered a higher percentage of orders and a transition to higher service level of delivery providers at Mattress Firm. Third, a 35 basis point increase in product margins driven by the continuation of in store initiatives that we began during the second half of 2015 such as emphasizing exclusive products which generate higher margins both for us and for our vendors and finally, 15 basis points of leverage in depreciation expense. Please note that adjusted gross profit excludes 11.5 million of acquisition related cost in the current year.

Sales and marketing expense for the quarter delevered 80 basis points from the prior year quarter to 204 million or 24.3% of net sales. The non-advertising components of sales and marketing expense delevered 60 basis points from the prior year to 16.6% of net sales or 139.5 million for the quarter. This was primarily a result of higher sales and expense due to same-store sales decline and legacy healthcare claims still coming in under our old health insurance plan. The cost from these plans should decrease now that we have moved to a fixed cost private health insurance exchange.

Looking now at the advertising component of sales and marketing expense, this delevered 20 basis points from the prior year quarter to 7.7% of net sales or 64.5 million. This deleverage is largely due to the ramp-up of our community marketing efforts and the decline in same-store sales. General and administrative expense on a GAAP basis delevered by 80 basis points to 9.9% of net sales or 82.2 million for the first quarter as compared to the prior year period. On an adjusted basis, general and administrative expense improved 20 basis points to 7.1% of sales for the current year quarter compared to the prior year.

Adjusted G&A expense excludes 20.1 million of acquisition related costs and restructuring charges and 2.1 million of other non-recurring charges in the current year. The prior year on an adjusted basis, excludes 9.2 million of acquisition related costs, 0.7 million of ERP implementation costs and 0.3 million of secondary offering. On a GAAP basis, operating margin was negative 20% in the first quarter largely due to the 138.7 million impairment charge triggered by our decision to move to one national banner over the next 12 to 18 months. In addition to the non-cash impairment charge we also have non-cash Tradename amortization expense this year and through the first quarter of 2017 which I will discuss along with our guidance.

On an adjusted basis, operating margin decreased 360 basis points to 1.6%. The four largest components of this adjusted operating margin increase were a 280 basis point decline in gross margin, 80 basis points of combined sales and marketing expense deleverage, 20 basis points of combined operating margin declines in franchise fees and other miscellaneous items partially offset by 20 basis points from adjusted general and administrative expense leverage.

Please note that our adjusted operating margin decreased by 30 basis points more than our adjusted EBITDA margin which decreased by 330 basis points. This differential is primarily the result of additional adjustments related to vendor new store funds, depreciation and amortization and store closings in Q1 of fiscal 2016 compared to Q1 of fiscal 2015. These items all fall below adjusted EBITDA, but impact adjusted operating profit.

Turning now to depreciation and amortization, our non-direct operating expenses increased as a result of our continued new store growth and the acceleration of Tradename intangible amortization as a result of our decision to adopt one national banner. The largest area of increase was in depreciation and amortization where we saw a year-over-year increase of 10.7 million to 26 million during the fiscal first quarter. The effective income tax rate during the first quarter on both a GAAP and adjusted basis was 37.9%.

On a GAAP basis we generated a Q1 loss per share of $3.22 excluding intangible asset impairment charges, acquisition related costs, fixed asset impairment charges and other non-recurring charges. Adjusted EPS was a loss of $0.17 per share. This $0.17 loss per share included incremental non-cash Tradename amortization of $0.07. When we provided our Q1 adjusted EPS guidance range of negative $0.07 to flat EPS we were still researching the intangible component of Sleepy’s amortization expense. Excluding this amortization expense our EPS of negative $0.10 was $0.03 below the low end of our guidance range for Q1.

The $3.05 of EPS adjustment this quarter were attributable to $2.33 per share from the write off of Tradename intangible assets moving into our decision to adopt one national banner. $0.53 per share due to the elimination to put the overhead and expenses related to the Sleepy’s acquisition. $0.15 from the impairment of fixed assets as we optimize our store base and $0.04 in severance charges related to the streamlining of our management structure.

Despite the challenges in Q1 we have stated about our cash flow generation ability now that we have reached the cash generative summer selling season, and we have already reduced our revolver balance by 15 million quarter-to-date. We anticipate near-term cash flow generation from our operations as well as the previously discussed sale lease backs of Sleepy’s own property. We have signed definitive agreements for the sale lease backs and expect to achieve more than the $50 million in net proceeds we expected when we started the process. We expect these to close during Q2 and we will update you on the outcome next quarter.

Turning now to guidance, as Steve and Ken discussed our net sales year-to-date were impacted by the upgrade of our ERP software and elongated new product rollout cycle and the transition to a new primary finance provider. We have also seen continued pressures in the oil markets as well as a choppy retail environment. And as Ken just outlined we have several strategies in place to drive our business going forward and believe the challenges we faced in Q1 are largely behind us.

Given the magnitude of our sales and earnings to-date we are revising our guidance for adjusted EPS before Tradename amortization for fiscal year 2016 by $0.25 to a range of $2.25 to $2.35. Approximately $0.17 of the reduction is due to the issues in Q1 that continued until late before Memorial Day with the remaining $0.08 due to the softer retail backdrop during the remainder of the year. We have largely moved past these issues and our revised full year same-store sales guidance of 1% to 2% is in line with the trends we have seen during and since Memorial Day.

Thank you for your time and interest in Mattress Firm. Operator we will now open it up for Q&A.

Question-and-Answer Session

Operator

Thank you. At this time we will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Michael Lasser from UBS. Please go ahead.

Michael Lasser

Steve and maybe Ken as well can you offer some perspective on where your traffic per store is today versus where it was call it four years ago? Because clearly units have been under pressure or kind of up and down but I think there is a lot of concern out there that just traffic to your stores has been on the decline and that's been exacerbated by some internal and external issues. So if you could give us some sense is it 80% of where it was previously at peak or is that too cumulative or is it if you can provide of some sense that will be great?

Steve Stagner

Yes, Michael. This is Steve. Thank you. Well when I look four year ago I mean we had about a 1.1 million store average we've added 1,700 stores at typically lower volume stores when we bought their businesses and we are still at about 1.1 million in terms of absolute volume per store. So Michael I think it's been a little punitive to think that we are anywhere near traffic per store getting down anywhere close to what you are talking about we've also had six consecutive years of positive comps in 10 consecutive quarters. I think we definitely saw obviously some declines in units persist over the past couple of quarters or -- and so we are seeing some traffic declines but not to the level you are talking about.

Ken Murphy

Yes, I don’t know that I would have much to add to that Michael other than that moving in transactions are pretty good proxy for traffic that we do speak to in the public markets clearly it has been down although we won’t largely encourage to see sequential improvement in units this quarter perpetually against the backdrop of the challenges we talked about. So hopefully that will continue accelerating here into the balance of the year.

Michael Lasser

And Ken you spoke about the financing issues in general terms. Maybe you could provide more specifics and then I just have another follow up?

Alex Weiss

Sure and this is Alex. So with the financing as you know we shifted to a new partner who has been fantastic in their effort and enrolling out a customized program for us. During the ramp-up phase as the program was getting tweaked, we did experience a drop in our overall financing volume of close to around 10% during kind of a transitionary period. Good news is as Ken mentioned on the call our partner has been fantastic got that back to the level where it needed to be by Memorial Day and now things feel great from that perspective.

Michael Lasser

And Alex, my follow up question is embedded in your guidance for the second half for the year is the pretty significant improvement in your profitability, can you give us outline the factors that are going to drive that improvement in profitability? And in addition you are running pretty tight from a liquidity perspective can you talk about where your covenants are and how much breathing room you have with those covenants? Thank you.

Alex Weiss

No, no absolutely. So from a profitability perspective as you go throughout our year, you do see an uptick, there is a biggest reason for that is obviously Q1 and really into the first month of Q2 prior to Memorial Day, we had significant sales issues as Ken mentioned which we believe are temporary and we have come out of that since Memorial Day. And so as you know our business leverages up and leverages down from sales volume in the short run and to that will wait a lot on the profitability to date. When you take out all the fixed cost deleverage, our operations have been running nicely where we expected them and going throughout the course of the year part of the reason why you see more benefit particularly over the summer months is because the Sleepy's business was more summer seasonal than the Mattress Firm business which also has some summer seasonality in it. And so that’s really the reason for the profitability change over the year basically what our expectations are for our guidance for the rest of the year is that our comps are pretty similar to the rate that we have comped up for the last 10 days. So since the issues have ended.

To answer your second question around the covenants, based on our debt covenants that we submit to the bank which give you credit for a various items including the synergies that you are going to achieve in the short run were levered around four times right now on a debt to EBITDA basis. And our covenant is at 5.5 times. So we have about $100 million of flexibility from an EBITDA perspective before we would get in any issues with our covenants and that assumes that we stayed at the same debt levels that we are at today. And the very nice part as you know about this time of year is once you get into the summer selling season you generate a lot of cash and so we went through a Memorial Day, we have already paid down $15 million on our revolver since the start of the second quarter plus we have our sale lease backs under definitive agreement and expect to generate cash from those upon closing.

Operator

Next question comes from Peter Keith from Piper Jaffray. Please go ahead.

Peter Keith

First off I know that the Sleepy's e-com business was going to contribute about 300 basis points to the full year, is that kind of equal for Q1 and where you are quarter to-date?

Ken Murphy

Peter thanks for the question. What we saw was around that area closer to approximately 250 basis points of comp contribution in Q1 consistent with what we are seeing into Q2 as well.

Peter Keith

Okay thanks. And then you guys have a new breakout on the products by price point. So you are seeing I guess broader weakness at the higher end and then better trend at the low end, is that across the chain or is that more of a mix issue with Sleepy’s coming in the full?

Ken Murphy

Yes, the issue at the higher end of the range in Q1 for us was one really reflective of product line changeovers, not too dissimilar from prior experience when we have had a premium or luxury product waited, product change overs as we get out of all four samples obviously we see some affect there in terms of AUP, but also just lower revenue and then from a some of the challenges that we talked about or I guess I talked about on the call also contributed to that. The good news is that we -- once those issues were behind us and to be quite clear, the supplier challenges that we had are definitively behind us, we are actually seeing really nice performance there.

And in terms of the low end what we are seeing, strong activity there as well I mentioned in answer to Michael's question around units that we are actually pleased with the sequential improvement and optimistic that we will see a balanced mix of both unit and AUP improvement here as the balance of the year unfolds.

Peter Keith

Okay thanks Ken that’s helpful. And maybe just to follow up quickly on that with the elongated product cycles, did you get everything you wanted on the floors by Memorial Day?

Ken Murphy

Yes, we did Peter, what is perhaps a starveling store or two as an exception but any store that didn’t have the lines down it was not reflective of anything the suppliers challenges we had there, would have been just been if there was sort of legacy spots to sell-through. But the overwhelming majority of the floors were set, our associates did a fantastic job of trying to embrace all the training associate new products and leading the holiday recounts from the field a real source of energy I think for our team being excited around the new product introductions obviously a heavy focus on exclusive. But even some of the legacy bestsellers as I said on the call have really gotten off to a good start and we’re encouraged about that.

Operator

Next question comes from Budd Bugatch from Raymond James. Please go ahead.

Bobby Griffin

Good afternoon this is Bobby filling in for Budd, I appreciate you guys taking my questions.

Ken Murphy

Of course Bobby how are you?

Bobby Griffin

Alex, I was hoping, that you can maybe give us a little color on the cost for converting that average store to Mattress Firm maybe the total cost of all the conversions and how that’s going to be accounted for whether it’s going to be capital or expenses?

Alex Weiss

Yes, absolutely. So from a, there is really a combination of multiple components. The biggest component would be the sign change, which ends up costing basically around $20,000 or $25,000 per store. In addition, we’re going to putting in some new basic POP things like that and also they’re going to be some stores from the Sleepy’s business where we think we can do a little bit deeper, remodels, maybe change out some paints or some carpet or things like that, that can drive sales. And so the bucket of, we put a $40 million bucket in for CapEx during the current year and very nice thing about that from a CapEx plan. Is that our new CapEx number is now a $30 million number, which includes the full $40 million of CapEx related to those conversions, because by converting the Sleepy’s business quicker, we’ve been able to strip out almost $15 million from our original CapEx plan. And then we’ve also been able to strip out about $15 million of CapEx from the core Mattress Firm business. And so for about $10 million incremental to the plan we showed you before, we’re going to be able to convert the majority of the Sleepy’s stores in the current year.

Bobby Griffin

Okay. I appreciate that. And now what is the -- is the plan the same for the omni-channel brands are those all going to be rebranded to Mattress Firm as well, all the omni-channel, that you guys have to offer now with the acquisition?

Alex Weiss

No, actually Bobby, one of the real strengths we think is in the omni space is by having a diversity of digital platforms that we can continue to operate. Clearly the branded side, the Mattress Firm side will be, will have a real concerted focus on customer education, pointing folks to store locators, helping to speed up reviews and really that will be the brands, the digital brand that is focused on sort of a guided selling journey. But we’re going to continue to operate the host of other sites that we have. We think one of the best things about the Sleepy’s acquisition was a real rich arsenal of digital properties and we’re excited to see what they can do by virtue of being part of our team now.

Bobby Griffin

All right, I appreciate that. And then also on the balance sheet, usually I guess, the goodwill’s value kind of annually, but now with 1.5 billion of goodwill and another 100 million of intangibles on there, that is significantly above the market cap of close today, going to be above it we are closest to market given the indication in the afterhours. Can you give us a little color on kind of the process there and is there a risk of another a need for a goodwill write down coming in the coming quarters?

Alex Weiss

So none that we see, we follow all the standard accounting practices with regard to goodwill. As you know the amortization, the intangible impairment that we took during the quarter that was primarily related to the fact that we were writing down the brand names. And basically that was and fairly related to the Sleep Train brand name, which had about $100 million of impairment costs. What you’ll notice is that over the remaining year on about an annual basis we have about 17 million of annual amortization that will be primarily run down by the end of the first quarter of next year. And so we follow all accounting practices and the reason we have, a lot of goodwill, because we made a major acquisition and a lot of the acquisitions that you purchase generate a lot of goodwill in this category.

Bobby Griffin

All right, I understand. And then lastly, Ken do you have any type of rough estimate on what the ERP issue cause in terms of sales, the sales impact from that?

Ken Murphy

I would tell you Bobby. Bobby, I would tell you internally, we do. I think we’ve guided to or how we framed it on the call is probably as deep as we would go. And that is collectedly, the ERP issue, the supplier challenges and the ramp-up during new finance, we believe attributed to about two-thirds of the mess.

Operator

Our next question comes from Keith Hughes with SunTrust. Please go ahead.

Keith Hughes

A couple of questions, first going to the one national brand, you’re converting. Yes you guys are converting Sleepy’s in ’16 and then Sleep Train next year is that right?

Steve Stagner

That’s correct Keith.

Keith Hughes

I was a little surprised you would be doing Sleepy’s first in terms of Sleep Train has been under the fall for a while [indiscernible] Sleepy’s support structure.

Steve Stagner

Yes, I can explain that. And then but Keith when you, when we looked at it the first thing that we recognized is that there is a system point of sale system over at Sleepy's that's operating in a certain way and being a public company we felt a very important and urgent need to change that system over. So, the effort to go in and change that over is essentially very closer to the same effort of changing over the entire brand. Secondly, the stores because -- and primarily the reason for that Keith is it's a training effort so once you are in there in the stores the cost of getting in there is going to get you about two-thirds or three-fourths of the way there, so you may as well train them on compare by color and the other things which leads to the second point is that and I think Adam Blank the President of Sleepy's will be the first to tell you that the Sleepy's organization had not invested intensely over the past five or so years in their existing store base, I've personally visited a very large number of stores.

Well, we see if there is a big opportunity to refresh those stores and we see some pretty immediate upside and we also see some upside of putting in certain initiatives such as compare by color and the value centers inside the stores we think that that can get what we see Keith as a lower store average than our base chain as an opportunity for upside. When you contrast that to Sleep Train, Sleep Train is still performing very well overall in terms of a very high store average. We have the systems working well over there. We're not in an urgent need to change those systems. So we did decide to flip the order and as we think it will give us a bigger upside by doing it now.

Keith Hughes

Okay. So it's Sleepy's particularly in addition to the signage of the brand change you're also undergoing I guess what the floor looks like? Is there any change in sales and compensation practice procedure it is all coming in one time is that fair to say?

Steve Stagner

Yes, I mean once you are in effects in the stores and doing the training it's much easier just to go through a new program and as you probably know Keith because you followed us for a long time this is pretty much the offense we have done in 28 acquisitions and the faster we get in there and change things over it certainly removes that doubt that you have. The exceptions being to that rule where the West Coast would Sleep Train in and obviously sleep experts and the reason being there is you have very high store averages out there, and so we've been very careful to protect it. And it's slightly different advertising model. And so we've been implementing the heart of that advertising model in the Mattress Firm market, so by the time we get to 2017 we will have mastered a part of that advertising model and we'll take it over across the country.

Ken Murphy

The one caveat, Keith this is Ken. Just one caveat to add to what Steve said, I think where this might differ slightly from the previous 28 branded and just go in sort of the offence. We're pretty committed to making sure that we have the sort of newly defined best practice offence and obviously we have talked before about some of those best practices coming out of Sleep Train brand there are many of those inside Sleepy's as well and so there are some things that they've done in the merchandising space, compensation since you bring it up we've had some of the most senior Sleepy's field leaders be involved and sort of jointly helping us create the compensation plan of the future. So I think while you ultimately will see a new look and a new feel on the new system it will be reflective not just of sort of Mattress Firm of yesterday but hopefully it is sort of the best practices of Sleepy's and the Sleep Train and these other brands as well so.

Keith Hughes

I have got a question too on the second point of your issues in the quarterly the elongated product introduction and may be you got some private label you've been excited about but is that part of the issue in the quarter in addition to third-party brands that were coming in?

Ken Murphy

Yes, the issues that we have from a supplier’s perspective were fairly wholesale across, no pun intended across our entire supplier base those of our sort of long established suppliers but also some of the private label product as well a byproduct margin and probably of growth and there is a lot of complexity servicing our account to be sure. But, as I said on the call the good news is those have been rectified to a brand and to a product and that stuff is really in our rearview mirror.

Keith Hughes

Okay. And final question, you've mentioned Memorial Day getting back to what you're kind of projecting for the rest of the year. Do you think your numbers are indicative of what Memorial Day I feel I mean based on your comments it sounds like that industry is kind of struggling for growth right now?

Ken Murphy

Yes, and we don't usually talk holiday by holiday but we gave a little bit more color this time that we've returned to kind of that low single-digit growth rate between Memorial Day and the weeks after leading up to this call.

Steve Stagner

Yes and Keith I think deeper than that when we look at the quantification or the mitigation of the system outages that are not happening anymore and we look at the work that our third-party finance provider has done and we’re starting to see the approval rates and credit limits and all those things performing well and we didn’t have just the absolute knowledge that we're not in a back order situation anymore. Those are kind of the leading indicators that were causing the sales to fall those are gone and since those are gone and then in conjunction with that our sales have resumed and it's kind of back to the period one trends that we were having and so we’re looking at it saying we had some very clear distinguished events that occurred that were unrelated but happened as we prepare for the summer selling season, as those things happen it caused major headwinds. We tirelessly worked to fix those and our partners were fantastic. Our vendor partners, our financing partners all of the partners from our system partners across the board were all hands on deck to try to get them fixed and we did different tricks from prior taking a right leading us to the holiday weekend and then since then things have been really, really smooth so that's why we have lot of confidence. Go ahead Ken?

Ken Murphy

Yes, just your question around how does the industry do on Memorial Day I would channel checks be careful what you read probably I don’t know, but I think for us the fact that we are past it and beginning to ramp back up I think is a really encouraging thing. I would tell you the sting of what happened right before Memorial Day was still there for our folks I know it and literally as each week passes we get closer to July of the Labor Day we get further removed from that so our hope is that the Memorial Day was just a preview of what can be and even stronger summer selling season but we obviously didn’t think it will be prudent to guide anything above what we saw around Memorial Day.

Operator

Our next question comes from Jessica Mace from Nomura Securities. Please go ahead.

Jessica Mace

My first question is a clarification on those good change in the guidance those -- on the store rebranding was there already an impact anticipated that was reflected in your guidance you gave after the fourth quarter?

Ken Murphy

There was not an impact from the Tradename amortization we had not finished the calculations given the timing of the acquisition of the Sleepy’s business in order to perform that calculation plus we had not decided on our name so we didn’t know what brand or what Tradenames we would be impairing at the time of our Q4 release.

Jessica Mace

But in addition to the impairment any potential sales impact from any dislocation around the actual physical changeover of the Sleepy’s stores?

Ken Murphy

No we had built in a little bit of distraction element just given that you are doing a major acquisition and you always typically see a little bit of sales degradation as a result of a major acquisition, but we had not built in for change overs given that. We had built in for the overlap market change overs because we knew we were doing those.

Jessica Mace

Understood and apologies if you already said this but will those begin after the summer selling season?

Ken Murphy

Those have actually already began Jessica we started in the Carolinas and Virginia beach right before Memorial Day as the first round on our Chicago conversions began literally this very weak this next week I guess. And then we will begin moving to non-overlap but starting sort of small working our way to big as Steve said so that we can make sure we do some real time learning and adjust for any audibles we need to call on the flag.

I will tell you one thing I mentioned Chicago and perhaps shareholder shuddered given some of the well documented challenges we had converting Chicago the first time relative to signage knock on proverbial word but our ability to get signs up has been dramatically improved of our recent experience in fact we are almost 100% fully convertible at signs already in the Carolinas and Virginia beach and our expectation is that we will be north of 80% signage complete in Chicago by July 4th so we are pretty excited about that.

Jessica Mace

Good to hear. My other question relates to the comp guidance and the just what you mentioned about the improvement in traffic and units since Memorial Day and how potential improvement in the higher AUP products could impact the pricing contribution as well? Thank you.

Ken Murphy

Sure. So I guess Steve talked about the relative performance from today to four years ago around average floor volumes I talked a little bit about transactions being a proxy for traffic. I think some of the initiatives that we are focused on here inside the organization around better creating in an associate incentive program that can help reward their success but also helps the company and candidly helps our guest some of the obstacles we are trying to remove now that the wholesale systems issue from a software perspective is gone we are attacking sort of second level stuff the stud that is still interference from time-to-time like connectivity, like speed that sort of thing. The products that you mentioned have been incredibly well received really across the entire line and so those are the sorts of things that we are focused on from a momentum building perspective we think that we will continue to see now that the supply chain issues are past us that momentum we expect will only build and we will continue to hopefully have incentives and promotional offers that can help with units as well.

Operator

Our next question comes from John Baugh from Stifel. Please go ahead.

John Baugh

I just want to get clarity on the comp guidance what you're saying low single-digits now, is that inclusive of the 200 to 300 bps of help from the e-commerce?

Ken Murphy

Yes that is inclusive of that.

John Baugh

Oaky and then maybe Alex of the 340 million guided adjusted EBITDA and excluding the intangible add back, but what are all the other adjustments in their I guess the big in Q1 was acquisition related cost, but I guess I am looking for a number of how much that 340 is adjustments and maybe the 2 or 3 big buckets of them? Thank you.

Alex Weiss

Yes so basically to goods going through first maybe going through the first quarter would be helpful where we broke out about $2.33 of the adjustments were from the intangible write-off of the Tradenames about $0.53 was because of duplicative overhead and other expenses related to the Sleepy’s acquisition about $0.15 were from the impairment of the fixed assets as we optimized our base and about $0.04 for severance charges related to the streamlining of our management structure. And so going forward when you look at those, we don't anticipate another write-off related to the Tradename so that portion should be captured fully in the first quarter. The biggest bucket that will continue will be related duplicative overhead or other expenses related to the Sleepy's acquisition purchase so we do the conversions and so the majority of the remaining adjustments are primary related to Sleepy's and the conversions and the duplicative overhead and any other onetime charges that come up as a result of that.

John Baugh

And do you have a sense of maybe in the next nine months because you obviously worked it all out in the first quarter of what those dollars would be of adjustments roughly a range or?

Alex Weiss

Yes, what, given to a GAAP EPS number for the second quarter of $0.27 to $0.32 and so you can bridge from that to the adjusted EPS before Tradename amortization number and get to a number that's around $0.35 of adjustments in the second quarter. We don't break out all of the other adjustments but you can also look at our guidance for the full year and see and do the math between the full year and the first quarter.

John Baugh

Okay. And then my last quick question was around Sleepy's and change of the name and that is sort of -- maybe what you Steve have mentioned you were trying to incorporate some anticipation of impact to sales, in sales and what kind of what you do around that and what assumptions you are making because that seems like a bit of risk on and uncertainty? Thank you.

Steve Stagner

Yes. So we partially given the history of all the acquisitions that we've done before, we have a little bit of experience in seeing that there is usually a drop for a couple of periods and then it starts to pick up as we acclimate the customers. We go through that experience and then we model that out and we also are going to start with as I mentioned in the call with some smaller markets and kind of work our way through that, so I don't know Alex if you want to add to that but.

Alex Weiss

Yes, no I mean it's a great point I mean in the larger markets most then come at the very end of the year. As Ken mentioned we are going to covert the overlap markets which are the highest return markets so while there may be some sales degradation there, those are the markets which are performing poorly right now anyway, and so we think getting those converted over to one brand where we can leverage advertising, leverage market level overhead and various other items within those markets and utilize more advertising that's been reallocated from those markets. We think is very strong and so while there will be some impact more of it will be later in the year and we're taking a very measured approach where we start off small and then get bigger.

Operator

Our next question comes from Brad Thomas from KeyBanc Capital Markets. Please go ahead.

Brad Thomas

A question on the store optimization, I know you're not ready to get all the details yet but maybe directionally could you give us a little bit more indication on how you're thinking of the number of stores that this could impact and the timing, and perhaps some details like what kind of recapture rate you've seen when you've done closures in the past maybe on a whole what kind of benefit you might think you could see from a metric like EBIT? And then as you think about that dynamic of potentially breaking leases how you're considering sort of the cash impact on maybe a one year basis that you might see from this consideration? Thank you.

Alex Weiss

Yes, I know absolutely and it's a great question, so typically the stores that we would buyback or that we would buy out of, typically have a two to three-year return or less, in addition to the fact that eliminate the operating new center or challenge of having to staff and maintain stores that have in a very low volume.

In terms of our cash usage, it’s going to depend completely on the number of stores that fall underneath those metrics. So, we’re being very disciplined in the event that we do decide to buy out of specific stores. We’re still working along our process with our real estate partner group as long as with different brokers. And so to give you a number now would be premature. But, we think there, we can get nice incremental benefit from it and set are store based up for the future. And so, any high return stores that make sense, we’re going to go after.

Brad Thomas

Great. Housekeeping item on sales, I don’t mean to get too myopic about the last couple of weeks, but obviously that seems to be a bright spot. I think Memorial sell a bit later this year than last year. Was there any impact that you had from that?

Ken Murphy

It fell one week later is correct, Brad. And when we talk about the holiday being up, we accounted for that relative to the calendar shift or not only the Memorial Day week, but the week after and that sort of thing.

Brad Thomas

Coming back to the full year guidance, when we incorporate the first quarter numbers or second quarter guidance, just when I look at your second half guidance relative to the Street, I think it does suggest that street would move numbers up in the back half. Can you just give us a sense of how much us maybe miss-modeling the timing of your year versus what if anything you feel better about as you look at the back half?

Alex Weiss

Yes, absolutely. It’s really two things, one, taking into account the historical Sleepy seasonality. Basically, we show it you on a quarter-by-quarter basis, but you don’t have the full benefit of every single piece of that. In addition to the fact that as we convert the overlap markets, we are going to read some benefits within those markets as they are the highest and quickest return markets, and Sleepy’s was not making any money within those markets. So that’s one of the reasons why, we expect to get a little bit of an uplift during the back part of the year, combined with the fact that obviously we had our sales challenges during the first quarter and through the first month of the second quarter up until Memorial Day. And those are primarily the reasons why, you see somewhat an uptick in the back part of the year.

Brad Thomas

And it’s like -- squeezing one more and I know going pretty long. But, the question composition obviously comes up a lot. And could you just give us an update on how you’re viewing the competitive landscape, as you think e-commerce and other retailers among different channels? Thanks.

Ken Murphy

Yes. Thanks for the question, Brad. I figured you if nobody else would come with an e-commerce bed in the box question. And so, I think our view of the landscape is that it continues to proliferate in the online space. Obviously there have been a lot of entrants. This is a group that collectively we think is long-term a really good thing and that it adds to the narrative around the need for better sleep. Clearly there are some units capture that’s coming from this channel. We’ve been really encouraged by our own e-commerce results, as I talked about on the call, obviously off a small days, but nonetheless some pretty consistent strong growth and also sort of reflective of the fact that we think we’re really well positioned to compete in sort of the landscape of the future. We’re having truly interconnected capabilities, not only a robust digital offering, but brick-and-mortar distribution network and opportunity for folks to try before they buy.

We feel pretty confident about our ability to maybe pack an even more powerful punch. And as I mentioned on the call, some of the feedback we’ve received from consumers and our initial test of Dream Bed in market, has been really positive. So, we’re excited to see that product rollout a little bit more expansively than where we have it just today.

Operator

Our next question comes from Curtis Nagle from Bank of America Merrill Lynch. Please go ahead.

Curtis Nagle

Great. Thanks very much for taking the question. So, yes, just curious if you could comment maybe in terms of once you got the products on the floors, what you think was really resonating best with consumers in terms of the newer products? And then, I guess as a follow-up question. Just how are you guys thinking about your strategy around different brands and balancing [ph] third-party your own brands and are you doing any I guess brand consolidation?

Ken Murphy

So, to address Curt the first part of your question around how the products were received, I think what we’re perhaps most encouraged by is there has been a really balanced reception in terms of brands. We are really appreciative of the efforts that all of our suppliers put into building lines for us that we’re compelling; for consumers, had good AUP and margin expansion opportunities for our business and for our suppliers business, highlighted certainly by our product exclusives. We now have a pretty healthy collection of product exclusives across a variety of different brands, which we’ve been pleased by. But even some of the legacy best sellers out of Lexington Tempur-Pedic Breeze product has been really well received; it's always been a big part of our portfolio; and the new product there has been well received.

So, our viewpoint in terms of private label and expansion there, we think it's important to have a diversified offering to be sure but in the end, we want compelling products that can create good distinguishable advantages for our associates, good clear benefits for consumers and that can help us grow, grow profitability. So to the degree that our suppliers will help with that and they have done a great job so far, there is no real push to accelerate private label because of that necessarily.

Curtis Nagle

And then, I guess just one another quick one. So, I guess there has been some commentary in the market that you guys aren't carrying Stearns & Foster anymore, and I guess could you confirm I guess or not and if you aren't, I guess why?

Ken Murphy

So, I can absolutely confirm that that is not the case. It's funny how rumors get started. And I guess there can be some peril and putting too much in channel checks. But, Stearns & Foster has been a long part of our offence. It will continue to be a part of our offence going forward. We're going through a product changeover, as has been documented. The Stearns & Foster GS line continues to be a big seller for Sleepy's; we don't see that changing. And we're pretty excited about bringing out some new exclusive Stearns & Foster products at the end of the summer. We made a decision to hold during mid-summer; so, it's not to disrupt and distract our sales associates given some of the challenges that they already have had. So, perhaps that may have been the emphasis for some of that commentary. But, we're excited to see what that would bring to the table.

Curtis Nagle

Great. I really appreciate the commentary. And yes, thanks very much.

Operator

Our next question comes from Mark Rupe from Longbow Research. Please go ahead.

Mark Rupe

Hey, guys, real quick here. Is the store comp composition between transaction AUP materially different than the reported comp?

Alex Weiss

No, I mean it's not materially different. We report off a same store comp.

Mark Rupe

Right. But, I mean, is transaction on the minus 3.6 is which is kind of implied for the stores; was AUP like minus 3.6 and unit flat or is it that kind of delta?

Alex Weiss

Yes, I don't know that we'll get into bifurcating the exact mix in different business segments but I will tell you that our AUP in stores is definitely higher than it is online. I think that's probably consistent with a lot of retailers, certainly it’s the case for us here in this channel. So, directionally, I think you're probably thinking about that the right way.

Mark Rupe

Okay. And just last, this is a little bit of a long track question here; you can ask me if you want. But just from a communication on the store optimization plan at end of the second quarter, is there a scenario where next year store count could be less than the end of this year store count?

Alex Weiss

No.

Ken Murphy

No.

Alex Weiss

You've seen our new store growth numbers. And if we're going to have anything extreme like that, we would be reporting it to you. We view the store optimization as incremental. And it purely in arbitrage from if some of our worst stores particularly in the acquisition market, if we can get them away and recapture those dollars in a way that’s cash beneficial to us where we get a very quick return, we're going to do it. Besides that, we're going to operate as we always have. And if a store is going to close, it’ll close at the end of term typically.

Steve Stagner

Yes, Mark, just to reiterate, I mean we're definitely feeling growth, [ph] but what we're trying to do is optimize the best locations. And when you go through 1,700 stores that you've recently acquired, there are certain stores that candidly are not stores that either we would've picked or the best location. And to Alex's previous point, we want to make sure we can get a good return on an exit, if we can’t, we can still make money on lower volumes. So, we will stick with it. But if we can, we would love to get on a better corner. And we might also have in some cases too many stores on a particular corner and in those cases, if we can get out of some of those, we will, which we believe will get some recapture and also have better leverage over occupancy inside those better performing stores. So, look, we're optimizing our volume at the trade zone level and that's what we're doing.

Ken Murphy

Yes, and still have some wide space ahead. Clearly, we're in a lot of the country; there is a few parts that we're not. And candidly we've got some opportunity inside of our developmental and leadership markets to [indiscernible] but this will as Steve and Alex both said, just a part of running a healthy operation as leases come up. And if they're not profitable, we will move out or if we have a chance to profitably relocate, we'll do that too.

Operator

Our next question comes from Seth Basham from Wedbush Securities. Please go ahead.

Seth Basham

Thanks for clarification on Stearns & Foster; just a follow-up question there. Obviously, you delayed the launch of the exclusive product of that brand and you talked about last quarter. As it relates to the new product that Stearns & Foster is launching across the country, there is a collection you guys carrying that?

Steve Stagner

Yes, I don't think we're going to get into that at this point, Seth. Our merchandising team and the team in Lexington are still working on the exact particulars of our offence but it will be exclusive product and we think it will be an exciting return to a long standing brand on our floors.

Seth Basham

And as you think about the optimal mix of advertising versus promotion versus financing offers, what have you guys learned over the past six months, where you want to see that mix going forward; are there any lessons learned that you can apply to improve the performance going forward?

Alex Weiss

I think from a financing perspective we were very happy with our own partner who’s been a great partner to us for many years. Our current partner, we are working on a lot of interesting ways to optimize our promotions and drive additional financing business and better service for our customers. So, I think we feel great there. From an advertising perspective, I think Ken’s done a lot to try to own the hearts and minds of customers. And so, I think you are going to see a big push their combined with the fact that as we get to our conversions over the next 12 to 18 months, there is a ton we can do from an advertising perspective as a national brand with national advertising. And so, we think there is a very nice upside there as we get pass the near-term.

Steve Stagner

Strategically, we have a huge opportunity in front of us to get away from despaired advertising efforts whether they be physical efforts or financial efforts of just planning events and planning that and getting towards a single voice across the country. Not only would that help us efficiently into our organization but we know that there is heavy synergies that we can start to tap in to when we do that. And but we were also very introspective of our learning lessons about how we can reach our consumer a little bit differently. One of the dynamic things we’re seeing in the industry is the way that there are new entrants and the categories speaking to customers, as Ken said earlier we think is largely positive for the industry. And so, we’re certainly going to take advantage of everything think that we see out there.

Seth Basham

Got it. Just following on that, is there any insights you can provide to us on a regional basis in terms of performance in the Mattress Firm brand?

Ken Murphy

I don’t think that we would necessarily get into to regional level performance Seth. But as Alex talked about or perhaps it was Steve on the call, we did continue to observe some pressure in our oil market and we have talked about framing those, in the past obviously concentrated in Texas or parts of Texas anyways, Louisiana, Oklahoma City that sort of thing. So that's probably I think as close as we would get to provide region specific performance. And we continue to feel effects there. And the good news is that hopefully A, we get to sort of begin anniversarying that but also by virtue of having a broader platform, you are less at risk to any one particular geographical high or low for that matter.

Seth Basham

And last broader question as it relates to the sales cadence; you talked to softer retail backdrop more generally. What is your diagnosis of what's causing that for the mattress industry right now?

Ken Murphy

Well, it's a great question. I think if you look at it, it's the data -- that's probably as it relates to your other question, a good preview and some of the geographical challenges. We talked about earlier on the call that we felt some softness in the West Coast certainly early to start the year. Obviously there has been a lot of news even including today and some other retailers around luxury consumer. We don’t actually feel that we’re seeing that, as our -- once we got our consumer finance shift fully implemented, we saw really strong performance, as Alex talked about. If you look at sort of where we’re having units challenges, it's not concentrated to a particular price segment. So, I think we have to acknowledge that in the bed in the box, there are some units that we think are incremental but we also think there is some units that are going that way. And it's part of the reason we’re so excited about what we're doing to reinforce our omni-channel efforts. So, I don’t know, Steve or Alex anything else you would add there.

Steve Stagner

No, just this GDP continues to remain low, there is a lot of mixed economic news out there and companies across retail as Ken mentioned, some are doing okay and a lot have seen challenges. And so I think we’re just feeling some of that.

Alex Weiss

A little choppy with the election and lot of noise plus the jobs market; so, I think we’re little worried about that. Sometimes the bigger ticket items take a little bit of pressure.

Operator

Our next question comes from Brian Nagel from Oppenheimer. Please go ahead.

Brian Nagel

Just a quick one. As you look at the sales disruptions you outlined that occurred in the quarter and the reason behind that. Do you think those -- were those sales lost or were they delayed? And if they were delayed, then, would you see somewhat of a bounce back or even a stronger than trend sales line, after the problems are resolved?

Ken Murphy

It’s a great question, Brain, I would love to be able to tell you, we think that they were merely delayed. Unfortunately we think they were lost. If these issues that we encountered were unique just to us, they weren’t sort of industry wide and in times of industry wide issue, sometimes you will see delays. Our view point is that we probably lost them regrettably. And it’s the reason that our guidance and our outlook for the balance of year reflects performance consistent with what we're seeing now that they’re past. But, it doesn’t really account for us capturing those back. If in fact they were deferred and we can get them back, fantastic; but if you look at the cause, we think that it would be too optimistic of you.

Steve Stagner

Yes. Brain, I mean if you think of the nature them, when you have [indiscernible] that suggest that the consumer within the store and responded to your advertising, expensed there, went to the store, got to the counter, we are having challenges either with our system or didn’t have the product in stock, or some financing things. And so, as a result of that they are in the store, they are probably not waiting a couple weeks until we get our things fixed. So, they most likely to Ken's point, would consume -- buy, purchase a product that weakened somewhere else. So, we do think that we hurt ourselves during that timeframe. But, like I said before, the team and all of our partners work very hard to get each of those unique issues fixed. And not only do we feel like it’s behind us but we also feel like we have a better system now that can take us into the future because the issue is getting to the new system was the right decision. And it opens the door for a better omni-channel platform, it opens the door for the Sleepy's integration and certainly, the other two issues are fixed completely, so.

Operator

Thank you. I would now turn the floor back over to management for any closing.

Steve Stagner

Okay. Well, thank you very much for joining our call and your continued interest in Mattress Firm. And we look forward to seeing you on our next quarter call. Thank you.

Operator

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

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