All three companies including Mattress Firm are trading at trailing-12-month P/Es of between 15-18, and Mattress Firm is also trading at similar EV/EBITDA levels as Ethan Allen at 11-12 times EV/EBITDA. The market values Haverty Furniture at eight times EV/EBITDA, as its trailing-12-month ROA at 6.4% is inferior to that of Mattress Firm and Ethan Allen; Mattress Firm and Ethan Allen delivered trailing-12-month ROAs of 7.9% and 9.0% respectively.
Haverty Furniture and Ehtan Allen both sport a 1% dividend yield with significantly less leverage than Mattress Firm, with gross debt-to-equity ratios of 5% and 48% respectively. Macy’s, Inc. (NYSE:M), a department store chain with bedding departments, trades at a a trailing twelve months P/E of 12.2 and a trailing twelve months EV/EBITDA of 5.9. Lower valuations are reflective of a lower trailing-12-month ROA of 6.1% and a higher gearing of 124%.
Investment Risks
Mattress Firm plans to grow to 1,450 stores in 2015, through the opening of new stores in existing and surrounding markets, with 40% of growth coming from new markets. It may not be able to execute its store growth plans successfully, as it faces challenges in the following three areas: finding favorable locations for new stores, advertising of stores in a cost-efficient manner and achieving operating results in new stores at the same level as its current stores in the vicinity.
Mattress Firm’s sales are heavily dependent on consumer discretionary spending and the strength of the housing market. Same store sales declined by approximately 23% during the housing crisis in 2008.
Mattress Firm faces significant supplier concentration risk. Sealy, Simmons and Tempur-Pedic, the primary suppliers of branded mattresses for Mattress Firm accounted for 73% of its mattress product costs for fiscal 2011; while Corsicana, a primary supplier of its private label mattresses, accounted for 14% of its mattress product costs for fiscal 2011.
Mattress Firm is unlikely to pay dividends or buy back shares in the near term. It currently does not have a share repurchase program in place; and its 2007 Senior Credit Facility alsoplaced restrictions on the payment of dividends.
Conclusion
Mattress Firm’s valuations are comparable with furniture retailers like Haverty Furniture and Ehtan Allen, but do not provide a compelling case for investment. Current valuations do not offer a sufficient margin of safety to compensate investors for the financial risks associated with its high gearing and the inherent cyclicality of the industry.
The article Will You Sleep Well With This Mattress Retailer? originally appeared on Fool.com and is written by Mark Lin.
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