Do Mattress Companies Look Comfortable to Investors? Tempur-Pedic International Inc. (TPX), Select Comfort Corporation (SCSS)

Mattress Firm Holding Corp. (NASDAQ:MFRM) is on a three month run from $23.97 per share to $29.86 as of March 14, 2013. It announces fourth quarter and annual earnings on March 26 after hours. Does this short term bull run foretell strong earnings?

Mattress Firm is a specialty store that sells mattresses and mattress accessories in the United States. It operates 1,011 stores nationwide. Mattress Firm does not manufacture mattress; it only sells them. The two main suppliers to Mattress Firm are Tempur-Pedic International Inc. (NYSE:TPX) and Select Comfort Corporation (NASDAQ:SCSS). These two companies partially depend on the success of Mattress Firm and other retailers.

Tempur-Pedic (TPX)

Tempur-Pedic International Inc. (NYSE:TPX) has four separate divisions: retail, third party, healthcare and direct. Of the $1.4 billion the company had in sales in 2012, 87% was from retail. 24% of all sales were from the top 5 customers. 10% of all sales in 2012 were directly form Mattress Firm. This represents more than $140 million in 2012. With margins at 7.6%, the company cannot command a stock price of $46 per share without continued growth at Mattress Firm.

Select Comfort, on the other hand, isn’t tied as strongly to Mattress Firm as Tempur-Pedic International Inc. (NYSE:TPX) is. Select Comfort Corporation (NASDAQ:SCSS) operates its own retail stores, which contribute 96.7% of all sales. Just $30 million of sales in 2012 came from non-company owned stores. It trades the dependence on other retailers for increased risk in operating its own stores. With this risk comes a concentration in return, though. In 2012, same store sales were up 24%. In 2011, they were up 29% from the year before.

When looking at the last four quarters for each of these companies, the earnings per share follow a similar trend. The only exception is in the most recent quarter, when Mattress Firm increased its earnings by 11.9%.

In May of 2012, Mattress Firm acquired Mattress Giant and its 181 stores. Since this acquisition, Mattress Firm’s top line has grown by 32%. In addition to this acquisition, the company also purchased Mattress Xpress – a regional chain operating in Florida and Georgia. The company has been able to acquire existing business to grow its top line.