The Ongoing Case For Mattress Firm (MFRM)

Mattress Firm Holding Corp. (NASDAQ: MFRM) is turning out to prove that there is money under mattresses other than just those who fear that they have to hoard cash.  The company is the leading retailer of mattresses and beds and if you live in a major city chances are high that you have seen the company stores here and there.  Shares are surging after posting a solid earnings report and after making an acquisition.

The fairly recent initial public offering now looks expensive in stock screens and that $1.5 billion market value may scare away some investors.  Throw in the notion that a double-digit gain has the stock at a post-IPO high today and some may be inclined to throw in the towel.  But… The real question that investors need to be asking is “what will happen next?” in their decision-making process.

The acquisition of Mattress Giant for $47 million should be considered as not the company’s last effort for a merger out there.  Go back to what the company said in its filing for its IPO:

• The mattress industry had net sales of roughly $11.6 billion in 2010 and the company called the market “highly fragmented”… it also noted that no single retailer held more than a 7% market share.  It also noted that the top eight participants only account for about 25% of the total market. In 2008, mattress specialty retailers had a market share in excess of 40%, which represented the largest share of the market, having more than doubled their share over the past 15 years.

What the company has going for it is that everyone has to buy a bed.  Sure, these last a long time.  Sleeping on an old mattress gets to be a literal pain after a while and all beds have to eventually be replaced.  The replacement cycle is generally considered about ten years.  With over 300 million Americans, this still allows for millions and millions of mattresses to be sold nationwide each year.

Investors will want to try to hope for pullbacks here in this company’s stock.  That being said, it seems that there is a lot of room for the company to consolidate its competition under its own Mattress Firm name.  Shares are up 17% at $44.00 on more than 600,000 shares.  The average volume is only 137,000 shares and the prior post-IPO range was $21.03 to $39.90.

JON C. OGG