BofA Downgrades Mattress Firm To Underperform

Mattress Firm Holding Corp MFRM reported a 1Q16 miss on comp and EPS; and reduced its FY16 guidance. BofA Merrill Lynch’s Curtis Nagle downgraded the rating for the company from Neutral to Underperform, while slashing the price objective from $42 to $28. The analyst commented that issues at the company were likely to continue.

Mattress Firm reported its EPS at $(0.10), missing the BofA estimate of $(0.02). Comps declined 1.1 percent, compared to the estimate of 2 percent growth. The comp decline was on account of declines in ticket and units. Total sales grew 49.2 percent to $839mn, backed by the acquisition of Sleepy’s, but EBIT margins contracted 322bp to 1.93 percent.

Management reduced full-year EPS guidance from $2.50-$2.60 to $2.25-$2.35. Total sales and adj. EBITDA projections were lowered from $3.95-$4.00bn to $3.825-$3.875bn and from $365-$370mn to $338-$343mn, respectively.

Analyst Curtis Nagle pointed out that continued margin pressure from Sleepy’s is likely to impact Q2 EPS. He lowered the EPS estimates for 2016, 2017 and 2018 from $2.53 to $2.19, from $3.01 to $2.64 and from $3.70 to $3.15, respectively.

More Risks To Earnings

Nagle said there were additional risks to Mattress Firm’s earnings from:

1. Difficult integration of Sleepy’s
2. Transitioning all 3,500 store chain to a single banner over the next 18 months
3. Consolidation of overlapping stores in the network

“We also see heightened risk from rent-adjusted leverage…With so little visibility in the model, we cannot say with any certainty whether lowered earnings guidance is realistic or not,” the analyst added.