(Editor: Leona) Mattress Firm Holding Corp. announced its financial results for the third fiscal quarter (13 weeks) ended October 28, 2014. Net sales for the third fiscal quarter increased 42.3% to $464.3 million, reflecting comparable-store sales growth of 8.5% and incremental sales from new and acquired stores. The Company reported third fiscal quarter earnings per diluted share (“EPS”) on a generally accepted accounting principles (“GAAP”) basis of $0.45, and EPS on a non-GAAP adjusted basis, excluding acquisition-related costs, ERP system implementation costs and loss on debt extinguishment (“Adjusted”), of $0.70.

“The increase in net sales of 42.3% and comparable-store sales growth of 8.5% reaffirms the validity of the relative market share strategy,” stated Steve Stagner, Mattress Firm’s chief executive officer. “Furthermore, the integration of the Sleep Train and Back to Bed operations continues to progress, providing us with the confidence that our Company will derive further benefits from our deliberate strategic growth initiatives. We expect to realize such benefits relatively quickly in the case of Sleep Train, but over time from the Back to Bed operations as we will need to work through the immediate drag period, which is typical with all of our acquisitions that require the rebranding of stores. We estimate that our entry into and operation of the Chicago market in the third quarter resulted in an approximate loss of $0.03 per diluted share, excluding acquisition-related costs. We remain steadfast in our commitment to pursuing the relative market share strategy and creating value for our shareholders as we expand our presence as the leading national mattress specialty retailer.”

Third Quarter Financial Summary

Net sales for the third fiscal quarter increased 42.3% to $464.3 million, reflecting comparable-store sales growth of 8.5% and incremental sales from new and acquired stores.

Opened 54 new stores, closed eight, and acquired 460 bringing the total number of Company-operated stores to 1,986 as of the end of the fiscal quarter.

Income from operations was $31.6 million, including $12.1 million of acquisition-related costs and ERP system implementation costs. Excluding such costs, Adjusted income from operations increased 33.7% to $43.7 million from the comparable prior year period. Adjusted operating income margin was 9.4% of net sales as compared to 10.0% in the third fiscal quarter of 2013, and included a 80 basis-point increase in gross margin, offset by expense deleverage of 80 basis-points from sales and marketing expense relating to the increased use of third party financing incentives and 40 basis-points of expense deleverage from general and administrative expense relating to investments in infrastructure to support current and future growth, and 20 basis-points of combined operating margin declines in other areas. 

Net income was $15.6 million and GAAP EPS was $0.45. Excluding $8.8 million, net of income taxes, acquisition-related costs, ERP system implementation costs and loss on debt extinguishment of, Adjusted net income was $24.4 million and Adjusted EPS was $0.70. Please refer to “Reconciliation of Reported (GAAP) to Adjusted Statements of Operations Data” for a reconciliation of net income and GAAP EPS to Adjusted net income and Adjusted EPS, respectively, and other information.

For the full fiscal year-to-date:

Net sales increased $303.0 million, or 33.5%, to $1,207.7 million, for the three fiscal quarters (thirty-nine weeks) ended October 28, 2014, from $904.7 million in the comparable prior year period, reflecting comparable-store sales growth of 7.6% and incremental sales from new and acquired stores.

The Company opened 163 new stores, closed 21, and acquired 619 during the first three fiscal quarters of fiscal 2014, adding 761 net store units.

Net income was $37.6 million for the three fiscal quarters ended October 28, 2014 and GAAP EPS was $1.09. Excluding $18.3 million, net of income taxes, of acquisition-related costs, ERP system implementation costs, loss on debt extinguishment and impairment and severance charges adjusted net income was $55.9 million for the three fiscal quarters and Adjusted EPS was $1.62. See “Reconciliation of Reported (GAAP) to Adjusted Statements of Operations Data” below for a reconciliation of net income as reported to adjusted net income.

Acquisitions Completed During the Third Fiscal Quarter

In September 2014, the Company completed the acquisition of substantially all of the mattress specialty retail assets and operations of Best Mattress Co., Inc., which operated retail stores in Pennsylvania under the brand Mattress Discounters. The acquisition added 15 mattress specialty retail stores to the Mattress Firm company-operated store base for an aggregate purchase price of approximately $6.0 million, subject to customary adjustments. The Company is currently in the process of rebranding these acquired stores as Mattress Firm.

In September 2014, the Company completed the acquisition of substantially all of the mattress specialty retail assets and operations of Back to Bed Inc., M World Mattress LLC, TBE Orlando LLC and MCStores, LLC, which collectively operated Back to Bed, Bedding Experts and Mattress Barn retail stores in Illinois, Indiana, Wisconsin and Florida, primarily in the Chicago and Orlando metropolitan areas. The acquisition added 131 mattress specialty retail stores to the Mattress Firm company-operated store base for an aggregate purchase price of approximately $60.0 million, subject to customary adjustments. The Company is currently in the process of rebranding these acquired stores as Mattress Firm.

In October 2014, the Company completed the acquisition of all of the outstanding equity interests in The Sleep Train, Inc., which, together with its subsidiaries, operates stores in California, Oregon, Washington, Nevada, Idaho and Hawaii. The acquisition added 314 mattress specialty retail stores to the Mattress Firm company-operated store base for an aggregate purchase price of approximately $425.0 million, subject to customary adjustments, along with the assumption of certain additional liabilities totaling approximately $15 million. The Company expects to receive future annual cash income tax benefits of approximately $11 million over the next 15 years from deductible tax basis goodwill generated from the transaction, subject to the Company’s ability to generate future taxable income. Of the total purchase price, $44.2 million was delivered in the form of 745,107 shares of common stock, par value $0.01 per share, of Mattress Firm Holding Corp. common stock as calculated in accordance with the terms of the purchase agreement.

Pending Acquisition

On November 5, 2014, the Company entered into an agreement to acquire substantially all of the mattress specialty retail assets and operations of Sleep America LLC, which operates 47 Sleep America retail stores in Arizona, for a total purchase price of approximately $12.5 million, subject to working capital and other customary adjustments. The acquisition, which is subject to customary closing conditions, is expected to close in the fourth fiscal quarter.

Balance Sheet

The Company had cash and cash equivalents of $4.9 million at the end of the third fiscal quarter of 2014. Net cash provided by operating activities was $21.3 million for the third fiscal quarter of 2014. As of October 28, 2014, there was $35 million in borrowings outstanding under the $125 million revolving portion of the 2014 Senior Credit Facility (defined below) and approximately $3.2 million in outstanding letters of credit, with additional borrowing capacity of $49.2 million.

The Company entered into a new senior secured credit facility with Barclays Bank PLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities LLC, and UBS Securities LLC, as joint bookrunning managers and joint lead arrangers. The senior secured credit facility (the “2014 Senior Credit Facility”) is comprised of (i) an asset based revolver of $125 million that includes a sublimit for letters of credit and swingline loans, subject to certain conditions and limits and (ii) a term loan B borrowing of $720 million at an interest rate of LIBOR plus 425 basis points during the first six months and LIBOR plus 400 to 425 basis points thereafter. Proceeds from the new senior secured credit facility, including $49 million in revolver borrowings, were used to retire $349 million of outstanding debt under the previous credit facility and to fund the cash requirements of recent acquisitions. The Company incurred a $2.3 million non-cash debt extinguishment loss in connection with this transaction.