Mattress Firm Holding Corp (MFRM, Financial) operates as a specialty retailer of mattresses and related products and accessories in the U.S. Shares of the company tumbled almost 5% in Monday’s trading after reporting better-than-expected earnings for its fiscal third quarter ended Nov. 3.
Earnings per share increased by 48% to 67 cents per share compared to 45 cents per share in the same period the year before. Excluding special items, the adjusted earnings came in at 82 cents per share, beating estimates by 1 cent. Further, revenue rose 50.7% year-over-year to $699.5 million and beats by $38.87 million, due to incremental sales from acquired and new stores, and comparable-store sales growth of 3.8%.
In the press release, CEO Steve Stagner said, “We are pleased with our third quarter results, with over 50% net sales growth and a 3.8% comparable-store sales increase, representing our ninth consecutive quarter of positive same-store sales. Our third quarter Adjusted EPS grew 17% from the prior year, as we continue to execute on our plan and integrate the nine acquisitions, totaling over 600 stores, that we completed in fiscal 2014. Our Sleep Train business continues to perform extremely well with strong sales growth as we convert the Mattress Discounters stores to the Sleep Train banner. With our recently streamlined organizational structure and initiatives in place, we believe we are well-positioned to execute on our growth strategies and capitalize on our relative market share strategy.”
Acquisitions
In the last eight years, the company has made 18 acquisitions of mattress retailers. Last year, the firm made some acquisitions expanding operations in Illinois, Indiana and Wisconsin as well as in Florida. About 131 mattress specialty retail stores were acquired by $64.5 million.
The past days, the firm announced the acquisition of Sleepy's. That would be enormous when compared to its nearest competitor.
Downward trends
The operating margin has been in decline, and its three-year average operating margin growth rate was 0.00% per year.
Let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other businesses in the same industry.
| Ticker | Company | ROE (%) |
| MFRM | Mattress | 11.63 |
| M | Macy´s | 26.69 |
| COST | Costco Wholesale | 21.20 |
| HVT | Haverty Furniture | 2.86 |
| Ă‚ | Industry Median | 6.91 |
The company has a current ROE of 11.63% that is higher than the industry median and the one exhibit by Haverty Furniture Companies Inc. (HVT, Financial). In general, analysts consider ROE ratios in the 15% to 20% range as representing attractive levels for investment. So for investors looking for those levels or more, Costco Wholesale Corporation (COST, Financial) and Macy's (M, Financial) could be the options.
It is important to understand this metric before investing, and it is important to look at the trend in ROE over time.
As we can see, it is has a downward trend that should worry investors.
Stock price evolution
The stock is selling at a premium.The P/E ratio as of Dec. 7 is 34.52x, which is higher than the industry median of 20.97x. The stock has plummeted 7% on a year-to-date basis and 21.5% in the past 12 months.
Final comment
Although the company has posted strong Q3 fiscal 2015 earnings results that beat expectations, the stock plummeted. Perhaps investors thought in higher profits than reported.
Hedge fund gurus have also been active in the company in Q3 2015. Hedge fund managers Joel Greenblatt (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio) have initiated new positions in the stock with 6,153 and 5,300 shares, respectively. Further, Columbia Wanger (Trades, Portfolio) has started a stake with 517,657 shares.
Disclosure: Omar Venerio holds no position in any stocks mentioned.
