Mattress Firm encounters restless days and sleepless nights
What is going on with the Houston Company called Mattress Firm ($NASDAQ:MFRM), the largest mattress retailer in the United States with more than 3,423 locations? It sells many of its products at premium prices (high-end king-size mattresses there can retail for more than $5,000) and is now adding its own brand to stave off competition from online sellers. But looking under the surface, all is not well with this sleeping giant.
Sinking stock, executive turnover, and debt
We dug deeper and discovered that Mattress Firm is dragging a lot of baggage behind it. Its CEO and president, Ken Murphy, stepped down in early 2018, and the company's chairman Steve Stagner took his place on March 1. That change happened in the wake of its parent company, South African retailer Steinhoff International, admitting to "accounting irregularities" — the kind of financial anomalies that led to then-CEO Markus Jooste resigning in December, 2017. The company's stock price responded by plunging a staggering 69.4%. (Currency denoted in Euro)
In a 37-page report entitled "Steinhoff's Skeletons," [PDF] Viceroy Research wrote, “We found [Steinhoff's] acquired businesses are struggling but net income has been artificially propped up by a massive web of undisclosed related-party transactions.” Details are in the linked PDF, but the short version: "Creative accounting" covered up corporate losses with a technique described as "corporate dialysis." It's essentially fraud, corrupt enough to get CEOs fired and stock prices to plunge "from investment-grade blue chip to penny stock overnight," according to Daehee.com.
All this commotion has company employees tossing and turning, as reflected in the Glassdoor data trails. The company's CEO rating sunk from 3.6 last July to a low of 3.2 in early March — an 11.1% drop — as Stagner was taking the reins of the company:
Those dipping CEO ratings were likely fueled by employees who just lost their jobs due to store closures and others whose stock options lost a majority of their value. Public discovery of the accounting problems and increased debt load surely eroded employee confidence as well. That's when Mattress Firm took on new debt of $225 million and announced the closure of 200 stores in the United States.
Mattress Firm's parent company, in its latest quarterly report, stated an even-higher number of store closures - to the tune of 99 stores - during the fourth quarter of 2017, plus another 175 stores in 2018.
It's hard to see how these closures will change much, other than lease overhead, given the bizarre number of nearly duplicate locations among the company's thousands of stores in the United States. Sure, we all must sleep and practically everyone needs some sort of mattress, but must there be more mattress stores per square mile than gas stations?
Notice that many of these store locations in the map below are essentially competing against themselves in the same neighborhoods. For instance, look at some of the stores in the Chicago area, where there are two or three stores on the same street — within a mile of each other.
According to our confidential source within the company, the close proximity of many of these stores is a condition often created with the kinds of acquisitions Mattress Firm and its parent company have been making over the past several years. The company's overall plan is reportedly to continue operating the highest-performing stores and sell off those that are either too close to others or underperforming. This would be a good way to begin paying off the enormous debt the company has acquired.
The company's overall plan is reportedly to continue operating the highest-performing stores and sell off those that are either too close to others or underperforming.
We spoke anonymously with Mattress Firm sales staff, who said that many people still find it helpful to come in and try these mattresses out for themselves. But when it comes to lagging sales, they say that it seems some people come in to try products at physical locations and then buy similar ones at a deep discount (and often tax-free) online.
Questionable digital footprint
And then there are Mattress Firm's online reviews. Take a close look at these customer reviews (we picked this store at random, but almost all its stores' customer reviews are like this), and you'll notice a polarized customer base, where reviews run either hot or cold — with no in between —when they are stating their opinion about the company's products.
Language used in the five-star reviews is suspiciously gleeful, and many of them appear to be written by the same people with similar phrasing. The Google reviews we found are even more dramatic: Pick any random location and you'll see nearly all five-star reviews.
Suspecting some self-reviewing on the part of over-zealous Mattress Firm salespeople, we looked at the cadence of reviews in our data. Indeed, both reviews and store check-ins arrive in dramatic waves, on days that don't necessarily track what store employees told us were the company's busiest times of weekends and around holidays:
There's more evidence that there might be some location-based enhancement going on as well. Case in point: Notice the dramatic rise in customer check-ins to the company's locations in February and March of this year, when Mattress Firm had a near-miraculous jump in "We're here" Facebook checkins:
Our data suggest that Mattress Firm either has an intermittently enthusiastic fan base or it's exceptionally aggressive at manipulating reviews, ratings and check-ins. Could it be that all that debt and competition is causing Mattress Firm to feel the flop sweat of failure? As online mattress sellers such as Casper, Leesa, Tuft & Needle and Purple make headway with updated products, clever marketing and heavy pushes on social media, Mattress Firm appears to be experimenting with digital marketing erratically and, possibly, too late.
Cozying up with Mattress Firm
When we contacted Mattress Firm for comment, we were pointed to its latest product line, "Tulo," that competes directly with online mattress startups. This cut-rate "bed in a box" looks a lot like its online competitors, including the facts that it can be shipped in a compact size and then returned after 120-night trial (where customers must pay an $80 fee to return the mattress).
When we visited a retail location, the sales staff we met was decidedly friendly and low-key. We got the impression they were willing to wheel and deal, mentioning frequent sales and discounts. There were offers all over the store touting available financing and specials.
And then there's the matter of deeply discounted, returned mattresses, which Mattress Firm sells in the separate clearance centers that are part of its 3,423-store empire.
Like many other brick-and-mortar retailers who are shuttering big-box locations, Mattress Firm appears to be a sleeping giant that was caught napping. By its own admission, it was even engulfed in "accounting irregularities," trying to make its numbers appear less dire to investors and creditors.
Now it's digging deep into debt in an attempt to power its way above upstart competitors. It's possible that once it reduces its retail footprint to a more reasonable, cost-effective level, gets up-to-speed with its online competitors, and shores up its accounting practices, Mattress Firm could survive this nightmare.