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Aug
27

Mattress Firm Holding Corporation (MFRM)

 Executives

Scott McKinney – VP, IR

Steve Stagner – Executive Chairman and Chairman of the Board

Ken Murphy – President and CEO

Alex Weiss – CFO

Analysts

Michael Lasser – UBS

Peter Keith – Piper Jaffray

Bobby Griffin – Raymond James

Keith Hughes – SunTrust Robinson Humphrey

Jessica Mace – Nomura Securities

John Baugh – Stifel, Nicolaus

Brad Thomas – KeyBanc Capital Markets

Curtis Nagle – Bank of America Merrill Lynch

Mark Rupe – Longbow Research

Seth Basham – Wedbush Securities

Brian Nagel – Oppenheimer

Presentation

Operator

Greetings and welcome to the Mattress Firm First Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host Mr. Scott McKinney. Thank you. You may begin.

Scott McKinney

Thank you, operator. Good afternoon. Thank you for joining us today for Mattress Firm’s first quarter 2016 financial results conference call. I want to remind you that certain comments made during the call today may constitute forward-looking statements made in and pursuant to and within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995 as amended.

Such forward-looking statements are subject to both known and unknown risks and uncertainties which could cause actual results to differ materially from such statements. Those risks and uncertainties include without limitation those described in today’s press release and Mattress Firm’s latest filings with the Securities and Exchange Commission. The forward-looking statements made today are as of the date of this call and the company does not undertake any obligation to update those forward-looking statements.

Also during the call today, the company will be discussing adjusted EPS, adjusted EBITDA and EBITDA, which are non-GAAP financial measures. Please see the company’s press release for a reconciliation to the most comparable GAAP measures. If you do not have a copy of today’s press release, you may obtain one from the Investor Relations page of the company’s Web site at ir.mattressfirm.com.

Leading our call today will be Steve Stagner, our Executive Chairman and Chairman of the Board. After Steve’s remarks, Ken Murphy, President and Chief Executive Officer will discuss our key initiatives and strategies. Then Alex Weiss, Chief Financial Officer, will provide greater detail on our results and outlook before opening up the call for Q&A.

With that, I will turn the call over to Steve Stagner. Steve?

Steve Stagner

Thank you, Scott and good afternoon everyone. Welcome to our first quarter fiscal 2016 earnings call. Joining me today are Ken Murphy, our President and Chief Executive Officer and Alex Weiss, our Chief Financial Officer.

First I will review our recent performance and revised outlook for the remainder of the year and then discuss our decision to move to one national brand for all of our nearly 3,500 stores. Next, Ken will provide a more detail on our performance to-date and discuss our strategies and initiatives to drive continued growth. Finally, Alex will take you through the financial results and expectations in more detail before we open it up for Q&A.

To begin our first quarter results were clearly disappointing, as we encountered prolific and unanticipated challenges in three distinct areas of the business, which I will discuss momentarily. The good news however is that we believe we have resolved and largely moved past each of these three issues, after mitigating these challenges our trends have now begun to return to positive territory as reflected in low single-digit comps over the Memorial Day holiday and the day since. However the impact of these challenges that began in Q1 and continued into early Q2 is both clear and profound. As a result we are revising our guidance for the full year.

While difficult to precisely quantify the sales impact we believe the challenges were due to three primary factors that Ken will take you through in more detail. One, a systems upgrade that caused an extended disruption to the business; two, an elongated and painful new product rollout that resulted in back orders, lost sales and frustrated consumers and sales associates alike; and three, challenges during the ramp-up period with a new primary financing provider in our Mattress Firm stores. To illustrate the impact of these three unrelated factors our comparable sales trends were positive in the first period of the quarter and a reverse, as we encounter these temporarily challenges.

In the second and third periods of Q1, our same-store sales declined to negative low single-digits, and remained pressured until Memorial Day. Since Memorial Day, our trends have been positive and in line with our revised same-store sales guidance for the remainder of the year. This gives us additional confidence that we have put these challenges behind us. We believe these three compounding challenges accounted for approximately two-thirds of our shortfall to plan. We are also in the midst of a soft industry backdrop and saw continued pressure in our oil effected markets, which we believe accounted for the remaining one-third of the shortfall.

Our Q1 GAAP loss per share was $3.22 and our adjusted EPS excluding Tradename amortization was a negative $0.10, which was below our Q1 guidance for a loss of $0.07 to flat adjusted EPS. For the year we now expect adjusted earnings excluding Tradename amortization of $2.25 to $2.35 per share. This revised guidance reflects the impact of a pre-Memorial Day sales mix as discussed, the contemplation of potential temporary choppiness during the Sleepy’s brand conversion, and a continued expectation for a slightly softer retail environment.

The Q1 challenges we have discussed primarily impacted the Mattress Firm branded business and so I would like to give some color on the performance of Sleepy’s. Sleepy’s have larger than a very good story during our first four months of ownership. We had a dignified and accelerated path to a long-term expected synergy capture inside the business. Sleepy’s legacy store base outside of the overall markets comped slightly positive in Q1 and beginning in Q2 we have now started to convert the overlapping Sleepy’s stores in the Carolinas and in Chicago through the Mattress Firm banner.

To this end we now expect to convert substantially all of Sleepy’s stores to the Mattress Firm banner during fiscal 2016. This decision aligns with our long established national roll out strategy and positions us to begin realizing the numerous benefits of a national chain in 2017. After converting the highest return overlapping markets we plan to bring these to smaller Sleepy’s markets in a measured approach that will allow us to incorporate real time earnings, which should lead to better execution. We continue to find new opportunities with Sleepy’s and believe we can achieve many of the cost synergies faster than we first expected. We will continue to update you on our progress in future quarters.

Finally, I want to talk about the decision to move to one brand nationwide. Over the last few years we have announced many best practices from the best specialty retailers and talent in our industry. We now have nearly 3,500 company operated stores in 48 states, and are the largest and only national specialty Mattress chain. Behind is upon us to begin activating and unlocking the true power of all of these assets, to better focus the organization, recognize the full potential of the national chain and become the preferred choice for better sleep in this country. We have made the decision to consolidate all of our stores under the Mattress Firm brand, this is not a decision we took wisely and we engaged a top consulting firm to help make the right decision. Together we analyzed the branding decision through consumer, employee and financial lending and are confident that this is the best brand to roll out nationally.

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