Mattress Firm — Investor Day (October 2015)
75 slides from Mattress Firm's investor day presentation, Oct 22, 2015
Slide 1: Forward Looking Statements and Non-GAAP Information
Forward Looking Statements and Non-GAAP Information This presentation contains forward-looking statements within the meaning of federal securities laws, that are subject to risks and uncertainties. All statements other than statements of historical fact included in this presentation are forward-look
Slide 2: Welcome
Welcome Steve Stagner Chief Executive Officer 3
Slide 3: The #1 Mattress Specialty Retailer
The #1 Mattress Specialty Retailer Real estate Marketing strategy Product offering Customer experience National distribution Omni-channel #1 Over 90% of stores in markets where we have 2,343 locations(1) #1 market share(2) ($ in millions) ($ in millions) 2010 LTM 15Q2 2010 2015 Q2 2010 LTM 15Q2 (1)
Slide 4: Specialty Retailers Taking Market Share
Specialty Retailers Taking Market Share Consumers demand expertise and prefer destination shopping Mass merchants not meaningful industry participants Department Stores 5% Other 14% Department Stores 11% Other 14% Furniture Retailers 34% Furniture Retailers 56% 19% 47% Mattress Specialty Retailers M
Slide 5: Fragmented Landscape
Fragmented Landscape Mattress Firm (MFRM) is the nation’s largest mattress specialty retailer, with over 2,300 stores in 41 states as of August 4, 2015 ($ in millions) (1) Source: Furniture Today Top 100, May 2015. Mattress Firm store count includes franchised locations (2) Reflects net sales of the
Slide 6: Key Investment Highlights
Key Investment Highlights Long-term stability and consistent growth Fragmented industry with no national chain Specialty Retailers continue to take share Pent-up demand with ~80% replacement Largest footprint with significant scale Over 90% of stores in markets where Company is #1 Unique selling pro
Slide 7: Management Team
Management Team Steve Stagner Chief Executive Officer Ken Murphy President Rob Killgore Chief Operating Officer Alex Weiss Chief Financial Officer Resources 8 Human eCommerce Legal Merchandising Tax Real Estate Marketing Accounting Information Technology Distribution Finance Strategy Store Operation
Slide 8: Key Accomplishments Since Last Analyst Day
Key Accomplishments Since Last Analyst Day Grew store base from 1,467(1) to 2,343 stores at end of Q2’15 Acquired 668 stores in 2014 through nine acquisitions Expanded national footprint into key geographies as we build the first national specialty mattress retailer Store Growth Q1’14 LTM Sales: $1.
Slide 9: Agenda
Agenda Industry Overview & Key Trends 01 02 Best-in-Class Retailer 03 Growth Strategy 04 Financial Review & Outlook 05 Q&A 10
Slide 10: Industry Overview & Key Trends
Industry Overview Rob Killgore & Key Trends Chief Operating Officer 11
Slide 11: Consistent Track Record of Industry Growth
Consistent Track Record of Industry Growth Long-term industry sales growth CAGR of approximately 5% Quick bounce back following recessions Projected industry total sales growth of 6.8% in 2015 and 6.5% in both 2016 and 2017(1) (2) ($ in billions) Recession Recovery Dollar Value 9% 6% 7% 9% 8% 2% 9%
Slide 12: Key Drivers of Bedding Sales
Key Drivers of Bedding Sales Bedding sales are most correlated with Consumer Sentiment and Gross Domestic Product 15% 120 15% 6% 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% 10% 100 10% 5% 80 5% 0% 60 0% '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '94 '95 '96 '97 '98 '99
Slide 13: Housing Less Correlated with Bedding Sales
Housing Less Correlated with Bedding Sales The replacement nature of the bedding industry has shielded it from much of the volatility experienced in the housing market 15% 2,500 15% 400 350 10% 10% 2,000 300 5% 5% 250 1,500 0% 200 0% '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '1
Slide 14: Long-Term Industry Expansion
Long-Term Industry Expansion Everyone sleeps Mattress sales are primarily replacement in nature with an ~10 year average purchase cycle(1) (Dollars) $220 (Units) 0.410 $217.1 0.386 0.390 $200 0.377 0.370 $180 0.357 0.350 0.332 $160 0.330 $140 0.303 0.310 $120 0.290 $93.7 $100 0.270 0.280 $80 0.250 1
Slide 15: Population Growth
Population Growth Consumer spending typically peaks when people hit their mid-40s Generation X currently in their peak spending years Millennials have not yet entered peak spending years and represent approximately 25 million more consumers than Generation X 76 80 73 60 40 20 0 Millennials Ages 18-3
Slide 16: Awareness of Importance of Sleep
Awareness of Importance of Sleep At least 40 million Americans each year suffer from chronic, long-term sleep disorders, and an additional 20 million experience occasional sleeping problems (1) Searches for sleep, relative to the total number of searches done on Google over time, have continued to i
Slide 17: Replacement
Replacement Approximately 60% of the mattresses being replaced are over 8 years old Opportunity to educate consumers on proper replacement cycle 26+ years 60% Up to 50% of Mattress Firm advertising dedicated to creating demand and highlighting sleep benefits rather than price Messaging: ALLEVI TERMI
Slide 18: Product Innovation Areas
Product Innovation Areas Phase-change components Breathable mattress borders Heating/cooling technology Customize comfort Customize temperature Self-adjusting components (comfort / adjustable) Bold and textured covers Upholstered foundations Visually pleasing aesthetics Higher priced options ($2,000
Slide 19: The Mattress Industry Consumer
The Mattress Industry Consumer Average Age Average Retail Price Median Household Income 49 $720 ~$50k Units Dollars Influencer Female Male 20 Source: Ipsos DuraTrend Findings for Mattress Firm, August 2014 – July 2015
Slide 20: Mattress Spending Trends
Mattress Spending Trends 30% 40% 35% 30% 25% 20% 15% 10% 5% 0% 25% 20% 20% 16% 21% 19% 18% 15% 12% 10% 9% 5% 5% 0% <25 25-34 35-44 45-5455-64 >64 <$25k $25-50k $50-100k $100-150k >$150k Mattress Firm target audience 21 Source: ISPA – 2014 Mattress Industry Report of Sales & Trends issued May 2015 23
Slide 21: Mattress Spending Trends
Mattress Spending Trends 33% 40% 35% 30% 25% 20% 15% 10% 5% 0% 37% 35% 30% 25% 20% 15% 10% 5% 0% 36% 29% 21% 20% 17% 7% <$500 $500-$1,000 $1,000-$2,000 >$2,000 <$500 $500-$1,000 $1,000-$2,000 >$2,000 22 Source: ISPA – 2014 Mattress Industry Report of Sales & Trends issued May 2015 Percentage of Matt
Slide 22: Attributes Driving Retailer Selection
Attributes Driving Retailer Selection Price is the biggest driver of retailer selection, although much less so with higher priced purchasers Mattress Firm captures traffic with prices, location and advertising, and then provides selection and knowledgeable sales associates to drive ticket 40% 35% 30
Slide 23: Ticket Average
Ticket Average Specialty category generates a premium on average ticket Mattress Firm generates an additional premium over the specialty category $1,200 $1,000 $800 $600 $400 $200 $0 MFRM Specialty Department Furniture Internet 24 Source: Ipsos DuraTrend Findings for Mattress Firm, August 2014 – Jul
Slide 24: Best-in-class Retailer
Best-in-class Retailer Ken Murphy President 25
Slide 25: What Makes MFRM Best-in-Class?
What Makes MFRM Best-in-Class? 26 Omni-channel National Distribution Customer Experience Product Offering Marketing Strategy Real Estate
Slide 26: Competitive Real Estate Platform
Competitive Real Estate Platform Average size: 4,800 sq ft 80% Freestanding or End Cap 20% In-line Source: Xspan 27 Data Driven Analysis Unique Look and Feel Convenient and Prominent Locations Trusted and Recognizable Banners
Slide 27: Marketing Mix
Marketing Mix Since this is a high consideration category, the marketing mix primarily focuses on building awareness and creating demand through a variety of channels, specifically traditional mediums Targeted channels make up 25% of spend and drive cost-effective conversion Traditional AWARENESS Ra
Slide 28: Go To Market Messaging
Go To Market Messaging WHY BUY WHY MFRM WHY NOW Unique selling proposition and key differentiators Drive awareness and provide education Promotional offers and messaging 29
Slide 29: Community Connection
Community Connection Online and employee support for pancreatic cancer research Local drives that engage the community and support foster children 30
Slide 30: Merchandising Approach
Merchandising Approach Differentiated and trademarked Empowers customers to control process Enhances consumer’s trust and brand recognition Increases conversion and average sales ticket 31
Slide 31: All the Best Brands
All the Best Brands Estate Hybrid Beautyrest World Class Black Hybrid Posturepedic Hybrid Optimum Category Price Band Promotional <$500 Premium $500-999 Luxury $1,000-1,999 Ultra Luxury $2,000-2,999 $3,000+ 32 Simmons Promo Sert a H&R Core H&R H&R Select Flex Contour Cloud Breeze Brand Matrix
Slide 32: Meaningful Private Label Growth Opportunity
Meaningful Private Label Growth Opportunity Leverages buying power Global sourcing opportunities Enables margin expansion Pillows/ Accessories Mattresses Headboard/ Footboard Estimated FY15 Private Label Volume +$330 million (~13% of sales)(1) (1) Based on midpoint of 2015 MFRM sales guidance refere
Slide 33: Mattress Firm Outperforms in Luxury
Mattress Firm Outperforms in Luxury 40% 30% 20% 10% 0% <$500 $500-$1,000 >$2,000 $1'000-$2,000 Mattress Firm target audience • Mattress Firm • Industry Source: /SPA-2014 Mattress Industry Report of Sales & Trends issued May 2015 Note: Mattress Firm data for 2014 (excludes Sleep Train) 34
Slide 34: Talent Acquisition
Talent Acquisition Monthly Total Turnover Since Less Likely to 35 Talent Team From MFRM Avg. Team Efficiency & Field Tenure Effectiveness 90%+6+ yrs Profile System 11%63%80% Sales Increase System Launch Terminate Talent Mix Campus Referral Digital Walk in/Other 40% 30% 20% 10%
Slide 35: Talent Development
Talent Development Committed to relevant and scalable training Career path progression creates highly developmental environment First Year Ongoing Training Training 260+ 85+ 1:1 Hours Hours 36 Corporate Support strong connection with field; ~ 40% of team started in MFRM field Regional Sales & Operat
Slide 36: Talent Retention
Talent Retention 35% Total Turnover 3.9 3.8 3.8 81% 78% 76% 69% 10% Involuntary 25% Voluntary <5% Leadership Turnover Culture Counts Note: Turnover is an annualized metric Source: Glassdoor.com as of October 15, 2015 37 64% 3.5 3.4 Overall Rating Recommend to a Friend
Slide 37: Distribution Strategy
Distribution Strategy Delivery Window 3hr Transactions Delivered 80% Distribution Centers 72 Same Day Capacity 35% 38 Note: Includes Mattress Firm , Sleep Train and third party distribution centers Same Day or Next Day Delivery Capability Nearly Anywhere in the Continental U.S. and Hawaii Current Ca
Slide 38: Emerging Omni-Channel Platform
Emerging Omni-Channel Platform MFRM uniquely positioned to capitalize on consumer demand for integrated retail experience Connecting online and offline touchpoints allows for evolution of true customer lifetime value model Digital (1) 2015 YTD Web Traffic Growth: +73% Logistics Rapidly expanding nat
Slide 39: The Role of Online in Mattress Retail
The Role of Online in Mattress Retail The new starting point once in the market—78% of purchases begin online with research (1) Actual online purchases are a small segment; growing at slower rate than specialty stores(2) Tactile nature of product, strong consumer preference for choice, and high-touc
Slide 40: Digital Enhances Brick & Mortar
Digital Enhances Brick &Mortar Development of a digital toolkit unlocks multiple resources for driving store-level productivity Digitally integrated approach allows for more frequent customer engagement Gateway to meaningful connections with an increasingly important customer group - Millennials (1)
Slide 41: Dream Bed
Dream Bed CONNECTION CONVENIENCE CHOICE Launched 10/1/15 to bring new consumers into MFRM Family of Brands One for one giving model Bed-in-a-box Two business day delivery (most cities) Two comfortable options: – – Original ($829-Queen) The Dream Bed Cool "180 Night No-Nightmare Guarantee” 42
Slide 42: Proven Growth Strategy
Proven Growth Strategy Steve Stagner Chief Executive Officer 43
Slide 43: Profitability and Relative Market Share
Profitability and Relative Market Share Company Market Share RMS = Top Competitor’s Market Share Financial Impact of RMS Generate traffic RMS Leverage Areas Advertising Recruiting / training Warehouse Delivery Corporate and market overhead Higher customer conversion / retention Improved site selecti
Slide 44: Relative Market Share (RMS) is Our Core Growth Strategy
Relative Market Share (RMS) is Our Core Growth Strategy Case Study: Southeast Market A ADV per Capita Driving Profitability Model 45 Note: Internal estimates Comp Sales Sales per Store $1.2mm 20092014 $0.9mm Relative Market Share 20092014 Fortress Leadership Leadership Developmental Developmental In
Slide 45: Market Penetration Highly Correlated to Profitability
Market Penetration Highly Correlated to Profitability(1) FY 2014 Market Level Adjusted EBITDA(2) Sales per Store(2) Advertising $ Per Capita(2) Developmental 1:>170k Leadership 1:90k – 170k Fortress 1:<90k Penetration level (stores per capita) Note: Internal estimates (1) Based on fiscal year 2014 r
Slide 46: Relative Market Share (RMS) Drives Profits
Relative Market Share (RMS) Drives Profits 20% Case Study: Southeast Market B +$13.6m +$4.7m 14.5 x 12) x -$1.7m 2) Ending Store Count Sales per Store Stores per Capita Advertising per Capita Advertising as % of Sales 28 $0.7m 1:232k $0.23 8.7% 89 $0.8m 1:73k $1.00 11.8% 92 $0.9m 1:72k $1.32 10.0% 9
Slide 47: EBITDA vs. Market Penetration 2014
(1) EBITDA vs. Market Penetration 2014 Represents all existing Mattress Firm markets in the chain (excludes Sleep Train and acquisition markets) (2) Higher store penetration per population results in higher market level EBITDA 40.0% 30.0% 20.0% 10.0% 0.0% 350 300 250 200 150 100 50 - -10.0% -20.0% S
Slide 48: EBITDA vs. Market Penetration 2014
o EBITDA vs. Market Penetration 2014 = Represents all existing Mattress Firm markets in the chain (excludes Sleep Train and acquisition markets) @ = Higher store penetration per population results in higher market level EBITDA 40.0% 30.0% 20.0% 10.0% Market-level EBITDA (% margin) -20.0% Store Penet
Slide 49: Highly Achievable Growth Plan
Highly Achievable Growth Plan Growth Drivers 50 New stores: strong unit benefits of Leverage economics increasing relative market share (RMS) Existing franchisees Market leaders Tuck-ins Drive existing store sales volumes Best practice sharing Organic – New Stores Acquisitions Organic – Existing Bas
Slide 50: Robust Growth Created National Footprint
Robust Growth Created National Footprint 51 Note: Includes 120 franchise locations, as of August 4, 2015 Opportunities to leverage national distribution, advertising and omni-channel
Slide 51: Significant Runway Ahead
Significant Runway Ahead Fortress 1:<90k Leadership 1:90k – 170k Development 1:>170k Note: Includes 120 franchise locations, as of August 4, 2015; penetration defined as total units (including franchise locations) divided by the population of the respective states 52 Only eight states at fortress pe
Slide 52: Opportunistic Acquisitions Key Driver of Growth
Opportunistic Acquisitions Key Driver of Growth Washington Denver, Wichita Note: Back to Bed includes Bedding Experts and Mattress Barn. Sleep Train includes Sleep Train, Sleep Country, America’s Mattress of Hawaii and Got Sleep? Excludes acquisitions prior to 2006 and acquisitions of fewer than 10
Slide 53: Balanced Approach to High Growth
Balanced Approach to High Growth 900 680 50 40 30 20 10 (100) 2007 2008 2009 2010 2011 2012 2013 2014 Organic stores opened Acquired stores Closed stores 54 Net New Store Growth 0 0 0 0 0 0 Average Annual Store Growth: % Growth Organic stores 16% Acquired stores 17% Closed stores -4% Total 29% 0 Org
Slide 54: Acquisition Update
Acquisition Update Reduced the drag from Q1 by approximately $2 million, and now approaching breakeven profitability at the market EBITDA level Market Level EBITDA Margin (% of Sales) Q4 Q1 Q2 Acquisition Market 1 Acquisition Market 2 Acquisition Market 3 Acquisition Market 4 Acquisition Market 5 Ac
Slide 55: Sleep Train Update
Sleep Train Update Sleep Train business continues to perform extremely well with implied comps in Q2’15 showing low-double digit growth, on top of a low-single digit comp in Q2 last year Currently rebranding 91 Mattress Discounters stores on West Coast to Sleep Train banner – – Over 80% complete wit
Slide 56: Organic Growth Plan Through FY2018
Organic Growth Plan Through FY2018 Expansion primarily through new stores in existing markets and the in-fill of recently acquired markets Long-term potential for at least 4,500 stores in the United States 5,000 4,500+ 4,000 750 2,900-3,000 3,000 130 2,223 2,000 1,000 0 Store Count Q215 FY2015 New S
Slide 57: Financial Overview
Financial Overview Alex Weiss Chief Financial Officer 58
Slide 58: Sales Momentum Driving Increasing EBITDA
Sales Momentum Driving Increasing EBITDA Strong historical sales growth through new store openings, same store sales growth and acquisitions ($ in millions) 41% CAGR 36% CAGR $2,286 $1,007 $494 2010 2011 2012 2013 2014 LTM Q2'15 ($ in millions) $224.5 $190.2 $140.0 $121.0 $87.5 $57.1 2010 2011 2012
Slide 59: Same Store Sales Performance
Same Store Sales Performance Eight consecutive quarters of same store sales growth FY 2011 SSS: 20.5% 24.8% FY 2012 SSS: 6.1% 16.1% FY 2014 SSS: 6.1% FY 2013 SSS: 1.3% 9.7% 8.5% 2.8% (1.6%) (5.2%) Q1'11 Q2'11 Q3'11 Q4'11 Q1'12 Q2'12 Q3'12 Q4'12 Q1'13 Q2'13 Q3'13 Q4'13 Q1'14 Q2'14 Q3'14 Q4'14 Q1'15 Q
Slide 60: Illustrative ISPA Data Comparison
Illustrative ISPA Data Comparison ISPA wholesale dollar increases represent an estimate of total industry sales growth for a given time period Given MFRM’s acquisitions and organic growth, we believe we represent a significant portion of ISPA’s total dollar growth 8% 7.0% 7% 6% 5% 4% 3% 2% 1% 0% ISP
Slide 61: Third Party Financing
Third Party Financing Third party financing drives ticket and conversion MFRM pays a fee to the third parties and the financing is non-recourse to MFRM While primary usage levels have stayed fairly consistent since 2011, Mattress Firm has been able to drive secondary and tertiary financing business
Slide 62: Capex Investments Support Continued Growth
Capex Investments Support Continued Growth Strong historical revenue growth through new store openings, same store sales growth and acquisitions has funded reinvestment in business Low maintenance capex: Only ~25% of 2015E capital expenditures are maintenance related ($ in millions) $120 $110 $100 $
Slide 63: Strong New Store Economics
Strong New Store Economics ($ in thousands) Sales % Growth Year 1 Year 2 ($ in thousands) Average Investment $950 $1,000 0% - 10% Buildout and Equipping Cost Floor Sample Inventory $232 24 Store 4-Wall Profitability(2) % of Sales $233 23-26% $245 23-26% 256 (43) Less: Tenant Reimbursement Cash Requi
Slide 64: History of Strong Free Cash Flow Generation & Deleveraging
History of Strong Free Cash Flow Generation & Deleveraging Repaid $55 million of borrowings in Q2 and expect to generate approximately $77 million of FCF in 2015 – 2015E capex includes approximately $25 million for conversions of acquired stores Annual tax deduction of over $11 million from acquisit
Slide 65: Outlook and Long-term Targets
Outlook and Long-term Targets 67
Slide 66: Path to Achieve Long-term Targets
Path to Achieve Long-term Targets Continued store growth –In-fill existing markets •Developmental Leadership Fortress •Realize benefits of increased RMS –Continue the march towards national scale Drive average store volume growth –Regional best practices –Accessories Expand operating margins – – – P
Slide 67: Store Growth
Store Growth CAGR(1): Projected 2015-2018 approximately 7% to 9% before acquisitions Prior Target (3) Current Target 2,900-3,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 2003 Based on midpoint of 2015 guidance 2008 2013 2018F 2018F (1) (2) (3) Reflects only company-operated stores and does not cont
Slide 68: Net Sales Growth
Net Sales Growth Projected 2015-2018 CAGR(1): approximately 10% to 11% before acquisitions Assumes 7% to 9% annual net store growth and approximately 2% to 3% annual comparable-store sales growth ($ in millions) $4,000 Prior Target (3) Current Target $3,400-$3,500 $3,500 $3,000 $2,500 $2,000 $1,500
Slide 69: Adjusted EBITDA
Adjusted EBITDA Projected 2015-2018 CAGR(1): approximately 13% to 15% before acquisitions EBITDA margin expansion of ~100 bps from midpoint of 2015 guidance ($ in millions) $500 Prior Target (3) Current Target $375-$395 $400 $300 $200 $100 $0 2003 Based on midpoint of 2015 guidance 2008 2013 2018F 2
Slide 70: Key Margin Drivers
Key Margin Drivers 2018 target represents ~100 bps of Adjusted EBITDA margin from the midpoint of 2015 guidance – Driven primarily by: improvement • • • Gross margin expansion Sales and marketing expense efficiencies Corporate overhead leverage – Partially offset by occupancy deleverage ($ in millio
Slide 71: Financial Targets
Financial Targets (1) Reflects financial guidance provided on September 11, 2015 and reaffirmed on October 22, 2015. Although business conditions are subject to change, in accordance with the Company’s policy, this earnings guidance was effective at the date given and is not being updated or reaffir
Slide 72: Financial Targets
Financial Targets 2015 Guidance (") New Store Growth (net of closures): 250 - 270 stores Net Sales: $2,530 - $2,550 million Comparable-Store Sales Growth: Low Single Digit Adjusted EBITDA: $253 - $262 million Adjusted Diluted EPS:() $2.30 - $2.45 2018 Financial Targets Excluding Opportunistic Acquis
Slide 73: Appendix
Appendix 75
Slide 74: Mattress Firm EBITDA Reconciliation
Mattress Firm EBITDA Reconciliation ($ in millions) LTM Q2 FYE January of the following year 2011 2012 2013 2014 2015 Net Income (loss) Income tax (benefit) expense Interest expense, net Depreciation and amortization $34.4 (8.8) 29.3 17.5 $39.9 26.7 9.2 23.5 $52.9 33.2 10.9 29.5 $44.3 29.2 20.1 41.7
Slide 75: Mattress Firm EBITDA Reconciliation
Mattress Firm EBITDA Reconciliation (Sin mitions) LIM Q2 FYE January of the following year 2011-2012, 201320142018 Net income (loss) $344 $399 $529 $443 $49.6 Income tax (benefit) expense 68) 27 22 22 19 Interest expense, net 29.3 9.2 10.9 20.1 344 Depreciation and amortization 75 5 OS MT 523 Intang