Turmoil at Mattress Firm

Mattress Advisor's perspective and analysis on the recent Mattress Firm allegations and what this means for their business

Mattress Firm store front

The web is lighting up with questions about whether Mattress Firm is laundering money. A Reddit thread prompted questions about how the company’s business model could support such a large number of stores – more than 3,500 – that are often times found in close proximity to each other and rarely see any human traffic.

Reddit users shared their own personal horrors inside the store, like sketchy sales tactics and threats for missing out on deals if they walked out the door:

“I walk in and the first thing the sales dude says: ‘Hi, we are closing in 30 minutes so today’s deal is already gone sorry! But I can get you tomorrow’s deal RIGHT now because it’s so late! But we have to start the paperwork soon.’ Wait what? I just walked in, and it’s tomorrow? What paperwork? I haven’t even looked at a bed yet.”

Mattress Firm owner Steinhoff saw shares drop 93% during 2017 and both its Chairman and Chief Executive recently resigned after the announcement of “accounting irregularities.”[1]

Steinhoff Share Price 2017 (Google)
Steinhoff Share Price 2017 (Google)

Mattress Firm owner Steinhoff saw shares drop 93% during 2017 and both its Chairman and Chief Executive recently resigned after the announcement of ‘accounting irregularities.’

Todd Alexander and Zach Clayton, our co-Founders at Mattress Advisor, an online mattress reviews company, have been sharing their perspectives with major media outlets. Alexander and Clayton graduated at the top of their Harvard Business School class in 2009. Alexander once worked for a hedge fund; Clayton is a digital investor who actively advises top private equity firms on deals.

Their analysis suggests that Mattress Firm’s owner, Steinhoff, significantly overpaid for the company when Steinhoff bid $64 per share – more than 2x the then-current share price – in a 2016 acquisition valued at $3.8 billion. Supposedly, Steinhoff’s lofty valuation was based on a thesis of buying suppliers and transforming Mattress Firm from a retailer into a vertically integrated mattress company.

“Steinhoff’s timing was abysmal,” says Alexander. “They paid a premium for a business that was about bricks and mortar, and they did so as the category is being disrupted. The growth of foam mattress manufacturers Casper, Leesa, Nectar, and Saatva is putting pressure on prices and accelerating consumers’ movement from retail to e-commerce.”

Mattress Firm told Wall Street in 2016 that they had “exceptional” economics on launching new stores.[2] They also claimed they could open up to 4,500 stores, Alexander noted. “Seriously!? That would be one mattress store, from a single company, for every 72,000 people in America.”

Does the number of mattress stores make sense? 

Starbucks coffee vs. mattresses

Commentators have compared the number of Mattress Firm stores to the number of Starbucks, which now exceeds 16,000 stores. Does the comparison hold? We calculated the average American is more than 2,100x more likely to buy a Starbucks coffee than a mattress from Mattress Firm on a given day. The math? Every 1,000 Americans buy 33 cups of Starbucks coffee per day while every 1,000 Americans buy 0.0154 mattresses from Mattress Firm each day. Each Mattress Firm location actually makes just 1.3 sales per day, the same number of sales that many Starbucks can ring up in a busy minute.

Moreover, increasing the convenience of coffee stores can increase coffee consumption because consumers may substitute a latte for a Coke. Adding more Mattress Firm locations is unlikely to prompt additional demand for mattresses, which are an expensive, considered product. The net out? Mattresses don’t cost $4, and Mattress Firm isn’t a place to take an afternoon break with a coworker. Maybe Mattress Firm should slow down the store growth and invest its capital into e-commerce.

Clayton explained that historically, the company had strong earnings because of high margins per mattress sold. They didn’t need more than a few hundred customers per store to break even given they earned more than 37% in profit on each mattress they sold.[3]  In 2015, the average store sold just 1.3 mattresses per day – but made more than $500 in profit per mattress.

In 2015, the average store sold just 1.3 mattresses per day – but made more than $500 in profit per mattress.

Today, that is changing fast. Mattress Firm’s average price per mattress was $1,407 in 2015. Mattress Advisor tracks the top 50 sellers of online mattresses and shows that most online mattresses sell for $1,000 or less, with free delivery and free returns. As recently as 2016, Mattress Firm asserted that prices would likely rise. It cited data that average unit price of mattresses had grown in 19 of the last 21 years.[4] That trend is now certainly over. Casper, Leesa, Nectar, Tuft & Needle, Purple, and Saatva are all fast-growing mattress firms reporting more than $100 million in 2017 revenue.

So is there really money laundering at play? While it’s too soon to tell, Mattress Advisor’s Executive Editor, Alesandra Woolley, says, “Look, it’s not a good day at corporate headquarters anytime regulators investigate you for alleged accounting irregularities.” A report from The Economist indicates that Steinhoff used off-balance-sheet entities to shift earnings. Enron declared bankruptcy in December 2001 after using similar tactics. Closer examination of Mattress Firm’s own public filings with the Securities and Exchange Commission shows that they adjusted their profitability measure to add-back the cash requirements of closing underperforming stores and integrating newly acquired stores.

Set aside the financial issues for a moment. Woolley continued: “It’s pretty clear to me that their biggest issue right now is the online disruption. We just completed a survey of 543 people who purchased a mattress online. Most said price was the most important consideration. If you can find a cheaper mattress online and avoid a sketchy salesperson watching you roll around on a bed…well, that would make me avoid a store. Or 3,500 of them.”

For questions or media inquiries, please contact questions@mattressadvisor.com


[1] Share price from Google.

[2] Mattress Firm, February 2016, Form 10K, Securities and Exchange Commission filing.

[3] Mattress Firm, February 2016, Form 10K, Securities and Exchange Commission filing.

[4] Mattress Firm, February 2016, Form 10K, Securities and Exchange Commission filing.