Mattress Firm Considers Bankruptcy As It Reckons With Real Estate Woes
An embattled national mattress retailer embroiled in a real estate scandal is contemplating filing for bankruptcy to help clean out its portfolio of possible money-losing stores.
News of a possible bankruptcy comes just days after investment bank Piper Jaffray issued a report that speculated bankruptcy may be Mattress Firm's best option to reduce its bloated real estate portfolio, Furniture Today reported. Mattress Firm has been heavily discounting its products and has been criticized for adversely affecting the mattress industry at large.
“Bankruptcy would allow the company to clean up its real estate portfolio, get out of bad leases and improve cash flow and profitability,” Piper Jaffray analysts wrote in the report, according to Furniture Today. “The irrational behavior has been disruptive, and Mattress Firm pulling back on advertising has been damaging to mattress industry traffic trends.”
Analysts wrote that a bankruptcy could come as early as October. Sources told Reuters that no decision has been made to definitively pursue bankruptcy.
Officials with Mattress Firm did not return calls seeking comment as of press time.
An executive of one major competitor of Mattress Firm, Tempur Sealy International, already raised red flags last month that Mattress Firm was engaging in "irrational promotional activities."
"Mattress Firm has emphasized heavy discounting that appears to be uneconomic. These activities have created some noise in the market and has primarily impacted our lower-end Sealy business," Tempur Sealy CEO Scott Thompson told stock analysts on July 26. "This unit volume focus is in our opinion, an unprofitable strategy, given the magnitude of Mattress Firm's publicly reported operating losses and the ongoing debt restructuring of its parent company. We believe this irrational promotion activity is a folly and not sustainable or in the best interest of Steinhoff's lenders or other stakeholders."
Mattress Firm's parent company, Steinhoff International, announced that Mattress Firm lost more than $150M on nearly $1.5B in sales for the first half of 2018. The retailer shuttered 149 stores between September of 2017 and March of 2018.
This is the latest in Byzantine layers of troubles not only for Mattress Firm, but also for South Africa-based Steinhoff.
Last November, Mattress Firm accused former Colliers International Atlanta executive Alexander Deitch of being one of the ringleaders — along with former Mattress Firm in-house real estate executives Bruce Levy and Ryan Vinson — in a scheme to steer the company toward high-priced real estate in exchange for developer kickbacks and other incentives.
Deitch filed a countersuit earlier this year, claiming Mattress Firm’s aggressive growth strategy and desire to corner the mattress retail market were why it entered into leases that were above market rates, including at times to steal market share from competitors. Mattress Firm’s real estate committee — which was manned by a number of top executives, including CEO Steve Stagner and former CEO Ken Murphy — had full knowledge of those deals and signed off on them, Deitch claimed in the suit.
In February, attorneys for Levy, who headed Mattress Firm's store growth strategy from 2010 until 2016, filed a motion to compel Mattress Firm to reveal documents showing any real estate investments Stagner and Murphy participated in with developers of Mattress Firm stores between 2010 and 2016. Levy also is attempting to force Mattress Firm to reveal any gifts, trips, meals, tickets and other outside compensation to Stagner, Murphy and a host of other Mattress Firm executives, according to documents filed in Harris County District Court in Houston.
Most recently, Colliers attorneys moved to depose Stagner's ex-wife, Julie Stagner, about real estate deals tied to her and possibly her ex-husband that invested in retail sites that were home to at least one Mattress Firm competitor, Select Comfort.
Julie Stagner's attorneys, Houston-based Schirrmeister Diaz-Arrastia Brem Managing Partner Michael Brem and attorney Paige Bonne — denied charges in court documents that her ex-husband was involved with her in any outside real estate deals, adding that two retail deals she co-invested in with Levy — both executed in 2015 — did not involve Stagner.
“Since their divorce in 2010, Julie Stagner and Steve Stagner have not invested in real estate jointly,” Stagner's attorneys said in a court filing. “Colliers is apparently attempting to put pressure on Steve Stagner by harassing his ex-wife, and mother of his children, Julie Stagner and the non-party entities with intrusive, invasive, grossly over-broad discovery requests that have no relevance to any claims in the lawsuit.”
Steinhoff, which acquired Mattress Firm for $3.8B in 2016 at 115% the premium of the stock price at the time, has itself been embroiled in a far-reaching accounting scandal. At the end of last year, Steinhoff's former CEO, Markus Jooste, resigned from the company as the firm tapped PwC to investigate accounting irregularities that will result in the conglomerate restating earnings for multiple years. The scandal has rocked Steinhoff's valuation (it is traded publicly in Germany) and brought it close to financial ruin.
Steinhoff secured an agreement with a major creditor, Hemisphere International Properties, to stave off payments on a nearly $870M credit facility for three years, according to BusinessReport.
Bankruptcy could give Mattress Firm a green light to close stores that are clustered together in many of its markets, a result of the retailer's rampant growth leading up to the lawsuit detailing alleged real estate fraud. The lawsuit claims one portion of the scheme alone — a $50K broker fee per lease — could have cost the retailer at least $40M in excess payments. That accounts for roughly 800 locations.
“It's quite obvious [Mattress Firm] expanded too quickly," Transwestern Director of Research Stuart Showers previously told Bisnow. "They pushed very hard for growth, so it made it easy to cover [the alleged fraud] up. A lot of these locations don't make much sense. They're deals just to get a deal done."