Chapter 11: The mattress cabinet prepares a reorganization of bankruptcy

Mattress Firm, the country's largest mattress retailer, has filed for bankruptcy protection on Friday, which will result in hundreds of store closures as the Houston-based company seeks debt relief of less than 3.2. billions of dollars.

The retailer filed for bankruptcy under Chapter 11 in federal Delaware court, acknowledging that it operates too many stores after a series of acquisitions over the past decade.

"There are many examples of a Mattress Firm located literally in front of another Mattress Firm," said Finance Director and Chief Operating Officer Hendré Ackermann.

The bankruptcy procedure will allow Mattress Firm to terminate hundreds of store leases in poorly performing and overlapping locations. Mattress Firm said that it could close up to 700 of its more than 3,300 stores nationwide, using the savings it has made to improve its product offering, open stores in new markets, and develop in its existing markets.

The first 200 stores, including 18 in the Houston area, are expected to be closed in the coming days. Decisions regarding the closure of additional stores will be made in the coming weeks.

"The process we launched today will allow us to strengthen our balance sheet and accelerate the optimization of our store portfolio," said Steve Stagner, President and CEO of Mattress Firm.

Mattress Firm is the latest victim of brick and mortar retailing, which has struggled to compete with the boom of e-commerce and changing consumer preferences. The mattress retailer has joined Toys "R" Us, Gymboree, Payless ShoeSource and St.21 to declare bankruptcy in recent years. Other retailers, including Sears and Macy's, have closed thousands of stores and fired tens of thousands of workers to survive the so-called retail apocalypse.

Mattress Firm said Friday it has received pledges for some $ 250 million of debtor-operator financing, which – pending court approval – will help the company fund its operations through a bankruptcy proceedings. The company also secured commitments for a senior secured credit of $ 525 million.

The chain is working with A & G Realty Partners to close stores and restructure leases. Sidley Austin LLP is the legal advisor of the company, Alix Partners is its financial advisor and Guggenheim Securities is its restructuring advisor.

Mattress Firm plans to complete the restructuring process in the next 45 to 60 days.

Mattress Firm began in 1986 with three vendors and a small store in a Sharpstown mall. Over the next three decades, the retailer became the largest player in the bedding business in the United States with sales of $ 3.2 billion and 9,500 employees.

As it grew, the company struggled with the growing weight of its stores and the rising costs associated with operating and changing brands.

At the same time, Mattress Firm has been facing increasing competition from online competitors bed-in-a-box. Amazon, the country's most profitable retailer, would join the fray to introduce foam mattresses starting at $ 130.

Mattress Firm thought it had found salvation at Steinhoff International when the conglomerate of South African retailers paid $ 3.8 billion to acquire the company in 2016. However, according to court documents, Steinhoff imposed a debt on Mattress Firm $ 3.1 billion when it was acquired. when it came to obtaining lines of credit for its operations.

Steinhoff was involved in an accounting scandal at the end of last year that challenged the value of more than $ 7 billion in assets. Steinhoff is trying to restructure his debt as part of an ongoing investigation that has highlighted the extent of Mattress Firm's financial problems.

Mattress Firm, in its Friday filing, said it would run out of cash at the end of the month without bankruptcy protection. According to the filed documents, the company is expected to lose about $ 150 million during the 2018 fiscal year.

By closing some 700 stores, Mattress Firm could probably raise about $ 50 million, said Seth Basham, an analyst at Los Angeles-based Wedbush Securities.

With Steinhoff bankrupt, Steinhoff is likely to try to trick a buyer into buying the troubled retailer, analysts said. After bankruptcy, a restructured mattress business might be of interest to investors, such as private equity firms.

"The business model of Mattress Firm is acceptable, but it is too broad," said Drew McManigle, managing director of SierraConstellation Partners, a financial consulting firm in Houston. "There is a lot of private equity money looking for good deals and companies to buy."

Mattress Firm did not name a bidder or prospective purchaser on Friday. The company was bought since March, but there was a stalemate between Steinhoff's creditors and potential buyers over the company's price, Basham said.

Mattress Firm struggling with financial difficulties, he lobbied his long-time supplier, Tempur Sealy International, to sign a new deal with significant concessions. The company based in Lexington, Kentucky, one of the largest mattress manufacturers in the country hesitated and removed its high-end Tempur-Pedic beds from the Mattress Firm stores last year.

According to Basham, this is a costly mistake for Mattress Firm, with Tempur-Pedic beds sales accounting for about a third of the retailer's total sales.

In 2016, Tempur Sealy sold $ 670 million worth of products to Mattress Firm, of which $ 400 million was Tempur-Pedic beds. High-end mattresses, which cost more than $ 2,000 each, account for about 40 percent of Mattress Firm sales, Basham said.

Mattress Firm has signed a new contract with Serta Simmons, the largest mattress manufacturer in the country, with a 40% market share. However, the damage was caused, said Basham. Mattress Firm sales were lagging due to supply chain issues and the loss of a major revenue generator at Tempur-Pedic.

Mattress Firm and Tempur Sealy clashed in court, filing lawsuits for trademark infringement and breach of contract. Mattress Firm has filed other lawsuits against its real estate brokers over allegations that it would have pushed the company too much

At the same time, Serta Simmons of Atlanta has invested $ 100 million to open four new plants to meet Mattress Firm's demand for bedding. The first of the new plants – a 265,000 square foot facility, producing more than 1,000 mattresses per day – opened in Houston last year. The two companies also agreed to spend $ 100 million on advertising to promote their new partnership.

Analysts predict that Mattress Firm will emerge from Chapter 11 with new owners and executives ready to reconcile its differences with Tempur Sealy. It would be a boon for Tempur Sealy and a plague for Serta Simmons, who has not signed an exclusive deal with Mattress Firm, Basham said.

"Serta, who is already heavily indebted, would be a little out if it happened," Basham said.

According to reports of Mattress Firm's bankruptcy plans, Tempur Sealy's share price had risen more than 10% on Wednesday, but fell on Friday.

Scott Thompson, President and CEO of Tempur Sealy, declined to comment on the forecast for the sale of his mattresses through Mattress Firm, post-bankruptcy.

According to rumors, Serta Simmons, who is seeking to acquire Mattress Firm, announced Friday that Mattress Firm would continue to buy the Serta and Beautyrest beds from the manufacturer.

"For now, business continues as usual for Serta Simmons Bedding," said a spokesperson in an email. "We will continue to support Mattress Firm throughout the Chapter 11 process.

The closures of Mattress Firm stores would leave a big hole in the national real estate markets. The store's average footprint is 4,600 square feet, which means the company could potentially release 3.2 million square feet of commercial space if it closed 700 mid-size stores, Basham said.

A spokeswoman for Mattress Firm said they did not have information about sales spaces, nor about the number of employees affected by store closures.

Ed Wulfe, chief executive officer of Wulfe & Co., a brokerage firm specializing in retail, said he believed the vacancies in Mattress Firm would be absorbed fairly quickly. Most of his stores are located on highly desirable shopping center sites, with high visibility on car and pedestrian traffic, he said.

"Mattress Firm leaves spaces that are highly marketable and small enough to have many potential uses," Wulfe said. "We do not need a mattress store on every street corner."

Katherine Blunt contributed to this story.