MFRM
reported earnings for the quarter and full year ended January 2016 a few weeks
ago. There were a number of interesting developments, though none that alter
the general thesis. The initial write-up
focused on MFRM’s acquisition roll-up model, profitability deterioration, liberal
usage of non-GAAP reporting metrics, odd definition of comparable store sales,
and wrapped up with some relevant valuation context.
In addition to reporting the Q4 and full year
results, the earnings release also introduced MFRM’s FY 2016 guidance, provided
some more detail around the additional debt financing driven by the
acquisition, and announced a ‘real estate optimization’ plan.
Q4 earnings and revenue fell short of consensus expectations, while
forward guidance for revenue slightly exceeded views, despite EPS missing
consensus for 2016.
As noted in the recently filed 10-K, MFRM decided
to postpone closing date for Sleepy’s acquisition until after the close of
fiscal 2015. While it is entirely conceivable that all of the necessary work
genuinely could not be completed in time to close the Sleepy’s acquisition
prior to the fiscal year end, there is the obvious ‘benefit’ that in not doing
so, MFRM did not have to disclose a balance sheet with the incremental debt
load reflected.
Though anyone who follows the name closely should
have a good idea of what the post-Sleepy’s balance sheet looks like, the
company’s choice of acquisition closing date means that casual observers will
not see the impacted balance sheet for some time (until the next 8-K or 10-Q).
Another interesting (curious) development came
about as an analyst on the conference call
asked a clarifying question around MFRM’s comparable store sales policy as it
relates to newly acquired companies (emphasis added).
Analyst
Okay. And then just
definitionaly, I guess as I recall, well, Sleep Train and the Chicago market
just entered your comp base in the fourth quarter, just curious why with
Sleepy’s you are including it right away is it just what’s the kind of the
difference there in approach? What drives that?
MFRM
CFO
Yes, so with every
single acquisition that we've ever done, we’ve included the e-com and multi-channel
sales businesses of the acquisition that we’ve completed. That's been
our historical accounting methodology really since the start off when we’re a
public company and so for Sleep Train for instance, we included those numbers,
but those numbers were really small. It wasn’t as developed the business. And
so it’s never been material enough to call out, but that’s been our accounting
methodology since we started. And so we didn’t want to change from our
historical methodology.
MFRM
CEO
Yes, Dan just to
clarify, the brick-and-mortars that will come in next year. And I think that’s
maybe where the confusion, nature of your question is.
Analyst
I see. Okay. So in
another words, the brick-and-mortar component of the comp for Sleepy’s well get
the comp until let’s say year from now basically.
MFRM
CEO
That’s correct.
MFRM
CFO
We are expecting this
month, yes.
Analyst
Okay. And will you be
going forward reporting your – will you be breaking out the brick-and-mortar
portion of the comp as you report?
MFRM
CFO
No, similar to our
historical practice, we just wanted to call it out for you upfront because this
is really the first time it made a material impact. We wanted to be very
transparent with it.
Source: SeekingAlpha
MFRM’s policy, it seems, has been to immediately
include acquired companies’ e-commerce revenue within comp store sales as of day
one, while deferring acquired companies’ store revenue until the anniversary
(as would be expected). This is very curious, and only raises more questions
around the difference between MFRM’s reported comp store sales versus what
would be expected from a revenue per average store type of calculation.
Finally, with the completion of fiscal 2015, the
concern around the deterioration of the cash conversion cycle is somewhat
alleviated. Although, this does appear to have come at the expense of margins,
as gross margins declined for the fourth straight year.
Overall, the short thesis remains intact, as a multitude of red flags
persist. As well, given the amounts of debt that have been piled on the company
(when they are ultimately disclosed), the margin for error is getting smaller
and smaller.
