Sector financial performance:

This company, who is primarily a developer, manufacturer, retailor, and marketer of beds, bases and bedding accessories, has been grouped into bedding sector in furnishing industry.

It seems that demand for bedding products has not been strong in the past several years as indicated by continuingly declining companies’ unit sales (-7-0% annual decrease for typical retail sales). While rising average price (0-10% annual increase for typical retail sales), probably as a result of both rising costs and sales’ shifting to more expensive products, may play a role in the decrease in unit sales, weak demand for lower price products provided by companies in this sector may be the major reason. However, it seems that demand for higher price products has

been strong and growing during the same period. And it seems that demand for lower price products is bouncing back in 2018.

Online sales seem to have been growing fast (20-100% annual growth) but the pace slows down in 2018.

International demand for high price products has been strong (4-10% annual growth).

Benefited from sales’ shifting to higher margin products and lowered products costs, companies have seen improved gross margin across the sector. The typical average gross margin increased to about 52% in 2018. The typical SG&A as percentage of sales has been increasing due to deleverage of decreased sales or expansion of stores and reached to about 43% and caused an average operating margin down to 8% in 2018.

The typical enterprise price/EBI (adjusted) ratio: 25 (interest/EBI ratio of 25%).

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Company performance:

It seems that the domestic demand for products of this company has been mixed in the past three years as indicated by the increased comparable sales and the decrease in units of comparable stores, probably a result of decreasing sales of lower price products offset by increase in higher price products. The shifting of sales to higher price may contribute to the increase in price. However, it seems that demand bounced back up in the second quarter of 2018 as indicated by increased sales units (probably in same stores as well). Online sales seem to be increasing quickly.

The six months of fiscal 2018 compared with the same of period of 2017

Comparable sales increased by 2% (9% for second quarter) due to increase of 1% (8% second quarter) in retail comparable stores sales and increase of 12% in online and phone sales (average price per mattress increased 7% (5% for second quarter); mattress units in comparable stores decreased 6% (increase 3% for second quarter estimated)).

Growth attributable to new stores: 3%.

 The fiscal 2017 compared with the 2016

Comparable sales increased by 4% due to increase of 3% in retail comparable stores sales and increase of 16% in online and phone sales (average price per mattress increased 6%; mattress units in comparable stores decreased 3%).

Growth attributable to new stores: 7%.

Fiscal 2016 compared with 2015

Comparable sales increased by 1% due to increase of 0% in retail comparable stores sales and increase of 25% in online and phone sales (average price per mattress increased 0%; mattress units in comparable stores was flat).

Growth attributable to new stores: 7%.

Fiscal 2015 compared with 2014

Comparable sales increased by 3% due to increase of 3% in retail comparable stores sales and decrease of 4% in online and phone sales (average price per mattress increased by 10%; mattress units in comparable stores decreased 7%).

Growth attributable to new stores: 2%.

Its gross margin has been consistent at 61% primarily due to effect of improvement in production efficiency and reduction in costs and changes in sales mix. Due the increase of 250 basis points in SG&A as percentage of sales and increase of about 10 basis points in R&A as percentage of sales, its operating margin has thus gone down from 9% to 6% in 2018.

Stock price

This stock currently has a stock price/cash flow ratio of 23 ($32). We think that its stock is being relatively undervalued.