Mattress Firm Holding 10-Q 2012 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended October 30, 2012

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from              to              

Commission file number 001-35354

MATTRESS FIRM HOLDING CORP.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	20-8185960
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

5815 Gulf Freeway

Houston, Texas 77023

(Address of Principal Executive Offices) (Zip Code)

(713) 923-1090

(Registrants’ Telephone Number, Including Area Code)

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report.)

Indicate by check mark whether the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES x  NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES x  NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer o
Non-accelerated filer x	Smaller Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act)   YES o  NO x

As of December 6, 2012, 33,768,771 shares of common stock, par value $0.01 per share, of the registrant were outstanding.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of federal securities laws that relate to future events or our future financial performance. In many cases, you can identify forward-looking statements by terminology such as “may,” “would,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “intend,” “potential” or “continue” or the negative of these terms or other comparable terminology. These forward-looking statements are made based on our management’s expectations and beliefs concerning future events affecting us and are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. These uncertainties and other factors could cause our actual results to differ materially from those matters expressed or implied by these forward-looking statements.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Important factors that may cause actual results to differ materially from the results expressed or implied by these forward-looking statements are set forth under “Item 1A. Risk Factors” of Part I of the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2012 filed with the Securities and Exchange Commission (the “SEC”) on April 20, 2012 (as amended on May 30, 2012) (the “Fiscal 2011 Annual Report”) and any additional risk factors identified in our other filings with the SEC. All forward-looking statements in this Quarterly Report on Form 10-Q are based on information available to us on the date of this report. We undertake no obligation to publicly update or revise any of the forward-looking statements, whether as a result of new information, future events or otherwise.

Some of the important factors that could cause our actual results, performance or financial condition to differ materially from expectations are:

·downturns in the economy and a reduction in discretionary spending by consumers;

·our ability to profitably open and operate new stores;

·our intent to aggressively open additional stores in our existing markets;

·our relationship with certain mattress manufacturers as our primary suppliers;

·our dependence on a few key employees;

·the possible impairment of our goodwill or other acquired intangible assets;

·the effect of our planned growth and the integration of our acquisitions on our business infrastructure;

·the impact of seasonality on our financial results and comparable-store sales;

·fluctuations in our comparable-store sales from quarter to quarter;

·our ability to raise adequate capital to support our expansion strategy;

·our future expansion into new, unfamiliar markets;

·our success in pursuing strategic acquisitions;

·the effectiveness and efficiency of our advertising expenditures;

·our success in keeping warranty claims and comfort exchange return rates within acceptable levels;

·our ability to deliver our products in a timely manner;

·our status as a holding company with no business operations;

·our ability to anticipate consumer trends;

1

·heightened competition;

·changes in applicable regulations;

·risks related to our franchises, including our lack of control over their operations, their ability to finance and open new stores and our liabilities if they default on note or lease obligations;

·risks related to our stock; and

·other factors discussed in “Item 1A. Risk Factors” of Part I of the Fiscal 2011 Annual Report, elsewhere in this report and in our other filings with the SEC.

2

MATTRESS FIRM HOLDING CORP.

Table of Contents

		Page
PART I. FINANCIAL INFORMATION		4
Item 1.	Financial Statements	4
	Condensed Consolidated Balance Sheets as of October 30, 2012 (unaudited) and January 31, 2012	4
	Unaudited Condensed Consolidated Statements of Operations for the thirteen weeks ended October 30, 2012 and November 1, 2011 and the thirty-nine weeks ended October 30, 2012 and November 1, 2011	5
	Unaudited Condensed Consolidated Statements of Cash Flows for the thirty-nine weeks ended October 30, 2012 and November 1, 2011	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.	Controls and Procedures	28
PART II. OTHER INFORMATION		29
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 6.	Exhibits	29

3

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements.

MATTRESS FIRM HOLDING CORP.

Condensed Consolidated Balance Sheets

(Dollars in thousands, except share amounts)

	January 31,			October 30,
	2012			2012
				(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	47,946		$	10,855
Accounts receivable, net	18,607			28,187
Inventories	40,961			62,181
Deferred income taxes	12,574			6,357
Prepaid expenses and other current assets	12,054			15,715
Total current assets	132,142			123,295
Property and equipment, net	95,674			133,905
Intangible assets, net	84,795			91,206
Goodwill	291,141			345,423
Debt issue costs and other, net	9,729			10,839
Total assets	$	613,481		$	704,668
Liabilities and Stockholders’ Equity
Current liabilities:
Notes payable and current maturities of long-term debt	$	2,414		$	6,953
Accounts payable	42,396			76,952
Accrued liabilities	31,780			41,447
Customer deposits	6,294			8,290
Total current liabilities	82,884			133,642
Long-term debt, net of current maturities	225,940			225,630
Deferred income taxes	31,045			25,840
Other noncurrent liabilities	49,353			61,367
Total liabilities	389,222			446,479
Commitments and contingencies (Note 8)
Stockholders’ equity:
Common stock, $0.01 par value; 120,000,000 shares authorized; 33,768,828 shares issued and outstanding at January 31, 2012 and October 30, 2012	338			338
Additional paid-in capital	361,717			363,370
Accumulated deficit	(137,796		)	(105,519		)
Total stockholders’ equity	224,259			258,189
Total liabilities and stockholders’ equity	$	613,481		$	704,668

The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of these interim financial statements.

4

MATTRESS FIRM HOLDING CORP.

Unaudited Condensed Consolidated Statements of Operations

(Dollars in thousands, except share and per share amounts)

	Thirteen Weeks Ended					Thirty-Nine Weeks Ended
	November 1,			October 30,		November 1,			October 30,
	2011			2012		2011			2012
Net sales	$	183,514		$	277,259	$	515,352		$	749,091
Cost of sales	110,106			167,173		315,333			454,299
Gross profit from retail operations	73,408			110,086		200,019			294,792
Franchise fees and royalty income	1,329			1,490		3,401			4,022
	74,737			111,576		203,420			298,814
Operating expenses:
Sales and marketing expenses	41,420			67,475		122,134			183,167
General and administrative expenses	11,638			20,868		35,765			56,746
Loss on store closings and impairment of store assets	285			196		324			267
Total operating expenses	53,343			88,539		158,223			240,180
Income from operations	21,394			23,037		45,197			58,634
Other expense (income):
Interest income	(1		)	—		(4		)	(1		)
Interest expense	8,530			2,097		25,479			6,386
Loss from debt extinguishment	—			—		1,873			—
	8,529			2,097		27,348			6,385
Income before income taxes	12,865			20,940		17,849			52,249
Income tax expense	551			8,484		870			19,972
Net income	$	12,314		$	12,456	$	16,979		$	32,277
Basic net income per common share	$	0.55		$	0.37	$	0.76		$	0.96
Diluted net income per common share	$	0.55		$	0.37	$	0.76		$	0.95
Basic weighted average shares outstanding	22,399,952			33,768,828		22,399,952			33,768,828
Diluted weighted average shares outstanding	22,399,952			33,867,508		22,399,952			33,885,162

The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of these interim financial statements.

5

MATTRESS FIRM HOLDING CORP.

Unaudited Condensed Consolidated Statements of Cash Flows

(Dollars in thousands)

	Thirty-Nine Weeks Ended
	November 1,			October 30,
	2011			2012
Cash flows from operating activities:
Net income	$	16,979		$	32,277
Adjustments to reconcile net income to cash flows provided by operating activities:
Depreciation and amortization	12,951			16,432
Interest expense accrued and paid-in-kind	18,872			—
Loan fee and other amortization	1,911			1,855
Loss from debt extinguishment	1,873			—
Deferred income tax expense	—			8,613
Stock-based compensation	58			1,653
Loss on store closings and impairment of store assets	324			267
Effects of changes in operating assets and liabilities, excluding business acquisitions:
Accounts receivable	(3,389		)	(6,887		)
Inventories	(8,136		)	(15,219		)
Prepaid expenses and other current assets	256			(647		)
Other assets	(2,476		)	(904		)
Accounts payable	9,531			22,138
Accrued liabilities	4,780			1,837
Customer deposits	933			134
Other noncurrent liabilities	3,250			4,906
Net cash provided by operating activities	57,717			66,455
Cash flows from investing activities:
Purchases of property and equipment	(22,192		)	(50,726		)
Business acquisitions, net of cash acquired	(100		)	(51,613		)
Net cash used in investing activities	(22,292		)	(102,339		)
Cash flows from financing activities:
Proceeds from issuance of debt, including revolving facility borrowings	40,198			18,000
Principal payments of debt, including revolving facility repayments	(51,248		)	(19,207		)
Debt issuance costs	(1,273		)	—
Net cash used in financing activities	(12,323		)	(1,207		)
Net increase (decrease) in cash and cash equivalents	23,102			(37,091		)
Cash and cash equivalents, beginning of period	4,445			47,946
Cash and cash equivalents, end of period	$	27,547		$	10,855

The accompanying Notes to the Unaudited Condensed Consolidated Financial Statements are an integral part of these interim financial statements.

6

MATTRESS FIRM HOLDING CORP.

Notes to Unaudited Condensed Consolidated Financial Statements

1. Business and Basis of Presentation

Mattress Firm Holding Corp., through its wholly owned subsidiaries, is engaged in the retail sale of mattresses and bedding-related products in various metropolitan markets in the United States through company-operated and franchisee-owned mattress specialty stores that operate primarily under the name Mattress Firm. Mattress Firm Holding Corp. and its wholly owned subsidiaries are referred to collectively as the “Company.”

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) and they reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly the Company’s financial position as of January 31, 2012 and October 30, 2012, and the results of operations and cash flows for the periods presented. The Company’s historical and quarterly results of operations may not be indicative of the results that may be achieved for the full year or any future period.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the Company’s most recent audited consolidated financial statements and related notes for the fiscal year ended January 31, 2012, which are included in the Company’s Annual Report on Form 10-K filed with the SEC on April 20, 2012 (as amended on May 30, 2012) (the “Fiscal 2011 Annual Report”).

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates that are more susceptible to change in the near term are the accruals for sales returns and exchanges, product warranty costs, impairments, vendor incentives, self-insured liabilities and store closing costs.

The Company’s fiscal year consists of 52 or 53 weeks ending on the Tuesday closest to January 31. Each of the fiscal years ended January 31, 2012 (“Fiscal 2011”) and ending January 29, 2013 (“Fiscal 2012”) consists of 52 weeks.

2. Business Acquisitions

On May 2, 2012, the Company completed the acquisition of all of the equity interests in MGHC Holding Corporation (“Mattress Giant”) for approximately $43.9 million. The closing was funded with existing cash reserves and $10 million of borrowings under the revolving portion of the 2007 Senior Credit Facility (as defined below). The acquisition added 181 mattress specialty retail stores in certain markets in Florida and Texas where the Company operated Mattress Firm stores at the time of the acquisition. The process of rebranding the acquired stores as Mattress Firm commenced immediately after the closing of the transaction with the conversion of in-store merchandising and computer systems and the addition of temporary signage.  Permanent rebranding, including renovations and the addition of permanent signage is expected to be complete by the end of Fiscal 2012.

On September 25, 2012, the Company acquired the leasehold interests, store assets, distribution center assets and related inventories, and assumed certain liabilities, of Mattress XPress, Inc. and Mattress XPress of Georgia, Inc. (collectively, “Mattress X-Press”) relating to the operation of 34 mattress specialty stores located in Florida and Georgia for a total purchase price of approximately $13.2 million, subject to customary post-closing purchase price adjustments. Mattress Xpress provided unsecured financing to the Company in the amount of approximately $7.8 million in connection with the purchase, which is payable over a term of one year in quarterly installments, including interest at 8%. Permanent rebranding, including renovations and the addition of permanent signage is expected to be complete by the end of Fiscal 2012.

The acquisitions increased the Company’s store locations and market share in markets in which the Company previously operated, which generally is expected to result in greater expense synergies and leverage over market-level costs, such as advertising and warehousing. The acquisitions resulted in $58.1 million of goodwill, of which $38.4 million will not be deductible for income tax purposes.

7

The allocation of the purchase price to the acquired assets and liabilities, based on management’s estimate of their fair values on the acquisition closing date, is as follows (amounts in thousands):

	Mattress Giant			Mattress X-Press (Preliminary)			Total
Accounts receivable	$	2,667		$	26		$	2,693
Inventories	5,167			834			6,001
Prepaid expenses and other current assets	2,819			195			3,014
Property and equipment	3,043			884			3,927
Intangible assets	5,119			1,313			6,432
Goodwill	43,184			14,882			58,066
Deferred income tax asset	4,255			427			4,682
Other assets	640			413			1,053
Accounts payable	(12,896		)	(4,522		)	(17,418		)
Accrued liabilities	(7,693		)	(479		)	(8,172		)
Customer deposits	(1,559		)	(304		)	(1,863		)
Notes payable	—			(163		)	(163		)
Other noncurrent liabilities	(820		)	(667		)	(1,487		)
Fair value of consideration transferred	$	43,926		$	12,839		$	56,765
Seller note issued	$	—		$	7,750		$	7,750
Less: Pending purchase price adjustment for working capital settlement		––			(2,598	)		(2,598	)
Cash used in acquisitions, net of cash acquired	43,926			7,687			51,613
Fair value of consideration transferred	$	43,926		$	12,839		$	56,765

Goodwill represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. The goodwill arising from the acquisition is primarily due to the factors discussed above.

The net sales included in the Company’s consolidated statement of operations derived from the Mattress Giant and Mattress X-Press acquisitions from the respective acquisition dates to October 30, 2012 was $71.5 million and $1.6 million, respectively.

The following table presents the selected consolidated financial information of the Company on a pro forma basis, assuming that the Mattress Giant acquisition had occurred as of February 2, 2011. The historical financial information has been adjusted to give effect to pro forma items that are directly attributable to the acquisition and are expected to have a continuing impact on the consolidated results. These items include adjustments to record incremental depreciation and amortization expense related to the increase in fair value of the acquired assets.

The unaudited financial information set forth below has been compiled from the historical financial statements and other information, but is not necessarily indicative of the results that actually would have been achieved had the transaction occurred on the date indicated or that may be achieved in the future (amounts in thousands, except per share amounts):

	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	November 1,		October 30,		November 1,		October 30,
	2011		2012		2011		2012
Net sales	$	218,092	$	277,259	$	614,364	$	780,916
Net income	11,994		12,456		18,600		33,756
Diluted net income per common share	$	0.54	$	0.37	$	0.83	$	1.00

Acquisition-related costs for U.S. GAAP purposes are costs the acquirer incurs to effect a business combination, including advisory, legal, accounting, valuation, and other professional or consulting fees. The Company incurred a total of $0.6 million and $2.4 million of acquisition-related costs for the thirteen and thirty-nine weeks ended October 30, 2012, respectively, related to the acquisitions discussed above.

8

3. Fair Value of Financial Instruments

The amounts reported in the unaudited condensed consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their respective fair values because of the short-term maturity of these instruments. The table below summarizes the estimated fair values and respective carrying values of the credit agreement, exclusive of the revolver, among Mattress Holding Corp., a subsidiary of Mattress Firm Holding Corp., certain lenders, and UBS Securities LLC, as sole arranger and bookrunner and a lender (the “2007 Senior Credit Facility”) (amounts in millions):

	January 31, 2012				October 30, 2012
	Estimated Fair Value		Carrying Value		Estimated Fair Value		Carrying Value
2007 Senior Credit Facility	$	223.0	$	228.3	$	226.9	$	227.3

The fair value of the 2007 Senior Credit Facility was estimated based on the ask and bid prices quoted from an external source. The carrying amounts of other debt instruments at fixed rates approximated their respective fair values due to the comparability of interest rates for the same or similar issues that are available.

The Financial Accounting Standards Board (“FASB”) has issued guidance on the definition of fair value, the framework for using fair value to measure assets and liabilities, and disclosure about fair value measurements. The guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used to measure fair value. These tiers include:

·Level 1: Defined as observable inputs such as quoted prices in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

·Level 2: Defined as pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and current market and contractual prices for the underlying instruments, as well as other relevant economic measures.

·Level 3: Defined as pricing inputs that are unobservable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

The Company measures the fair value of its nonqualified deferred compensation plan on a recurring basis. The plan’s assets are valued based on the marketable securities tied to the plan. Additionally, the Company measures the fair values of goodwill, intangible assets, and property and equipment on a nonrecurring basis if required by impairment tests applicable to these assets. Assets requiring recurring or non-recurring fair value measurements as previously described consisted of the following (amounts in thousands):

	Net Book
	Value as of		Fair Value Measurements						Fiscal 2011
	January 31, 2012		Level 1		Level 2		Level 3		Impairments
Nonqualified deferred compensation plan	$	882	$	—	$	882	$	—	$	—
Property and equipment requiring impairment	$	246	$	—	$	—	$	246	$	134

	Net Book
	Value as of		Fair Value Measurements
	October 30, 2012		Level 1		Level 2		Level 3
Nonqualified deferred compensation plan	$	1,095	$	—	$	1,095	$	—

4. Goodwill and Intangible Assets

The Company tests goodwill and other indefinite lived intangible assets for impairment annually and when events and circumstances indicate that the carrying value of these assets may exceed their current fair values. The Company assigns the carrying value of goodwill to its “reporting units” and applies the test for goodwill at the reporting unit level. A reporting unit is defined as an operating segment or one level below a segment (a “component”) if the component is a business and discrete information is prepared

9

and reviewed regularly by segment management. Each of the Company’s metropolitan markets is an operating segment. The store unit components that comprise each operating segment are aggregated into a reporting unit on the basis that all stores have similar economic characteristics. All of the Company’s goodwill has been allocated to its metropolitan market reporting units for impairment testing.

The test for goodwill impairment involves a qualitative evaluation as to whether or not it is more likely than not that the fair value of a reporting unit is less than its carrying value using an assessment of relevant events and circumstances. If any reporting unit is concluded to be more likely impaired than not the following steps are performed for such reporting unit: (1) comparing the fair value of a reporting unit with the carrying value of its net assets and (2) if the carrying value exceeds fair value, the fair value of goodwill is compared with the respective carrying value and an impairment loss is recognized in the amount of the excess. An estimated fair value of the enterprise, which is allocated to each reporting unit for goodwill impairment purposes, would be derived by a combination of an income approach and a market approach, which incorporates both management’s views and those of the market. The income approach provides an estimated fair value based on the Company’s anticipated cash flows that are discounted using a weighted average cost of capital rate. The market approach provides an estimated fair value based on multiples of operating results to enterprise value of comparable publicly-traded entities that are applied to the Company’s historical operating results. The estimated fair values computed using the income approach and the market approach are then weighted and combined into a single fair value. The primary assumptions used in the income approach are estimated cash flows and weighted average cost of capital. Estimated cash flows are primarily based on projected revenues, operating costs and capital expenditures and are discounted using a weighted average cost of capital.

The circumstances which impact the valuation of goodwill could also be an indicator of impairment of trade names or trademarks, as could changes in legal circumstances, marketing plans or customer demand. In conjunction with our evaluation of goodwill, the Company also evaluated the carrying value of non-amortizing trade names and trademarks using the relief from royalty method, which values the intangible asset by estimating the savings achieved by ownership as compared to licensing the intangible assets from an independent owner. The Company did not recognize any impairment losses during the thirteen or thirty-nine weeks ended November 1, 2011 or October 30, 2012.

5. Income Taxes

Income tax expense during interim periods is based on the estimated annual effective income tax rate plus any discrete items which are recorded in the period in which they occur. Discrete items include such events as changes in estimates due to the finalization of tax returns, tax audit settlements, tax law changes, and increases or decreases in valuation allowances related to prior year estimates. The determination of the consolidated provision for income taxes, deferred tax assets and liabilities and related valuation allowance needs require management to make judgments and estimates. Although management believes that its tax estimates are reasonable, the ultimate tax determination involves significant judgments that could become subject to audit by tax authorities in the ordinary course of business, as well as the generation of sufficient future taxable income.

The Company recognized $20.0 million of income tax expense for the thirty-nine weeks ended October 30, 2012, compared to $0.9 million of income tax expense for the thirty-nine weeks ended November 1, 2011. The effective tax rate was 38.2% for the thirty-nine weeks ended October 30, 2012, compared to 4.9% for the thirty-nine weeks ended November 1, 2011, and differs primarily due to the fact that the Company had a full valuation allowance recorded against its deferred tax assets during the first thirty-nine weeks of 2011. The effective tax rate of 38.2% for the current period differs from the federal statutory rate of 35.0% primarily due to state income taxes.

The Company files income tax returns in U.S. federal and state jurisdictions. As of October 30, 2012, open tax years in federal and some state jurisdictions date back to October 2002 due to the taxing authorities’ ability to adjust operating loss carryforwards. As of January 31, 2012, the Company had net operating loss carryforwards of $37.2 million expiring in various years through fiscal year 2019.

The Company has established a cumulative liability for unrecognized tax benefits of $0.4 million as of October 30, 2012. Management does not anticipate there will be a material change in the total amount of unrecognized tax benefits within the next twelve months. Management had not accrued any interest on these unrecognized tax benefits as of October 30, 2012.

6. Reportable Segments

The Company’s operations consist primarily of the retail sale of mattresses and bedding-related products in various metropolitan areas in the United States through company-operated and franchisee-operated mattress specialty stores that operate under the name Mattress Firm. The Company also generates sales through its website and special events directed primarily at customers who reside in the metropolitan markets in which company-operated stores are located. The Company’s chief operating decision maker

10

reviews the aggregated results of company-operated stores at the metropolitan market level, including market-level cost data, consisting primarily of advertising, warehousing and overhead expenses that are directly incurred, managed and reported at the market level. Management focuses on improving the profitability at the market level and, therefore, each company-operated metropolitan market is an operating segment. The company-operated market, website and special events business segments are aggregated into a single reportable segment (“retail segment”) as a result of the similar nature of the products sold and other similar economic characteristics that are expected to continue into future periods. Furthermore, the Company generates franchise fees and royalty income from the operation of franchisee-operated Mattress Firm stores in metropolitan markets in which the Company does not operate. Franchise operations are a separate reportable segment, for which the results of operations, as viewed by management, are fully represented by the franchise fees and royalty income reported on the face of the statements of operations because costs associated with the franchise business are not distinguished from other cost data viewed by management. The Company’s assets are used primarily in the operation of its retail segment and the assets directly attributed to the franchise operations are not separately disclosed because they are not material.

The Company’s total net sales are generated from the sale of three major categories of products, consisting of (1) conventional mattresses which utilize steel-coil innersprings, (2) specialty mattresses which utilize materials other than steel-coil innersprings and (3) furniture and accessories, which include headboards and footboards, bed frames, mattress pads and pillows, and from delivery service revenues.

The following table represents the components of the Company’s total net sales (amounts in thousands):

	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	November 1,		October 30,		November 1,		October 30,
	2011		2012		2011		2012
Specialty mattresses	$	86,014	$	144,777	$	225,096	$	378,704
Conventional mattresses	81,955		109,335		245,149		307,178
Furniture and accessories	11,606		17,916		33,806		49,169
Total product sales	179,575		272,028		504,051		735,051
Delivery service revenues	3,939		5,231		11,301		14,040
Total net sales	$	183,514	$	277,259	$	515,352	$	749,091

Prior-year components of the Company’s total net sales have been reclassified between specialty mattresses and conventional mattresses in a manner consistent with the current-year presentation.

7. Earnings Per Share

The following table presents a reconciliation of the weighted average shares outstanding used in the earnings per common share calculations:

	Thirteen Weeks Ended		Thirty-Nine Weeks Ended
	November 1,	October 31,	November 1,	October 31,
	2011	2012	2011	2012
Basic weighted average shares outstanding	22,399,952	33,768,828	22,399,952	33,768,828
Effect of dilutive securities:
Stock options	—	93,907	—	113,592
Restricted shares	—	4,773	—	2,742
Diluted weighted average shares outstanding	22,399,952	33,867,508	22,399,952	33,885,162

One-half of the stock options granted to the Company’s employees are subject to a five-year time-based vesting schedule, while the remaining one-half of the stock options are subject to a four-year market-based vesting schedule, with such vesting based on specified stock price increase targets, as set forth in the option award agreement evidencing the grant of such stock options. The Company includes market-based stock option awards in the dilutive potential common shares when they become contingently issuable and exclude the awards when they are not contingently issuable. Diluted weighted average shares outstanding for both the thirteen and thirty-nine weeks ended October 30, 2012 excludes stock options for the purchase of 303,008 shares of common stock as the applicable vesting criteria were not satisfied as of October 30, 2012. Diluted net income per common share for both the thirteen and

11

thirty-nine weeks ended October 30, 2012 excludes stock options for the purchase of 105,148 shares of common stock as their inclusion would be anti-dilutive.

8. Commitments and Contingencies

The Company conducts the majority of its operations from leased store and warehouse facilities pursuant to non-cancellable operating lease agreements with initial terms ranging from one to 15 years. Certain leases include renewal options generally ranging from one to five years and contain certain rent escalation clauses. Most leases require the Company to pay its proportionate share of the property tax, insurance and maintenance expenses of the property. Certain leases provide for contingent rentals based on sales volumes; however, incremental rent expense resulting from such arrangements was immaterial during all periods presented in the accompanying financial statements.

The Company is subject to legal proceedings and claims that arise in the ordinary course of business. Management does not believe that the outcome of any of the currently pending matters will have a material adverse effect on the Company’s financial position, results of operations or cash flows.

9. Related Party Transactions

Management Fees

During the thirteen and thirty-nine weeks ended November 1, 2011, the Company incurred management fees and other direct expenses from affiliates of its majority owners. Such fees and expenses were billed by an affiliate of J.W. Childs Associates, L.P. Management fees and other direct expenses included in the results of operations were $0.1 million and $0.3 million for the thirteen and thirty-nine weeks ended November 1, 2011, respectively. On November 23, 2011, the management agreement was terminated in connection with the Company’s initial public offering.

2009 Loan Facility, PIK Notes and Convertible Notes

As discussed in Notes 5 and 12 in the Fiscal 2011 Annual Report, prior to the completion of the Company’s initial public offering on November 23, 2011, the Company owed certain indebtedness under the loan facility between Mattress Intermediate Holdings, Inc., the Company’s direct subsidiary, and a group of lenders maturing in January 2015 (the “2009 Loan Facility”), 12% payment-in-kind investor notes maturing at various times from October 24, 2012 through March 15, 2015 (“PIK Notes”) and 12% convertible notes due July 18, 2016 (“Convertible Notes”) to parties that owned equity interests in Mattress Holdings, LLC and certain affiliates of those equity investors. A portion of the balances outstanding under these debt instruments was paid off with proceeds from the Company’s initial public offering, and the remaining portion was converted into shares of the Company’s common stock in connection with the closing of the initial public offering.  The aggregate amount of debt paid and debt converted into equity on November 23, 2011 totaled $188.0 million, including interest accrued thereon.  Under the respective terms of these debt instruments, interest payments on the 2009 Loan Facility, PIK Notes and Convertible Notes were not made in cash, but were instead made by adding the interest to the respective outstanding principal balances.  Interest expense incurred under these debt instruments totaled $6.5 million and $19.4 million for the thirteen and thirty-nine weeks ended November 1, 2011, respectively.

10. Recently Issued Accounting Standards

New Accounting Standards Adopted in this Report— In May 2011, the FASB issued new guidance regarding fair value measurements to ensure consistency between U.S. GAAP and International Financial Reporting Standards. The new guidance applies to all reporting entities that are required or permitted to measure or disclose the fair value of an asset, a liability, or an instrument classified in a reporting entity’s stockholders’ equity in the financial statements. The new guidance applies prospectively effective during periods beginning after December 15, 2011. The Company adopted the provisions of the new guidance effective February 1, 2012 and the adoption of this standard did not have a material impact on the Company’s financial position, results of operations, or cash flows.

In June 2011, the FASB issued new guidance to increase the prominence of other comprehensive income in financial statements. This guidance provides the option to present the components of net income and comprehensive income in either one single statement or in two consecutive statements reporting net income and other comprehensive income. This guidance is effective for fiscal years and interim periods beginning after December 15, 2011. The Company adopted the provisions of the new guidance effective February 1, 2012 and the adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In July 2012, the FASB issued new guidance which gives companies the option to perform a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired, and in some cases, bypass the two-step impairment test. This guidance is effective for annual and interim indefinite-lived intangible asset impairment tests performed for

12

fiscal years beginning after September 15, 2012; however, early adoption of the new guidance is permitted. The Company adopted this guidance effective August 1, 2012 and the adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

New Accounting Standards Not Yet Adopted— In December 2011, the FASB issued new guidance which requires disclosures of gross and net information about financial and derivative instruments eligible for offset in the statement of financial position or subject to a master netting agreement. This guidance is effective for the Company in the first fiscal quarter of 2013 and is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

11. Subsequent Events

Effective November 5, 2012, Mattress Holding Corp., an indirect subsidiary of the Company, entered into an amendment and restatement of the 2007 Senior Credit Facility. The amendment, among other things, (a) increased the revolving loan commitment from $35 million to $100 million, (b) extended the maturity date of the revolving loan by two years to January 2015, (c) extended the maturity date of outstanding term loans having an aggregate principal amount of $200 million by two years to January 2016, (d) increased the interest rate applicable to amounts outstanding under the extended term loans and revolving loans by 1.25%, (e) increased the amount of permitted capital expenditures to $80 million on an annual basis, beginning with capital expenditures incurred during Fiscal 2012, and (f) increased the maximum cumulative amount that Mattress Holding Corp. and its subsidiary guarantors may spend through the extended maturity date.  The Company incurred fees in connection with the restatement and amendment of approximately $1.5 million.

On November 9, 2012, the Company entered into an agreement to acquire the leasehold interests, store assets, distribution center assets and related inventories, and assume certain liabilities, of Factory Mattress & Water Bed Outlet of Charlotte, Inc. (“Mattress Source”) relating to the operation of 28 mattress specialty stores located in North Carolina and South Carolina for a total purchase price of approximately $11.2 million, subject to customary adjustments. The closing of the purchase is expected to occur in the fourth fiscal quarter of 2012 and remains subject to the prior satisfaction of customary closing conditions. The Company intends to rebrand the stores as Mattress Firm subsequent to the closing of the transaction.

13

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q. The discussion in this section contains forward-looking statements that involve risks and uncertainties. See “Cautionary Note Regarding Forward-Looking Statements” included elsewhere in this report for a discussion of important factors that could cause actual results to differ materially from those described or implied by the forward-looking statements contained herein.

Unless the context otherwise requires, the terms “Mattress Firm,” “our company,” “the Company,” “we,” “us,” “our” and the like refer to Mattress Firm Holding Corp. and its consolidated subsidiaries. Unless otherwise indicated, (i) the term “our stores” refers to our company-operated stores and our franchised stores; and (ii) when used in relation to our company, the terms “market” and “markets” refer to the metropolitan statistical area or an aggregation of the metropolitan statistical areas in which we or our franchisees operate.

In this report, we refer to earnings before interest, taxes, depreciation and amortization and other adjustments (such as goodwill impairment charges, loss on store closings and acquisition expenses), or “Adjusted EBITDA.” Adjusted EBITDA is not a performance measure under accounting principles generally accepted in the United States, or “U.S. GAAP.” See “Adjusted EBITDA to Net Income Reconciliation” below for a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income.

We report on the basis of a 52- or 53-week fiscal year, which ends on the Tuesday closest to January 31. Each fiscal year is described by the period of the calendar year that comprises the majority of the fiscal year period. For example, the fiscal year ending January 29, 2013 is described as “fiscal 2012.” Fiscal 2012 contains 52 weeks.

Executive Summary

Net sales during the thirteen weeks and thirty-nine weeks ended October 30, 2012 improved $93.8 million and $233.7 million, respectively, from the comparable prior year levels as a result of comparable-store sales growth and the addition of new and acquired store units. Net income and other profitability measures improved during both the thirteen and thirty-nine weeks ended October 30, 2012. The improvements resulted from the net sales growth and our ability to gain leverage on certain costs through increasing sales per store, which was partially offset by increases in spending in certain expense categories during such periods. Such expenses included advertising and general and administrative expenses. Key results for the thirteen and thirty-nine weeks ended October 30, 2012 include:

·Net income increased $0.2 million to $12.5 million for the thirteen weeks ended October 30, 2012, compared with net income of $12.3 million for the prior year period. Net income increased $15.3 million to $32.3 million for the thirty-nine weeks ended October 30, 2012, compared with $17.0 million for the prior year period.

·Net sales increased $93.8 million, or 51.1%, to $277.3 million for the thirteen weeks ended October 30, 2012, compared to $183.5 million for the prior year period. Comparable-store sales increased 6.6% during the thirteen weeks ended October 30, 2012. Net sales increased $233.7 million, or 45.4%, to $749.1 million for the thirty-nine weeks ended October 30, 2012 compared to $515.4 million for the prior year period. Comparable-store sales increased 8.8% during the thirty-nine weeks ended October 30, 2012.

·Income from operations for the thirteen weeks ended October 30, 2012 was $23.0 million. Excluding $5.0 million of acquisition-related and secondary offering costs, adjusted income from operations was $28.0 million, and adjusted operating margin during the thirteen weeks decreased 160 basis points from 11.7% in 2011 to 10.1% in 2012. This operating margin decrease for the thirteen weeks ended October 30, 2012 on an adjusted basis (excluding acquisition-related and secondary offering costs) is comprised of a 10 basis-point decline in gross profit margin and a 40 basis-point improvement in general and administrative expense leverage, offset by a 180 basis-point decrease in sales and marketing expense leverage and 10 basis-points of operating margin deleveraging in other categories. Income from operations for the thirty-nine weeks ended October 30, 2012 was $58.6 million. Excluding $12.0 million of acquisition-related and secondary offering costs, adjusted income from operations was $70.6 million, and adjusted operating margin during the thirty-nine weeks improved 60 basis points from 8.8% in 2011 to 9.4% in 2012. This operating margin growth for the thirty-nine weeks ended October 30, 2012 on an adjusted basis (excluding acquisition-related and secondary offering costs) is comprised of a 80 basis-point improvement in gross profit margin and a 70 basis-point improvement in general and administrative expense leverage, offset by a 80 basis-point decrease in sales and marketing expense and 10 basis-points of operating margin deleveraging in other categories. Acquisition-related costs for purposes of management’s discussion and analysis, which are included in the results of operations, consists of the acquisition-related costs as defined under U.S. GAAP, including advisory, legal, accounting, valuation, and other professional or consulting fees and, in addition, costs of integrating store and warehouse operations and corporate functions that are not expected to recur in future periods, related to the Mattress Giant and Mattress Xpress acquisitions. See “Reported to Adjusted Statements of Operations Data” below for a reconciliation of net income as reported to adjusted net income.

14

·Adjusted EBITDA increased $7.8 million to $35.1 million for the thirteen weeks ended October 30, 2012, compared with $27.3 million for the prior year period. Adjusted EBITDA as a percentage of sales decreased to 12.6% during the thirteen weeks ended October 30, 2012, compared with 14.9% for the prior year period. Adjusted EBITDA increased $28.1 million to $90.1 million for the thirty-nine weeks ended October 30, 2012 compared with $61.9 million for the prior year period. Adjusted EBITDA as a percentage of sales decreased remained flat at 12.0% during the thirty-nine weeks ended October 30, 2012, compared with the prior year period. See “Adjusted EBITDA to Net Income Reconciliation” below for a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income.

·The components of the net sales increase were as follows (amounts in millions):

	Increase (decrease) in net sales
	Thirteen Weeks			Thirty-Nine
	Ended			Weeks Ended
	October 30,			October 30,
	2012			2012
Comparable-store sales	$	12.0		$	44.8
New stores	33.9			93.8
Acquired stores	49.9			101.3
Closed stores	(2.0		)	(6.2		)
	$	93.8		$	233.7

·The composition of net sales by major category of product and services were as follows (amounts in millions):

	Thirteen Weeks Ended								Thirty-Nine Weeks Ended
	November 1,		% of		October 30,		% of		November 1,		% of		October 30,		% of
	2011		Total		2012		Total		2011		Total		2012		Total
Specialty mattresses	$	86.0	46.9	%	$	144.8	52.2	%	$	225.1	43.7	%	$	378.7	50.6	%
Conventional mattresses	82.0		44.7	%	109.3		39.4	%	245.1		47.6	%	307.2		41.0	%
Furniture and accessories	11.6		6.3	%	17.9		6.5	%	33.8		6.6	%	49.2		6.6	%
Total product sales	179.6		97.9	%	272.0		98.1	%	504.0		97.8	%	735.1		98.1	%
Delivery service revenues	3.9		2.1	%	5.3		1.9	%	11.4		2.2	%	14.0		1.9	%
Total net sales	$	183.5	100.0	%	$	277.3	100.0	%	$	515.4	100.0	%	$	749.1	100.0	%

Prior-year components of the total net sales have been reclassified between specialty mattresses and conventional mattresses in a manner consistent with the current-year presentation.

·The activity with respect to the number of company-operated store units was as follows:

	Thirteen Weeks		Thirty-Nine
	Ended		Weeks Ended
	October 30,		October 30,
	2012		2012
Store units, beginning of period	957		729
New stores	31		88
Acquired stores	34		215
Closed stores	(11	)	(21	)
Store units, end of period	1,011		1,011

·Operating cash flows were $36.4 million and $66.5 million during the thirteen weeks and thirty-nine weeks ended October 30, 2012, respectively, which, in addition to existing cash reserves, were the primary funding source for capital expenditures and debt principal payment requirements.

15

·On May 2, 2012, we completed the acquisition of the equity interests in MGHC Holding Corporation (“Mattress Giant”) for approximately $43.9 million. The closing was funded with existing cash reserves and $10 million of temporary borrowings under the revolving portion of the 2007 Senior Credit Facility (as defined below).

On September 25, 2012, we acquired the leasehold interests, store assets, distribution center assets and related inventories, and assumed certain liabilities, of Mattress XPress, Inc. and Mattress XPress of Georgia, Inc. (collectively, “Mattress X-Press”) for approximately $13.2 million, subject to customary post-closing purchase price adjustments. Mattress X-Press provided unsecured financing to the Company in the amount of approximately $7.8 million in connection with the purchase, which is payable over a term of one year in quarterly installments, including interest at 8%.

The acquisitions are expected to advance our market-level profitability model that is centered on the benefits of increasing our “relative market share” in a given market. We believe that the incremental sales and store-level contribution attributable to the acquired stores will support our ability to increase the advertising spend in each of the markets, which is expected to drive sales increases in both the acquired and existing stores. This strategy is expected to provide sales increases, greater leverage over market-level costs and improved market-level profitability.

·We intend to rebrand approximately 20 additional stores to Mattress Firm during the first quarter of fiscal 2013 that were acquired in December 2010 and are currently operated under the name Mattress Discounters. A noncash impairment charge will be recorded in the fiscal fourth quarter of $2.1 million, before income tax benefit, related to the Mattress Discounters intangible trade name asset.

·We ended the thirty-nine weeks ended October 30, 2012 with no outstanding borrowings, and total borrowing capacity of $34.0 million, under the revolving credit line portion of the credit agreement among our indirectly owned subsidiary Mattress Holding Corp. (“Mattress Holding”), certain lenders, and UBS Securities LLC, as sole arranger and bookrunner and a lender (the “2007 Senior Credit Facility”). Effective May 22, 2012, we increased our revolver capacity under the 2007 Senior Credit Facility by $10 million to $35 million with no change in interest rate or other terms. Effective November 5, 2012, we increased our revolver capacity under the 2007 Senior Credit Facility by $65 million to $100 million and extended the maturity date of the revolver by two years to January 2015.

·Effective November 5, 2012, we entered into an amendment and restatement of the 2007 Senior Credit Facility. The amendment, among other things, (a) increased the revolving loan commitment from $35 million to $100 million, (b) extended the maturity date of the revolving loan by two years to January 2015, (c) extended the maturity date of outstanding term loans having an aggregate principal amount of $200 million by two years to January 2016, (d) increased the interest rate applicable to amounts outstanding under the extended term loans and revolving loans by 1.25%, (e) increased the amount of permitted capital expenditures to $80 million on an annual basis, beginning with capital expenditures incurred during Fiscal 2012, and (f) increased the maximum cumulative amount that Mattress Holding Corp. and its subsidiary guarantors may spend through the extended maturity date.  The Company incurred fees in connection with the restatement and amendment of approximately $1.5 million.

General Definitions for Operating Results

Net sales includes fees collected for delivery services and is recognized upon delivery and acceptance of mattresses and bedding products by our customers and is recorded net of estimated returns. Customer deposits collected prior to the delivery of merchandise are recorded as a liability. Net sales are recognized net of sales tax collected from customers and remitted to various taxing jurisdictions.

Comparable-store sales includes new stores beginning in the thirteenth full month of operation. Acquired stores are included in the comparable-store sales calculation beginning in the first month following the one-year anniversary date of the acquisition. The comparable-store sales calculation includes sales related to our e-commerce and other comparable sales channels. New stores that are relocated within a two mile radius of a closed store are included in the comparable-store sales calculation beginning with the first full month of operations by measuring the growth in revenue against the prior year sales of the closed store. Stores that are closed, other than relocated stores, are removed from the comparable-store sales calculation in the month of closing. Comparable-store sales during fiscal years that are comprised of 53 weeks exclude sales for the fifty-third week of the year.

Cost of sales consists of the following:

·Costs associated with purchasing and delivering our products to our stores and customers, net of vendor incentives earned on the purchase of products;

·Physical inventory losses;

·Store and warehouse occupancy and depreciation expense of related facilities and equipment;

·Store and warehouse operating costs, including warehouse labor costs and utilities, repairs and maintenance and supplies costs of warehouse and store facilities; and

·Estimated costs to provide for customer returns and exchanges and to service customer warranty claims.

Gross profit from retail operations represents net sales minus cost of sales.

Franchise fees and royalty income represents initial franchise fees earned upon the opening of new franchisee stores and ongoing royalties based on a percentage of gross franchisee sales.

16

Sales and marketing expenses consist of the following:

·Advertising and media production;

·Payroll and benefits for sales associates; and

·Merchant service fees for customer credit and debit card payments, check guarantee fees and promotional financing expense.

General and administrative expenses consist of the following:

·Payroll and benefit costs for corporate office and regional management employees;

·Stock-based compensation costs;

·Occupancy costs of corporate facility;

·Information systems hardware, software and maintenance;

·Depreciation related to corporate assets;

·Management fees;

·Insurance; and

·Other overhead costs.

Loss (gain) on store closings and impairment of store assets consists of the following:

·Estimated future costs to close locations at the time of closing including, as applicable, the difference between future lease obligations and anticipated sublease rentals;

·The write off of unamortized fixed assets related to store leasehold costs on closed stores; and

·Non-cash charges recognized for long-lived assets, consistently primarily of store leasehold costs and related equipment, to reduce the carrying value to estimated fair value, based on our periodic assessment of whether projected future cash flows of individual stores are sufficient to recover the carrying value of the related assets.

Income (loss) from operations consists of gross profit from retail operations plus franchise fees and royalty income, minus the sum of sales and market expenses, general and administrative expenses, goodwill and intangible asset impairment charges, and loss (gain) on store closings and impairment of store assets.

Total other expense includes interest income, interest expense and gain (loss) on early debt extinguishments. Interest expense includes interest on outstanding debt, amortization of debt discounts and amortization of financing costs.

17

Results of Operations

The following table presents the consolidated historical financial operating data for our business expressed as a percentage of net revenues for each period indicated. Certain percentages presented are calculated using actual results prior to rounding. The historical results are not necessarily indicative of results to be expected for any future period.

	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	November 1,		October 30,		November 1,		October 30,
	2011		2012		2011		2012
Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Costs of sales	60.0	%	60.3	%	61.2	%	60.6	%
Gross profit from retail operations	40.0	%	39.7	%	38.8	%	39.4	%
Franchise fees and royalty income	0.7	%	0.5	%	0.7	%	0.5	%
	40.7	%	40.2	%	39.5	%	39.9	%
Sales and marketing expenses	22.6	%	24.3	%	23.7	%	24.5	%
General and administrative expenses	6.3	%	7.5	%	6.9	%	7.6	%
Loss on store closings and impairment of store assets	0.2	%	0.1	%	0.1	%	0.0	%
Income from operations	11.7	%	8.3	%	8.8	%	7.8	%
Other expense, net	4.6	%	0.8	%	5.3	%	0.9	%
Income before income taxes	7.0	%	7.6	%	3.5	%	7.0	%
Income tax expense	0.3	%	3.1	%	0.2	%	2.7	%
Net income	6.7	%	4.5	%	3.3	%	4.3	%

Due to rounding totals may not equal the sum of the line items in the table above.

Thirteen Weeks Ended October 30, 2012 Compared to Thirteen Weeks Ended November 1, 2011

Net sales. Net sales increased $93.8 million, or 51.1%, to $277.3 million for the thirteen weeks ended October 30, 2012, compared to $183.5 million for the thirteen weeks ended November 1, 2011. The components of the net sales increase were as follows (amounts in millions):

	Increase (decrease) in net sales
	Thirteen Weeks
	Ended
	October 30,
	2012
Comparable-store sales	$	12.0
New stores	33.9
Acquired stores	49.9
Closed stores	(2.0		)
	$	93.8

The increase in comparable-store net sales represents a 6.6% comparable-store sales increase, which was primarily the result of an increase in the number of customer transactions. The increase in our net sales from new stores was the result of 129 new stores opened at various times during the twelve fiscal periods ended October 30, 2012, including 31 stores opened during the thirteen-week period ended October 30, 2012, prior to their inclusion in the comparable-store sales calculation beginning with the thirteenth full fiscal period of operations. The increase in net sales for acquired stores was the result of the acquisition of 55 stores in November 2011, 181 stores in May 2012 and 34 stores in September 2012. We closed 28 stores during the twelve fiscal periods ended October 30, 2012, including 11 stores during the thirteen-week period ended October 30, 2012, and the reduction in sales during the thirteen-week period ended October 30, 2012 from these closings totaled $2.0 million. We operated 1,011 stores at October 30, 2012, compared with 640 stores at November 1, 2011.

Cost of sales. Cost of sales increased $57.1 million, or 51.8%, to $167.2 million during the thirteen weeks ended October 30, 2012, compared to $110.1 million for the thirteen weeks ended November 1, 2011. The major components of the increase in cost of

18

sales are discussed below. Cost of sales as a percentage of net sales increased to 60.3% for the thirteen weeks ended October 30, 2012, as compared to 60.0% for the thirteen weeks ended November 1, 2011.

Product costs increased by $33.2 million, or 46.9%, to $104.0 million for the thirteen weeks ended October 30, 2012, compared with $70.8 million for the thirteen weeks ended November 1, 2011. Product costs as a percentage of sales decreased to 37.5% for the thirteen weeks ended October 30, 2012 from 38.6% for the thirteen weeks ended November 1, 2011. The increase in the amount of product costs is the result of the corresponding increase in net sales. The decrease of this expense as a percentage of net sales for the thirteen weeks ended October 30, 2012 is primarily the result of an increase in the mix of products with lower product costs and improvement in vendor incentive terms with certain vendors.

Store and warehouse occupancy costs, consisting primarily of lease-related costs of rented facilities, increased $13.6 million, or 59.8%, to $36.2 million during the thirteen weeks ended October 30, 2012, compared to $22.6 million for the thirteen weeks ended November 1, 2011. Store and warehouse occupancy costs as a percentage of net sales increased to 13.1% during the thirteen weeks ended October 30, 2012, compared to 12.3% in the thirteen weeks ended November 1, 2011. The increase in the amount of expense during the thirteen weeks ended October 30, 2012 was mainly attributable to the increase in the number of stores we operated and the commencement of warehouse operations in a number of new markets. The increase of expense as a percentage of net sales during the thirteen weeks ended October 30, 2012 was primarily attributable to the acquisition of Mattress Giant stores in November 2011 and May 2012 and Mattress X-Press stores in September 2012 with lower store occupancy expense leverage as a result of average sales per store that were lower than the Company average.

Depreciation expense of leasehold improvement and other fixed assets used in stores and warehouse operations increased $1.9 million, or 51.1%, to $5.7 million, for the thirteen weeks ended October 30, 2012, compared to $3.8 million for the thirteen weeks ended November 1, 2011. The increase in expense was primarily attributable to the increase in the number of stores we operated during the thirteen weeks ended October 30, 2012, as compared with the prior year period.

Other cost of sales, consisting of store and warehouse operating and delivery costs, increased $8.4 million, or 65.4%, to $21.3 million, for the thirteen weeks ended October 30, 2012, compared to $12.9 million for the thirteen weeks ended November 1, 2011, primarily as a result of the increase in net sales and in the number of stores we operated during the thirteen weeks ended October 30, 2012, as compared with the prior year period. Other cost of sales includes $0.5 million of acquisition-related costs related to Mattress Giant and Mattress X-Press.

Gross profit from retail operations. As a result of the foregoing, gross profit from retail operations increased $36.7 million, or 50.0%, to $110.1 million, during the thirteen weeks ended October 30, 2012, compared with $73.4 million during the thirteen weeks ended November 1, 2011. Gross profit from retail operations as a percentage of net sales decreased to 39.7% for the thirteen weeks ended October 30, 2012, compared to 40.0% for the thirteen weeks ended November 1, 2011.

Franchise fees and royalty income. Franchise fees and royalty income increased $0.2 million, or 12.7%, to $1.5 million for the thirteen weeks ended October 30, 2012, compared to $1.3 million during the thirteen weeks ended November 1, 2011. The increase in income was attributable to a $0.3 million increase in royalty income, which was mainly due to increases in sales for franchise stores as compared with the prior year period due to new stores and comparable-store sales increases, which was partially offset by a $0.1 million decrease in initial fees. Our franchisees operated 160 stores at October 30, 2012.

Sales and marketing expenses. Sales and marketing expenses increased $26.1 million, or 62.9%, to $67.5 million for the thirteen weeks ended October 30, 2012, compared to $41.4 million for the thirteen weeks ended November 1, 2011. Sales and marketing expense as a percentage of net sales increased to 24.3% for the thirteen weeks ended October 30, 2012, compared to 22.6% for the thirteen weeks ended November 1, 2011. The components of sales and marketing expenses are explained below.

Advertising expense increased $9.3 million, or 67.0%, to $23.0 million for the thirteen weeks ended October 30, 2012, from $13.7 million for the thirteen weeks ended November 1, 2011. Advertising expense as a percentage of net sales increased to 8.3% for the thirteen weeks ended October 30, 2012, compared to 7.5% for the thirteen weeks ended November 1, 2011. The increase in the amount of advertising spending was mainly attributable to our efforts to increase the number of customers shopping in our stores and, to a lesser extent, to the increase in the number of markets in which we operate as a result of new store growth and acquisitions. We expect to maintain or increase advertising expense as a percentage of sales if we continue to experience sales per store and comparable-store sales growth and gain expense leverage in other operating expense areas. We receive funds from time to time from certain vendors to advertise their products that are recognized as a direct reduction of advertising expense. The amount of vendor advertising funds that were recognized as a reduction of advertising expense totaled $2.1 million for the thirteen weeks ended October 30, 2012, compared with $1.4 million for the thirteen weeks ended November 1, 2011.

19

Other sales and marketing expenses, consisting mainly of salesman compensation costs and, to a lesser extent, costs incurred to accept payments from our customers, including credit card and third party finance fees, increased $16.8 million, or 60.8%, to $44.5 million for the thirteen weeks ended October 30, 2012, compared to $27.7 million for the thirteen weeks ended November 1, 2011, primarily as a result of the increase in net sales during the period. Other sales and marketing expenses as a percentage of net sales increased to 16.1% for the thirteen weeks ended October 30, 2012, compared to 15.1% for the thirteen weeks ended November 1, 2011. The increase reflects higher staffing levels that have occurred in connection with the recent acquisitions and lower productivity of the recent large number of new sales associates.

General and administrative expenses. General and administrative expenses increased $9.2 million, or 79.4%, to $20.9 million for the thirteen weeks ended October 30, 2012, compared to $11.7 million for the thirteen weeks ended November 1, 2011. General and administrative expenses as a percentage of net sales, increased to 7.5% for the thirteen weeks ended October 30, 2012, compared to 6.3% for the thirteen weeks ended November 1, 2011. General and administrative expenses increased primarily as a result of our growth, including a $4.8 million increase in wages and benefits resulting from employee additions to our corporate office, $2.5 million of acquisition-related costs related to the Mattress Giant and Mattress X-Press acquisitions and $1.9 million of costs borne by the Company in connection with a secondary offering of shares of common stock by certain of the Company’s stockholders, which was completed in October 2012. We expect to continue making investments in our corporate infrastructure commensurate with our growth strategy.

Other expense, net. Other expense, net, for both periods consists primarily of interest expense. Interest expense decreased $6.4 million, or 75.4%, to $2.1 million for the thirteen weeks ended October 30, 2012, compared to $8.5 million during the thirteen weeks ended November 1, 2011, primarily as a result of the repayment of related-party debt in conjunction with the initial public offering in November 2011.

Income tax (benefit) expense. We recognized $8.5 million of income tax expense for the thirteen weeks ended October 30, 2012, compared to $0.6 million of income tax expense for the thirteen weeks ended November 1, 2011. The effective tax rate was 40.5% for the thirteen weeks ended October 30, 2012, compared to 4.3% for the thirteen weeks ended November 1, 2011, and differs primarily due to the fact that we had a full valuation allowance recorded against our deferred tax assets during the thirteen weeks ended November 1, 2011.

Net income (loss). As a result of the foregoing, our net income was $12.5 million for the thirteen weeks ended October 30, 2012 compared to $12.3 million for the thirteen weeks ended November 1, 2011.

Thirty-Nine Weeks Ended October 30, 2012 Compared to Thirty-Nine Weeks Ended November 1, 2011

Net sales. Net sales increased $233.7 million, or 45.4%, to $749.1 million for the thirty-nine weeks ended October 30, 2012, compared to $515.4 million for the thirty-nine weeks ended November 1, 2011. The components of the net sales increase were as follows (amounts in millions):

	Increase (decrease) in net sales
	Thirty-Nine
	Weeks Ended
	October 30,
	2012
Comparable-store sales	$	44.8
New stores	93.8
Acquired stores	101.3
Closed stores	(6.2		)
	$	233.7

The increase in comparable-store net sales represents a 8.8% comparable-store sales increase, which was primarily the result of an increase in the number of customer transactions. The increase in our net sales from new stores was the result of 129 new stores opened at various times during the twelve fiscal periods ended October 30, 2012, including 88 stores opened during the thirty-nine-week period ended October 30, 2012, prior to their inclusion in the comparable-store sales calculation beginning with the thirteenth full fiscal period of operations. The expected increase in net sales for acquired stores was the result of the acquisition of 55 stores in November 2011, 181 stores in May 2012 and 34 stores in September 2012. We closed

20

28 stores during the twelve fiscal periods ended October 30, 2012, including 21 stores during the thirty-nine-week period ended October 30, 2012, and the reduction in sales during the thirty-nine-week period ended October 30, 2012 from these closings totaled $6.2 million. We operated 1,011 stores at October 30, 2012, compared with 640 stores at November 1, 2011.

Cost of sales. Cost of sales increased $139.0 million, or 44.1%, to $454.3 million during the thirty-nine weeks ended October 30, 2012, compared to $315.3 million for the thirty-nine weeks ended November 1, 2011. The major components of the increase in cost of sales are discussed below. Cost of sales as a percentage of net sales decreased to 60.7% for the thirty-nine weeks ended October 30, 2012, as compared to 61.2% for the thirty-nine weeks ended November 1, 2011.

Product costs increased by $82.8 million, or 41.3%, to $283.5 million for the thirty-nine weeks ended October 30, 2012, compared with $200.7 million for the thirty-nine weeks ended November 1, 2011. Product costs as a percentage of sales decreased to 37.8% for the thirty-nine weeks ended October 30, 2012 from 38.9% for the thirty-nine weeks ended November 1, 2011. The increase in the amount of product costs is the result of the corresponding increase in net sales. The decrease of this expense as a percentage of net sales for the thirty-nine weeks ended October 30, 2012 is primarily the result of an increase in the mix of products with lower product costs and improvement in vendor incentive terms with certain vendors.

Store and warehouse occupancy costs, consisting primarily of lease-related costs of rented facilities, increased $31.2 million, or 46.2%, to $98.6 million during the thirty-nine weeks ended October 30, 2012, compared to $67.4 million for the thirty-nine weeks ended November 1, 2011. Store and warehouse occupancy costs as a percentage of net sales increased to 13.2% during the thirty-nine weeks ended October 30, 2012, compared to 13.1% in the thirty-nine weeks ended November 1, 2011. The increase in the amount of expense during the thirty-nine weeks ended October 30, 2012 was mainly attributable to the increase in the number of stores we operated and the commencement of warehouse operations in a number of new markets. The increase of expense as a percentage of net sales during the thirty-nine weeks ended October 30, 2012 was primarily attributable to the acquisition of Mattress Giant stores in November 2011 and May 2012 and Mattress X-Press stores in September 2012 with lower store occupancy expense leverage as a result of average sales per store that were lower than the Company average.

Depreciation expense of leasehold improvement and other fixed assets used in stores and warehouse operations increased $3.4 million, or 28.9%, to $15.0 million, for the thirty-nine weeks ended October 30, 2012, compared to $11.6 million for the thirty-nine weeks ended November 1, 2011. The increase in expense was primarily attributable to the increase in the number of stores we operated during the thirty-nine weeks ended October 30, 2012, as compared with the prior year period.

Other cost of sales, consisting of store and warehouse operating and delivery costs, increased $21.6 million, or 60.8%, to $57.2 million, for the thirty-nine weeks ended October 30, 2012, compared to $35.6 million for the thirty-nine weeks ended November 1, 2011, primarily as a result of the increase in net sales and in the number of stores we operated during the thirty-nine weeks ended October 30, 2012, as compared with the prior year period. Other cost of sales includes $1.9 million of acquisition-related costs related to Mattress Giant and Mattress X-Press.

Gross profit from retail operations. As a result of the foregoing, gross profit from retail operations increased $94.8 million, or 47.4%, to $294.8 million, during the thirty-nine weeks ended October 30, 2012, compared with $200.0 million during the thirty-nine weeks ended November 1, 2011. Gross profit from retail operations as a percentage of net sales, increased to 39.4% for the thirty-nine weeks ended October 30, 2012, compared to 38.8% for the thirty-nine weeks ended November 1, 2011.

Franchise fees and royalty income. Franchise fees and royalty income increased $0.6 million, or 18.5%, to $4.0 million for the thirty-nine weeks ended October 30, 2012, compared to $3.4 million during the thirty-nine weeks ended November 1, 2011. The increase in income was attributable to a $0.9 million increase in royalty income, which was mainly due to increases in sales for franchise stores as compared with the prior year period due to new stores and comparable-store sales increases, which was partially offset by a $0.3 million decrease in initial fees, resulting from a decrease in the number of new franchisee stores opened during the thirty-nine weeks ended October 30, 2012 as compared with the prior year period. Our franchisees operated 160 stores at October 30, 2012.

Sales and marketing expenses. Sales and marketing expenses increased $61.0 million, or 50.0%, to $183.1 million for the thirty-nine weeks ended October 30, 2012, compared to $122.1 million for the thirty-nine weeks ended November 1, 2011. Sales and marketing expense as a percentage of net sales increased to 24.5% for the thirty-nine weeks ended October 30, 2012, compared to 23.7% for the thirty-nine weeks ended November 1, 2011. The components of sales and marketing expenses are explained below.

21

Advertising expense increased $21.5 million, or 48.3%, to $65.9 million for the thirty-nine weeks ended October 30, 2012, from $44.4 million for the thirty-nine weeks ended November 1, 2011. Advertising expense as a percentage of net sales increased to 8.8% for the thirty-nine weeks ended October 30, 2012, compared to 8.6% for the thirty-nine weeks ended November 1, 2011. The increase in the amount of advertising spending was mainly attributable to our efforts to increase the number of customers shopping in our stores and, to a lesser extent, to the increase in the number of markets in which we operate as a result of new store growth and acquisitions. We expect to maintain or increase advertising expense as a percentage of sales if we continue to experience sales per store and comparable-store sales growth and gain expense leverage in other operating expense areas. We receive funds from time to time from certain vendors to advertise their products that are recognized as a direct reduction of advertising expense. The amount of vendor advertising funds that were recognized as a reduction of advertising expense totaled $4.5 million for the thirty-nine weeks ended October 30, 2012, compared with $2.9 million for the thirty-nine weeks ended November 1, 2011.

Other sales and marketing expenses, consisting mainly of salesman compensation costs and, to a lesser extent, costs incurred to accept payments from our customers, including credit card and third party finance fees, increased $39.5 million, or 50.9%, to $117.2 million for the thirty-nine weeks ended October 30, 2012, compared to $77.7 million for the thirty-nine weeks ended November 1, 2011, primarily as a result of the increase in net sales during the period due to an increase in the number of operating stores. Other sales and marketing expenses as a percentage of net sales increased to 15.7% for the thirty-nine weeks ended October 30, 2012, compared to 15.1% for the thirty-nine weeks ended November 1, 2011. The increase reflects higher staffing levels that have occurred in connection with the recent acquisitions and lower productivity of the recent large number of new sales associates.

General and administrative expenses. General and administrative expenses increased $21.0 million, or 58.7%, to $56.7 million for the thirty-nine weeks ended October 30, 2012, compared to $35.7 million for the thirty-nine weeks ended November 1, 2011. General and administrative expenses as a percentage of net sales, increased to 7.6% for the thirty-nine weeks ended October 30, 2012, compared to 6.9% for the thirty-nine weeks ended November 1, 2011. General and administrative expenses increased primarily as a result of our growth, including a $9.5 million increase in wages and benefits resulting from employee additions to our corporate office, $8.2 million of acquisition-related costs related to the Mattress Giant and Mattress X-Press acquisitions, $1.9 million of costs borne by the Company in connection with a secondary offering of shares of common stock by certain of the Company’s stockholders, which was completed in October 2012, and an aggregate increase of $1.4 million in various other general and administrative expense categories. We expect to continue making investments in our corporate infrastructure commensurate with our growth strategy.

Other expense, net. Other expense, net, for both periods consists primarily of interest expense. Interest expense decreased $20.9 million, or 76.7%, to $6.4 million for the thirty-nine weeks ended October 30, 2012, compared to $27.3 million during the thirty-nine weeks ended November 1, 2011, primarily as a result of the repayment of related-party debt in conjunction with the initial public offering in November 2011. The thirty-nine weeks ended November 1, 2011 also includes a $1.9 million loss from debt extinguishment related to the repayment of related-party debt.

Income tax (benefit) expense. We recognized $20.0 million of income tax expense for the thirty-nine weeks ended October 30, 2012, compared to $0.9 million of income tax expense for the thirty-nine weeks ended November 1, 2011. The effective tax rate was 38.2% for the thirty-nine weeks ended October 30, 2012, compared to 4.9% for the thirty-nine weeks ended November 1, 2011, and differs primarily due to the fact that we had a full valuation allowance recorded against our deferred tax assets during the thirty-nine weeks ended November 1, 2011.

Our estimated full year effective tax rate for fiscal 2012, before discrete period adjustments, is approximately 38.9%, which is above the federal statutory rate of 35.0% primarily due to state income taxes.

Net income (loss). As a result of the foregoing, our net income was $32.3 million for the thirty-nine weeks ended October 30, 2012 compared to $17.0 million for the thirty-nine weeks ended November 1, 2011.

Off-Balance Sheet Arrangements

Except for a guarantee of approximately $1.1 million that we have provided with respect to one real estate lease of a franchisee, we do not have any “off-balance sheet arrangements” (as such term is defined in Item 303 of Regulation S-K) that are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

22

Liquidity and Capital Resources

As of October 30, 2012, we had cash and cash equivalents of $10.9 million compared with $27.5 million as of November 1, 2011. The following table summarizes our cash flows (amounts in thousands):

	Thirty-Nine Weeks Ended
	November 1,			October 30,
	2011			2012
Total cash provided by (used in):
Operating activities	$	57,717		$	66,455
Investing activities	(22,292		)	(102,339		)
Financing activities	(12,323		)	(1,207		)
Net increase (decrease) in cash and cash equivalents	23,102			(37,091		)
Cash and cash equivalents, beginning of period	4,445			47,946
Cash and cash equivalents, end of period	$	27,547		$	10,855

Net cash provided by operating activities was $66.4 million for the thirty-nine weeks ended October 30, 2012, compared to cash provided of $57.7 million for the thirty-nine weeks ended November 1, 2011. The $8.7 million increase in cash flows from operating activities was primarily due to the following differences as compared to the prior year :

·$15.3 million improvement in our net income for the thirty-nine weeks ended October 30, 2012, offset by elements of the increase that are related to non-cash expense included in net income of the prior year, including:

·$18.9 million of non-cash paid-in-kind interest related to debt repaid and debt converted into shares of our common stock in connection with the initial public offering in November 2011, and

·$1.9 million of non-cash loss from debt extinguishment;

·Decrease to fund $7.1 million increase in inventory related to new and acquired stores and warehouses in new markets;

·Increase of $12.6 million related to the timing of cash requirements for accounts payable payments;

·Increase of $8.6 million in non-cash deferred tax expense; and

·Increase of $0.1 million due to other changes in operating assets and liabilities.

Net cash used in investing activities was $102.3 million for the thirty-nine weeks ended October 30, 2012, compared to net cash used of $22.3 million for the thirty-nine weeks ended November 1, 2011. The $80.0 million increase in cash flows from investing activities was primarily due to the May 2012 Mattress Giant acquisition and the September 2012 Mattress X-Press acquisition for approximately $43.9 million and $7.7 million, respectively. Capital expenditures increased $28.5 million for the thirty-nine weeks ended October 30, 2012. The increase in capital expenditures reflected new store openings, renovations of the stores acquired in November 2011 and May 2012 from Mattress Giant and in September 2012 from Mattress X-Press, and the ongoing design and implementation of our new enterprise resource planning system. The renovations of Mattress Giant stores acquired in November 2011 were substantially completed during the thirty-nine weeks ended October 30, 2012 and resulted in $3.4 million in capital expenditures. The renovations of Mattress Giant stores acquired in May 2012 and of Mattress X-Press stores acquired in September 2012, expected to be substantially complete by the end of fiscal 2012, resulted in $12.4 million and $0.2 million, respectively, in capital expenditures in the thirty-nine weeks ended October 30, 2012. We expect to incur additional capital expenditures of approximately $2.7 million in completing the renovation of the acquired Mattress Giant and Mattress X-Press stores.

Our financing cash flows consist of proceeds from the issuance of debt, borrowings, and repayments for scheduled debt service payments, and prepayments of other debt. Net cash used in financing activities was $1.2 million for the thirty-nine weeks ended October 30, 2012, compared to cash used of $12.3 million for the thirty-nine weeks ended November 1, 2011. The $11.1 million decrease was the result of a reduction in debt repayments primarily as a result of the repayment of related-party debt in conjunction with the initial public offering in November 2011.

23

Covenant Compliance

The 2007 Senior Credit Facility requires us to comply on a quarterly basis with financial covenants, including a maximum total leverage ratio and a minimum interest coverage ratio.  These financial covenants are measured using, among other things, Adjusted EBITDA of Mattress Holding and its subsidiaries, as adjusted to include pro forma results of acquisitions.  Prior to its amendment in November 2012 as described below, the 2007 Senior Credit Facility limited the permitted capital expenditures of Mattress Holding and its subsidiaries to $40 million for fiscal 2012.  The interest rate for borrowings under the 2007 Senior Credit Facility was a LIBOR-based rate with a margin spread of 225 to 275 basis points depending upon the maintenance of certain ratios. At October 30, 2012, the interest rate was 2.47%.

On November 5, 2012, Mattress Holding Corp., an indirect subsidiary of ours, entered into a Restatement Amendment dated November 5, 2012, among Mattress Holding Corp., as borrower, Mattress Holdco, Inc., certain subsidiary guarantors party thereto and UBS AG, Stamford Branch, as administrative agent.  The Restatement Amendment (a) amended and restated that certain Credit Agreement dated as of January 18, 2007, as amended and restated as of February 16, 2007, as further amended by that certain Amendment No. 1 thereto dated June 28, 2011 and that certain Revolver Increase Joinder dated May 1, 2012 (as so amended, the “Second Amended and Restated Credit Agreement”) and (b) provided for certain fees to be paid to lenders under the Credit Agreement in connection with such lenders’ agreement to consent to the amendment and restatement of the Credit Agreement and extension of loans thereunder.

The Second Amended and Restated Credit Agreement, effective as of November 5, 2012, among other things, (a) increased the revolving loan commitment from $35 million to $100 million, (b) extended the maturity date of the revolving loan by two years to January 2015, (c) extended the maturity date of outstanding term loans having an aggregate principal amount of $200 million by two years to January 2016, (d) increased the interest rate applicable to amounts outstanding under the extended term loans, (e) increased the amount of permitted capital expenditures to $80 million on an annual basis, and (f) increased the maximum amount we and our subsidiary guarantors may spend in respect of acquisitions to $200 million. At October 30, 2012, there were no outstanding revolver borrowings under the 2007 Senior Credit Facility. There were standby letters of credit outstanding in the amount of $1.0 million and additional borrowings available of $34.0 million.

For more information about the restrictive covenants imposed on us by the 2007 Senior Credit Facility, please see “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended January 31, 2012 filed with the SEC on April 20, 2012 (as amended on May 30, 2012) (referred to herein as the “Fiscal 2011 Annual Report”). The debt instruments governing the indebtedness under the loan facility between Mattress Intermediate Holdings, Inc., our direct subsidiary, and a group of lenders maturing in January 2015, 12% payment-in-kind investor notes maturing at various times from October 24, 2012 through March 19, 2015 and 12% convertible notes due July 18, 2016 did not contain any financial covenants.  Such debt instruments were terminated following repayment in full or conversion into our common stock of all indebtedness outstanding thereunder in connection with our initial public offering.

We were in compliance with all of the covenants required under the 2007 Senior Credit Facility and our other indebtedness as of October 30, 2012. We believe that we will be able to maintain compliance with the various covenants required under our debt facilities for the next twelve months without amending any of the credit facilities or requesting waivers from the lenders that are party to the agreements.

Seasonality

Our business is subject to seasonal fluctuations. We generally have experienced more sales and a greater portion of income during the second and third quarters of our fiscal year due to a concentration of summer season holidays, including Memorial Day, the Fourth of July and Labor Day, and other seasonal factors. While we expect this trend to continue for the foreseeable future, we also expect that the acquisitions we make and the timing of those acquisitions may have some effect on the impact of these seasonal fluctuations.

Recent Accounting Pronouncements

In May 2011, the FASB issued new guidance regarding fair value measurements to ensure consistency between U.S. GAAP and International Financial Reporting Standards. The new guidance applies to all reporting entities that are required or permitted to measure or disclose the fair value of an asset, a liability, or an instrument classified in a reporting entity’s stockholders’ equity in the financial statements. The new guidance applies prospectively to periods beginning after December 15, 2011. The Company adopted the provisions of the new guidance effective February 1, 2012 and the adoption of this standard did not have a material impact on the Company’s financial position, results of operation, or cash flows.

24

In June 2011, the FASB issued new guidance to increase the prominence of other comprehensive income in financial statements. This guidance provides the option to present the components of net income and comprehensive income in either one single statement or in two consecutive statements reporting net income and other comprehensive income. This guidance is effective for fiscal years and interim periods beginning after December 15, 2011. The Company adopted the provisions of the new guidance effective February 1, 2012 and the adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

In December 2011, the FASB issued Accounting Standards Update No. 2011-11 “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-11”), which requires disclosures of gross and net information about financial and derivative instruments eligible for offset in the statement of financial position or subject to a master netting agreement. ASU 2011-11 will be effective for the Company in the first fiscal quarter of 2013 and is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In July 2012, the FASB issued new guidance which gives companies the option to perform a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired, and in some cases, bypass the two-step impairment test. This guidance is effective for annual and interim indefinite-lived intangible asset impairment tests performed for fiscal years beginning after September 15, 2012; however, early adoption of the new guidance is permitted. The Company adopted this guidance effective August 1, 2012 and the adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

Adjusted EBITDA to Net Income Reconciliation

Adjusted EBITDA is defined as net income before income tax expense, interest income, interest expense, depreciation and amortization (“EBITDA”), without giving effect to non-cash goodwill and intangible asset impairment charges, gains or losses on store closings and impairment of store assets, gains or losses related to the early extinguishment of debt, financial sponsor fees and expenses, non-cash charges related to stock-based awards and other items that are excluded by management in reviewing the results of operations. We have presented Adjusted EBITDA because we believe that the exclusion of these items is appropriate to provide additional information to investors about our ongoing operating performance excluding certain non-cash and other items and to provide additional information with respect to our ability to comply with various covenants in documents governing our indebtedness and as a means to evaluate our period-to-period results. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed to imply that our future results will be unaffected by any such adjustments. We have provided this information to analysts, investors and other third parties to enable them to perform more meaningful comparisons of past, present and future operating results and as a means to evaluate the results of our ongoing operations. Management also uses Adjusted EBITDA to determine executive incentive compensation payment levels. In addition, our compliance with certain covenants under our 2007 Senior Credit Facility are calculated based on similar measures, which differ from Adjusted EBITDA primarily by the inclusion of pro forma results for acquired businesses in those similar measures. Other companies in our industry may calculate Adjusted EBITDA differently than we do. Adjusted EBITDA is not a measure of performance under U.S. GAAP and should not be considered as a substitute for net income prepared in accordance with U.S. GAAP. Adjusted EBITDA has significant limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. Some of the limitations to the use of Adjusted EBITDA are:

·Adjusted EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;

·Adjusted EBITDA does not reflect interest expense or the cash requirements necessary to service interest or principal payments on our debt;

·Adjusted EBITDA does not reflect tax expense or the cash requirements necessary to pay for tax obligations;

·Although depreciation and amortization are non-cash charges, the asset being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements;

·Adjusted EBITDA does not reflect the cash requirements of closing underperforming stores;

·Adjusted EBITDA does not reflect costs related to management services that were historically provided by J.W. Childs Associates, L.P.; and

·Adjusted EBITDA does not reflect certain other costs that may recur in future periods.

25

We compensate for these limitations by relying primarily on our U.S. GAAP results and using Adjusted EBITDA only as a supplemental measure. The following table contains a reconciliation of our net income determined in accordance with U.S. GAAP to EBITDA and Adjusted EBITDA for the periods indicated (amounts in thousands):

	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
	November 1,			October 30,			November 1,			October 30,
	2011			2012			2011			2012
Net income	$	12,314		$	12,456		$	16,979		$	32,277
Income tax expense	551			8,484			870			19,972
Interest income	(1		)	—			(4		)	(1		)
Interest expense	8,530			2,097			25,479			6,386
Depreciation and amortization	4,234			6,257			12,951			16,432
Intangible assets and other amortization	439			(215		)	1,254			972
EBITDA	26,067			29,079			57,529			76,038
Loss on store closings and impairment of store assets	285			196			324			267
Loss from debt extinguishment	—			—			1,873			—
Financial sponsor fees and expenses	102			12			294			63
Stock-based compensation	19			651			58			1,653
Secondary offering costs	—			1,935			—			1,935
Vendor new store funds(a)	473			304			773			937
Acquisition related expenses(b)	70			3,025			178			10,074
Other (various)(c)	242			(132		)	924			(896		)
Adjusted EBITDA	$	27,258		$	35,070		$	61,953		$	90,071

(a)Adjustment to recognize vendor funds received upon the opening of a new store in the period opened, rather than over 36-months as presented in our financial statements, which is consistent with how management has historically reviewed its results of operations.

(b)Non-cash effect included in net income related to purchase accounting adjustments made to inventories resulting from acquisitions and other acquisition-related cash costs included in net income, such as direct acquisition costs and costs related to training and integration of acquired businesses.

(c)Consists of various items that management excludes in reviewing the results of operations.

26

Reported to Adjusted Statements of Operations Data

(In thousands, except share and per share amounts)

The following table provides a reconciliation of our “As Adjusted” statements of operations data for the thirteen and thirty-nine weeks ended October 30, 2012 with the most directly comparable financial measures in our “As Reported,” or GAAP statements of operations data.  The as adjusted data excludes costs of integrating store and warehouse operations and corporate functions that are not expected to recur in future periods related to the Mattress Giant and Mattress X-Press acquisitions, as well as other costs relating to the acquisitions and costs borne by us in connection with a secondary offering of shares of common stock by certain of our stockholders completed in October 2012, including advisory, legal, accounting, valuation, and other professional or consulting fees.  We believe that these non-GAAP financial measures provide meaningful supplemental information for investors and analysts regarding the performance of our business and facilitate a meaningful evaluation of our financial results.  Our management uses these and other non-GAAP financial measures, including Adjusted EBITDA, in order to have comparable financial results to analyze changes in our underlying business from quarter to quarter.  However, we are providing our as adjusted data as a supplement to our financial measures calculated in accordance with GAAP, and such as adjusted data should not be considered a substitute for, or preferable to, as reported, or GAAP financial data.

	Thirteen Weeks Ended
	November 1, 2011		October 30, 2012
					Acquisition-		Secondary
					Related		Offering
	As Reported		As Reported		Costs (1)		Costs (2)		As Adjusted
Income from operations	$	21,394	$	23,037	$	3,025	$	1,935	$	27,997
Other expense, net	8,529		2,097		—		—		2,097
Income before income taxes	12,865		20,940		3,025		1,935		25,900
Income tax expense (3)	551		8,484		1,175		492		10,151
Net income	$	12,314	$	12,456	$	1,850	$	1,443	$	15,749
Basic net income per common share *	$	0.55	$	0.37	$	0.05	$	0.04	$	0.47
Diluted net income per common share *	$	0.55	$	0.37	$	0.05	$	0.04	$	0.47
Basic weighted average shares outstanding	22,399,952		33,768,828		33,768,828		33,768,828		33,768,828
Diluted weighted average shares outstanding	22,399,952		33,867,508		33,867,508		33,867,508		33,867,508

	Thirty-Nine Weeks Ended
	November 1, 2011		October 30, 2012
					Acquisition-		Secondary
					Related		Offering
	As Reported		As Reported		Costs (1)		Costs (2)		As Adjusted
Income from operations	$	45,197	$	58,634	$	10,074	$	1,935	$	70,643
Other expense, net	27,348		6,385		—		—		6,385
Income before income taxes	17,849		52,249		10,074		1,935		64,258
Income tax expense (3)	870		19,972		3,395		492		23,859
Net income	$	16,979	$	32,277	$	6,679	$	1,443	$	40,399
Basic net income per common share *	$	0.76	$	0.96	$	0.20	$	0.04	$	1.20
Diluted net income per common share *	$	0.76	$	0.95	$	0.20	$	0.04	$	1.19
Basic weighted average shares outstanding	22,399,952		33,768,828		33,768,828		33,768,828		33,768,828
Diluted weighted average shares outstanding	22,399,952		33,885,162		33,885,162		33,885,162		33,885,162

* Due to rounding to the nearest cent per diluted share, totals may not equal the sum of the line items in the table above.

27

(1) In April 2012, we announced the signing of an agreement for all of the equity interests of MGHC Holding Corporation (“Mattress Giant”), including 181 specialty retail stores. The acquisition closed on May 2, 2012. In September 2012, we announced the signing of an agreement for the acquisition of the leasehold interests, store assets, distribution center assets and related inventories, and assumption of certain liabilities, of Mattress XPress, Inc. and Mattress XPress of Georgia, Inc. (collectively, “Mattress X-Press”), including 34 mattress specialty retail stores. The acquisition closed on September 25, 2012.  Acquisition-related costs, consisting of direct transaction costs and integration costs, are included in the results of operations as incurred. During the thirteen and thirty-nine weeks ended October 30, 2012, we incurred $3.0 million and $10.1 million of acquisition-related costs, respectively.

(2) Reflects $1.9 million of costs borne by us in connection with a secondary offering of shares of common stock by certain of our selling stockholders which was completed in October 2012.

(3) Reflects effective income tax rate of 38.9% and an additional $0.3 million in foregone tax benefits on certain acquisition-related costs considered nondeductible.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

There have been no material changes in the interest rate risk and inflation risk discussed in “— Item 7A. Quantitative and Qualitative Disclosures About Market Risk” included in the Fiscal 2011 Annual Report.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures.  Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.  Based on the evaluation of our disclosure controls and procedures as of the end of the period covered by this report, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.

Changes in Internal Control

During the thirteen weeks ended October 30, 2012, there were no changes in the Company’s internal controls over financial reporting that have materially affected or are reasonably likely to affect the Company’s internal control over financial reporting.

28

Part II.
OTHER INFORMATION

Item 1. Legal Proceedings.

The Company is subject to legal proceedings and claims that arise in the ordinary course of business. Management does not believe that the outcome of any of the currently pending matters will have a material adverse effect on the Company’s financial position, results of operations or cash flows.

Item 1A. Risk Factors.

Other than described below, there have been no material changes from the risk factors previously disclosed in “Part I. Item 1A. Risk Factors,” in the Fiscal 2011 Annual Report and our other reports filed with the SEC (including our Quarterly Report on Form 10-Q for the quarterly period ended July 31, 2012).

Item 6. Exhibits.

(a) Exhibits: Reference is made to the Exhibit List filed as a part of this report beginning on page E-1. Each of such exhibits is incorporated by reference herein.

29

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	MATTRESS FIRM HOLDING CORP.
Date: December 10, 2012	By:	/s/ R. Stephen Stagner
		R. Stephen Stagner
		President and Chief Executive Officer (principal executive officer)
Date: December 10, 2012	By:	/s/ James R. Black
		James R. Black
		Executive Vice President, Chief Financial Officer and Treasurer (principal financial officer)

30

EXHIBIT LIST

Exhibit
Number		Exhibit Title
	2.1	Asset Purchase Agreement dated September 4, 2012, by and among Mattress Firm, Inc., as buyer, Mattress XPress, Inc., Mattress XPress of Georgia, Inc., Steven Milesic and Steve Lytell. (incorporated by reference to Exhibit 2.1 to Mattress Firm Holding Corp.’s Current Report on Form 8-K (File No. 001-35354) filed September 6, 2012).
	31.1	Principal Executive Officer Certification Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to the Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2	Principal Financial Officer Certification Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to the Section 302 of the Sarbanes-Oxley Act of 2002.
	32.1	Principal Executive Officer Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32.2	Principal Financial Officer Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	101.INS*	XBRL Instance Document
	101.SCH*	XBRL Taxonomy Extension Schema Document
	101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document
	101.LAB*	XBRL Taxonomy Extension Labels Linkbase Document
	101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document
	101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document

*   Pursuant to Rule 406T of Regulation S-T of the SEC, and subject to the conditions set forth therein, the interactive data files furnished on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purpose of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

E-1