Mattress Firm, which has been grappling with declining sales after an acquisition spree gone bad and a scandal at its parent company, filed for Chapter 11 bankruptcy protection Friday.
The nation's largest mattress retailer has been ailing amid a surge of bed-in-a-box online retailers, too many physical stores and an accounting mess at conglomerate owner Steinhoff International.
Houston-based Mattress Firm plans to close as many as 700 of its 3,230 company-owned stores. Those stores are located "in certain markets where we have too many locations in close proximity to each other," CEO Steve Stagner said in a statement.
More than 200 stores will close within days. (See the full list here.) The company has nearly 10,000 employees and another 125 franchised locations.
"We intend to use the additional liquidity from these actions to improve our product offering, provide greater value to our customers, open new stores in new markets, and strategically expand in existing markets where we see the greatest opportunities to serve our customers," Stagner said. The company declined to make Stagner available for an interview.
Mattress Firm said in a court filing that it will not conduct typical liquidation sales, where customers might otherwise score a going-out-of-business deal.
Instead, it will transfer mattresses to other stores, warehouses or distribution centers, or could "decide to abandon" showroom products, according to a court filing.
In Chapter 11 bankruptcy, retailers typically try to get out of expensive leases and slash debt to have a better chance of surviving profitably.
Mattress Firm ballooned in size in recent years through a series of acquisitions — including Mattress Giant in 2012, Sleep Train in 2014 and Sleepy’s in 2016.
It was too much, too fast.
The company has since closed hundreds of locations, seeking stability amid upheaval in the mattress market.
A move to rebrand acquired stores as Mattress Firm locations exacerbated the retailer's troubles. In a court filing, the company also acknowledged "several well-intentioned, but ill-advised, marketing and sales promotions" in 2017 and 2018.
Mattress Firm expects to lose $150 million in its 2018 fiscal year after making a profit before earnings, taxes, interest and depreciation of $251 million in 2017.
A feverish rush in recent years to open stores, which can be operated with low fixed costs, is at the heart of the troubles that have befallen Mattress Firm.
There are now more places to buy a mattress in the U.S. than places to buy a Big Mac.
Kyle Owusu, a senior distressed debt analyst at Reorg Research, who tracks Steinhoff’s crisis, said Mattress Firm "didn’t anticipate there wouldn’t be as much of a need for its stores."
"In this retail environment, it’s probably necessary for companies that have leases that (are expensive) to use Chapter 11 and the court system to reject those leases and restructure those leases so they can position themselves better," he said.
The bankruptcy could cause significant collateral damage:
• Landlords that bet on Mattress Firm's expansion will be left with empty stores.
Nearly 43 percent of Mattress Firm stores are located within one mile of another one, according to financial data firm Thinknum.
And the company has about 2,500 landlords, according to a court filing.
"There are many examples of a Mattress Firm store being located literally across the street from another Mattress Firm store," Chief Financial Officer and Chief Operating Officer Hendré Ackermann said in a court filing.
• Mattress makers could face huge losses. Mattress Firm owes Serta Simmons Bedding alone more than $90 million, according to a court filing.
Serta Simmons Bedding last year won a contract to supply Mattress Firm after rival mattress maker Tempur Sealy International had a falling out with the retailer. But sales have since disappointed.
"According to their filing, Mattress Firm has financing that will allow it to continue running its business, which includes buying product from SSB," Serta Simmons Bedding said in a statement. "For now, it is business as usual for SSB. We will continue to support Mattress Firm as they work through the Chapter 11 process."
• Competitors could face a flood of cheap mattresses. If the company can't survive bankruptcy, enormous disruption would ensue.
Serta Simmons Bedding private equity majority owner Advent International is a possible buyer of Mattress Firm, S&P Global Ratings said.
Owusu, the Reorg Research analyst, said Mattress Firm would likely emerge from bankruptcy without liquidating and without a sale. He said any potential sale would likely occur afterward.
Mattress Firm said it had secured enough support from secured lenders to stay in business, but a federal judge must approve with the company's restructuring plan, which is not guaranteed.
Online competition takes toll
Bed-in-a-box sellers like Casper and Leesa have surged in recent years, offering free trial periods, free delivery, easy ordering and product innovation.
"I think Casper is the reason why they are in this position," Casper CEO Philip Krim said Friday. "Casper has really pushed the industry to reinvent itself. We continue to give the customer what they want, and that’s not how the incumbents in this space operated."
Krim said Mattress Firm needs to "make some big changes," but he doubts it will happen.
"I think they’re going to try to hide the fact that they’re going through this process from consumers as best they can," he said. "It’s hard for them to change the way they operate."
Online retailers could capitalize in the long run. But online mattress makers are facing their own problems, including steep discounting, intense marketing and the threat of Amazon out-muscling them.
About 10- to 12 percent of mattress sales are online, Krim estimated. He said it would likely double within a few years.
Meanwhile, Casper plans to open more than 200 stores within the next three years. Leesa is also expected to open stores.
Mattress Firm has its own bed-in-a-box offering, but Krim said it "has not impacted us."
"Candidly, it’s not a great product," Krim said. "If anything, it’s helped us because it validates to the market that bed-in-a-box is here to stay and it’s a great way to buy a mattress."
Complicating Mattress Firm's situation is a scandal at Steinhoff, a global conglomerate that has acknowledged accusations of "accounting irregularities," including an overstatement of how much cash it had. Steinhoff sells more than 40 brands throughout the world in areas such as household goods, clothing and automotive dealerships.
Asked for comment, Steinhoff referred to a statement by CEO Danie van der Merwe: "Mattress Firm has been facing significant operational challenges which management is addressing through its turnaround plan" and bankruptcy "is the best way to support and accelerate the turnaround plan so as to ensure a future for Mattress Firm and its employees and unlock value for shareholders over time."
Mattress Firm told a federal judge in a court filing that Stagner's turnaround efforts since being appointed as CEO March 1 have begun to bear fruit.
The company said it's focusing on improving advertising, "financial accountability," "a rewarding in-store customer experience," better products and an upgraded e-commerce offering.
Follow USA TODAY reporter Nathan Bomey on Twitter @NathanBomey.