Did Mat­tress Firm ex­pand too quickly?

Star-Telegram (Sunday) - - Local & Texas - BY JEF FEE­LEY, MATT TOWNSEND AND LAU­REL CALKINS

Mat­tress Firm has three stores in Austin, Texas, within half a mile of one an­other. In Win­ston-Salem, North Carolina, it has two stores with iden­ti­cal hours at about the same dis­tance. Scher­erville, In­di­ana (pop­u­la­tion 28,701), once had five shops less than a block apart.

While re­tail­ers across the U.S. were shut­ter­ing out­lets and more com­merce was mov­ing on­line, the mat­tress com­pany was buck­ing the trend, go­ing from about 700 lo­ca­tions to 3,500 in five years be­fore fil­ing for pro­tec­tion from cred­i­tors last month.

Was it the break­neck growth alone that landed Mat­tress Firm Inc. in bank­ruptcy court? Or, as the com­pany claims in a law­suit filed last year, did a pair of greedy ex­ec­u­tives – tak­ing ad­van­tage of the strat­egy to skim money off its real es­tate deals and en­rich an out­side ac­com­plice – help it get there?

The an­swer may hold lessons for Amer­ica’s big­gest mat­tress seller now that it has emerged from bank­ruptcy court af­ter a fast-track re­struc­tur­ing.

The com­pany blamed over­ex­pan­sion and above­mar­ket rents in its bank­ruptcy fil­ing and jet­ti­soned about a fifth of its stores in the re­struc­tur­ing. But it faces a small army of on­line re­tail­ers like the fast-growing Casper. And it is re­turn­ing to the market as its owner, Stein­hoff In­ter­na­tional Hold­ings NV, works its way through an ac­count­ing scan­dal that pre-dated its pur­chase of Mat­tress Firm and has wiped out some $13.7 bil­lion of the global re­tail­ing gi­ant’s market value.

Mat­tress Firm was clear from the start about its growth strat­egy, say­ing in its 2011 reg­u­la­tory fil­ings, “We in­tend to ag­gres­sive- ly open ad­di­tional stores in our ex­ist­ing mar­kets, which may di­min­ish sales by ex­ist­ing stores in those mar­kets.”

But the com­pany says in its suit it isn’t en­tirely to blame: Two ex­ec­u­tives al­legedly con­spired with a real es­tate bro­ker in a “bribery, kick­back and fraud scheme” to push the Houston-based re­tailer into ex­pen­sive lo­ca­tions – it de­clined to say how many – based on phony sales fore­casts.

Ac­cord­ing to the suit, Bruce Levy, the for­mer head of real es­tate, and Ryan Vin­son, a for­mer vice pres­i­dent, let the bro­ker, Alexan­der Deitch, over­see deals in a half­dozen states and “fron­trun” some of them, tip­ping him off to the next out­let’s lo­ca­tion so he could se­cretly buy it him­self while reap­ing mil­lions in fees.

In re­turn, Mat­tress Firm claims, Levy and Vin­son got di­a­monds, a Roger Dubuis watch, Eu­ro­pean va­ca­tions and stakes in other real es­tate deals. One Florida prop­erty al­legedly came com­plete with a yacht.

The three men deny the al­le­ga­tions in court pa­pers and say they’re be­ing scape­goated by Mat­tress Firm. Levy used to scout out prop­er­ties for the de­funct video chain Block­buster LLC and was hired in 2008 to quar­ter­back Mat­tress Firm’s ex­plo­sive growth plan, he said.

“The com­pany was hell­bent on own­ing most of the mat­tress stores in the coun­try” to ex­act deep dis­counts from sup­pli­ers, Levy said in an in­ter­view. To him it’s sim­ple. “We went from be­ing the ex­ecu­tors of the com­pany’s strat­egy” to be­ing its fall guys, he said. “And we’re call­ing BS.”

The law­suit also names Col­liers In­ter­na­tional, where Deitch was a bro­ker. Col­liers de­nies the al­le­ga­tions and is “vig­or­ously de­fend­ing” it­self against the suit, spokesman Matthew Hawkins said.

Vin­son de­clined to be in­ter­viewed.

Mat­tress Firm said in court fil­ings that Levy “was the en­trusted leader of Mat­tress Firm’s real es­tate com­mit­tee meet­ings, where the com­pany de­cided what mar­kets to en­ter into, what devel­op­ers to use, what lo­ca­tions to lease and what lease terms to ac­cept,” and that he “re­peat­edly breached that trust” through con­flicts of in­ter­est.

Spokes­woman Sunni Good­man said in an email that “noth­ing in Mat­tress Firm’s cor­po­rate cul­ture, poli­cies or busi­ness goals con­tem­plated or al­lowed trusted ex­ec­u­tives” to en­gage in the mis­con­duct al­leged in the suit. She de­clined to com­ment on whether the re­tailer had turned over its bribery al­le­ga­tions to law en­force­ment.

Wi­chita Ea­gle file photo

Mat­tress Firm blamed over­ex­pan­sion and above-market rents in its bank­ruptcy fil­ing, though on­line com­pe­ti­tion may have had a role also. It closed about a fifth of its stores.

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