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How a Frenzied Expansion Brought Down America’s No. 1 Mattress Seller

Giant retailer emerges from bankruptcy but faces rough market.

How a Frenzied Expansion Brought Down America’s No. 1 Mattress Seller
A worker assembles a mattress using organic staple cotton at the McRoskey Mattress Co. facility in San Francisco, California, U.S. (Photographer: David Paul Morris/Bloomberg)

(Bloomberg) -- 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 above-market 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.

How a Frenzied Expansion Brought Down America’s No. 1 Mattress Seller

Mattress Firm was clear from the start about its growth strategy, saying in its 2011 regulatory filings, “We intend to aggressively 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 half-dozen states and “front-run” 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 hell-bent 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.”

How a Frenzied Expansion Brought Down America’s No. 1 Mattress Seller

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.

How a Frenzied Expansion Brought Down America’s No. 1 Mattress Seller

The quick trip through bankruptcy court was designed to help Mattress Firm shed most of its $3.2 billion in debt, close more than 600 stores and break high-rent leases. But the retailer remains part of the beleaguered Steinhoff, which bought it in 2016 for $3.8 billion and, separately, is restructuring more than 9 billion euros ($10.2 billion) of debt -- a much bigger headache for the South African company than its mattress retailer’s challenges.

Asked about the acquisition, the lawsuit and the bankruptcy filing, Steinhoff said that “as a result of ongoing investigations, the group has taken a decision not to comment on any past transactions or relationships until we have the results” of a probe by PwC it commissioned into its accounting practices.

If Mattress Firm has learned its lesson, it could prosper. It has already bought many of its largest brick-and-mortar competitors in its quest to become a national chain, and young adults in the U.S. are starting families at a faster pace, supporting demand for mattresses.

Certainly the retailer’s future looked rosy when its first store opened in 1986. Two decades later, when it was acquired by J.W. Childs Associates LP, Mattress Firm had 300 locations. The investment fund took the company public in 2011, targeting baby boomers ready to open their wallets for a good night’s sleep. The party ended when the 3,200-store chain made its bankruptcy court filing on Oct. 5.

Levy said Chief Executive Steve Stagner demanded that his executives “weaponize real estate,” surrounding competitors with Mattress Firm outlets to put them out of business or “put the company on its knees so we could buy ’em for less.” He said the mandate was to push deals through at any cost, even if there was an identical store on the other side of the street. “We’d pay whatever we had to pay to get what we wanted,” he said.

Deitch, the broker, said in an interview that he “would bird-dog sites, find opportunities.” He and Levy say all their transactions were approved by an internal committee that included Stagner.

Levy said he got a $5,000 Dubuis watch from Deitch as a birthday gift. Deitch said it came with no strings, just like the steaks and lobster he paid for at Mattress Firm Christmas parties.

“Buying dinners for friends should not count as a kickback or a bribe,” Deitch said.

Mattress Firm claims in its lawsuit that Levy and Vinson kept a “preferred list” of developers from whom they demanded extra “development fees” as high as $50,000. Some builders dangled joint ventures making Levy and Vinson part-owners of homes in the Florida Keys worth as much as $2 million, one with a yacht, Mattress Firm contends.

Levy said in court filings that some of those deals, including properties in Orlando and Eden Prairie, Minnesota, involved Stagner.

“The allegations against Mr. Stagner are without merit and are merely an attempt to deflect the focus on those truly culpable for wrongdoing,” Goodman, Mattress Firm’s spokeswoman, said in the email. “We are confident that our claims will be vindicated in a court of law.”

While he acknowledges buying properties in the Keys with developers who worked with Mattress Firm, Levy said there was no quid pro quo.

And the yacht? Try a bass boat.

“It’s the only yacht I know,” he said, “that sits on a trailer.”

--With assistance from Dawn McCarty, Janice Kew, Loni Prinsloo and Dave Merrill.

To contact the reporters on this story: Jef Feeley in Wilmington, Delaware at jfeeley@bloomberg.net;Matt Townsend in New York at mtownsend9@bloomberg.net;Laurel Calkins in Houston at lcalkins@bloomberg.net

To contact the editors responsible for this story: David Glovin at dglovin@bloomberg.net, Peter Jeffrey, Heather Smith

©2018 Bloomberg L.P.