Sleep Country Canada Holdings Inc (TSX: ZZZ) is Canada's leading omnichannel specialty sleep retailer with a national retail store network and robust eCommerce platforms. The company operates under three retail banners: "Sleep Country Canada", with omnichannel operations in Canada excluding Québec; "Dormez-vous?" with omnichannel operations in Québec and "Endy", Canada's leading direct-to-consumer online sleep solutions retailer.

Investment Rationale

• Solid Bottom Line Growth Reported in Q1FY21: The company reported solid bottom-line growth in the first quarter of fiscal 2021. Net Income increased by CAD 3.7 million or 74.1% from CAD 5.0 million (CAD 0.14 per share) in Q1 2020 to CAD 8.7 million (CAD 0.24 per share) in Q1 2021. This increase was mainly driven by the increase in EBITDA and decrease in finance-related expenses and partially offset by an increase in income taxes. Further, Adjusted Net Income for Q1 2021 increased by CAD 3.5 million or 57.5% from CAD 6.1 million (CAD 0.17 per share) in Q1 2020 to CAD 9.6 million (CAD 0.26 per share) in Q1 2021.

• Digital Channel- A new Catalyst for Future Growth: The company's digital channels drove a record-breaking 29.3% of revenue in Q1, delivering the fourth consecutive quarter of triple-digit eCommerce growth. These results clearly highlight the group's unique ability to serve customers across digital and physical touchpoints with opportunities to explore, learn, trial and deliver on their own terms. The company also completed a successful and well-received brand activation with the #MySleepPromise World Sleep Day campaign. With a reach of over 30 million social impressions, 50 million PR impressions and a partnership with the SleepScore sleep science company, the campaign inspired Canadians to prioritize sleep as a pillar of wellbeing and empowered them to establish healthy sleep habits.

• Decent Dividend Distribution: At the last closing price (on June 18, 2021), its shares were yielding ~2.7%, which is quite decent given the present lower interest rate environment. Also, since 2016 the company has a consistent track record of dividend payment. Further, given the decent yield, we believe that the investor is getting holding power.

Dividend History

• Solid Same-Store Sales Growth: During the first quarter of FY21, the company's same-store sales growth was increased by 19.6% from the previous corresponding period; this implies a strong operational performance. Same-store sales are widely tracked financial metrics for retail chains and are a key element of their operational results. For chains that are growing quickly by opening new outlets, same-store sales figures allow analysts to differentiate between revenue growth that comes from new stores and growth from improved operations at existing outlets. This indicates that total dollar revenues at a retail chain's existing locations increased by 19.6% over the same time period from the previous year.
  

• New Partnership with Best Buy would Unlock Future Opportunities: Sleep Country Canada Holdings Inc. announced the launch of a new partnership with Best Buy Canada, a wholly-owned subsidiary of Best Buy Co., Inc. and one of the country's largest and most successful omnichannel retailers. Beginning June 4, 2021, Sleep Country would retail a curated selection of sleep solutions on the Best Buy Marketplace™, including exclusively supplying the traditional mattress category on BestBuy.ca. Through this innovative partnership, Best Buy customers would have access to the world's most relevant mattress brands such as Tempur-Pedic, Sealy, Serta, Simmons, Simba, Purple and more, while also benefitting from Sleep Country's elevated white glove home delivery and installation service.
  

• Impressive RoE of 20.1%: ROE is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments. In the case of ZZZ, the TTM ROE is quite strong at 20.1%, which is gigantically higher compared to the industry median of 8%. This reflects the strong competitive advantage ZZZ shareholders are having over the competition.

• Risk Associated with Investment: The Company's revenues depend, in part, on discretionary spending by its customers; hence, the company's performance would be affected by a change in the taste, nature and fashion of the target audience. Any resurgence in the covid-19 cases would lead to store closures and have an impact on the overall operations.

Financial Highlights: Q1FY21

• During the quarter under review revenues increased by CAD 31.4 million or 20.7% on a YoY basis. This increase was primarily on account of a 19.6% increase in SSS, two new stores and wrap stores. The performance was noteworthy considering the fact that the company's retail store network was temporarily closed for an average of 32.9% of its normal operating days in Q1 2021 versus 10.2% of its normal operating days in Q1 2020. In Q1 2021, eCommerce sales were 29.3% of revenues.
• Gross profit increased by CAD 9.1 million from CAD 41.2 million in Q1 2020 to CAD 50.3 million in Q1 2021. The gross profit margin increased by 0.4% from 27.1% in Q1 2020 to 27.5% in Q1 2021 primarily due to lower product and compensation costs, leveraging of fixed distribution costs, occupancy costs and depreciation costs. This decrease was partially offset by higher COVID-19 PPE, delivery and inventory adjustment costs.
• Total G&A expenses increased by CAD 5.1 million or 17.5% from CAD 29.0 million in Q1 2020 to CAD 34.1 million in Q1 2021. The change was mainly driven by an increase in media and advertising, compensation and occupancy expenses.
• Operating EBITDA was CAD 31.5 million for Q1 2021, or 17.2% of revenue, compared to CAD 27.9 million for Q1 2020, or 18.4% of revenue, representing an increase of CAD 3.6 million or 12.9% mainly due to the strong revenue growth in Q1 2021 combined with an improved gross profit margin and partially offset by an increase in G&A expenses.
• Net Income increased by CAD 3.7 million or 74.1% from CAD 5.0 million in Q1 2020 to CAD 8.7 million in Q1 2021. This increase was mainly driven by the increase in EBITDA and decrease in finance related expenses and partially offset by an increase in income taxes.
• Finance related expenses decreased due to the decrease in interest expense on the Company's senior secured credit facility and decrease in accretion expense on the contingent consideration due under the purchase agreement related to the Endy acquisition which was paid in full in Q1 2021. These decreases were partly offset by an increase in the revolver commitment fees.
• This was the fourth consecutive quarter of triple-digit eCommerce revenue growth for Sleep Country, Dormez-vous? and Endy.

Top-10 Shareholders

Top-10 shareholders together hold around 53.03% stake in the company. Fidelity Management & Research Company LLC and Burgundy Asset Management Ltd. are the major shareholders in the company, with an outstanding position of 11.77% and 9.58%, respectively. The institutional ownership in the company stood at ~64%.

Valuation Methodology (Illustrative): EV to EBITDA based Valuation Metrics

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks.

Stock Recommendation:  The company reported solid financial performance in Q1FY21. Despite lengthier COVID-19 mandated store closures of 32.9% of operating days compared to 10.2% in Q1 2020, Sleep Country continued to deliver powerful growth across its sleep ecosystem, including capturing 29.3% of total sales through eCommerce. We expect the group’s revenue to increase as the restrictions are easing out, which would result in the opening of remaining stores.

Further, the company is building on the momentum of its record 2020 results, and moreover, its banners remain uniquely positioned to anticipate, adapt and evolve with the needs of new and loyal customers.

The company has 283 stores and 17 distribution centres and opened two new stores in the quarter just gone by. Moreover, the company is expanding its reach through the digital channel, which is the future catalyst. Further, the innovative partnership with Best Buy is unlocking opportunities in growth markets.

Also, despite the recent fall in the stock prices, its shares are trading well above the long-term crucial support levels of 200-day SMAs, and 14-day RSI is recovering from the oversold zone and hovering in the neutral zone.

Therefore, based on the above rationale and valuation, we suggest a “Buy” recommendation on the stock at the closing price of CAD 29.27 on June 18, 2021.      

1-Year Price Chart (as on June 18, 2021). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

*Recommendation is valid on June 21, 2021, price as well.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.