Sleep Country Canada Holdings Inc. (TSX: ZZZ) is engaged in the retail of mattresses and offers mattresses and bedding-related products. The group sells bedding products such as bed frames, pillows, mattress pads, sheets, duvets, headboards, and footboards under brands like Sealy, Serta, Simmons, Kingsdown, Contour Collection.

• Focusing on increasing Market Share: In FY22, the company is expecting to open minimum of six new stores while it expects to renovate 20 to 30 stores. Additionally, ZZZ is also prioritizing on several strategic partnerships and in-house innovation in order to improve its current offerings. These are expected to boost the company’s upcoming operations in the coming days. Additionally, in order to expand market share, the group is planning to increase its digital marketing budget in order to drive engagement across the marketing funnel and traffic to the Company’s websites and stores.
  

• Growing traction from the e-Commerce segment: In the recent past, the company is witnessing growing traction from the ecommerce segment, due to change in buying pattern of the consumers. Notably, the company acquired 52% stake in Hush Blankets Inc. in Q4FY21, which operates as a direct-to-consumer ecommerce sleep retailer. Hence, in Q4FY21, the eCommerce sales represent 20.9% of the revenue, which increased from 17.9% of the revenue in Q3FY21. The addition of Hush is likely to provide robust eCommerce platforms and would allow the Company to expand its digital footprint both nationally and in the United States.

• Higher Dividend payment: The group reported a higher dividend payment of CAD 28.7 million, as compared to CAD 13.6 million in FY20. This is impressive as most of the companies are lowering their dividend distribution in order to retain liquidity. The stock of ZZZ carries a dividend yield of ~3.033% on an annualized basis, which looks impressive considering the ongoing interest rate scenario.
  

• Result Update: The company would disclose its First quarter result on May 04, 2022.

Risks associated with the investment:

The demand for the products depends upon the ongoing consumer preferences, and a change in the consumer preferences would lead to a decline in sales volume. Moreover, the company is encountering higher input costs, and the continuation of the above trend would challenge the company’s profitability and margins.

FY21 Financial Highlights:

FY21 Income Statement Highlights (Source: Company Report)

• In FY21, ZZZ reported its revenue of CAD 1 million, which grew from CAD 757.6 million in FY20. The growth was mainly driven by an 18.3% increase in Same Store Sales, due to addition of four net new stores in FY21.
• Gross profit stood higher at CAD 0 million, compared to CAD 244.4 million in FY20, supported by higher income, partially offset by an elevated cost of sales.
• Income before provision for income taxes stood at CAD 121.8 million, soared from CAD 84.0 million in FY20, supported by higher gross profit and lower finance related expense, while an elevated general & administrative expense stood as a drag.
• Net income stood at CAD 88.9 million in FY21, as compared to CAD 63.3 million in FY20. The growth was aided by higher income before provision for income taxes, partially offset by a surge in the income taxes.

Valuation Methodology (Illustrative): EV to Sales based

Analysis by Kalkine Group

Stock Recommendation:

In order to achieve higher operational efficiency, the group would invest in and evolve new ERP system, which includes a new in-store point of sale system, supply chain demand planning tool and warehouse management system. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of ZZZ at the last closing price of CAD 25.72 on April 22, 2022. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on April 22, 2022). Analysis by Kalkine Group

Technical Analysis Summary

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