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.

Key Highlights:

• 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.
  

• Bullish management guidance: In order to expand its market share, the group is focusing to enhance the omnichannel customer experience across the omnichannel banners through the new ERP system. This is expected to add new capabilities to connect the digital and store experience and enable more robust analytics and would lead to improved customer satisfaction. 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 their current offerings. These are expected to support the company’s upcoming operations, which is a key positive.

• Robust profitability margins: The company reported improved profitability margins as compared to the industry median, which indicates better operational efficiencies. Notably, in FY21, the company reported its EBITDA margin and operating margin of 21.7% and 15.1%, respectively, as compared to the industry median of 10.6% and 7.7%, respectively. Moreover, the company reported its net margin of 9.7% in FY21, higher than the industry median of 4.6%.

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)

• ZZZ announced its full-year result, wherein the company posted its revenue of CAD 1 million, surged 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 from CAD 244.4 million in FY20, supported by higher income, partially offset by an elevated cost of sales.
• General and administrative expenses also stood higher at CAD 178.2 million from CAD 134.9 million in FY20. Despite a higher input cost, income before finance related expenses, interest and other expenses and income taxes stood higher at CAD 138.8 million, as compared to CAD 109.5 million in FY20, driven by higher gross profit.
• 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 profitability as mentioned above coupled with lower finance costs, partially offset by higher income taxes.
  

  Valuation Methodology (Illustrative): EV to Sales based

  Analysis by Kalkine Group

Stock Recommendation:

In FY21, the company reported a significant surge in its dividend payment, and posted its dividend distribution of CAD 28.7 million, as compared to CAD 13.6 million in FY20, backed by stable cash flows. This is impressive as most of the companies are lowering or suspending dividend distribution in order to retain liquidity. We have valued the stock using the EV to Sales based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Premium Brands Holdings Corp, Gildan Activewear Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of ZZZ at the closing price of CAD 30.58 on March 18, 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 March 18, 2022). Analysis by Kalkine Group

   Technical Analysis Summary

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.