The dividend cut must have hurt…

Sleep Country is a leading mattress and bedding company in Canada. It also deals in specialty sleep products.

Sleep Country has extensive experience of 25 years in the mattress industry. Starting out with four stores in Vancouver, British Columbia, the chain has since grown to over 265 stores across Canada. It has a national as well as a regionally diverse footprint. The company derives nearly 80% of its revenues from its core mattress business and the remaining 20% is from accessories.

The company operates a network of 276 stores and 17 distribution centers across Canada and also offers Canadians eCommerce services from coast-to-coast. Other than mattresses, Sleep Country also provides other sleep accessory products such as pillows, sheets, duvets, and headboards and footboards. The company manages its business on the basis of two operating segments, SCC and Endy but has only one reportable segment.

Investment Data

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Revenue Growth & Market Exposure

As Canada’s premier sleep retailer, Sleep Country is known for its excellent customer experience, driving higher sales and repeat business and its large range of specialty and innovative sleep products. The company has an estimated 31% market share in the specialty mattresses market. Sleep Country derives its revenues primarily from the retail sales of mattresses, lifestyle bases, and accessories. It partners with leading industry names like Sealy, Simmons, Kingsdown, BlanQuil, Serta, Tempur-Pedic, etc.

The company is well-positioned to serve customers online given its prominent digital presence through its platforms like Sleep Country and Dormez-Vous? platforms, Endy, and Walmart online marketplace. Endy is a market-leading online mattress-in-a-box retailer. The inclusion of the Endy banner expanded Sleep Country’s product offering as well as accelerated its online growth. Sleep Country continues to grow its national footprint of stores and expanded its omnichannel platform across Sleep Country, Dormez-Vous?, and Endy banners in the last year. It also launched exclusive Canadian distribution deals with Simba and Blanquil.

Sleep Country’s business was affected by the temporary closure of all its 276 retail store locations in Canada as a result of the pandemic and sales declined by 31% YoY. However, the company implemented a process for contactless delivery. The company has grown its revenues at a growth rate of 10%+ CAGR in the last three years. It has a target to open 4 new stores and renovate 10 to 15 stores in 2020 from the initial target of 12 new stores each year. The company also keeps investing in the renovation of its stores from time-to-time as they strive to achieve higher same-store-sales growth relative to legacy stores. Sleep Country should also benefit from its strategic partnership with Canada’s largest retail store, Walmart.

Dividends

Sleep Country has a proven track record of profitable growth. It paid a quarterly dividend of $0.195 in 2019. The company has currently suspended its dividend payments and share repurchases under its NCIB to manage its liquidity and ensure financial flexibility. However, Sleep Country intends to reinstate the dividend payments and repurchases in the future. It sports a three-year dividend growth of 11%+ CAGR. The company’s EPS has also grown at 4%+ CAGR In the last three years.

Sleep Country has a just-in-time inventory business and as a result, has very low capital expenditure requirements and a negative working capital operating model. A proven business model and strong free cash flow have enabled profits and dividend growth in the past. The company expanded its mattress and adjustable base market share to an estimated 33% in the last year, from 28% a year ago. Sleep Country has also been focusing on expanding its online presence through strategic partnerships with Walmart’s online marketplace and Urban Barn that should help in further diversifying revenue channels and customer base. This move is giving significant results, especially in current times.

Sleep Country operates in a large and growing core market for mattresses where the demand is driven by the essential nature of the product and replacement every 8-10 years. Driven by higher health consciousness, customers are preferring to buy premium mattresses and other sleeping products. The company is also well-positioned to drive market share in an attractive and highly fragmented Canadian sleep accessories market. Together the Canadian sleep industry is estimated to have a market size of $3.3 billion. A large store footprint, dynamic digital platform, and powerful logistics and delivery infrastructure act as strong competitive differentiators for Sleep Country.

Competition

The retail mattresses industry is highly competitive. Sleep Country competes with various national and regional full-line furniture retailers, departmental retailers, small regional specialty mattresses retailers, and online mattress-in-a-box retailers. Sleep Country’s organic and acquisition-driven growth strategy continues to differentiate it from competitors and supports attractive future returns. It is the only national specialty mattress retailer. Another leading company that operates in the specialty retail space is Canadian Tire Corporation which has more than a century’s old existence and over 1700 retail outlets. Sleep Country accounts for a 5%-8% market share of the Canadian sleep accessories market.

Bottom Line

The North American mattress industry is characterized by long-term stable growth. Sleep Country is focusing on future growth through expanding its digital and physical footprints and advancing its retail partnerships. Mattress sales might be delayed in the current times of economic downturn but are not totally lost. Sleep Country’s growing digital footprint should help to address the customer’s demand in the current times. Its strategic alliances with leading industry players also position it well to cater to demands for innovative and essential sleep products.