Sleep Country Canada Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 10, 2023

There are 9 speakers on the call.

Operator

I would like to welcome everyone to Sleep Country's Q3 2023 Results Conference Call. Yesterday, Sleep Country released its financial results for the 3rd quarter of 2023. A copy of the earnings disclosure is available on their Investor Relations quarter's website and includes cautionary language about forward looking statements, risks and uncertainties, which also apply to the discussion during today's conference call. I would now

Speaker 1

like to

Operator

turn the call over to Stuart Schaeffer, President and CEO. Please go ahead.

Speaker 2

Quarter. Good morning and thank you everyone. Thank you for joining us for our Q3 earnings call. With me today is Craig DiPrado, our Chief Financial Officer. Quarter.

Speaker 2

Overall, I am pleased with our performance this quarter as we continue to navigate through this volatile macro environment, quarter delivering our 2nd highest Q3 revenues in the company's 29 year history. Our Q3 revenues grew by 1.9% quarter as we integrate our strategic acquisitions and see our channels coming together to grow our market share and expand on our channel distribution. Quarter. Q3 saw once again pressure in our mattresses sub $7.50 price band, while our mid to high end remained flat. Quarter.

Speaker 2

The slowdown in the Canadian real estate transactions caused by the impact of higher interest rates quarter, plus the impact of inflation, saw certain customer segmentations defer their purchases on larger ticketed items quarter and spent cautiously in this challenging environment. When looking at revenues across all our channels, we continue to see the greatest weakness quarter, coming from our price sensitive e commerce channels. Revenues from our brick and mortar stores stayed strong in the 3rd quarter, quarter, reinforcing the importance of the in store experience and the importance of our diversified omni channel positioning. Quarter. Our teams have worked diligently over the last couple of quarters to get us to the point of launching 3 new brick and mortar brands.

Speaker 2

Quarter. The first two are highly recognized direct to consumer brands Endy and Silken Snow that are going to introduce their brands quarter into a tactile environment with an expanded collection of sleep products while also bringing to life a new customer quarter by allowing our DTC customers the opportunity to discover, trial and purchase quality sleep products with the help of our trusted Q3 experts. Earlier this week, we celebrated the opening of our first Endy store at Sherway Gardens in Toronto quarter and later this month we'll be opening our first ever store within a store featuring silken snow within our newest Sleep Country location in Ottawa. Quarter. This will be the first of many to come that will showcase these 2 powerful brands.

Speaker 2

All our teams are very excited to see these leading digital brands quarter. I'm also thrilled to share that we'll be launching our exclusive new luxury sleep banner called The Rest with the opening of our very first store in Yorkdale Mall in Toronto this month. Quarter. The rest will redefine luxurious sleep and offer a uniquely elevated experience quarter, bringing customers the world's most exquisite collection of bespoke mattresses and the very finest in premium bedding. Quarter.

Speaker 2

As leaders and innovators in the sleep space, we can't wait to showcase this highly curated luxury offering to Canadians for the very first time. Quarter. We surely couldn't be happier with our newest acquisitions and the results they are delivering. Silk and Snow continues to outperform our expectations quarter. And this quarter, they received recognition for the 3rd consecutive year as one of the top quarter, the fastest growing businesses in the Globe and Mail's 2023 report on business.

Speaker 2

We've also been making tremendous progress with Casper Canada. Quarter. Over the last 5 months, our teams have invested significant energy in redefining the future of this business quarter from planning the expansion of Casper Canada store footprint to designing a new collection of mattresses quarter, tailored explicitly for the Canadian consumers' needs in mind. Half of this collection has already begun to roll out quarter with the other models hitting the floors in the first half of next year. Looking ahead, as we continue to execute on our strategic growth initiatives, quarter.

Speaker 2

We remain cautiously optimistic on our medium term outlook, but are very bullish on our strategic long term positioning quarter as we focus on strengthening our sleep ecosystem while investing in growth of all our brands to continue to deliver the best in class sleep quarter to our growing customer base. Finally, I want to extend my deep and sincere thanks to our incredible dedicated, quarter driven and talented teams who proudly represent all of our amazing brands and who have worked tirelessly to help make quarter. With that, I will now turn it over to Craig to discuss the financial results. Quarter.

Speaker 3

Thank you, Stuart, and good morning, everyone. This quarter, we saw an increase in revenues by $4,700,000 or 1.9 percent from $251,000,000 quarter in Q3 2022 to $255,700,000 in Q3 2023. This increase quarter, mainly driven by incremental revenue earned from new stores opened in 2023, wrap stores opened in 2022 and the incremental revenue earned quarter from our acquisitions of Silk and Snow in January of 2023 and Casper Canada in April 2023. Quarter. This increase was partially offset by a decrease in our same store sales by 5.5%.

Speaker 3

Our Q3 revenues from our e commerce platforms quarter increased 190 basis points from 18.5 percent in Q3 2022 to 20.4% in 2023 or Q3 of 2023. Quarter. Taking a step back and looking at our total revenues over the last 4 years from 2019 to 2023, we have achieved a strong CAGR of 4.9%. Quarter. Moving on, our gross profit margin increased $4,800,000 from $96,600,000 in Q3 2022 quarter to $101,400,000 in Q3 2023.

Speaker 3

Our gross profit margin increased by 120 basis points quarter from 38.5 percent in Q3 2022 to 39.7% in Q3 2023, mainly due to higher average unit selling prices, quarter. Lower product costs. These were partially offset by higher sales and distribution compensation costs and deleveraging tied to our store occupancy costs. Quarter. Store occupancy costs were also impacted by our 9 new stores opened in 2023, of which 6 were acquired under the Casper Canada acquisition.

Speaker 3

Quarter. Our improved gross margin this quarter was negatively impacted by the deleveraging on our G and A expenses. Total G and A expenses increased by 10 $900,000 or 22 percent from $49,800,000 in Q3 2022 to $60,700,000 in Q3 2023. Quarter. Of the $10,900,000 increase in G and A expenses, dollars 4,500,000 of the increase was driven by advertising expenses quarter and $4,300,000 was due to an increase in compensation costs.

Speaker 3

Both of these increases were primarily tied to the incremental spend related to the acquisitions quarter of Silk and Snow and Casper Canada. A reminder to the market that there is seasonality in our advertising expenses similar to our revenues. Quarter. Our advertising spend is generally highest in Q3. Total G and A expenses were also impacted by an increase in information and technology quarter cost tied to software and licensing and support.

Speaker 3

And lastly, as a reminder, our D2C brands, Hush and Silken quarter, which are earlier in the growth cycle have a higher marketing and fixed cost as a percentage of total revenue and therefore caused a deleveraging impact quarter at a consolidated level on our advertising spend and G and A. Taking a step back, EBITDA decreased by $5,800,000 or 9.1 percent quarter from $63,700,000 in Q3 2022 to $57,900,000 in Q3 2023, quarter, which is primarily due to an increase in G and A expenses, which was partially offset by the improved gross profit margin. Quarter. Adjusting EBITDA for LTIP, ERP and acquisition related costs, operating EBITDA decreased by $5,800,000 or 8.8 percent from quarter, $55,600,000 in Q3 2022 to $59,800,000 in Q3 2023 and operating EBITDA margin decreased by 270 basis points from 26 0.1% in Q3 2022 to 23.4% in Q3 2023. Finance related expenses increased by $1,700,000 quarter from $6,300,000 in Q3 2022 to $8,000,000 in Q3 2023, mainly due to an increase in interest expense on our lease obligations quarter and our senior secured credit facility, which were both impacted by higher interest rates and higher debt levels on a year over year basis.

Speaker 3

Quarter. These increases were partially offset by a decrease in accretion expense as a result of lower redemption liabilities related to the Hush acquisition. Quarter. In Q3 2023, we completed the 2nd closing of our share purchase of Hush Blankets Inc, increasing our share ownership by quarter to 68%. As a reminder, we will purchase the remaining 32% of shares in 2 equal increments in 24% and 25%.

Speaker 3

Quarter. Other income and expenses decreased by $1,200,000 from an expense position of $200,000 in Q3 2022 quarter to income of $1,000,000 in Q3 2023. This change was largely tied to interest income related to investments acquired in 2023. Quarter. Income taxes decreased by $2,200,000 from Q3 2022 to Q3 2023.

Speaker 3

This change was driven by the decrease in net income before taxes of 6 point $5,000,000 from $40,300,000 in Q3 2022 to $33,800,000 in Q3 2023, quarter, a decrease in our effective tax rate by 110 basis points from 28.1 percent in Q3 2022 to 27% in Q3 2023. Quarter. Net income attributable to the company decreased by $4,200,000 from $28,900,000 in Q3 2022 to $24,700,000 in Q3 2023. Quarter. Adjusting for LTIP, ERP and acquisition related costs as well as accretion expenses related to the redemption liabilities of Hush and Silk and Snow, quarter.

Speaker 3

Adjusted net income attributable to the company decreased by $5,700,000 from $32,500,000 in Q3 2022 quarter to $26,800,000 in Q3 2023, primarily impacted by the decrease in accretion expense as a result of the lower redemption liabilities related to the Hush acquisition. Quarter. Onto diluted earnings per share decreased by $0.09 or 11.4 percent from $0.79 in Q3 2022 to 0 point 7 0 dollars quarter in Q3 2023. This change in diluted EPS of $0.09 was mainly impacted by a $0.16 decrease in EPS tied to lower EBITDA as quarter as well as $0.07 decrease in EPS due to higher interest expense on our senior secured facility and leases. These decreases were partially offset by lower accretion expense of $0.04 per share and a decrease in income taxes of $0.06 per share.

Speaker 3

Quarter. Moving on to liquidity. As of September 30, 2023, our cash balance was $38,300,000 with an additional 121,900,000 claim available to us on our credit facility, and this does not include the $100,000,000 accordion available to us as well through the credit facility. Quarter. In regards to capital allocation in Q3, we purchased 165,000 common shares for a total consideration of $3,800,000 under the NCIB.

Speaker 3

Quarter. Subsequent to the quarter end, in October, the company repurchased for cancellation an additional 446,000 shares quarter for $9,900,000 or year to date 910,000 shares for $21,000,000 in total. Quarter. On November 9, 2023, the Board approved a quarterly dividend of $0.237 per share, which will be payable on November 30, 2023 to shareholders of record quarter at the close of business on November 24, 2023. Regarding our CapEx spend, we will be opening a total 7 Sleep Country Dormez vous stores in 2023.

Speaker 3

Quarter. And as Stuart mentioned earlier, we just opened our 1st Endy store at the Sherway Mall in Toronto, Ontario, and we'll be opening our 1st quarter within a store under the Silk and Snow brand in Ottawa, Ontario and lastly, our new luxury store, The Rest in Yorkdale Mall is slated to open in the coming weeks. Quarter. We will also be opening our new warehouse in Montreal and relocating our 2 existing warehouses to this location by the end of this year. Quarter.

Speaker 3

Additionally, we will continue to invest in our digital infrastructure and further enhance our digital capabilities and omnichannel experience and spend approximately 1% of revenue for ongoing maintenance in the store and DC. Thank you. And I'll now pass the call back over to Stuart for closing remarks.

Speaker 2

Quarter. Thank you, Craig. As I said earlier, we are pleased with our Q3 results despite the macroeconomic environment quarter and feel confident that our talented and dedicated teams are razor focused on executing on our multi year strategic growth plans, quarter, while also focusing on our collective synergies and cost efficiencies as we position our growing more diversified business quarter into a stronger and more profitable business than ever before. As more Canadian consumers quarter. We feel confident in investing in their health and wellness.

Speaker 2

We will be there to serve them through the power of sleep. With that, we conclude our remarks and open the call for questions.

Speaker 4

Thank you. 3rd call. And your first question comes from the line of Martin Landry from Stifel. Your line is open.

Speaker 5

Quarter. My first question is I'm trying to quarter. Understand a little bit where we are in the industry cycle. Stuart, you've mentioned in the past that quarter. Some customers are delaying their purchases.

Speaker 5

And I'm wondering if it's a delay or if it's not quarter. Rather, just a return to normal industry volumes after the pull forward that was created by COVID. Quarter. So, is there any way for us to figure out where industry volumes are right now quarter. In units versus 2019 level, it's a pre pandemic?

Speaker 2

Quarter. I don't have that data for you, Andy Martin, but we can probably give you a good indication. Quarter. And to answer your question specifically, when business exploded quarter. During those 2 years of the pandemic, the argument quarter that was made by a lot of analysts was, is this a pull forward?

Speaker 2

You who've been around long enough know that for a period of time prior to the pandemic, quarter. There was a little bit of a lull in the industry, which really triggered farther back from 'eight and 'nine financial crisis. And quarter. Because this industry has always been around a 6% CAGR. So I do think it's a little bit of both and I would have said that quarter?

Speaker 2

For 2022. 2023, there is no question and I see it all around me from my team of 1700 quarter. From conversations that we have, inflation and mortgages quarter. And the cost of interest rates has definitely impacted those who are affected in terms of Their personal savings and discretionary spending. And every single time I've been in this business for 29 years.

Speaker 2

Every quarter. Single time, there's been a little bit of a pause. It usually starts with discretionary spending. Read the Canadian Tire script like everyone is seeing the exact same thing. Compared to some of our peers within the industry, quarter.

Speaker 2

Martin, you put on one of the biggest best spreads and I'm not going to say the company out loud, but you know what I'm talking about of buying Sleep Country and shorting someone else. Quarter. Like if you're seeing some of the things that I'm seeing within this industry and I'm hearing numbers down 20%, 30%, quarter. When you look at our numbers or even Tempur Pedic Sealy, there are some real winners in the space quarter. And then there's some losers in this space.

Speaker 2

And I do think it's a pause of the consumer, quarter, which always comes back. And the beauty of our business, unlike fashion, unlike restaurants, unlike any other type of business, Your mattress is just getting older and when it does come back, whether it's a pull forward or catching up, quarter. We do get that benefit of it and that's why we're strategically investing in our longer term plan. So if you rent our stock, quarter. You may not be happy on a quarterly basis.

Speaker 2

If you own our stock, I think you're going to be very pleased as we're still going to finish quarter. This year was one of the strongest years that we've ever had in our 29 year history. So I'm still pretty bullish, quarter. But I'm not going to say that for these last few months. I don't know if that answers your question.

Speaker 5

Quarter. Yes. No, it helps out. It helps out. 'twenty two was maybe a bit of a quarter.

Speaker 5

COVID hangover in 'twenty three is maybe a pause and delay. So maybe just a follow-up. So if to your point, if quarter. There's right now a delay in purchases that suggests that we're going to see a pent up demand on the other side when quarter. Is this what we've seen in previous recessions?

Speaker 2

Always, always, always, always. Every single time that there's been a recession, Sleep Country has emerged stronger than ever before. We had a recession quarter? In 2020, 2021. There was a recession, but it was a subsidized government bailout.

Speaker 2

This time, there won't be a subsidized government bailout. Quarter. And I don't want to ever do well off of the backs of others because we want everybody to do well. It's healthy for the entire industry. Quarter.

Speaker 2

But as we strategically position ourselves with some of the acquisitions, as we expand our channels of distribution, as we acquire some quarter. Fabulous brands giving consumers a choice in an environment where other retailers may or may not quarter. Make it or have some struggles along the way. Each and every time in a recession, we've come out of it stronger. And that's why we're quarter?

Speaker 2

Doubling down in terms of our investments in some areas where you're seeing deleveraging. This is planned, not planned. Quarter. That business is a little bit softer than I would like. I would like it to be much more buoyant than it is, but quarter?

Speaker 2

It's not changing anything in terms of our perspective to position ourselves in the strongest way we can.

Speaker 5

Quarter. Okay. And the last question for me. You've made several acquisitions and you have a portfolio of brands right now. Quarter.

Speaker 5

And I'm trying to understand what's their impact on the bottom line. So is there any way for you to quantify, if we look at Casper, quarter. For Osh and Silk and Snow, are these business dilutive or were these just dilutive to your EBITDA margin in Q3? And then if so, any chance you can quantify their impact?

Speaker 3

Quarter. Yes. Hi, Martin. I'd say that the we've continued to remind the market that quarter? As we have earlier cycle in the growth of like a Silk and Snow or Hush acquisition, it is going to be dilutive quarter to the EBITDA margin, but from a are they accretive acquisitions to the bottom line?

Speaker 3

Yes. Quarter? In terms of quantifying or breaking out or giving additional detail, at this time, we don't break out that segment of the business quarter separately, but I would say that they do have higher marketing spend upfront as they're continuing to mature. They have a higher Percentage of compensation costs compared to the top line, which puts pressure on the G and A stack. But again, as these mature quarter.

Speaker 3

And they move more towards kind of the mid term life or like the kind of where Endy is in its cycle, that's where you start seeing quarter? The leverage start coming back into the right direction. So I'm trying to help out without Being able to break it out specifically, but those will have pressures around marketing and compensation costs quarter? In the near term, but in the medium term, you'd see that smooth itself out and then start adding back to the bottom line from the G and A and marketing positions.

Speaker 2

Quarter. I also want to add Martin that you should view and glad to go out for lunch with you and go even deeper on it. But we think of this as a chessboard and there's some strategic moves that we're making because in the eyes of quarter. Consumers, we believe having multiple brands in different customer segmentations and different merchandising hierarchies quarter. It's very important to be able to grow our market share and serve the customers in terms Of what they need.

Speaker 2

Plus, a big part of what we're doing and positioning, which you've seen over the years, is expanding our accessory mix, quarter, which is a very important area of our business that is incredibly profitable, which in these times serves quarter as a lead generator. Our traffic in our stores was really not down in this quarter. I mean, maybe slightly, September saw some a little bit slower as the market sold off and people got maybe a little bit nervous. Quarter. But the customers are coming in and I call it and I said it before, the Starbucks effect.

Speaker 2

They come in, they're kicking the tires a little bit on

Speaker 1

the mattresses, but they're walking out with a pillow or some sheets

Speaker 2

or a duvet. Quarter, but they're walking out with a pillow or some sheets or a duvet and we look at that as a lead generator in the exact same way that we looked at it in 2,008, 2,009 in quarter. Financial crisis when everyone just stopped for a moment and we just wanted them to engage with the brand. And all these things Are still early investments. Casper, the reason we were able to acquire this unbelievable brand is that they had a misstep quarter.

Speaker 2

And we capitalized on that misstep and now we are investing in this fabulous brand and it's going to take, as I keep saying, quarter. It's going to be a 2024 story as we rejig what we believe and sprinkle a little bit of the Sleep Country magic into this Casper Unbelievable brand.

Speaker 5

Okay. That's helpful. Thank you

Speaker 6

for me. That's it for me. Thanks, Martin.

Speaker 4

Quarter. Thank you. And your next question comes from the line of Stephen MacLeod from BMO Capital Markets. Please proceed with your question.

Speaker 1

Quarter. Thank you. Good morning, guys.

Speaker 2

Good morning, Stephen.

Speaker 1

Good morning. Just a couple of follow-up questions there. Lots of good color, quarter. Stuart, thank you. I was wondering if you could just talk a little bit more about Casper, quarter.

Speaker 1

Just around the repositioning I don't know if repositioning is the right way to say it, but just some of the quarter. Sort of what you're doing to the brand this year and how you expect that to be positive for driving incremental growth quarter? Next year.

Speaker 2

Yes, sure. And repositioning is the perfect word, especially as we look at our business, quarter. As I just said to Martin, like a chessboard. So we have some really great partners already, Tempur Pedic, Sealy, Kingsdown, Simmons, Serta. And everyone plays a role within our floors.

Speaker 2

And when we look at our floors, quarter. Our policy has always been from more economical pricing at the bottom quarter. And could be at $199 to our premium bedding within our stores, which will be probably $5,000 or $6,000 And we have to make sure that we offer consumers brands, Great brands, quality brands at all different price points. Casper to us is a premium brand and we are repositioning quarter. Before when we were buying the Casper products, we were buying from the U.

Speaker 2

S. Whatever they were making. Our team has redesigned these beds quarter to make them better and more Canadian focused. There isn't a dramatic difference, but there actually is a difference between quarter, what customers like in Canada compared to United States and we are positioning them in on our floor so that our customers as well as our sales associates quarter. Have different price points at different ranges.

Speaker 2

A big part of this also, which I said earlier when we did this acquisition, was around expansion of margin quarter, while also bringing down the price of Casper beds for Canadian consumers. And we have effectively done that quarter because we were buying these beds 100 percent from the United States before and with the dollar at $1.38 right now or $1.39 We've insulated ourselves from that difference within itself and we're already seeing quarter. Expansions of margins in this particular category by 10 points, as well as quarter. We've seen the cost of these mattresses dropping anywhere from 12 to 21 points. Quarter.

Speaker 2

So that's important within our stores, plus we believe that the Casper brand itself quarter and the customer experience for those who don't want to shop in a house of brands will be incredibly well served as we Roll out the Casper unique personality and their unique Casper settings, as if you visit one of our stores already. Quarter. And that's a different customer, we believe. It's a customer who chooses to go to a brand specific quarter. And we're going to make sure that we continue to roll that out in specific markets, but methodically and thoughtfully quarter and make sure that we do it right.

Speaker 1

Great. That's good color. Thank you. And then maybe just maybe a little more granular, quarter. Can you just talk a little bit about how you saw demand or sales trends through the quarter?

Speaker 1

And then what you've seen on a quarter to date basis, quarter. Has the trend changed materially from how you finished the quarter?

Speaker 2

Sure. July was good. Quarter. August was flat and September was soft and October quarter. It was good up until probably the weekend of October 7, and then we saw it get soft again.

Speaker 2

Quarter? So it's been very choppy. We've seen and I'll even break it out for you provincially. We've seen quarter? GTA, the softness Montreal, the second and BC, the third, quarter?

Speaker 2

Well, the Maritimes and the Prairies have were actually positive for the quarter. Quarter. So, I mean, we're not economists here, but we do believe that the quarter. More price sensitive, mortgage sensitive markets, housing markets, quarter. Montreal, Toronto and Vancouver are the consumers who are most sensitive or quarter.

Speaker 2

Affected I mean, everyone's affected by mortgage rates, but the wealth effect or the consumer confidence effect quarter. Is impacting those markets the most at the moment.

Speaker 1

Great. Okay. Thanks, Stuart. Appreciate the color. Quarter.

Speaker 3

Thanks, Ken.

Speaker 2

My pleasure.

Speaker 4

Your next question comes from the line of Jen Zumaro from CIBC. Your line is open.

Speaker 2

Quarter. Thank you. Good morning. Good morning. Good morning.

Speaker 7

I wanted to start on the macro picture. That's great color on the previous quarter, but obviously there's concerns about the Canadian consumer going into 'twenty four for all the reasons that you cited. And if we do see a more difficult environment quarter. In 'twenty four, even than the one we're in now. I wonder if what would the playbook be and what have you learned from previous downturns?

Speaker 7

Do you focus more on quarter capturing share or do you prioritize margins and capital allocation? Do you accelerate M and A or do you quarter. They prefer the buyback. Obviously, there's lots of unknowns, but I wonder if you can provide some insights on how you might react if conditions worsen versus today?

Speaker 2

Quarter. Yes. And I'm going to tell you it's a little bit of everything. First of all, I'll start off. This has been a year of investment quarter.

Speaker 2

And we always have a strong focus around our capital allocation. I mean, this year alone, we increased our dividends, we increased our buyback program, quarter. And we did 2, like 2 strategic acquisitions. It seems long time ago, but Silke and Snow was in January and Casper was in quarter. In April or May.

Speaker 2

April. Yes. And so managing capital managing our capital and our strong balance sheet Is always top of mind, including we're ready to roll out our new version, which I've been talking about quarter in terms of our Sleep Country design, which is going to be an expansion of our accessory collection. Quarter. But we paused on it, not because we weren't ready, but as a use of capital allocation in a market that may be a little bit softer, quarter.

Speaker 2

We decided to push it off into Q1, which is where you're going to see the first two new prototype stores that are going to be opening up. Quarter. And if the market turns softer, maybe we'll pause it because our stores still look fantastic and are transacting incredibly well. Quarter. That being said, even this year and always for us, the big focus is around always our cost efficiencies quarter and driving the synergies.

Speaker 2

There's some really exciting things that are happening that have not yet unfolded in terms of the overall expenses of our business quarter. As we consolidate the Endy, the Hush, the Silk and Snow, the Casper businesses on the what I like to call the back of the store. Quarter? Logistically, there is going to be savings there, which I'm not don't ask me for specifics now, because let us make it happen, but we're Already seeing progress where we will reduce the use of 3PLs as we bring it into our back end because we have the capacity to do so, quarter, which was recognized when we want to do these acquisitions. There is going to be synergies around how we approach the market on marketing and our with our fabulous partners, whether it's Google and Facebook and all the others.

Speaker 2

And there will be synergies in terms of sourcing, which has already begun. Quarter. Mike Douglas, who is the Head of Merchandising is already working closely with those teams and the buying power of that is already Happening, the back office on our HR and our finance teams, all that while maintaining the personalities quarter. And the uniqueness of the brand is happening and we're going to double down on that in a softer economy. Quarter.

Speaker 2

And not because it's a softer economy, it's just it's our focus. On advertising or market share, because that's a great question, quarter. In the history of this company, 29 years that I've been with this business, there is one time quarter that we paused on our advertising or what we called our growth strategic initiatives because quarter. That's a big part of us growing market share being top of mind, being there all the time, so that when you're ready, quarter. When you're ready, we're in the consideration funnel and that was in 20102011 as everyone was quarter.

Speaker 2

Feeling the 'eight, 'nine financial crisis and we pulled back in 2010 quarter. And the beginning of 2011 and we rode on the halo effect of our powerful brand quarter. Because everyone knew why buy a mattress anywhere else. That worked quarter? For 9 months and then it took us 6 months to regain what we pulled back on quarter.

Speaker 2

And we said that we will never do that again. That being said, quarter. We're getting better and more efficient in terms of how we allocate our advertising dollars. As we look at some of our traditional spend quarter compared to our digital spend where we have the lever of literally of a live view of whether we want to quarter and see if our ROAS is delivered or pulling back and we divide it quarter? In two ways, one is performance and one is awareness.

Speaker 2

So you shouldn't expect quarter. Pull back on our advertising. Obviously, we'll watch the deleveraging component and we will be quarter. Smart about our performance spend, but our awareness spend is our long term plan that positions us quarter? Stronger than anyone that I've seen in this marketplace and you should see that continuing.

Speaker 7

Quarter. Okay. That's good color. Thank you for that. And then I wanted to pivot to population growth, because it's quarter.

Speaker 7

It's frequently said that one of the drivers of this industry is robust immigration levels that are on now and expected over the next few years. And I think, quarter. You said in the past, you don't think you get your fair share of sales from new Canadians and Express stores and Walmart are one way you can address that. Quarter. I wonder, is that still the case?

Speaker 7

How might you capture more of those sales? And do you anticipate Express being a bigger driver in 2024?

Speaker 2

Quarter. Yes, I'm going to answer it in well, first of all, let me just I'm never going to be happy with our share of business. Quarter. We're at a 40% market share right now. When we were at 20%, I wasn't happy to hit 25%, 30%, 35%, and when we're at 60%, I'm still not going to be happy in thinking that we're not getting our fair share.

Speaker 2

That being said, a lot of the brands that we're doing in a lot of the positions, quarter.

Speaker 6

When I talk about

Speaker 2

distribution channels, we view it as though we want to be everywhere that customers are. And certain customers will not come to the Sleep Country brand because there's no question that some people perceive it as mid to high end, even though we do have our unfair share of the lower end because quarter. Our price bands range from, like I said, dollars 199 to over $5,000 That being said, what I said before in the past, our belief is quarter. When newcomers come to Canada, which is terrific and great for our business long term, They may not know the Christine McGee WhyBuy Mattress Anywhere Else OR Sleep Country brand as well as they should, obviously, quarter. But they do know the Walmarts and they do know the IKEAs and they do know the COSCOs of the world.

Speaker 2

And so our relationship with Walmart, quarter, which has been a good relationship, was important almost like a billboard to be able to have newcomers over 2,000,000 people walk through those doors quarter on an annual basis on per store Walmart basis where we probably don't even get $2,000,000 in our 300 stores. So that was very important. But it's so and a lot of our marketing and advertising, quarter. Especially within the digital side, it is trying to target the newcomers. So that is a big initiative for our marketing teams.

Speaker 2

Quarter. The other side though is the aging demographic of Canadians where some people and some retailers depending on their business Get concerned about that. That's actually a longer term bullish positioning for us. The aging demographic and their disposable income rises within Canadians quarter. And has been nicely for a period of time, whether or not their saving rate their savings are a little bit lower than they were during the pandemic is not

Speaker 3

the

Speaker 2

quarter. And we've been seeing that, you've been seeing that over the last few years as our average unit selling price grows quarter. And as our premium bedding collections grow and that is a huge strategic quarter. Longer term part of our business. So when I say don't rent my stock, buy my stock, quarter.

Speaker 2

You're going to see, you have seen ups and downs on the markets, recessions come and go, but our positioning is key quarter? In terms of the demographic and the future demographic of Canadians.

Speaker 7

Understood. Quarter. Thank you for that. One last one. Can you remind us what percent of sales are financed?

Speaker 7

Has there been any change in performance among those customers versus ones quarter. Not

Speaker 2

financing. Quebec is the highest and always has been and that for us is about 25 percent of our business, which is low. If you look at the Bro and Martinos and Leon's and the Brixton those markets, They finance much higher and we're actually bringing in a specialist this year around that because we quarter. We don't know if that's good or if that's bad, because there is a cost to us as for financing. But I guess you're asking the question in a more price sensitive economy when people may want to pay over a longer period of time.

Speaker 2

But that's by the way, to answer your question, it is increasing. Quarter. For the rest of the country, it's low. It's about 11%, 12%. And but it is something that we have been quarter focusing on also and it's creeped up a little bit too, not as much as you would think, because I still think quarter.

Speaker 2

The Canadian consumer is healthy. I mean, unemployment is still low. GDP is still great. Whether we get a soft landing or not, I have no idea. But quarter.

Speaker 2

I think it's more a choice at the moment that the consumers are just being a little bit more cautious because we're all feeling the same thing, the uncertainty. Quarter. So, usually in a recession, when you see a contraction on the GDP, when unemployment is spiking about quarter over 5.5%, 6%. We've seen our financing programs tick up aggressively, but we're not seeing that yet.

Speaker 7

Quarter. Okay, great. That's all for me. Thank you very much.

Speaker 2

Cool. Thank you. Thank you.

Speaker 4

Quarter. Your next question comes from the line of Brian Morrison from TD Securities. Your line is open.

Speaker 6

Hey, good morning, Saju. Good morning, Craig.

Speaker 2

Quarter. Good morning, Brian.

Speaker 3

Good morning, Brian.

Speaker 6

Hey, I just want to go back to the consumer. It's clearly stretched here quarter. And you're really seeing a bifurcation towards the high end being positive and lower end product, probably feeling more pressure. I guess with the transformation acquisitions you've made, do you have more closure to this premium market or are you still evenly spread throughout both segments?

Speaker 2

I think we always lean probably more quarter. Premium, I mean, I know it's not exciting or sexy when I talk about the back end of the business, but it is a huge component quarter. Of why we're profitable and why others coming to the market are not profitable. It costs us the same amount to deliver $1500 mattresses, it does a $500 mattress and take it all down the line on everything else. Quarter.

Speaker 2

We are seeing and you're right, Brian, we're seeing the softness part, which is in my commentary I wrote quarter. Our below $7.50 price point. We measure our business by bands, and I'm not going to get into all the bands. But the fact that our above 7.50 band, which is everything above 7.50 quarter was flat for the quarter and are below 7.50 was softer for the quarter. That is definitely an economic questions online below $1,000 is a fabulous cost efficient way quarter.

Speaker 2

Of driving transactions, even more so than in a physical footprint. And that customer is pulling back right quarter. Now, which is why you're seeing some of the deleveraging, because it's also a higher cost of advertising. The brick and mortar stores have always been more in terms of the premium bedding because if you're buying a bed over $1,000 you sometimes want to kick the tires and the more expensive you go for sure you want quarter. Try that, Ed.

Speaker 2

That being said, over the last few years, to answer your question specifically, we have quarter. Been positioning ourselves so that we make sure that we offer all price points, but we're doing it in different types of way. Quarter. If you walked into our stores 5 years ago, you would have maybe seen 2 or 3 more SKUs on the floor below $1,000 quarter. We measure that square footage and the productivity of that square footage very carefully and it's more quarter?

Speaker 2

Profitable for us to put a little bit more of a premium bed, and I'm not talking $2,000 $3,000 but creeping over that $1,000 price point Within our stores because we know the customer wants that way. And one of the reasons Endy is such a powerful brand and Silk and Snow is quarter. Doing amazing is because of their price points and the efficiencies of delivering it Through a digital transaction. Casper is exactly where I think you're going also because we do believe it's A category of premium bedding, which is why we wanted it. It fits so well in terms of our long term strategic plan and our 29 year quarter of premium bedding and the fact that we actually got it, we still pinch ourselves.

Speaker 2

Now you're going to judge us on quarter. What we do with it, but we're quite bullish on what we're going to do with it.

Speaker 3

Well, I guess I do want to follow-up there, Stuart.

Speaker 6

So in terms of the Casper transformation, clearly, you're making progress here. Quarter. I think you've said previously that's your worst margin performer. When can we expect to see this get to industry average? When can we start to see the financial benefits?

Speaker 6

Will they be immediately? Quarter. Should we see them early 2024 to get to your industry or permit your company average or will it take longer than that?

Speaker 2

Back half of twenty twenty four, I'm very confident quarter. To say, we're already starting to like we're just rolling out. So we have to do just to be clear on this acquisition, because quarter. I'll have given you guys as much knowledge as you can to build out your models. But we bought this company.

Speaker 2

We were tied to the U. S. Quarter. The first thing that we decided after 60 days is to move away from their platform, which was on sales force quarter. And bring in the Shopify and re platform the entire site, change the POSs in the stores for Shopify also.

Speaker 2

And that quarter. I think you all know once you re platform, it has an effect in terms of your traffic, which we knew and we were planning for also. And the leaders quarter? Endy and Silken Snow, Ali and Albert were the ones that were driving that for us and we did that quarter in 10 weeks, which was record breaking for us in terms of how fast we did that. That was step 1.

Speaker 2

Step 2 is quarter? Looking at the logistics of it because Casper used 3PL and we are now shifting that quarter. Component into our DCs. Step 3, which was happening while these 2 were actually happening too, quarter was rebuilding Casper products. Here, even in Canada, I mean, we'll do multi sourcing, quarter.

Speaker 2

But because we knew we could just in the difference in terms of the margin and then they started rolling out. They actually started rolling quarter? Out about 30 days ago. I will tell you that we were and I don't break down margins normally, gross quarter. Margins top line, but we've seen already as we're rolling out some of this product quarter at a lower price to the consumer, which is making it more attainable, margin expansion of quarter?

Speaker 2

North of 10 points, and that's big. So it's now entering it's gone from the lowest quarter in a better way at a lower price point. So you're going to see more of that happen in Q sorry, In the first half of the year, because we've done half of the lineup, which is still rolling out and the other half will rollout in the first half of twenty twenty four. So, start the back half of twenty twenty four, you'll see that quarter. Throughout the country, in our stores, you will see it in the Casper stores, you will see it on the Casper site and our website.

Speaker 6

That's great. Craig, last question. Your NCIB, you were kind of modest or temperate with it quarter throughout the year and then it really accelerated in October. I'm wondering if you're going to keep that going and if you plan on hitting $50,000,000 by your quarter? March, call it year end for the NCIB.

Speaker 3

Yes. So, as we discussed on previous calls, we our first half of the year quarter was very acquisition heavy. And so the capital that typically might maybe would have deployed more towards the NCIB at that point in time was quarter towards the acquisitions. And on the back half of this year, you can see in October, quarter. Where the price is at, you can expect that we're going to be active in the market going forward as well.

Speaker 3

Quarter? On the $50,000,000 by March, I believe that based off of the number of trading days, we should be able to get fairly close to that mark. Quarter. And, but yes, we're in a position where, we think that the signal that we put out in October in terms of being more aggressive on the buyback. We would intend obviously to continue that.

Speaker 6

All right. Certainly makes sense. Thank you both.

Speaker 2

Thank you.

Speaker 4

Quarter. And your next question comes from the line of Sabahat Khan from RBC Capital Markets. Your line is open.

Speaker 8

Quarter. Hi, good morning. This is Arthur Newerney on for Saba here. Just my first question, I guess, could you walk us through the thought process quarter on adding store counts across your various banners, I guess, given the softening operating backdrop. Quarter.

Speaker 8

And as a follow-up, I guess, could it make sense to also maybe convert some of these or some of your potentially less productive stores On the legacy Sleep Country side to some of these new banners over time as well?

Speaker 2

Quarter. Let me answer your latter question first. First of all, there's not too many of our stores that are not productive, quarter, which is, I guess, a positive. And if they weren't productive for a Sleep Country banner, quarter. Then I would never take one of our new exciting brands and set them up for failure and I'd rather just wait till that lease expires quarter.

Speaker 2

And reposition it. To answer your first question, quarter? A softer market for us and nobody wants a recession and nobody wants a softer market. But quarter. In some regard, we get and I know this is going to sound silly, but we get excited about the softer markets because it does create greater opportunity because other retailers and usually within the fashion struggle and quarter.

Speaker 2

And usually within the fashion struggle and some of those fashion have fabulous AAA spots. Quarter. So we already have a very clear roadmap in terms of locations of across the country of quarter. Where and how and we want to expand. We are patiently waiting for certain leases quarter, but we will only, only take AAA locations.

Speaker 2

We don't need to Rush to do it, but nothing has slowed down. In fact, if more availability comes quarter on to the market. We will quickly open up the stores. Our stores are very accretive, become very profitable very quickly. We have quarter.

Speaker 2

We've seen that through the pandemic. We've seen that through past recessions, but we must have the right locations.

Speaker 8

Quarter. Okay. And then, I guess you're talking about AAA locations. Quarter. So just wondering how you're thinking about the rent expense for some of these locations, I guess, particularly in the malls.

Speaker 8

Quarter. And I guess, is there an angle here as well where, I guess, the storefronts also serve as potentially marketing quarter. Getting in front of the customers as well.

Speaker 2

I just said that yesterday to our Board. So interesting that you even made that comment. Quarter. And I'll just talk about our existing brick and mortars. We have 300 billboards all around the country That create a high awareness even if you're not in the consideration funnel and we do view it that way.

Speaker 2

Quarter. We view our relationship with Walmart Express, our Sleep Country Express as a billboard too. Obviously, in all these places, our job is to transact quarter and drive revenue and profitability, but it is an ongoing component of our advertising. Quarter. We're not going to open up stores as advertising and give an excuse that if a non performing store Is around that well, it's an advertising thing.

Speaker 2

Every store for us has to perform, But it definitely is an added benefit because most people aren't buying a mattress Every 3 years, I wish they were, but they're buying it every 8 to 12 years. And the beauty of this company is we've always thought long term. So in quarter. Every single thing that we do, we think about the customer first hand and how we are engaging with them and quarter. That visibility component is a big part.

Speaker 2

Malls have never been a big part of it. Malls do have higher rents quarter. To your question, but also unbelievable exposure. And we have a great relationship with all our landlords. Quarter.

Speaker 2

And I think our landlords have been fair with us and we've been fair with them. And quarter. The fact that we have 300 stores across this country allows landlords to help us on properties of theirs that may have reduced traffic, and we are considerate to them on some of their properties that are doing more traffic. So it's always been a very equal partnership relationship that we've cherished with our landlords.

Speaker 4

Quarter. At this time, I would like to turn it back to Stuart Schaeffer for closing remarks.

Speaker 2

Well, thank you, everyone, and we appreciate your time and your patience and your focus quarter on our company, and I wish you all well. Let's all stay safe. Let's all stay well and let's all sleep well and we'll see you at the next quarter. Quarter. Have a good day.

Speaker 4

Thank you, presenters. Ladies and gentlemen, this concludes today's conference call. Thank you for quarter. You may now disconnect.

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Earnings Conference Call
Sleep Country Canada Q3 2023
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