Sleep Country Canada Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 11, 2023

There are 7 speakers on the call.

Operator

I would like to welcome everyone to Sleep Country's Q2 2023 Results Conference Call. Yesterday, Sleep Country released its financial results for the Q2 of 2023. A copy of the earnings disclosure is available on the Investor Relations website and includes cautionary language about our forward looking statements. Risks and uncertainties, which also applies to the discussion during today's conference call. I would now like to turn the call over to Stuart Shafer, President and CEO.

Operator

Please go ahead, sir.

Speaker 1

Thank you, and good morning, everyone. Thank you for joining us today. With me is Craig DuPrado, our CFO. I'm pleased to discuss one of the strongest second quarters in our company's history, 2nd in revenue only to the same period last year, which was up over 18%. Released a record quarter of $1,000,000,000 of cash.

Speaker 1

These results were delivered against challenges in a less favorable macro environment than we expected, the impact released its release of the company's proactive strategic initiatives around cost controls, direct sourcing and targeted advertising for more profitable segments of our business. As Canadians adapt to an environment of higher interest rates and inflation, released a slowdown in consumer spending on large discretionary goods that began in the second half of twenty twenty two. We still feel that the consumer spending is cautious but healthy, albeit our mid to lower end of the business is softer, was down high single digits, but holding up better than the industry, which has reported to be down 20% to 25% in units. Released a record low unemployment, we believe that there was no material change in the competitive landscape and held our share of market and remain focused on executing on our strategic initiatives as our customers temporarily shift their spend away from large ticket purchases in favor of travel and leisure, while also navigating higher food, rent and Mortgage Payments. Our digital platforms continue to experience softness as customers come back into our retail stores post pandemic.

Speaker 1

Released the shift we have experienced between our digital platforms and our brick and mortar over the last few years only reaffirms our long term strategic plans to build a seamless omnichannel experience and allow our customers to shop how they want, when they want and where they want. Released a call from the line of John.

Operator

As for some positive

Speaker 1

growth highlights for the quarter, first off, during the quarter, a big focus was on our 2 recent acquisitions, released Silk and Snow in Casper, Canada, and I'm very happy to report that our plans are well underway to enhance and grow the value of these 2 powerful brands. Released a strong alliance that is being formed between the teams at Endy, Silk and Snow, Hush and Casper Canada as they organically share best practices to drive our businesses. 2nd, this quarter we signed off on the final plans to open up our very first released Endy and Silken Snow retail locations. With these 2 new store openings planned for Q4, we are excited to bring these digital brands into a tactile environment. 3rd, at Casper Canada, all of our teams have been working closely together released a 4 stage plan to relaunch Casper Canada and enhance this valuable asset for years to come.

Speaker 1

As we said last quarter, will be a 2024 story as we put our plans into place for the remainder of this year. That being said,

Operator

released a call. I'm pleased

Speaker 1

to report the progress of our plan, which was to discontinue the 2022 lineup in our 289 Sleep Country and Dormez vous stores and reintroduced a Canadian inspired collection with lower prices and expanded margins, which is well underway. Number 2, replatforming both the site and our POS systems released a call to be independent of Casper USA and over to a new platform controlled and managed by our teams released a 3rd, realign our marketing and ad campaigns to our targeted strategic approach that we have successfully implemented with our Canadian digital brands, in progress also and we will flick that switch when our new platform launches. And 4, we continue to double down on our investment in the Casper people who are hard at work every day and share with them the enhanced magic that all our teams will bring to their skill set in both their digital and brick and mortar business. Released a call today. We are well

Operator

underway and are happy with the progress

Speaker 1

we are seeing. Once we secure the foundation of this powerful brand, released a record quarterly quarter of $1,000,000,000 We look forward to methodically and thoughtfully rolling out an expanded footprint of this business across the country. Looking ahead to the second half of the year, we will also be redefining the definition of luxurious sleep released the introduction of our newest concept, a high end luxury category of sleep called the Rest, released a new 3rd quarter of the year. The rest will redefine luxury sleep with a bespoke sleep experience. And lastly, we expanded our partnership with Walmart Canada with the opening of 2 additional Sleep Country Express Stores in Walmart Supercenters, released a total number of Express locations to 19 and we continue to build out our full service Sleep Country retail footprint with 4 new stores planned to open in the back half of this year.

Speaker 1

Along with the growth of our retail footprint, released we continued to build the most innovative product lineup of sustainable sleep essentials and create opportunities for product sourcing released across all our brands. In Q3, we will begin offering new Hush, Silk and Snow and Casper products in our Sleep Country and Dormez vous stores, and we are currently rolling out 3 new Casper mattress models released a call to all our Sleep Country and Dormez vous stores that we expect will be hugely popular with our customers. Released a call from the

Operator

line of John. At the same time, we

Speaker 1

are focused on managing costs and driving efficiencies throughout our organization and see great opportunities released a new quarter of fiscal 2019 to leverage our infrastructure and scale as a consolidated company across the 3 acquisitions that we have made in the last 2 years. In May, we opened our largest and most technologically advanced distribution center to date in Kitchener, Ontario, released tripling our warehouse capacity to meet the growing needs of our customers and business. We continue to transform our digital capacity released new technology that will integrate our systems and enhance our omni channel service with the planned launch in Q3 information teams are hard at work building our integrated systems of the future that will harness our data with advanced AI customization tools released a call to maximize our engagement in ROAS with our customers. We are proud to be releasing our 2nd ESG report this month. Released a report.

Speaker 1

This report outlines the progress we've made on our commitment to being a purpose led sustainable business focused on helping people released a social change in protecting our planet. As always, we are incredibly grateful to our entire teams who proudly represent all our fantastic brands and have worked tirelessly over the last few years to transform the sleep industry in Canada and our businesses, making us Canada's favorite and most trusted sleep expert. Looking ahead, we remain cautiously optimistic for the second half of twenty twenty three and beyond as we continue to focus released a call on optimizing our investments, delivering a seamless customer experience across all our brands and channels released driving growth in our business and value for our shareholders. With that, I will now turn it over to Craig to discuss our financial results.

Speaker 2

Thank you, Stuart, and good morning, everyone. We continue to be pleased with the financial performance of our business, including our Q2 2023 results. Released a decrease in our revenues by $10,400,000 or 4.6 percent from our highest Q2 revenue ever of $227,600,000 in Q2 20 $22,000,000 to $217,200,000 in Q2 2023. This change was mainly due to a decrease in same store sales, which was partially offset by wrap stores opened in 2022 as well as incremental revenue earned from our acquisitions of Silk and Snow in January 2023 released a cash flow in Casper Canada in April 2023. Our Q2 2023 same store sales were negative 10.9%, coming off of same store sales growth of 15.1 percent in Q2 2022 and 65.5 percent in Q2 2021.

Speaker 2

If we were to normalize our Q2 2023 revenues and remove the incremental revenue earned from Silkenstone Casper Canada from our results, released its Q2 revenue in the company's 29 year history. Our Q2 revenues from our e commerce platform increased by 320 basis points from 18.1 percent in Q2 2022 to 21.3% in Q2 2023. 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 6.5%. Moving on, our gross profit decreased $2,700,000 from $81,700,000 in Q2 2022 to $79,000,000 in Q2 2020 3. Our gross profit margin increased 50 basis points from 35.9 percent for Q2 2022 to 36.4 percent for Q2 2023, mainly due to higher average unit selling prices and lower product costs, partially offset by higher sales and distribution compensation costs and deleveraging tied to our occupancy and depreciation costs.

Speaker 2

Increased by $9,000,000 or 19.7 percent from $45,700,000 in Q2 2022 to $54,700,000 in Q2 2023, of which $2,100,000 of the $9,000,000 increase was due to incremental media and advertising expenses and $2,600,000 was due to compensation costs. Both increases were primarily tied to incremental spend from our Silk and Snow and Casper acquisitions. Additionally, total G and A expenses were impacted released due to higher professional fees driven by the acquisition of Casper and intangible depreciation costs, which were largely tied to our recent acquisitions. Released a 2nd quarter. As a reminder, our D2C brands such as Hush, Zilk and Snow, which are earlier in their growth cycle, have higher marketing and fixed costs as a percentage of total revenues and therefore caused a deleveraging impact at the consolidated level.

Speaker 2

Taking a step back, EBITDA decreased by $10,500,000 or 20.1 percent $51,900,000 in Q2 2022 to $41,400,000 in Q2 2023. Adjusting our EBITDA for LTIP, ERP and acquisition related costs, our operating EBITDA decreased by $9,000,000 or 17 percent from $53,200,000 in Q2 2022 to $44,200,000 in Q2 2023. Operating EBITDA margin for the quarter increased 300 basis points versus the prior year. Finance related expenses increased by 1,300,000 $5,300,000 in Q2 2022 to $6,600,000 in Q2 2023, mainly due to the decrease in an unrealized gain on our company's interest rate swap released an increase in interest expense on the company's lease obligations and its senior secured credit facility, which is impacted by higher interest rates and debt levels. Released a decrease in accretion expense as a result of lower redemption liabilities related to the Hush acquisition.

Speaker 2

Released a net income attributable to the company decreased by $10,000,000 from $22,700,000 in Q2 2022 to $12,700,000 in Q2 2023. Adjusting for LTIP, ERP and acquisition related costs, as well as accretion expenses related to the redemption liabilities for Hush and Silk and Snow, adjusted net income attributable to the company decreased by $10,900,000 from $25,700,000 in Q2 2022 to $14,800,000 in Q2 $2,023.22 to $0.36 in Q2 2023. The change in diluted EPS of $0.25 was mainly impacted by a $0.28 decrease released a $0.07 decrease in EPS due to higher interest expense on our senior secured facility and leases released an $0.04 decrease in EPS due to higher depreciation and amortized expense, mainly driven by the intangible depreciation as a result of the acquisitions of Silken Snow and Casper Canada. These decreases were partially offset by lower accretion expense of $0.05 per share released a decrease in income taxes of $0.11 per share. Income taxes decreased due to lower taxable income, in addition to a lower effective tax rate by 1 point released a $2,000,000 from 28.4 percent in Q2, 2022 to 27.2% in Q2, 2023.

Operator

Released a call.

Speaker 2

As of June 30, 2023, our cash balance was $48,100,000 with an additional $90,900,000 of liquidity released a $100,000,000 accordion available to us through our credit facility. On to some capital allocation items, released a $1,000,000 during the Q2, we did not purchase any of our common shares under our NCIB. We suspended the repurchases during the acquisition process of Casper Canada, which closed in mid April and while we put an automatic share purchase plan ahead of our Q2 blackout, the share price remained above our predetermined purchase threshold. Released a call from the

Operator

line of John.

Speaker 2

We do intend to execute our NCIB as opportunities arise in the second half of twenty twenty three. I would like to remind everyone that nearly 2 thirds of our repurchases in 2022 occurred in the second half of the year as we enter our seasonally higher sales periods. Released a quarterly dividend of $0.237 per share, which will be payable on August 31, 2023 to shareholders of record at the close of business on August 25, 2023. Regarding our CapEx for 2023, we continue to plan on opening a minimum 6 new Sleep Country Dormez vous stores and due to store renovations to our new store concept. In Q2 2023, we opened a new warehouse in Ontario and consolidated its operations with an existing warehouse.

Speaker 2

Additionally, we continue to invest in our ERP and technology to will further enhance our digital capabilities and omni channel experience, and we spend approximately 1% of revenue for ongoing store and DC maintenance.

Speaker 1

Released a quarter of our testament to our unwavering commitment to our strategic plan to build the country's best sleep ecosystem with an expansive and innovative product lineup, while expanding our distribution channels and touch points has enabled us to create the most robust omni channel sleep experience in Canada. This quarter, Sleep Country was one of the many organizations affected by the previously unknown vulnerability in the widely used MoveIt software. Our organization has determined that no meaningful Sleep Country Canada customer information was affected. Our websites and payment portals all remain safe to use. Released its I want to congratulate the technology and transformation teams for doing an excellent job in safeguarding our business.

Speaker 1

Looking ahead, we approached the remainder of the year with cautious optimism for the macro environment. While we continue to focus on driving efficiencies and results and managing our strong balance sheet, we remain committed to identifying opportunities that align with our long term strategic goals will deliver growth and value to our shareholders. Thank you once again to our fabulous teams at Sleep Country, Dormez vous, ND, Hush, released Silken Snow and Casper and to all our partners for the commitment and support for all our customers and our businesses and have a good summer. With that, we conclude our remarks and then open it up for questions.

Operator

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer number

Speaker 1

2.

Operator

Your first question comes from Mark Landry with Stifel. Please go ahead.

Speaker 3

Hi, good morning guys.

Speaker 1

Good morning, Martin. Good morning.

Speaker 3

I would like to touch on your EBITDA margins. They have eroded in recent quarters and it's partly as a result of the acquisitions that you've done. Some of them are have a bit of a lower profitability at the EBITDA level. So how much of the 300 bps margin erosion that we've seen in the quarter comes from acquisitions. Any color on that would be helpful.

Speaker 2

Yes. Hi, Martin. Yes, on the EBITDA margin, a large component of the deleveraging that we did see this quarter and we have seen over the last kind of 2 quarters is those new investments do have a deleveraging impact because their fixed cost base at the G and A level is higher. In addition, as we continue to grow those businesses Digitally, the cost of marketing, which gets grouped into our G and A lines is higher. So, I would look at it as these businesses mature and then also as we go into seasonally higher selling periods on the back half of the year.

Speaker 2

We should see less pressure on at the G and A level. Released it And but it is mostly tied to acquisitions. And then the other thing that you always have to remember is taking a step back at G and A. Renewed approximately 24 new leases and under IFRS 16, those do get accounted for with the new more recent higher interest rates. So there is additional pressure there.

Speaker 2

And then at the G and A level on the warehouse side, we did open released the new warehouse in Kitchener. We also did take possession or not possession, but we're in the build out phase So we did see some pressure just tied to occupancy and depreciation as well in this quarter.

Speaker 3

Okay. That's helpful. And then I mean, you touched a little bit on it, but I mean Casper, you just acquired Casper, and I think that's a bit margin is dilutive for now at the EBITDA level. Like when can we expect you guys to lap The dilution from your acquisitions. I know there's some initiatives that Stuart you mentioned about is improving the profitability of Casper.

Speaker 3

So if we can get maybe just some visibility as to When we turn that corner?

Speaker 2

Yes. No, that's a great question, Martin. We look at the 2024, specifically for Casper, 2024 is kind of that year where it will be released the kind of Casper story. Now on the silken snow, it's very similar. I think 2024 is when you see going forward.

Speaker 2

So I'd say we'll have a little bit of pressure in the back half of twenty twenty three on those new investments, which will have a little bit of delevering impact, but in 2024 is when we kind of see more level results on those and more predictable kind of margin profiles for those two investments. And I don't know, Stu, if you

Speaker 1

have anything else to add around that operating component. Yes. I'll just add back I guess the real question Martin is in terms of the plan. And as we said right from the very beginning, I mean, we're thrilled to now own this a powerful brand with one of the highest awarenesses in mattresses. We were less impressed, which is why it created an opportunity for us with how the business was managed in Canada.

Speaker 1

And the first step for us was to discontinue the American made released ATN's and there's not a ginormous difference, but there is definitely a difference that we know very well. Also Casper was one of our lowest margin contributors and now hopefully it will be one of our highest margin contributors and that's already starting to materialize With the new 3 beds that have rolled out. The rec and rebuilds we're doing on the POS It will go on to our new platform, which we're going to be going on to Shopify for Casper and within our stores also on the POS, which we're very excited about and having great conversations with them. And once that's replatformed, We're going to flick the switch on our advertising, which we completely pulled back. Also in the numbers, and again, we didn't want to call it out because we don't want to make any excuses, but over $500,000 was in ad spend that we couldn't the ad campaigns were handled by an agency out of New York.

Speaker 1

And so there was a transition phase and a timeline of when and what you could cancel that was already booked within the market. So there was a $500,000 plus of wasted spend that was happening while we discontinued released its for Q4, but I rather under promise and over deliver, so the Q1 of 2024.

Speaker 3

Okay. That's super helpful, guys. Thank you. And I'll pass along the line. Thanks, Martin.

Operator

Thank you. Your next question comes from Stephen MacLeod of BMO Capital Markets. Please go ahead.

Speaker 4

Thank you. Good morning, guys.

Speaker 1

Released a good

Operator

morning. Good morning, Steve. Good morning.

Speaker 4

Thanks for that great color on the last couple of questions, very helpful. Just wanted to ask a little bit about sort of how you saw consumer spending and same store sales evolving through the quarter and if you're able to share any color on what you're seeing on a quarter to date basis?

Speaker 1

Yes. So I guess, very similar to what we were seeing in Q1. I mean, the back half of Q2, everyone knows is old history. The pressure is for sure on the lower end of the business. There are more price sensitive consumer.

Speaker 1

But I've been doing this for 29 years and I don't I've lived through I don't know how many recessions and stock market crashes, not that we I have a stock market crash, but we always see a little bit of a pause when there's a little bit of a pause on consumer confidence or a shift in terms of their overall spending. We have not seen any signs of a recession. I mean, there There's for sure a recession within the mattress industry, especially within United States and definitely a slowdown here, but these are still quite bullish numbers historically for our brands. And usually, if we received the slowdown, we see it across all categories. So to be specific, it's our mid to lower end that's was having the biggest impact, but our high end, mid and higher end has been fine.

Speaker 1

And interestingly enough, our accessories released across the board, which is usually a gauge for us of consumer confidence because they're coming in, they're interacting With the brand, kicking the tires, buying a nice pillow and then creating a lead generator for us released a We saw like we have said cautiously optimistic and we don't give guidance, but July came in better than June finished. So let me just say that. And We are comping off of lower numbers from last year. So we have a lot of things on the go that are in place and we're hoping that as long as the consumer stays the way they are in the macro environment, doesn't get worse and people get used to the new world of 22 year high interest rates, I think we'll be fine.

Speaker 4

Okay, great. Sir, can you just clarify the comment on accessories? Were you saying that It's held in okay and then obviously the growth was up year over year.

Speaker 1

Yes. I mean that's a big part of our business. People forget that years ago when we introduced the accessories, we introduced accessories at what we used to call a lead generator. We just wanted someone across the lease line to experience Sleep Country or Dormez vous. It then became an incredibly profitable business and obviously a big focus for us Because we think there's lots of runway to grow there.

Speaker 1

In previous recessions that I have lived through, everything goes soft, everything. Right across the board, everything goes soft. So whether this is a recession or not or a slowdown just on discretionary a spend or shift in spend on pause. We have not seen that in our accessory business, which we look at that as a very good sign. In fact, some of our categories have ticked up.

Speaker 1

And for us, That means our customers are still engaging with us on our smaller items, which are very profitable, which has an impact also on our gross profit margin, which is one of the comments I made in my that our advertising campaigns were targeting released some of our more profitable channels, which is the accessories because we call it the Starbucks effect. They're coming in, they still want to see a little bit good, Thinking about their health and well-being and maybe just at the moment they're pausing to buy a mattress.

Speaker 4

Right. Okay. That's great. Thank you. And then maybe just on that gross margin comment.

Speaker 4

We did see some growth on a year over year basis in Q2. And I'm just curious if you could give released Is that sort of a new run rate that we should expect? I know last year's H2 comps are quite difficult, but I'm just wondering if you can give a little bit of color on how gross margins should evolve over the next couple of quarters?

Speaker 2

Yes, Stephen, I think you're talking about overall gross margins, correct?

Speaker 4

Yes, that's right.

Speaker 2

Yes. I think we've said on previous calls is we kind of expect the like a leveling of our gross profit margin on a year over year basis. We did have a little bit of an uptick this quarter, very slight, But I would expect more consistent with year over year, like a stabilization rather than counting on continued expansion. Again, we're going to do all the things we can to continue to drive margin and we've got lots of things in the pipeline. But if I was planning the back half released a year.

Speaker 2

I just look at kind of year over year similar profile.

Speaker 4

Okay, that's great. Thanks, released its Thanks, Stuart. Appreciate it.

Speaker 1

Thanks, guys. Thanks.

Operator

Thank you. Your next question comes from John Zamparo with CIBC. Please go ahead. Released a

Speaker 5

Thank you. Good morning, John.

Speaker 3

Good morning, John.

Speaker 1

Good morning, John.

Speaker 5

I'd like to get a better sense of consumer behavior. Just wanted to follow-up on some of the prior questions. And clearly, you think there's an opportunity with your higher end models and that's evident through launching the rest. But you're also leaning more into the Walmart partnership with the 9 additional stores planned there. So when it comes to lower prices or lower price models or lower income consumers, Is it that you think there's an opportunity to take share even though that segment isn't performing as well?

Speaker 5

Just would like to better understand that dynamic.

Speaker 1

Yes. I'm smiling, John. You can't see me, but I always laugh because it's always about taking share. We lay in bed. We're happy with our 40% market share, but we wonder why 60% of the population are still not shopping with us.

Speaker 1

So we do believe that it's across all segments, across all channels. And we don't manage the business released a quarterly basis. So nothing's changed or shifted in our minds strategically. In fact, on times like this, There is an opportunity because of the strength of our balance sheet to accelerate certain things. And we think With a growing population, 500,000 newcomers coming to Canada, that's a very important part that Walmart is a a big component of introducing the brand, even if it's not transactional at the moment, does give it an enormous amount of exposure, and it is an area that we want to grow our unfair share.

Speaker 1

A more difficult segment of the market to grow in a down market, which is what we have right now in that category, but again, we put these things in place for years and we're optimistic, very optimistic in terms of released it. When it turns, we'll be ready for them. On the mid to high end, that's our sweet spot. And the acquisition of Casper is a big component of that. The mid to high end is definitely where the biggest profitable part of our business is.

Speaker 1

It cost us the same amount of money to deliver a $2,000 mattress as it does a $200 mattress and all the other metrics that go along with that. So that's why we're expanding on our regular store base. If we find great opportunities for fabulous real estate, released its that's in the pipeline a lot. We have many stores in the pipeline that are hopefully coming up over the next 3 years. And the high end, this is something that we've talked about for a long time.

Speaker 1

Obviously, it will not be a huge expansion, but we do see an opportunity for this to grow to about 6 to 8 stores strategically across Canada and some very affluent markets where we have customers that are asking for something a little bit more special. You've seen this trend develop in the United States successfully in a few different areas. And so we're going to be very careful and methodical as we enter into this space. Yorkdale Mall, as you know, is like the premier mall and that will be a good testing place for us. And we're going to test, test, test and see If what happens what we think is going to happen, happen, then we'll consider other markets.

Speaker 5

Okay. I appreciate that color. Sticking with Yorkdale, I wonder why Hush wasn't the brand that you plan to open with later this year given the test did seem quite successful and also that accessories are outperforming mattresses at the moment?

Speaker 1

Great question. And so they're still not far behind, but it's more that we have to its brand, the merchandising selection. So Hush is a fabulous brand for us and as they introduce other products under like everyone knows them as hush weighted blankets, but their sheets are now their their cooling sheets are probably their best sellers. They're selling mattresses now.

Speaker 6

There's new pillows that are rolling out.

Speaker 1

So, Now there's new pillows that are rolling out. So when you enter into the brick and mortar world, you need to be able to fill up that its square footage. It's a little different in terms of how we transact online and what we transact per square foot within our stores. Released a new release and Mike Douglas, our Head of Merchandising is overseeing this mission for us for all our businesses and expanding the accessories and Hush is number 1 on that. So, let's see what happens on the next call, maybe I'll surprise you.

Speaker 5

Okay, fair enough. 2 more for me. 1, the change in store renovations target, now you're down to 2 for the year. Is that a function of You just have a lot going on, on the brick and mortar side. You don't entirely know what the next generation of stores will look like or is it is there some other factor beyond that?

Speaker 1

Yes, yes and yes. So we do. Like When we put this script together and we look around as a team and we are hitting on like strategic objective that we laid out. This team has been working like dogs in the last 2 years and we're really pleased ahead of schedule on a lot of the things that we're doing. And this the remainder of this year is to buckle down released a and really drive efficiencies and maximize the value of the investments that we have made So we have our hands full there.

Speaker 1

And add in the macro environment, We're also cautious. Our balance sheet is still incredibly strong and but we like having a war chest because you never know what other opportunities pop up. So on the renovation side, we could pause that a little bit and we'll reconsider that released in Q1. I also don't want to be doing renovations in the Q3, which is one of our biggest quarter, Especially if we're thinking that there's a bit of a pent up demand. And your last comment on the 2 renovations, Those are the 2 new store concepts that we've been mentioning.

Speaker 1

So we're rolling out, we're ready to roll out our 2 new store concepts, which is going to bring a digital optimization component within our stores and a fresh new look and feel and an expansion of our accessory side of our business. But again, we like to test, test, test before we decide that if something that is going to move the needle before we allocate capital to do it across the board.

Speaker 5

A Okay, understood. That's helpful. And then my last question is on margins and you talked in your prepared remarks and also the press release about The idea is managing costs and driving efficiencies, and specifically the new DC and transforming your digital capacity. Are we right to think about The benefits mostly being on gross margin rather than SG and A. And is there anything you can say to help us frame the magnitude That benefit, whether it's dollars or in percent?

Speaker 2

Yes. I mean, on I think as we look at all of the different efficiencies that we can use from a roll up perspective of the D2Cs and centralizing certain departments. There will be an impact over that we'll see through 2024 that would hit G and A because there's a lot of different synergies and those are some of the reasons why we looked at these different acquisitions. There will be some benefit there. And then again, we continue to look at our product sourcing roadmap, released additional scale as we roll in some of these additional investments and there will be some, we feel, margin opportunities.

Speaker 2

But I wouldn't count on that in the back half of this year. It's more of a 2024 story. And I think the other component is also With some of the acquisitions like Casper, we saw a good opportunity to expand released our gross profit margin while providing the customer with a better pricing on a just as good a better better. So There's opportunities like that, that we're going to continue to explore, but so I could see relief in both buckets. And then lastly, the marketing as we mature in those B2Cs.

Speaker 2

They do become more efficient as they grow up and then so we're we'll see some opportunity there as well. But Again, this is more of a 2024 and beyond story rather than 2023 back half.

Speaker 1

And I just want to add, John. We don't make your jobs Easy and we get it and that's why we try to be as transparent as possible and sometimes hard to read the tea leaves because some of the investments that we're making Today, we won't reap the benefits until farther periods released it But every one of the acquisitions that we've done, we're not buying these companies just to buy them. We're buying them to grow them. Spanned out the footprint both digitally and retail across Canada. We want Canadians to shop with one of our brands that our customers choose whatever that appeals to them and we just want to make it easier and more released a seamless for them.

Speaker 1

And like even just the investment in the Kitchener DC, it triples our capacity of our distribution. But clearly, that's not going to be filled for years to come or our 2 super hubs, Belleville and Calgary, which support our direct sourcing part of our business as our margins expand, They're not anywhere near full capacity, but we have to plan these moves So that while we're doing these acquisitions and while we're growing organically, the Sleep Country Dormez vous business

Speaker 5

Excellent. All right. I appreciate the color and I'll pass it on. Thanks very much.

Speaker 1

Thanks, John. Have a good weekend.

Operator

Thank you. Your next question comes from Brian Morrison with TD Securities. Please go ahead.

Speaker 6

Released a Good morning, Stuart. Good morning, Craig.

Speaker 2

Hey, Brian. Hey, Brian. How's it going?

Speaker 3

Good. Thanks. Stuart, I want

Speaker 6

to start off with your cautiously optimistic comment. I know you don't provide guidance, but it sounds like July is off to a decent start, especially for accessories. I'm wondering if you might be able to just talk about how mattress sales have had a cadence of them maybe over the last 6 weeks. You did have one of Canada's most representative retailers come out yesterday and say that they've seen a a substantial decline in sales in the past 6 weeks. I'm just wondering if you're seeing anything remotely similar to that.

Speaker 1

I will say to you because I want to give you guys as much color as possible. So let's start with the easy one. Accessories seem to be holding up Still very nicely. The mattress business is soft, but not as soft released Q2 at the moment. And specifically to your question over the last 6 weeks, and I said this to the Board and again we don't have a crystal ball, we're not economists, you guys are better at that than us and we have no idea what tomorrow will bring.

Speaker 1

But If you lay over days when the stock market is up and when the stock market is down, it definitely has a play on consumer confidence because released a strong update and we've had big down days. And What we usually see is consistency across the country, Because I mean habits are the same from coast to coast, but we haven't been seeing that. When oil dipped down towards $70 Alberta got quiet as oil now pushes above $80 again, Alberta gets busy. I mean, it's been really released a funny times and trying to plan on our advertising because that's the one big lever We always have to determine if we want to drive, is it the right time to drive even more people through our doors, are we going to get the efficiency on the spend and that only is answered if the customer is there. So we have been leaning a little bit more into our advertising on accessories because that seems to be very healthy.

Speaker 1

We're launching 2 new campaigns that we're very excited about, which is part of the additional advertising spend that was in Q2 as we create the content. Endy is launching a new awareness campaign called Rise to shine, which is going to hit in Q3 this quarter, excuse me. Sleep Country is launched also a new campaign that's focusing on our sleep experts with the tagline, We Solve Sleep. So We're going to roll the dice in terms of driving awareness and hopefully the customers out there in Q3, released the ability to always pull it back if we're not seeing it there. I know that's a long answer, maybe not giving you what you need, but that is our best guess.

Speaker 6

I appreciate that. I wanted second question maybe for both of you. What's the decision to integrate Silk and Hush and Casper as opposed released into Sleep Country stores as opposed to keeping them independent. And Craig, with your earlier comment on these banners having a higher fixed cost structure, We should expect them to have a higher margin profile upon maturity such as Endy. Would that be correct?

Speaker 2

That's correct, yes.

Speaker 1

And on the accessory side of it, we have an eye on the possibility of released the wholesale component of our business. We believe like these weren't retail stores that we bought, these were brands, released very powerful brands that have high awareness and affinity with Canadians. And we control what the product is. So a silken snow or a hush or a cast or pillow Doesn't necessarily or sheets or whatever it may be on the accessory side, doesn't necessarily need to be the same product in a Casper store or a Silk and Snow store or a Hush store in the future. And We have a captive audience that we believe are willing to pay a premium dollar for a premium brand.

Speaker 1

And if that helps elevate the overall experience for the customer to acquire a Casper pillow while they're buying a Tempur Pedic mattress, Then we want to make sure that we make that opportunity for them.

Speaker 6

Okay. Last question. Craig, your message on the NCIB in the second half of last year, obviously blacked out last period. Released a little bit more debt due to the acquisitions. Should we expect that kind of $50,000,000 target to still be intact on the NCIB?

Speaker 6

Or should we look

Speaker 2

$50,000,000 is still doable. Again, we will always continue to be opportunistic with repurchases. We have lots of access to liquidity and then we're coming into our seasonally higher sales periods as well, which generate released much more of the free cash flow for our business. So we're not really changing Our outlook on that at this time, just with the understanding that we'll make the purchases in an opportunistic way.

Speaker 1

We're going to make sure we optimize our shareholder value by being opportunistic, whether it's in a buyback, Whether that it's in any other new business, whether it's expanding our own footprint, or raising the dividend, which was just done released it in May. We want to be able to be smart with our cash. Released a We like to have war chest because you never know what tomorrow will bring. And we have a long runway on things that we're planning. Released a And so as we have in the last year and a half, we've been very opportunistic and we'll continue to be so.

Speaker 5

A All right. Good luck.

Speaker 6

Enjoy the rest of your summer.

Speaker 1

Thank you. You too.

Speaker 3

Thanks, Brad.

Operator

Thank you, gentlemen. There are no further questions at this time. I will turn the call back to Mr. For closing.

Speaker 1

Well, thank you again everyone. We really appreciate your support. It's been a rainy summer, but Hopefully, we'll get a little bit of sun for the remainder of August and you can enjoy the last part of it. We'll speak to you on the next call. Be well.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your line.

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Earnings Conference Call
Sleep Country Canada Q2 2023
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