Q3 2019 Earnings Call
Sleep country, Canada's financial results conference calls for the third quarter ended September Thirtyth 2019.
We will begin today's call with management's discussion followed by a question and answer period open to investors and financial analysts for your convenience the third quarter earnings release financial statements and management's discussion and analysis are available on the Investor Relations section of the company's website at sleep country.
<unk> Dot CA.
They are also available on SEDAR. The results were released yesterday after market close.
Please note that the remarks on this conference may contain forward looking statements that sleep country candidates current and future plans expectations intentions results levels of activity perform in schools are cheap man or any other future events or developments forward looking statements are based.
<unk> currently available to management and on the investments and assumptions based on factors that management believes are appropriate unreasonable and the circumstances. However, there can be no assurance that such estimates and assumptions will prove to be correct.
Many factors could cause actual results levels of activity performance achievements future events or developments to differ materially from those expressed or implied by the forward looking statements.
A result, the country candid I cannot guarantee that any forward looking statement will materialize and you are cautioned not to place undue reliance on these forward looking statements, except as may be required by law sleep country, Canada has no obligation to update or revise any forward looking statements whether as a result of new information.
Future events or otherwise.
For additional information on these assumptions and risks please consult the cautionary statement regarding the forward looking information contained in the company's Mdna dated October 31st 2019 available on SEDAR dotcom.
I'd now like turn the conference over to Mr. David Freestyle. Please go ahead.
Joining me today are Stewart Shaffer, Chief business Development Officer, and President of door me too and Craig Good Prado Chief Financial Officer.
As we celebrate our 25th year in business. This week I am pleased by our powerful track record of profitable growth and the results of our exciting omni channel agenda.
This quarter our teams in all of our channels drove solid growth across our product categories confirming that our multi channel strategy is positioning us for today and for years to go to create greater market share by serving our customers for all their sleep needs anyway and anywhere they want to shop.
We are pleased with substantial 14.2% increase.
Revenue increased from the year before to 210 million.
The gains were led by a 14% increase in mattress sales a 14.9% increase in accessory sales on top of a 12.8% increase in accessory sales during the <unk> segment in the previous year.
We also posted 8.5% increase in same store sales.
We're also enthused with continued acceleration of our sleep country ecommerce business. The inclusion of Andy now in our family of brands has contributed to a tremendous increase in or online revenue.
And as plan is helping us to capture greater market share of a target customer segmentation that we want to grow.
Since going public in 2015, we have been significantly investing in strategic growth initiatives to reinforce our position as Canada is number one sleep retailer and our third quarter results demonstrates the progress. We then we've made in expanding our market share even further.
The sustained and significant growth in our mattress and accessories category in store and online is indicative of our strategic investments paying off.
Here growth is driven by the successful execution of our offer sleep brand platform investment in the Andy brand targeted digital advertising expanded mix of products strategic brand partnerships and investments in our store and E Commerce infrastructure.
As we have said on previous calls the lucrative and fragmented 1.5 billion Canadian sleep accessories market is an exciting opportunity for us and our investments in product innovation partnerships and our in store in digital platforms will continue to drive accelerated growth.
Yeah.
We're very excited about two of our key strategic initiatives.
First we successfully rolled out the first phase of our new enterprise resource planning or ERP platform.
Executing with excellence has always been to keep pillar of our success and our new ERP capabilities enable us to build upon this strength with enhanced analytics based decision making.
Operational agility and process automation.
Second we are launching our new cloud based Oracle E Commerce platform over the next few days.
This new platform will deliver many additional benefits to our customers and now offers our entire house of well known mattress brands, whether it is package in a box or not we will provide a seamless experience to our customers to purchase any bad. They want you are powerful network of 17 distribution centers strategically located across the country. We are uniquely positioned to offer our.
Bloom Burton a box assortment by courier or any of our traditional line of mattresses through our white glove delivery service.
The new platform provides the best in class online shopping experience, which will continue to evolve and offers an expanded assortment of the world's most innovative sleep products for customers to research and purchase online.
We're confident that this new platform will accelerate our revenue growth by deepening relationships with existing customers, while establishing relationships with new ones. This launches the first phase of our exciting online transformation, which we built upon in subsequent quarters with the introduction of leading digital capabilities across our stores and web site.
Shopping habits of our customers are evolving and we are evolving with them.
Last 25 years, our goal has always been to exceed our customers' expectations in serving them for all their sleep, which is why we're so proud to offer them the only truly national omni channel destination for all things sleep.
I commend the team for delivering both initiatives on time and on budget and in comp and I'm confident that these capabilities will position us for accelerated and profitable growth.
We are happy with Andy's growth and a tremendous online expertise that they have brought to our overall business.
Following the successful seep country model, we have been investing in further building the brand across the country with new television and radio creative.
Our online business continues to thrive driven by the integration of and do the positive reception of our expanded Bloom collection. The growing popularity of December hybrid mattress, our newly formed partnership with Walmart and an increased demand for our growing accessories assortment.
The online channel is driving an increasingly significant portion of our overall revenue and we expect that to salary accelerate with the launch of our refreshed ecommerce platform.
Our stores remain a critical piece of our omni channel infrastructure during the quarter, we expanded our store front footprint opening four new stores, bringing the total the 275 locations across Canada and.
And those four new applications of those four new locations to our in enclosed malls subsequent to the ended the quarter. We opened our 276 location in cameras Alberta.
As we continue to expand or footprint, our new stores are consistently exceeding our budgeted expectations demonstrating the effectiveness of our real estate strategy any important it plays in the overall omni channel experience for this very tactile product.
Our advantage over our competitors will continue to position us to drive strong results and take more market share with you open up our 276 store our 12, new location for the year, we've achieved our new store goal for the year. We have also.
We while also renovating 24 existing locations.
Strategic partnerships further support our omni channel strategy by expanding our customer reach through our partnership with Walmart, which offers our bloom collection on Walmart Dot see our Blue line up is exposed to 23 million additional customers per month.
This quarter, we advanced our relationship with Walmart by executing Bloom pop up shops at two of their GTH doors, giving customers the opportunity to touch and feel the entire collection.
These pop ups or an example of our commitment to next generation retailing and serving our customers anyway, they want to shop and we're pleased with the positive customer response to the collaboration.
In sum I believe we are uniquely positioned to serve today's customer our new best in class online online platform will complement our robust doormat work network and strategic read tail partnerships like Walmart and urban bar.
This powerful infrastructure differentiates us from both traditional brick and mortar retailers and online only retailers and serves as a strong foundation upon which to serve the sleep needs of all Canadians and continue to grow our market share.
Finally, I mentioned credit Prado early in the call and I would now like to officially welcome Craig joints deep country as Chief Financial Officer on September nine this year.
He has a proven and established track record of financial and strategic leadership in a rapid growth an entrepreneurial environment and we're very excited to have them on our team I will now turn the call over to him to discuss our financial details.
Financial results in detail.
Thank you Dave for the warm welcome and good morning, everyone before we get to the quarterly results I just wanted to say that I'm honored to join as CFO of Canada is one of Canada as most iconic companies.
I'm excited to contribute to the strategic vision laid out by Dave and a senior leadership team here at sleep country and helped to build upon the success. They have achieved over the past 25 years.
Turning to the result is important to note that like the previous two quarters in fiscal 2019. This quarter's numbers are directly comparable to Q3 fiscal 2018.
Mainly because of two reasons one the inclusion of Andy in the Q3 <unk> results in fiscal 2019 asleep at the reminders of the country acquired Andy in December 2018, and to our adoption to buy for a 16 accounting standard which came into effect on January 1st of this year I explained the impact of these two items on the reserve.
As we work through the numbers and will use pro forma numbers for the last year where possible.
The pro forma numbers are compiled for Q3 and year to date fiscal 2018 to improve the year over year compare ability by adjusting of reporting the reported 2018 results and their respective periods for estimated impacted by fresh 16. The reconciliation of pro forma Q3 and year to date 2018 results are disclosed in.
Q3 in the 2019 Mdna and are available on SEDAR any investor Relations section of the sleep country Web site.
As with previous calls will not be breaking out Andy's performance on our financial results at this time.
As a reminder, upon the adoption of IRS 16 rental expense, which as previously recorded in cost of sales for store leases and DNA for warehouse leases is no longer expensed in the piano and has replaced by depreciation of our right of use asset and interest expense on our lease liability well at breast 16. It has an impact on gross profit.
Gross profit margin EBITDA operating EBITDA net income adjusted net income and earnings per share. There is no impact on the underlying business economics on how sleep country operates as a business and no impact on our cash flow I.
I'd now like to specifically disclose the impacted by a fresh 16 on Q3 fiscal 2019.
In the cost of sales section depreciation related to IRS 16 increased by approximately 7.9 billion straight line rent, which as previously recorded in the section was reduced by 9.5 million in the DNA section depreciation related to IRS 16 increased 5.8 million and straight line rent at 1.2 million was removed on the edge.
<unk> expense line interest on lease liability increased by 2.9 million the bottom line impact on net income after taxes decreased by point 6 billion, resulting in two cents per share impact tied directly to this accounting standard change.
In Q3 fiscal 2018, the impact was as follows cost of sales section. The depreciation increased by 7.3 million straight line rent reduced by 8.8 million and in the DNA section straight line rent was lower by 1.1 million and depreciation increased by 8.9 billion. The interest expense section interests increased by two points.
7 million and the bottom line impact on net income after tax was a decrease of point 7 billion, which rounded up to two cents per share impact.
To give you some insight into this quarter's highlights let's begin with revenue in the third quarter revenue increased by 14.2% to 210 million.
This increase was driven mainly by the acquisition of Andy and aided by the opening of 15, new stores since September Thirtyth 2018, and same store sales growth of 0.51st that the significant growth in our mattress and accessories segment also continued to be key drivers to our business mattress revenue increased by 14% to 166.
7 billion compared to this time last year at our accessories business continued to grow substantially with revenue rising 14.9% to 43.3 million over the same period in the prior year, the 14.9% accessories revenue growth is building upon growth of 12.88% in the third quarter of 2018, resulting in a two years.
<unk> growth of greater than 27%.
Gains are attributable to the continued increase in our brick and mortar store network ecommerce growth, including the addition of Andy and our and our focus on all Firstly brand evolution to include more diverse total sleep solutions focused product offerings. The deepening relationships of our strategic partners increased customer awareness due to advertising campaigns and our enhanced story.
Design.
As we explained in our first two conference calls of this fiscal year gross profit for the quarter is not directly comparable to that to that of a year ago due to the adoption of Afrezza 16 accounting standard effective on January Onest since 2019.
Gross profit increased 19.5% to 71.6 million from 59.9 billion on a pro forma basis, our gross margin increased 5.7% to 34.1% from 33.4% at third quarter of 2018. This improvement was primarily influenced by three factors first.
Inventory and other directly related expenses net of volume rebates and expressed as a percentage of revenue decreased by 20 basis points second sales and distribution expenses decreased by 60 basis points.
This is largely due to improved efficiencies brought on by Andy and finally store occupancy costs together with depreciation decreased by 70 basis points, mainly due to the adoption of Afrezza 16, which changed the way we account for rent expenses being reclassified lease stores from operating leases to write of use assets ended.
Preceding these assets accordingly.
<unk> expenses for this quarter increased by 36.6% or 9.8 million to 36.6 million as a percentage of revenue. This expense represents 17, 4.4% up from 14.6% last year, taking a closer look at DNA expense media and advertising expansion expenditures rose by 6.4.
<unk> billion the rising that's cost during the quarter was largely because of the inclusion of Andy. In addition to planned marketing spend for sleep country indoor maybe shifting between quarter to quarter three in fiscal 2019.
Building on that I'd like to touch upon the quarterly marketing spend briefly as Dave mentioned, what are the key components of our long term profitable growth strategy is brand building.
Targeted marketing is an important part of brand building process and we're excited to see the entire family of brands continue to accelerate under this framework salaries wages and benefit in the DNA expenses increased by 1.3 million, which is largely attributable to the inclusion of Andy in fiscal 2019.
From a customer standpoint credit card finance charges grew as a percentage of revenue by 0.5% again, mostly due to the inclusion of Andy and providing our customers with longer term financing options. The new financing programs have allowed our sales teams to drive additional items into the customers basket and grow average unit selling price, which translated into an IND.
Greece in total average unit selling price in Q3 of 2019 for the entire company.
We will continue to measure and injury and Inreight on these new financing plans to ensure the net benefit to the company have performed this increased costs on the six <unk> expense line item.
The adoption of IRS 16 has also had an impact on our DNA expenses, specifically around our occupancy and depreciation figures occupancy charges, which include property taxes maintenance costs further distribution centers centers and office space fell by 1 million for a year ago. However, our depreciation expense almost doubled to two points.
7 million from one point Fourmillion. This increase relates to the changes to the treatment of leased warehouses and operating leases to depreciating revenues assets.
Moving on from our DNA or operating EBITDA for the quarter was 49.6 million on a pro forma basis that was an increase of 4% after accounting for the adoption by a for asked 16.
Operating EBITDA margins decreased by 230 basis points from Q3 at fiscal 2018% to 23.6% as a percentage of revenue on a pro forma basis.
Again these numbers are affected by the changes to the way, we recognize that at least warehouse and other impacts from my friend 16.
On to finance related expenses.
Thats related expenses increase in the third quarter to 5.3 million up from 1.1 million in Q3 of fiscal 2018. This is largely due to the adoption of I have for Essex team and the increased interest expenses related to the acquisition of anti.
Our adjusted net income for the quarter decreased 9.3% to 22.4 million from the same period last year.
It works out to an adjusted earnings per share of 60 cents diluted basis down from 66 cents a year ago. Again. This is largely due to the impact of and these results that have a lower profitability profile from our core Omnichannel operations of sleep country Indoor me do and in addition to the adoption of IRS 16.
Onto our cash flow net cash flows generated by operating activities for year to date fiscal 2019 were 98.2 million compared to 52.3 million in fiscal 2018 for the same period.
Net cash flows generated by operating activities year to date 2019 comprised of a positive impact as cash generated from operating activities of 98.2 million.
On September Thirtyth, our cash position currently stands at $48 million compared to 32.9 million as at September Thirtyth 2018.
As we stated in previous quarters, our priorities when it comes excess capital are as follows.
One we look for ways to grow our business and maintain some dry powder for future opportunities to pay down our debt three the accompany that continually raises our dividend and for use any remaining cash to buy back shares under our NC Ivy program.
This will continue to be our chief priorities for the foreseeable future.
As of the ended the quarter to bounce everybody revolving credit facility with SAB 175.8 million compared to 168.6 million as at December 30, Onest 2018.
Our board of directors declared a dividend of 19.5 cents per share payable on November 29, 2019 to shareholders on record at the close of business on November 19th 2019.
The dividend with increase for the fourth time since our IPO after the first quarter of this year.
Lastly, I'll provide an update on our NC IB program in the first quarter of 2019, we received approval from the trial stock exchange to buyback approximately 4% of our outstanding shares on the open market beginning on February 28 of this year since commencement of the ends JV program. We've not currently repurchased any shares for cancellation, but are exploring.
Possibilities in doing so in the future with that I'll conclude my remarks, and I'll turn the call back to Dave. Thanks, very much Craig as you've heard today in Q3, our teams drove solid financial performance across all of our categories channels and brands, while investing in further future growth and delivering significant process again start.
Strategic initiatives.
Our goal remains to be Canada's preeminent omni channel sleep solutions retail strategic investments I've outlined today are bringing existing and new customers into our stores and online and deepening relationships your increased frequency and expanded basket size.
We believe our track record of matching customers with their best night sleep, and our commitment to serving them, how and where they want to shop, well keep them coming back.
Before wrapping up I'm delighted to congratulate our colleagues that Andy for winning the proudly Canadian Award in 2019, Canada Post E Commerce Innovation Awards.
Legs sleep country, Andy was proudly founded in Canada and that remains a large part of our shared identi today.
Finally, as I mentioned at the beginning to call. This month, we're celebrating sleep countries 20 sit here in business looking to the past we're extremely proud of the business. We've built in our truly honored to be Canada's leading sleep solutions provider.
Shifting the focus towards the next 25 years I'm more excited than ever by the opportunity that lies ahead of us and look forward to continue to work alongside the team to execute our strategic agenda in service of an extraordinary customer experience at long term profitable growth.
As we celebrate this milestone I'd like to offer my sincere thanks to our best in the business team.
Valued suppliers vendors and investors and our loyal customers, who we will be thanking with some sellers Jerry promotions in the fourth quarter that concludes our remarks, we now open the call for questions.
Ladies and gentlemen, we will now conduct a question and answer session. If he'd like to ask a question at this time simply press star followed by the number one on your telephone keypad and your first question here comes from the line of Matt. Thank was the Ibcs. Please go ahead. Your line is open.
Good morning, Matt.
Hey, good morning, I guess, just just to start on same store sales I mean, it was a little bit softer than Q2, and a comparable period you realizing was a little bit easier. So did you see anything by mine by channel worth noting.
Yes, so I mean.
First of all let's just start off we would always like to do more revenue than we did no matter. What the number is but we are happy with 0.5% growth I mean, it is a big quarter and have growth over that is great, but we always want more the quarter unfolded. So July and September were both strong months and August was.
A little weaker and that's how the that's how it unfolds.
Okay. Thanks, very much and then.
On margins.
Down down I'm, a little bit more in Q3, then in Q1 in Q2 can you talk about the drivers in Q3 versus the first half of the year.
So I think well Craig might be able to add some more color to this but I think the one thing that we you know over the year I'll cover the first part of it because over the years, we've talked about it quite a bit.
Our marketing expenses are not always level quarter over quarter. It depends on what's going on in the quarter and sometimes you make investments in a quarter that you don't see until future quarters, and then you make it up in somewhere in the future, which we've shown a few times in the past and Q3 was a great quarter of investments for us and so both for Steve country door.
From a blue and Andy we did a lot of brand building investments for the future and a debt and we were did that on purpose and excited about it.
Yeah, and what just add to what Dave indicated we also did see a pickup in our gross margin in the and part of that is the efficiencies of the Andy business that line item as well as the continued acceleration of the accessories business, which as a reminder, does have a higher gross margin profile items that would be an additional a direction impact.
As a good pickup on gross margin line.
Okay and then on the on the gross margin can you just comment on the higher delivery expenses and also the higher compensation expenses actually country.
Selling and distribution.
Yeah, that's a a little bit of that is also with the diluted with the inclusion of Andy. So there wasn't me a fueling increases there, but it wasn't anything significant but we didn't see any sort of large anomalies in that line item.
And everything is I'm, sorry, when you look at.
Some of the we had some there was some timing on some sales bonus numbers that in Q3.
It will be a under.
For the year.
And.
It was the other item had to do with Oh benefits, which were analyzed it payroll tax deduction and benefits were a bit often we're we're looking into that but that's coming back into line for the year too.
Okay and last one for me what do you acquired I knew you said it would be immediately accretive to E. P. S has that hasn't happened.
And in Q3.
So as far as are our premise when we bought Andy we bought a company that we wanted to continue to grow just like Steve country in during May do and add to our long term profitability. The when we make investments in building the brand sometimes that investment doesn't pay off in a particular quarter, but.
It is something that we are very cognizant of you know for 25 years, we've always wanted to grow and grow profitably and that continues to be our focus.
Thank you.
Thank you Matt.
Your next question comes from a line of sub Con with RBC capital markets. Please go ahead. Your line is now open.
Good morning sub.
Hi, Good morning, just starting off me with the topline I guess can you maybe talk about what's in the during the quarter was it more no maybe a sequential slowdown in the macro environment was the traffic related just trying to understand the drivers of maybe the sequential slowdown and if there's anything you can share on what you're seeing in the market right now.
So as I as I said on the last question. It was UBS a quarter. We had July and September were stronger where August wasn't and interestingly enough. What we've been talking about for quite awhile has been the correlation between our business and consumer confidence and if you'll notice that track quite nicely with the way consumer confidence.
It's unfolding, we also do see anomalies region over region.
And there is nothing new there cut back continues to be very strong and areas where consumer confidence is lower we're it's not quite as strong, but nothing unfolded that would make us believe that we weren't winning in those regions and taking share.
Okay, and then I'm just looking at the gross margin line. Obviously, there's some variation there caused by I for 16, but if we think about you know 2019 as sort of a run rate number you know how should gross margin evolve over the next call. It 12 24 months as.
E Commerce becomes a bigger part of your business and as you invest a little bit in online view, what do you expect will be the drivers of gross margin was correction to expected to trend and.
So some of it I just I wanted a little clarifying or would you say gross margin are you talking about <unk> EBITDA margin.
Well, we are probably more gross margin, but also yeah, I guess overall im taking into account Nexgen. How do you think your overall margins I'll try and also I guess taken into account.
Yeah. So as we noted on on the call earlier, we do see some efficiencies within the business and as well with the accessories business. We do see a we do feel there will be continued efficiencies there at a higher margin as a reminder, the the accessories business is about a 10%.
Higher margin than what we've seen the mattress business.
So I would say direction and those two pieces as they continue to evolve through the model will be accretive to the gross margin.
Okay. So you expect I guess as accessories girls that can maybe offset some of the lower margin and the business. On overall, you think EBITDA margins I guess sort of gross margins should trend higher overall.
Yeah, No what I would I'd also point out that the Andy business is a is a good margin business for us. So it is slightly accretive.
To the overall margin profile compared to the the core mattress business, but we also will see additional a a efficiency than that and pickup pickups in that line as it relates to the continued expansion of accessories itself.
So we would you do it we do expect to see that that have opportunity in that line item.
Okay, and then just on the E. Commerce side can you, maybe talk where you're adding some capabilities to your E Commerce website.
How should we think about the evolution of that business. You know how much are you looking to invest behind it you eventually fears of getting to a point, where you may offer even mattresses online for sale that are sort of non but in a box brands like what are your plans over the next few years for developing your ecommerce platform.
That's great question. So so as if you go on our website today, you can buy five mattresses in a box.
And five models in a box.
And you can buy our accessories.
And when we roll attorney new ecommerce platform and when I say, a few days I mean literally a few days.
You will that you will immediately be able to buy.
Any bad that you see online will be for sale, whether it's in a box or whether it's not in a box whether it delivered by a carrier or whether it's delivered on our truck plus all our accessories and that's just the beginning that starts on day, one and as we can continue to evolve that it will just get more and more.
And then just one last one for me I guess, how are you noticing I guess the competitive intensity in the market you know how does it change over the course of the last year is a competition in the market from larger players smaller players just trying to understand the competitive intensity amid the current macro environment.
So I think you know a and I'm trying not to say too many times, but in our 25 years of being a business. We use this has been a competitive business since day, one and and that's not changing and the competition shifts from region to region from channel to channel overtime, but I would say, it's equally as competitive and.
I would say, we're equally as dominant and as strong today is ever and frankly, when our new E Commerce platform rolls out over the next couple of days few days.
And we continue to build Andy's brand and so on we will just continue to get stronger.
Great. Thank you.
Thank you.
Your next question comes from a line of Patricia Baker with Scotia Bank. Please go ahead. Your line is now open and good morning language, Russia. Good morning, I have two questions for you guys.
Number one Dave typically on these calls you do share with us the quarterly K.P. eyes. So can you talk about a U.S.P. conversion et cetera et cetera in the quarter.
Sure.
So again you look at our keep you guys and they if you look at total traffic we were up if you look a.
Conversion, we were a very flat, which is you know its first than we've ever said that but our conversion is so high it's hard to always have an increase and we were off a very high percentage last year and we held it so we're happy with that.
S P is up.
Units are up everything else is up I'm, just trying to I'm trying to I could go through the lift completely I'm just I don't want to Miss anything you know our gross product margin is strong.
Yeah, I mean, we really feel that it was a very solid quarter on those capesize. Okay excellent good to hear that and then I just want to come back to the new E Commerce platform and talk about that strategically because you've made the just the big decision here to put the rest of your mattress.
<unk> online and you know to be fair to you don't know how that is going to play out but given that you've made that decision you must have some thoughts about how that how the business is going to to evolve and I wonder how much of that you would share with us what what are you what do you anticipate the consumer will do and.
How are you are are you anticipating a small migration you know for the other that the standard mattresses online something larger what did the implications for your <expletive> DNA should part of that business a shift online and are there any long longer term implications that you're thinking about about your store.
Based related to shift in this business online.
Good morning produced good stewards how are you.
Good morning to give you a little I'm going to give you a little bit of color I'm, okay sorry.
I think I mean, we're very excited about this move and it's taken a few years for us to get there and it's more about making sure that it's a seamless experience for the customer and Canada knows us for our wide selection of mattress is all our major brands. The sealy same insert a temporary.
Ddics kings down and just to clarify little bit Dave's comments about the five mattress is that we sell he was including the sizes. So currently today of our vast selection of products that we offered to the Canadian consumer we only sell online balloon, which has been widely successful and created as a 2070.
And then expanded in the net and and 2018 with various different models in terms of the pricing, but the only the balloon collection and Sinbad the relationship that we created with the Europe's number one bed in a box.
We are in a uniquely.
Competitive market as the bed in a box business, but because that has really been the only broad offering online what's about to happen is the entire collection of sleep country. All our brands, which is probably about 45 different types of models in all various sizes, obviously will be off.
Our either through an overnight courier a bet in a box components or through our white glove delivery service. So the customer now we'll have a seamless experience to be able to shop anyway, they want but more importantly for us our advertising has always been our strongest lever in our business.
And it will it will unify everything that we do so that we drive a seamless message to our customers for driving business online or in store. We all know how important the omni channel component is in some of the bed in a box realize that their path to profitability requires a brick and mortar.
Components, we now are offering the entire line up through the online through the brick and mortar seamless experience through a overnight courier assist them or our white glove deliveries, giving our Canadian consumer more options than anyone else out there in this domain.
And then Patricia we.
We've done quite a bit in market research, we've been going through this whole process and I understand yeah, yeah, we understand that their customers there are customers, who want to shop in the store, which is because it's a very tactile purchase and that's the most customers and there are some people whether it be the way they shop or just what are what they need the matters for they're not as concerned about going to store.
Sure and for US, we just want to be in the right place at the right time for anybody and that's what this is going to open up.
Okay, just let me ask a.
A follow up on that and it's just thinking about your website. So lets say I'm I'm, a customer and I have ordered one of your traditional mattresses for from from from a store and I've set up a delivery time et cetera, et cetera, but something changed what would would would you be able to go online and make a change to your.
Your delivery will be that seamless.
So.
That is why we say this is going to continue to evolve over the next year, because our new online system that is rolling out very very soon we'll be it it's going to be vastly better than the one that we currently have and it's going to be leading edge from a competitive point of view, but it won't completely connect all the stores until we reach.
All out the next phase over the next year. So we will have good capabilities, but it's only going to get better as we move forward. Okay. So to answer your question. So to answer your question, specifically, we will be able to do that but not at rollout that will come later, okay fair enough and then back to my original question and I I know you won't give much color.
Here, but I just wanted to tell me, whether I'm directionally thinking about this properly, but I am thinking that over the long term that this this shift could result in lower is some lower SG ne.
Yeah. So.
It's hard for us to answer that question not trying to be a evasive on it our plan is and it always has been to grow our business and grow profitably and we're going to continue to evolve and we're going to continue to make sure. We're doing things that that are smart for the business. Both from a revenue point of view and profit how that actually unfold whether it be in the gross margin line.
Unrest DNA, we will continue to be prudent, but we don't have those answers at this point and consistently Patricia what are you referring to in a lower SG M&A is there something specific that you're thinking.
Well I just think that you would have less store related expenses when mattresses shift to being you know the traditional Mac mattresses, you know convert to being sold online. So you would have left.
You know selling expenses well most of all our selling just to be clear. We that's why we don't call SG Nay, we call. It DNA. So in the gross margin like our enough yet DNA. He is doesn't include those costs.
So, but depending on our hope Openstack you have to remember that selling online saves in some buckets and there's more cost and others. So fair enough for that.
Well I really look forward to having more in depth conversations on this later. Thank you. So do we were very very excited about this and look forward to talking more.
Okay.
Thank you.
Your next question comes from the line of Vishal Shreedhar with National Bank. Please go ahead. Your line is now open.
Good morning, Hi, Good morning, guys. Thanks for taking my question.
As you launch the new E Commerce platform should we should we consider that you would have to accelerate marketing in advance in order to prime to customers can you offer.
Actually we.
We are going to do a soft launch to make sure that everything is running smoothly.
As we get closer to Black Friday, and cyber Monday that will be in an opportunity for us. But this is this is a nada short race. This is a long marathon and we are going to experiment and carefully drive a deferred.
In categories in fact them over the next year, hopefully you will see us expand our endless aisle component of our business and be adding new items to it I expect as time goes on and we see that acceleration in our revenue online are profitable that revenue online we will.
We will act accordingly, with our advertising budgets to drive all different categories, but let's let's let's be clear and our thinking that we do believe theres. A this is a powerful omni channel tool and for us whether they drive the business to store or online it works well for our teams.
Any anyway, so there'll be a balance in terms of the overall media mix that will drive revenue and all our channels.
And Michelle just as a to add to just as a reminder, durbin it's on the call.
You know, we we've been talking to pass about how it's very difficult to look at our marketing expense on any individual quarter and we've seen that over the last couple of years and I think thats been proven out.
Over the long run our marketing will shift from different mediums and different messaging, but we do believe that over longer and we will be able to leverage our marketing expense and if we wanted to invest more it's going to have to deliver the revenue to make that worthwhile and so that's that's been our approach for the last 25 years, and it's going to be a continuing going forward.
Okay. Thanks for that on the on that point. The he just made what what tools or metrics as management used to evaluate if the marketing investment.
It was productive.
Well, there's different categories for each level. So if it's more tactical you can measure traffic and you can measure revenue you know over the short period of time, when you're investing in branding as we always have and continue to do so for instance, with our all for sleep campaigns and this year tell us everything as well as Andy.
Hang on TV and radio to expand their brand that is a longer term game and you don't sometimes always know exactly how well is paying dividends because there is an exact marketing for that but we've been doing it for long time, and and and feel very confident that we're sending the right messages in the right mediums to build the Brad.
Okay.
Can you ecommerce sales from the new platform, what will that be in the comp right away or will you take a year in lab.
No that will be in the comp because it's just part of our E. R. E. Commerce business is already in comps so that will just stay there.
Okay, when a non bed in a box mattress is purchased online and I know you know we're looking out.
At least a couple of quarters and ticket this fully running I should we expect that to be higher margin as you avoid some of the sales compensation incentive compensation.
I think it its again as we were talking into a previous question. When you sell something on line, there's different costs, there's different savings and there's different costs and so we will save some money in some areas and we will.
Spend it and others. So we really are looking at this is a additive to our business and not to drive our margins down but also not too while the increase that.
It's a way to for us to capture more market share in an effective way.
Okay.
I appreciate that just last one from me here.
The CV investment in a Andy and marketing.
As you indicated off the top even you been implementing that and have you seen andy's performance, yet accelerate associated with that marketing investment.
Well, it's interesting you mentioned that because you know obviously endings NB is still a fast growing company and they continue to be that Oh. We also can measure other key p. eyes that would indicate you know people.
Understanding their brand better and searching it more and we are seeing positive results there as well.
Okay. Thanks for the color guys.
Thank you.
Your next question comes from a line of Stephen Macleod BMO capital markets. Please go ahead. Your line is now open.
Good morning, Steven.
Morning, Dave many of them.
I just wanted to follow up very briefly on the CPI. So you talked about Dave's earlier in the earlier in the question period, just talk a bit but look how those kids you guys might have differed between online and bricks and mortar.
Oh, I'm, sorry, I don't understand that question I'm, how they we saw increases in our keep you guys. So for we saw increased traffic into our stores. We saw increased traffic to our websites. So they you know they were increasing on both fronts.
Daniel that I was wondering okay. There yeah. Yeah. That's yeah. That's why I was wondering just if you saw because our deferring capesize no versus all online to your online properties versus your bricks and mortar properties, but it sounds like you saw total traffic up you also saw total traffic up in both US both the source as well as a as well as online.
That is accurate I will add those Steven because one of the.
So yes to exactly what you just said but.
In the past, we have advertise differently online as we have done in store because we were not able to sell everything online. So if there was an event that was a sealy posturepedic a bad that we were selling.
It is possible that the positioning add through our traditional advertising was driving aggressively one message and it was possible that our messaging online was driving another message to June to drive revenue. So that added a layer of complexity to our business.
As even though it's been quite successful and growing.
Incrementally.
Now going forward.
The message will be very clear it will be very seamless the drivers will be exactly the same thing the Cape <unk> will be exactly the same thing and it will have a seamless.
Experience for us throughout all the advertising channels. So we do expect to see a nice lift because of that less fragmented advertising campaigns.
Okay, I see that makes sense okay.
I'm just trying to end the I just wanted to clarify it wasn't clear to me was indeed, well then did not.
Merging additive in the quarter.
I know Craig you mentioned that it is our it is additive to gross margin, but was it not margin out of the for the for the <unk> say operating EBITDA.
Yeah. So we don't break out Andy specifically, but you know I believe as we described previously there is different margin profiles for or Andy and where it is its growth stage versus the more established sleep country door maybe business.
But before we don't break out the results I, but I would say that though I can confirm that it was margin accretive throughout the entire up you know.
I will say, though that we are adding.
We are adding investment in brand awareness in the Andy Brandon Dave mentioned at the beginning of the call at we for 25 years have done a great job that have been having the highest brand awareness.
This category, Andy which is still relatively very new company, which is hugely successful and we don't break it out provincially, but it's definitely have dominated and beyond terrio market and one of the exciting opportunities for us is be be able to create a greater brand awareness cut.
Three white the same way, we did sleep country. So the investments that may not pay off immediately but we have a proven track record showing that creating strong brand awareness resonates with the consumer for years to come.
Okay. Okay, that's great.
And then just.
Underscore what Stuart said all the people that are calling right now generally are living in Toronto, and so you use the N.B. as this big Big brand. It it's not exactly the same across the country, but it will be someday hopefully and that's what we're working on so.
Yeah.
And along those lines as legendary would you would you say that there's another but there are other brands that resonate better and say western Canada in eastern can literally just things that the model of betting a box hasn't quite caught on outside of very much more urban areas.
We would say that Andy has done an excellent job building the brand that they have in the time they've been there and this is not a that anybodys winning elsewhere and they have to catch up. This is just the process of going through the whole country.
Okay. Okay. That's helpful.
And then one of the one of the other initiatives that.
We haven't talked about yet is that used that you cited is your new ERP platform, which has launched can you just talk a little bit about how that launch has gone and maybe just remind us as to what benefits you expect to see from from that overtime.
Sure.
So first of all we're we're very happy with the launch by the way we have a lot of tired people that work for the company right now [laughter]. It's a good thing where a mattress company because everybody got a good nicely, but we're really happy with the launch and and so basically that is our complete financial backbone that is now up and running.
And you know we're still in what they call hyper care, but but we're doing very well and.
We are starting to.
Really that's starting to any because that's now been launched for about three weeks and so that when it's gotten off to a great start the E. Commerce, one is that they taking a luxury soon but the back to the ERP that you mentioned it is just right now it's our financials.
Backbone as well as our merchandising and then over the next over the next period of time, we'll be adding the Pos in the stores because thats currently out out there the e-commerce platform will be running through the new ERP when it launches very soon and so on so it is right now it's the backbone and we'll just keep adding things to it as we move.
Forward.
Warehouse management, all those things.
Okay. That's great. Thank you very much that's occurring.
Thank you.
Your next question comes from the line of Brine Morrison with TD Securities. Please go ahead. Your line is now open.
Good morning, Brian .
Morning, Dave.
Good.
First question for Craig I think when I take a look at your I'm not sure I fully understand the gross profit margin. So when I take a look at it for the first half the year and I'm on an apples to apples pre <unk> for a 16 basis. Your gross profit margins up about 200 basis points and in this quarter. If I did the math correct I think you're only up about 75 basis points.
There's been a few questions on that some kind of curious as to.
Why is the performance in Q3, not as good as it wasn't the first half year specifically for gross profit is that competition is your new partner relationships onetime items, what's going on there.
Yes, sorry, just trying to.
We are there.
Yes, one thing one one thing we did have was we did have some different promotional activities that did fall into Q3.
The break though that if you have a little bit more specifically why do we ran a gift card program, where the redemptions crossed over the period so crossed over the quarter end and so we accrued for those and an expense those in Q3, I'm well aware the redemption rate is not fully baked through so there will likely be some kicked up.
In Q4 to offset what was hit in Q3 for those gift card programs for items that are not redeemed for the cards that are redeemed there obviously margin accretive second off we did run some promotional.
Bedding promotions, where we had some pickup in those items above the line in our gross profit margin because they were discounts from vendors to sell those through through promotional activities, where we are compensated ourselves a associates in a in an accretive manner to the sales associates on the discounted.
Base bed, so there's a little bit of pass through between each bucket a little bit higher margin up top as we discussed previously and a little bit of reduction down to contribution margin for those initiatives.
And I think another Craig another portion of it is a strong occupancy correct. Yes. There was we've been good at opening stores, yes. That's another another big bucket there was a store occupancy for the openings, which were at 11 to date versus.
Yes, the 11 today.
The 12.
A year forecast.
Okay. So on those new stores it sounds like you're getting good returns.
Having any impact upon your existing same store so the existing sorbet same store sales growth.
So that's a great question at the fact is.
I'm going to have to say it again for the past 25 years. Every time you know you opened a store that's not too far from other store you see some cannibalization and that is absolutely understood and we measure that and we're happy to do that because in the long run the market gets stronger.
And so yes, we do see some cannibalization when we open new stores and we're seeing a little bit more of that plan with some all stores. So as you know so it is some of that is affected but it is nothing new and it is something that we that we planned point it helps us grow market share over the long run because that's only a one year phenomenon and then it gets back on track.
Because a bigger market and I and I'll just add to that that one of the trackers is the overall revenue.
By store, so as we look and expand our markets the shift between stores is less relevant to us, but it does eat into a little bit at the same stores, especially with the last 15 to 17 stores have opened and exceeded our expectations they've done a fabulous job, but at the same than the most important metric.
That we measure is the overall gross revenue of the stores as as time goes on if you look a little bit back in that time panel in 2015. When we went public we were around on average of about 1.8 million a store we've grown from approximately 217 stores in 2015.
Theme to 276 stores currently and our gross revenue in the stores have also gone from 1.8 million on average to 2.4 million. So that metric for US is the biggest thing as we grow shifting around between stores may have some type of impact and cloudiness.
On the numbers, but the overall rope and market share that we continue to take has been far exceeding our expectations.
Okay last thank you for that Stuart and then the last question I have is as you successfully grow your e-commerce platform and the outlook, because obviously quite positive and expand the new partnerships.
I'm wondering if that's all incremental or whether that will impact the rate of new store growth as you go forward.
Oh, sorry, so we we sit here as Stuart just mentioned with 276 stores and we still see a strong future for adding stores for the foreseeable future, but we do measure each one and we make sure it's adding to the overall value and we continue to watch the customer to make sure that.
They want to still buying the stores I must say, we've seen very little information that would indicate that the stores are are not going to continue to be a big part of the future and and that's one of our big strengths you know I'm one of the things we're happy about is that.
So five years ago with this was a bricks and mortar industry two years ago people wondering if everybody in the world who is going to start buying online and now everybody seems to be coming back to a better understanding that's an omni channel.
Business and we're we have all the ingredients for an omni channel business. If you look at some of our online competitors you know, they're raising money to opens doors. We already have great stores, we already have 17 distribution centers to handle the final mile and coming in the next very few days, we're going to go from an okay web presence.
As a much better and industry, leading web presence that were to continue to add to over the coming quarters and I'd like to internally, we look at our business as Larry.
So sometimes the street doesn't necessarily see all delevering, that's going on and some of the moves that we're not making isn't because something isn't going well every single thing that we put into place over the last 25 years continues to compound and grow and accelerate I mean, four years ago, we went public and double digit cagar that we've been seeing.
It has not slowed I mean, maybe choppy on a quarterly basis, but look at the path and look all the things that we've added that we said that we were going to add that we continued to add including the multi channels. The partnerships. The accessory part of our business now layered on E. Commerce like we're really excited and Dave mentioned in the first part of the comment.
That we're more excited about her business.
For the next few years than we have in for the probably the last five years in the last five years has been exceptional mainly because of all the layering that we're doing onto our business. So that we could continue to take more market share within this more market share at a profitable.
Weight than over the next few years and we're positioned really like there's exciting things to come sale.
Thank you.
Thank you Brian .
Your next question comes from a line of Elizabeth Johnston with Luncheon Bank Securities. Please go ahead. Your line is now open.
Good morning Elizabeth.
Yes.
I just wanted to go back to something you mentioned in the prepared remarks about credit card and financing charges. So I do see the commentary about the higher cost of that as a percentage of sales coming from Andy but I. Just wanted you to go through some of that again when I look at this quarter specifically in the first half the or even though that would have included Andy.
It's either a differential year over year. So I wonder if you can just go through that and one more detail.
Oh sure so yeah and he did play a part like we said and there was another initiative that we put in place there.
Which is a third party financing to our customers and we've always done that for the past years and Weve continued over the years to try different tests to see how we can use that better to maximize our business and and so this particular quarter were running tests around how we can use it in a longer term plan to raise our average unit selling prices.
The store and a and which did drive higher financing charges, but it also did drive higher a U.S. Pete.
Okay, and so we look forward do you think that based on the test that you've done. This quarter. This is more like the level of cost we would see going forward eager happy other words with the test that you did I.
I would say they it's somewhere in the middle we're happy with the test and we've got a lot of learnings on it when the right direction, but we're going to continue to tweak it to make it even more efficient. So I would say that it's going to be a part of what we do going forward.
And we're just going to continue to try and maximize as we go.
And when it comes to this past are you seeing the customer pick up that you're seeing are you able to tease that out whether it's a customer that might not have purchased or one that's purchasing more items. So larger basket size, you haven't yet or data on on who the customers are that are that are using this offer this offering.
Yes, so we're still continue to do the evaluations of it but this who would be more about adding to the customers purchase rather than getting more customers and we're going to continue to try and get more customers with it but in our system that has never been as.
Easy to read what we can see very clearly is that people are using it to buy more.
Okay, and and apart from apart from that so I understand how that's driving U.S.P., but apart from that would you still said that you're seeing higher and U.S.P.. Excluding this impact Oh, yes, yes for sure.
Okay, Great I'm, just moving on going over to accessories, maybe you can talk about some of the drivers of the sale than many highly down a two year stack that 27% growth is it transactions or average basket size or maybe you can talk a bit about any new products that you launched in the period.
Sure. It Stuart can answer this much better than me, but I will just make the first come and it is both average unit selling price and unit. So it's nice because it both and I think also our partnerships and you will fall over the next.
Few quarters, you'll probably see new products being introduced that are solely being trinkle then.
That we've not dealt within the past that are are delivering exceptional results for us.
I also believe that our marketing campaigns as someone asked before it in terms of our measurements on our ROE asked or return on investment we do measure our business by category and we invest by category. So whether it's our pillows or lifestyle base is the accelerated growth is partially.
New product ever been entry that we've introduced him will continued introduced that are very relevant to our consumers, but it is also the metrics around driving our advertising awareness around certain products, which seem to be having a.
Terrific compound effect in our stores and online and that's going to continue into the new year.
And you can can you measure the number of sales that are accessories, only and if that's in that and if so how do you see not continue to tick up.
Yes and them.
Interestingly enough Dave mentioned in the early part of the call that the Q3 saw a July strong September strong in August a little softer, but our traffic in our stores for the month of August we still saw and accelerate.
Ration of our accessories. So there might have been a deferred purchase from customers, maybe because of consumer confidence on the macro site, but what's interesting to us which is exciting to us too is that on the accessory side of the business that didn't seem to slow down. So it came in the cross the lease line. They had this lead country.
We experienced they bought a pillow or something and we believe those customers also come back.
After having a good experience when they're ready for the mattress, which as possible we saw in September .
Great. Thanks, and my final question just on the Capex.
He just give us an update on what spending you anticipate incurring for the balance of this year and any update in terms of 2020, I know into passive discussed potential for some of the ERP costs to come through in 20 times.
Yes, so consistent with our with our outlook that we do a indicating the in the M&A is we do it planned to come in line a in the range of approximately 30 to 40 million on the Capex.
There will be some spillover of the of the ERP as you mentioned into into it in 2020, and but we expect about 70, 770% or so that's behind us at the end of this year, but there will be some fall over and we don't we're not breaking out what we plan to do in 2020, but I'd just confirming that we will see some spend related.
ERP release, two or phase two and a in 2020.
Okay, great. Thank you very much.
Thank you.
Your next question comes from Edward Friedman with DWP Mcaleenan Partners. Please go ahead. Your line is now open.
Good morning. Thank you. Good morning, Thank you very much for taking the.
Sure.
So I understand that the market was always competitive as you mentioned, but was a little surplus.
Marketing spend and merchant impact it seems like the competition from likes as Kasper and others intensifies.
Intensifying and as such it makes your question more pressure on margins and have a much higher marketing spend for a while I was wondering if this it seems like a fair.
Observation.
Well first of all.
We can break when we when we have our gross margin that you see that is including all the things we discussed that were in.
Additional costs in Q3, when you look at our actual gross product margin, we're very happy with that and so which is more what you would be talking about with intensified.
Competition and so yeah, we're not disappointed at all with our gross product margin and and then you know our increase in marketing came up for two reasons. One Andy is now in our business when it Wasnt last year and secondarily for sleep country dorm, who and Andy we've added Granby.
Turning in the quarter so.
I would say your comment is less about competitive intensity and it's.
In our business and it's more about you know winning today, but building for the future.
Okay fair enough.
There's also a another does there's usually some correlation between housing sales and bad purchases.
And though the housing market will still be weaken, especially in China for the last couple of quarters, but lately goals that resumed and but you will just actually decelerated over the last quarter. I was wondering why is that tend to do I was talking September was only in August was weak but.
It does have correlation between us and just quoted was not so it was one of its can make a comment about thanks.
Sure I'll make them or overall comment and this is something we've been saying for years.
While a strong housing market is good for our business because when people move it's a trigger for buying a mattress, but having said that there is other triggers to biometrics other than housing. So you know the best correlation that we've found over the years is consumer confidence and so housing effects our business more in.
Relationship to how it affects consumer confidence than the actual transactional side of it and so if you're really looking for a directional.
Measure I would I would suggest consumer confidence is a better correlation.
Thank you.
Thank you.
And once again, ladies and gentlemen, if he would like to ask the question. Please press star followed by the number one on your telephone keypad. Your next question comes from Subodh can with RBC capital markets. Please go ahead. Your line is now open.
Hello again.
Thanks, just couple of quick ones are there some commentary about the store network and your views on it can you maybe give us an update on your thoughts on maybe what you think is a good size for the store network over the long run or just Directionally speaking if you think you'll be opening up similar number of stores over the foreseeable future over the next few years just your thoughts.
On what the network could look like in a few years.
Sure.
As we've said we went public which may not have been it's clear that could that we could open between eight and 12 stores a year.
No I think the better way to put that is will we think we can open up a minimum of eight stores per year.
And that we don't see anything different looking forward for the foreseeable future.
To say exactly how many stores, we think we might have I think it's a bit premature to do that because we study every single store, but you know as we sit here today, we're opening our stores and they're very strong.
Both rural both infill stores within or the more urban markets plus mall stores. So we don't see a break to the ability to open stores for the next many years.
Ill add one another metric, but not a predictor, it's more of a metric that we use we do believe that we could have one store for every hundred thousand in terms of population ABT 101 hundred 20000. So just a quick calculation on the back of a knock and there is 36 million people in Canada, So and that will give you a little bit of an idea the runway.
Eight of our of our business and that that model has always been our model for the last 25 years and it's worked very successfully.
Great and then there is some of the you guys had some commentary earlier on it U.S. be trending higher can you maybe give a little bit of color on what you're seeing at the different price points in or is it the market is shifting a little bit more to the higher price points did you just see maybe a quarter of less sales at the lower price point, just trying to understand direction.
How you see the market shifting.
So first of all our average unit selling price for mattresses has gone up every year.
We've been in business, except for one and that was more than a decade ago. So this is nothing new and frankly, we saw increases in every single price band across our whole company in the quarter, which we've seen all year and so it is.
One of the things that really is good about our company is that we every single one of our sales within assisted sale in our stores and so we do a lot of work to make sure we understand what the customer's needs are we asked them to tell us everything and we then find the right product for them and generally speaking when people do that and they talk to our.
They generally by they might invest a little bit more because they realize how important sleep is we've always been a company that doesn't want to come modify kamada makes sleep, a commodity and we're going to continue to focus on that.
And just on the comment I guess is it fair to assume then that the bed in a box brands are not included in the metric and do you plan on including them once and annualize it from point.
So no we were in who we include them in our overall business already.
Okay. Good. Thank you. Thank you.
Hi, presenters I'm showing no further questions in the queue. At this time I will now turn the call back over to David Friedman for closing remarks.
Well. Thank you all four is a great questions. We look forward to sharing or Q4 results with you on the next call and just the last thing keep your eyes open for our new ecommerce platform, which is rolling out very soon thanks take care.
And ladies and gentlemen. This concludes today's conference call you may now disconnect.