Q4 2019 Earnings Call
Welcome to the sleep country, Canada fourth quarter results call.
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I would now like to hand, the conference over to Wonder if your speakers for today, Dan freestyle CEO. Please go ahead Sir.
Thank you.
Good morning, everyone and thank you for joining US with me. This morning, our credit Prato, our Chief Financial Officer, and Stuart Shaffer, Our Chief business Development Officer.
2019 marked CEE countries, 25th year in business and I'm proud of our track record of profitable growth and last year was no exception in 2019, we delivered results by executing against our value creation strategy, resulting in improved sleep for hundreds of thousands of Canadians and further market share gain.
The final quarter of 2019 was strong propelled by robust robust black Friday, and boxing weak results across our country Gourmet Guru and Andy brands in fact, any achieved 88% growth over the prior year. During these periods and sleep country delivered well over a million incremental dollars over black Friday weekend versus the prior year.
Our 16.5% Q4 revenue growth and market share improvement reflects the strength and relevance of our evolving business model and strategy.
Topping sleep countries list of achievements in 2019 was the expansion of our omni channel network, enabling us to reach more Canadians anyway, they choose to show.
We understand where and how Canadians are buying their sleep products and are making investments to better serve customers up today and tomorrow.
The launch of our cloud based Oracle ecommerce platform in Q4 enriched our online and mobile presence by offering our entire assortment of mass mattresses online and delivering an enhanced user experience results from our relaunch website have exceeded our expectations and we look forward to building. Upon this foundation with expanded merchandise assortment and enhanced capability.
These in Europe.
To further bolster our reach we opened 12, new stores in 2019 for which our enclosed in enclosed malls and renovated an additional 26 stores, resulting in 70% of our store network now being in our new contract.
One of the new stores opened last year Institute any qubec drove our biggest opening weekend ever.
New store return on investment continues to be very strong with an average payback of only 1.2 years.
Further new and existing stores continue to perform even as our digital footprint grows demonstrating the complementary nature of our channel strategy.
Rounding out our network, our strategic partnerships with Walmart in urban bar.
In 2019, we launched the Bloom lineup on Walmart Dot CA and executed to back to school pop up shops in the DTA.
Exposure generated from our Walmart partnership propelled excellent bloom sales in our stores during key events our growth from retail partnerships.
Oh properties, new stores and significant growth from Andy combined with a 1.9% growth since the country same store sales in Q4 proves the strength of our overall strategy to drive results is important to note that our same store sales results do not include any growth from Andy Andy will be included in our results beginning in Q1 fiscal two.
2020.
I am pleased to share that our key metrics remained strong in Q4 as we continue to see increases in mattress and accessory U.S.P. basket size network wide traffic in store and online.
And growing conversion rates of shoppers to buyers, new and loyal customers continue to respond positively to our expanding mattress and accessory collections with increases of 15.4% and 20.6% respectfully in Q4, demonstrating our ability to identify and served the sleep needs of Canadians.
As an example of our commitment to bring Cascadian sebastien sleep products from around the World and 2019, we launched two exclusive partnerships starting with simple hybrid mattress firm Europe with more than 45005 star reviews, and exclude and an exclusive Canadian distribution deal with blank will to consumer favorite weighted blanket Brad.
Widely popular with Americans and consumers endorsed by celebrity these partnerships helped to fuel our overall accessory business.
Of course, we can't talk about 2019 successes without discussing it we are thrilled with this strategic acquisition and all that it brings to our business with thanks to Raj, Mike and the entire entity.
We are very happy with how the relationship has progressed.
Our first full year together.
Strategic plan involves the growing each up each of our brands individually and India has made excellent strides on that front delivering strong and profitable growth in 2019, which accelerated in Q4 highlights from Andy's performance include a tremendous increase in branch search demand in Q4 and significant revenue gains made in multiple provinces as we.
Built out awareness of the any brand geographically as well.
In addition to top and bottom line growth Yandi team has maintained their commitment to customer experience as evidenced by winning the readers' Choice Award for best Mattress store the integration of Andy into our business has been instrumental to the success for 25th year, and we'll continue to leverage knowledge and data across our brands to enable growth inefficiencies.
For many years ago.
I'm very proud of the team for delivering these results in 2019, Wow successfully implementing phase one of our enterprise resource planning platform.
Last year, we completed the imagine phase and in Q4 launched a new financed platform with the foundational elements of a new merchandising platform.
These new capabilities enable us to build upon or legacy of operational excellence to strengthening our data architecture, driving further analytics and data driven decision, making new ERP platform also supports nimble agile business management and process automation.
Capabilities, we believe will support our growth in today's fast changing retail environment.
Reaching Canadians and a compelling way remains a critical pillar of our success in 2019, we launched our tell US everything brand campaign across all channels, including TV public relations, social media and digital along with our social content strategy.
Another more recent development was the implementation of our first ever Influencer campaign, which generated fantastic results more than quadrupling, our social engagement in a month.
As Steve country, we'd been dedicated to enhancing the Canadian sleep experience for 25 years I'm excited about about what we've accomplished in 2019 and look forward to continuing to execute against our value creation strategy for many years to come.
Craig I now turn the conversation over to you to discuss our financials.
Thank you, Dave and good morning, everyone turning to the results. It's important to note the like previous three quarters of 2019. This quarter's numbers are directly comparable to Q4 of fiscal 2018, mainly because of two reasons one the inclusion of that need in the Q4 2019 results, which as a reminder, sleep.
Country acquired Andy in December of 2018.
And to our adoption of the eye for 16 accounting standard which came into effect on January onest of this year [noise].
I'll explain the impact of these two items on the results as we run through the numbers. In addition, we will use pro forma numbers for last year, where possible. The pro forma numbers are compiled for Q4 and year to date fiscal 2018 to improve comparability between the year over year results by adjusting the reported 2000.
18 results of the respective periods for estimated impact a buyer for 16 and are disclosed in the Q4 fiscal 2019, mdna and available on SEDAR.
As a reminder, upon the adoption of I have read 16 rental expense, which way, which was previously recorded in cost of sales for our store leases and in gene a for warehouse lease at leases is no longer recorded as rent expense in the piano, but is instead recorded as depreciation on the right to use asset and interest expense on the lease liability.
Well I first 16 has an impact on our 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 entry operates as a business and more importantly on our cash flow.
Before I dive into the impacted by a fresh 16 I'd like to read reiterate that we're extremely pleased with our results for the quarter and for the year given the challenging retail landscape. We think it's worth noting up front that our same store sales excluding Andy are up our total sales accessories and E. Commerce sales are showing double digit growth and our mattress bid.
This continues to deliver strong growth and be our foundational pillar.
Moving onto the impacted by a fresh 16 on Q4 2019.
And the cost of sales section depreciation related to I have for 16 increased by approximately 8.1 million straight line rent, which was previously recorded in the section was reduced by 9.6 million in the DNA section depreciation related to <unk> first 16 increased 5.9 million and straight line rent expense of 1.2 million.
You are moved on the interest expense line the interest on lease liability increased by 2.8 million. The bottom line impact on net income after tax was a decrease of point 8 million, resulting in a two cents per share impact tied directly to this accounting standard change.
Pro forma Q4 2018, the impact was as follows in the cost of sales tax and the depreciation increased by 7.5 million straight line rent was reduced by 9 million in the Genie section straight line rent was lower by one point Threemillion and depreciation increased 5.9 million in the interest expense section.
Interest on the lease liability increased by 2.7 million and therefore, the bottom line impact on net income after tax was a decrease of point 6 million, which rounded up to two cents per share.
Now on to some of the quarters highlights, let's begin with revenue.
As Dave also mentioned, our 25th year, so the highest fiscal revenue in the company's history in the fourth quarter revenue increased by 16.5%.
To 186.5 million on an annual basis, our revenue increased by 14.3% to 712.4 million when compared to 623 million. The last year, our total sales growth over the year was driven by.
The addition of 12, new stores are wrap stores coming into the comp base positive same store sales, excluding Andy for the quarter at 1.9% and 0.3% for the entire year and lastly, the acquisition of Andy generating generating topline growth throughout the year.
The success of our strategic agenda to provide customers more targeted and catered selection of total sleep products was reflected in our double digit growth in both mattresses, and CAD or mattress and accessories revenues. This year as Dave mentioned Q4 matches revenue increased by 15.4% to 146.2 million.
When compared to 126.7 million in Q4 2018.
On the annual basis.
Total mattress sales increased by 13.7% to 564.7 million.
Well the mattress growth was significant in of itself, we achieved an accelerating growth in our accessories revenue, which showed the strongest growth as a percentage of revenue and increased by 20.6% to 40 point Threemillion from 33.4 million in the prior year, demonstrating our ability to profitably stay ahead.
Trends in this competitive retail landscape on annual basis accessories revenue again saw an increase of 16.9% to 147.7 million.
As we explained on the first three conference calls of this fiscal year gross profit for the quarter is not directly comparable to that of a year ago due to the adoption of I for F 16, accounting standard on January Onest of 2019.
Gross profit during the first.
During the fourth quarter increased by 25.8% to 59.7 million from 47.4 million in the same period of 2018, our gross profit margin expanded to 32% of revenue from 29.6% in the same period last year were 30.6% on a pro forma basis.
Which restates the fiscal 2018 results to conform tie for a 16.
The improvement in gross profit margin in Q4, 2019 was primarily influenced by the following items.
First there was no sales or distribution compensation expenses that were incurred for the revenue generated through and these online platform. This reduced sales and distribution compensation expense from 14.5% of revenue in 2018% to 12.9% in Q4 2019 into.
To decrease store occupancy costs tied to the Afrezza accounting standard, bringing down the occupancy costs to 3.3% of revenue in Q4 2019 down from 9% in 2009% in 2018.
These improvements to gross profit were partially offset by the following items.
Inventory and other directly related costs in Q4, 2019 increased to 45.4% of revenue from 44.7% of revenue driven largely by lower net rebates in the quarter, partially offset by lower direct product costs.
And lastly increased depreciation expense of 5.8% of revenue was up from 1.6% in Q4 2018 again. The majority of this impact was tied to Iflorist 16, and the depreciation of the right abuse asset.
Annually gross profit margin also expanded for the year to 31.3% from 29% in 2018 or 29.9% through the pro forma lens. The factors, resulting in this improvement were similar to those in Q4 2019.
DNA expenses for the fourth quarter increased by 27.8% to 34.8 million compared to 27.2 million in Q4 2018, as a percentage of revenue DNA increase from 17% to 18.6%.
This increase in spend was largely tied to the inclusion of and these operations for the full quarter and full year and at the adoption of IRS 16.
Sure I think some additional light into GNS expenses for Q4 2019, the media and advertising expenses increased by 2.6 million, mainly due to the inclusion of advertising expense related to Andy in Q4, 2019 and increase in TV advertising advertising, partially offset by a decrease in internet.
For advertising spend during the quarter.
Depreciation and amortization expense increased by 2.1 million, mainly due to the increase in the intangible depreciation related to the implementation of the finance and merchandise module of our ERP, which was completed in Q4 2019. In addition, our salaries wages and benefits increased by.
1.9 million, mainly due to the inclusion of compensation expense related to Andy for the entire fourth quarter of 2019 compared to partial inclusion post acquisition in Q4 2018.
Touching on credit card and financing charges briefly this line item increased by $1 million to 5 million in the quarter compared to 4 million in Q4 2018.
The reason for this increase is tied to the variable processing fees from the inclusion of Andy In addition to the company, providing our customers with longer term financing plans.
Annually Genie expenses increased by 32 million or 34.2% to 125.8 million from 93.8 million in 2018 similar to Q4 2019, the annual increases mainly attributable to the increase of Andy since its acquisition in December 2018.
The adoption of IRS 16, effective January one 2019, and the impact of higher processing fees related to providing our company or customers with longer term financing plans.
Moving on from DNA, our operating EBITDA for Q4 increased by 59.5% to 41.3 million or 22% of revenue compared to 25.9 million last year with a pro forma view for Q4, 2018, where operating EBITDA was 36.2 million. This represents an increase it.
14%.
This is a direct result of the strong revenue growth as David I already discussed paired with improved gross profit margins and partially offset with increased DNA expense on an annual basis operating EBITDA increased by 47.4% to 155.9 million or 21% of revenue compared to 105.8.
Okay and in fiscal 2018 again with pro forma this represents a 10.9 million dollar increase as operating EBITDA was 145 million at this time last year.
[music].
[noise] finance related expenses increased in the fourth quarter to 5.3 million up from 1.3 million. In Q4 2018. This is largely due to the adoption of IRS 16, and increased interest expense as related to the acquisition of Andy.
Similarly on an annual basis to finance related expenses increased by 16.7 million.
Our adjusted net income for Q4 increased by 8.9 million to 15.7 million or 43 cents per share.
From 14.8 million or 40 cents per share in Q4 2018.
We rounded off our fiscal 2019, adjusted net income at 59.3 million or one dollar and 60 cents per share compared to 63.9 million or $1.72 cents per share in 2018. This represents a decrease of 4.6 million or seven point or 7.2%.
This decrease was mainly a result of gene a expenses higher finance related expenses and lower stock based compensation costs tied to the forfeiture of options and performance stock units for eligible employees, who left during the year in 2019 compared to 2018. These items were partially offset by favorable.
Gross profit decreased an income tax expense and an increase in other income as a result of insurance compensation received.
On an annual pro forma basis, our adjusted net income and net income decreased by 2.1 million or six cents per share and 1.7 million or five cents per share respectively.
Net cash flows generated by operating activity in fiscal year, 2019 was 132.1 million compared to 68.1 million last year. This represents positive impact of 136.9 million in cash items generated from operating activities offset by $4.8 million.
As cash used towards working capital.
Net cash flows using investing activities was 35.4 million in 2019 compared to 93.2 million in 2018 as a reminder, in 2018. This figure included the acquisition of Andy for 66 million Unsurprisingly in the current year allergic on contributing factor to our investments of 35.4 million.
The initial spend on the investment in our new ERP and new ecommerce platform as well as new store openings renovations and maintenance capex.
In terms of our cash position at the ended 2019, we came out at $44 million compared to 30 million last year.
As of December 30, Onest 2019, our existing credit facility balance was 175.8 million compared to 68.6 million at the same time last year.
Our NCB, which authorized us to purchase up to 25% of the average daily trading volume to a maximum of 1.2 million shares expired on February 27th 2020.
We have since since submitted a request to the TSX for a new program.
As of December 30, Onest 2019 sleep country had purchased approximately 510000 common shares for cancellation at an average price of 19.59 per share for total consideration of approximately 10 million.
The final note I'd like to mention is that our board of directors declared a dividend of 19.5 cents per share payable on February 25, 2020 to the shareholders of record as at the close of business on February 14 2020.
That completes my overview of the financial results back over to you Dave for closing remarks.
Thanks, Craig.
Great progress we've made this year as a direct reflection of the strength of our business model and the value and service we deliberately Canadians.
Looking ahead, we plan to continue to deliver results by executing against our growth strategy, including.
It's always focusing on our customers and our team.
Continuing to advance our digital banners, including expanding our merchandise assortment and enhancing the user experience on our website.
Growing our physical footprint by opening at least eight new stores next year and renovating a further 25 to 30 stores to our fresh new concept.
Advancing our strategic retail and brand partnerships.
And continuing to offer Canadians the most innovative products from around the world.
And lastly, expanding our reach and customer engagement through targeted and compelling market.
Going forward, we expect to continue to grow each of our brands individually seep country to army Buena, Andy and believe that our new ERP system, ERP system, and ecommerce platform, along with sharing our capabilities and best practices amongst banners well fuel this growth in 2020 and beyond.
As I mentioned in our fundamentals remain strong and we are deeply committed to continuing strength in our core business and maintaining the magic that has driven our profitable success for the past 25 years.
At the same time, we continued to layer on strategic growth initiatives to evolve our model to serve the customer as of today and tomorrow best.
We are executing a clear value creation strategy I feel confident will drive continued market share expansion and profitable growth for many years to come.
As any marks its fifth birthday in March and we celebrate 25 years asleep country and Jeremy.
It's exciting to thinking about the value of our partnership is unlocking coming together, we're able to best serve the sleep needs of all Canadians at all stages and in all channels.
On an internal notes the country door, maybe was once again certified as a great place to work and received recognition in the following categories Best places to work for mental health best workplaces for giving back and best workplaces in retail and hospitality. We're also very proud of our progress in 2019 to help the environment and people in needs through our comp.
Pensive mattress donation and recycling program.
In 2019 alone over 138000, mattresses and foundation units were diverted from landfills through donation or recycling.
I'd be remiss not to discuss how we are responding to covert 19 or corona buyers.
We've established a robust plan to address the situation both internally and externally.
Internally, we are communicating and educating our teams on the facts and listening to our associates and customers to ensure our we are ahead of any concerns.
Externally, we are constantly assessing the risk to our entire supply chain, including the impact on sourcing inventory levels and marketing campaigns to date, we've not seen an immediate impact. However, we appreciate the situation changes daily and are continually updating the planned to mitigate future impact on our business.
Finally, as always we remain committed to providing our customers with the safe and healthy environment asleep country dorm HBU Andy.
In closing as we enter into a new decking sleep country is uniquely positioned to continue to grow market share and exceed our customers' expectations.
Our growing 276 store chain.
Leading digital banners collection of the most relevant brands and sleep today and ability to serve Canadians coast to coast with White glove delivery service combined to create a recipe for success not easily duplicated we've been dedicated to enhancing the Canadian sleep experience for 25 years, and we look forward to continuing to fulfill our promise.
While also investing in future growth for many years to come.
With that we conclude our remarks and open the floor for questions.
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Withdraw your question please press the pound or hash key.
Our first question today comes from my Bank from Sea IVC. Please go ahead.
Good morning, Matt Good morning, I guess can we start with same store sales and if you could give any additional detail on the drivers. So anything on same store traffic and then trends either by month or by region anything would be helpful.
So we.
I would say you know as we've talked in the past we grew our same store sales by traffic.
Closing rates average unit selling price and and we saw.
Again traffic was.
Not up in same store sales, but we thought it varied throughout the country and we were we were comfortable with where we start traffic. We did see improvement in conversion rates. We also saw improvement in average unit selling price and so.
We were quite pleased with the way the quarter unfolded, especially around some of the holiday weekends. We really felt we were able to capture a lot more business and.
So you know frankly October was a little bit slower and it got stronger at the last two months of the quarter. If there is some of the color for you.
Great. Thank you and then turning to and she had a and specifically median advertising spend so looks like that was up about 200 basis points as a percentage of sales pretty pretty consistently Q1 through Q3, and then was up only about 40 Bips in Q4. So is there is there's some timing there and then.
And then also how do we think about out expense growing versus sales in 2020.
Sure I'll, let Craig answer any of the.
Dollar questions, but I just wanted to say as we said at the end Q3, and we've said in the past our marketing expense isn't always exactly the same on a quarter over quarter basis, and we have to watch out for that and you know a couple of occasions, we did as in Q3.
We are held accountable for having higher marketing expense and we explain that it was more branding and that it would come back into line and that's what you're seeing a lot of.
Yeah, and just kind of quarter over quarter as Dave mentioned, we did see the step down from about 8.5% of sales in Q3 down to 7.2%.
Some of the de lever a year over year was mainly driven by the Andy acquisition rolling through because they do have a higher percentage of marketing compared to their sales versus our core business and and in terms of kind of what's a good kind of level to set for 2020, we feel that at the end of.
2020, it was a good proxy for what or sorry, Yeah, and 2019 story, it's a good proxy as a percentage of total sales.
For the three banners, yes, the country during May do Andy to as a percentage of sales.
What do you see end to end of 2019 is a good proxy de meaning that the full year 2019 over the Q4 29.
The full year, okay. Thank you.
That's it for me.
Thanks, Matt and by the way, while we're waiting for the next question you know, we do realize that the our comments were longer than normal this time and that had a lot to do at the IRS 16, and the and the any acquisition and so hopefully you got a lot of it we're going to continue to those should not be nearly his in depth in the future.
Our next question comes from stuff that comes from RBC capital markets. Please go ahead.
Good morning.
Good morning, Thanks, just on the gross margin side the numbers came in somewhat higher than we're looking for and can you maybe talk about what the drivers. There was it just a full quarter. Andy there was maybe the type of mattresses you were selling in the quarter just want to understand the driver and then we'll then be known your numbers for a full year at the kind of similar.
Question to the last on it this gross margin number a good proxy going forward for us.
Yeah, Hi, Sabah, it's a it's Craig here somebody efficiency that we saw on the gross profit line item, where I'll go through the positives first and then offset by some items that went to the in the a and a de levering direction as well.
Our sales and distribution cost and we did see that a lever by about 1.6% on the on the quarter and that's really the sales that are driven by the end the business are not privy to the commission structure that we have in our in our core business of sleep entry door may do and.
Another good news in that in that bucket is our SDC indoor may do you know compensation in sales Commission also remained flat. So we didn't see any levering or de levering. There. So the main pickup there was the Andy business rolling through.
And then the next big pieces really inefficiency that's caused by the IRS 16.
I buckets within that within the cost of sales that.
In this area, we didn't see a pick up on the rent and occupancy from about a 9% to bet a 3.3%.
Pickup so a significant pickup there of about 5.7% an occupancy cost then that gets offset by depreciation on the right to use asset.
That flows through in the in the other direction. So it's a net overall pick up from the IRS 16 standard of about 1.5%.
The other a item in the cost of sales stack that did go in the other direction is tied to inventory direct costs net of rebates.
On a positive note within that bucket, we did see our product costs and product margin improved somewhat side today split of accessories, and the weighting of sales mix to access.
That's very sorry, and then we did see lower rebate in Q4. This is not to say that we won't see that benefit in Q1.
On what tied to timing of purchases when we purchased the good as the rebate gets attached to the inventory item and then gets relief once the good as a as subsequently shipped so we don't see that as a loss rebate, which is something somewhat of timing and we should see that back in Q1 to 20.
Great and then just Directionally speaking I think when you acquired Andy the EBITDA margin was lower but obviously they have Laura DNA should we assume that it might be a similar or higher margin gross margin business or how does that compare to the legacy sleep country a gross margin.
I think what Weve I think it's.
Where our results came in at we shouldn't see significant variations.
You know expected in that area.
So I wouldn't say that we should expect a significant levering in that line item or de levering. So I think it's a decent proxy.
And and then the only thing just a on the Andy business is a you'd mentioned DNA being being lower that does get there is some different real estate within the business model, where again as mentioned on the SDMA piece or the marketing and advertising spend is a is higher for Andy.
Great and then can you maybe comment on I guess in early does the ecommerce platform are you noticing any thing different in the consumer take up of you know mattresses from kind of the traditional sleep country model versus what your historically seen in the MD model.
Price point or just consumer use of the website anything you can share.
Sure I think.
While we share that I'll, just give a little bit more of an overall comment in a reminder, we rolled out are you knew ecommerce platform at the end of last year and we're pleased with the improvement that we see in that over our old site.
One of the biggest differences is that we do carry all the majority of our products online now I will say that we're still in the process of optimizing and making the site as good as we wanted to be in the future and that's an ongoing process, but what we are seeing as we're seeing more sales across our full product line rather than just obviously the bloom products that we sell.
And so we're actually pleasantly surprised by how many people are willing to buy a traditional mattress online through our website and will continue to be able to optimize that as we move forward.
And then I'm just on the performance of sort of the new store openings and some of them. All openings are those also still tracking in line with their expectations. How are some of the the nearest store I guess in the bigger shopping centers performing for you.
Yeah. We we have no reason to feel that are that our real estate strategy is not going well.
You know we've opened.
Approximately 70 stores since going public our same store sales have continued to get straight our average sales per store excuse me have continued to grow through that period of time and frankly, our payback on stores, even with more expensive mall stores is falling in the same category at 1.2 years payback on the store.
Okay, and then last one for me up the kind of the at least eight stores that you're looking to open. This year is there a focus on region or type of stores or market that you're looking to add those into.
No. We we have a investigations all the time going on across the whole country and we look at we know where we want our next many stores to be and as we find the best opportunities across the board then we can take those so.
The one thing that we have mentioned for the last year show and was again in 2019 successful. We are still also very much looking at the satellite type stores I mentioned the store in Chicago to me come back that we opened in was the biggest opening weekend we've had.
So you know just because it's in a smaller town doesn't mean, it's not a.
A good location or a very.
Advantageous place to be.
Great. Thank you.
Our next question comes from Vishal Shreedhar from National Bank. Please go ahead.
Good morning, Michelle.
Hi, Thanks for taking my questions.
Management noted in the script that it aims to advance strategic retail partnerships.
Maybe you can expand on that and talk about your thoughts on the partnerships that you have right now and how they are progressing.
So well first of all Stuart shape, where normally answer this and he's writing notes right now because he's not feeling well you as a sore throat. So he might chime in a little bit but yeah. He's the his voice is not what it should be today the hub.
So one of the things that we have always been as a company is we wanted to be the house of brands and we wanted to make sure that we offer the best selection to our customers and and so that's been since we've been around for 25 years and so we can continue to do that now in our stores as we did with CYMBA as we've done with blank wheel as we've done in other times across.
Our history and a and so there are many other companies were looking out to talk to you to have exclusive relationships and that's the nice thing about being is having as much market share as we do in our breadth to stores is that we can both bring something the table that benefit each other whether it be marketing dollars that they bring whether it be our stores that we bring our expertise that we bring.
And we're finding that to be real additive to both sides of that equation.
Okay, Okay, and just on the actual brands that.
Country offers through this period of coverage I've noticed that its.
Its expanded a fairly significantly.
And and that's part of management's goal, but are you noticing at some point to consumers get decision fatigue as a review the portfolio and they they just trying to side among all these options a C country offers.
Well I think the one thing you have to keep in mind and it's one of our one of our strength is that our in store experience is very good and we have very long tenured people that have a lot of expertise and every single one of our transactions generally is assisted so we're able to really on explained to the customer listen to the customer talk to them.
And I understand what their needs are and help them make the right decision. So you know as long as we are doing it in a as long as you're bringing out new products that actually have different qualities and other products there that might be associated with different customers, which we always do they shouldn't be confusing shall I will I will add that our choice of partners and brands that we.
Being in is very much.
It's very important to us in terms of the branding they do and the awareness that there are creating through their own advertising campaigns, because in the and as Dave mentioned, our our position as the house of brands the traffic and the investments that they're making a on their own is driving additional traffic not just specific.
Typically for their own brands, but for our entire network.
Okay and on the traffic yet management noted total traffic increase for the network and a little bit side, you know decline on the in store basis wondering if the traffic on the on the per store basis that decline is that due to.
Cannibalization from your store growth or is that just a market for ti from the consumer do you have any insights on that.
So I think there's a few different category of buckets to look at so number one is as a general we don't feel that we're seeing cannibalization in our stores from ourselves across the board. We we measure that carefully now I will say and we've talked about it before in some of our mall stores, which are very centrally located whenever you opened a store closely located to another you might see some.
For that 12 month period, and so we are seeing that outside of that we can really look at our same store sales as a reflection of what the consumer confidence is any particular market and so we spent a lot of time, making sure that we understand our traffic flows and that we have a really good explanation for our we causing it is the market, causing it.
Or is this something unknown and we're very comfortable as we look across the country that there's good reasons for where its high and there is good reasons for where it's not as high.
Okay, and just moving onto your average unit selling price management noted increases again.
And I'm wondering what's that related to particularly as you as you add these mattresses they've seen some of them seem to be attacking the lower price points or the lower end of the range. So I'm just surprised to see that the average price point continues to go up maybe you can describe that dynamic for me.
Well I think again kind of goes back to what we've talked about a minute ago with our expertise in store and making sure that were showing the customer what we have listening to them because generally speaking give any good education and the understanding of how important sleep is a person will generally by something a little bit more expensive because they realize it seems there.
Needs more and that's nothing new but we also bring in product at all price point and we've always had products at all price points. So that's also nothing so while you're seeing some things that might be lower price. We're also bring in things that are higher price and it's a good balance.
Okay. Thanks, very much great color.
Thank you.
Our next question comes from Stephen Macleod from BMO capital markets. Please go ahead.
Good morning, Steven.
From one of Craig.
Just a couple of questions here I just wanted to go back to your comments from the Corona virus and Cobot 19.
Obviously understanding that.
You maybe haven't seen anything to date can you just talk a little bit about or just remind us about the supply chain and how.
Currently set up in terms of across Andy accessories, and see country.
Sure.
Generally speaking we have we would have exposure to offshore product in both NDN sleep country in some of our areas, but generally speaking it's not as much in the matricide is it isn't the accessory side. So first of all the mattresses, we get some components or some of our suppliers get components from offshore and some of our mattress did you come up from offshore.
But it's a lower percentage on the accessory side, it's a little bit higher percentage, but we do also have alternatives that are more locally produced so while well. If this were to continue it would not be completely unworthy of us keeping a very close eye on it we're certainly not in a position of many of us.
Other retailers or other companies in Canada as far as how serious it could get the.
Excuse me the other side of that equation is you know we're talking to all of our suppliers every week and many of them are already in production. So it's not like we're sitting back saying you know, we think we're going to be okay, because they're going to start in a couple of weeks. We you know there are a lot on that are already backup in production.
Right. Okay. So that's helpful.
And then just turning to the ecommerce platform you talked a little bit about expanding or merchandising assortment can you just.
Expandable, but on a on what that means I was on the impression that you already had everything or I guess the majority of your in store offering already online.
Well, we do but that's really only been since the end of last year. So prior to rolling out our new ecommerce platform, we sold accessories, and we sold the bloom product and we sold the Simba product and when we rolled out the new ecommerce platform, we still carry all those products, but we've added most of the mattresses that we carry in our store.
So that is still very new.
Okay.
Okay.
Then in terms of the new store outlook, you talked about a in the in the prepared remarks and the press release I think you know a minimum of eight new stores for 2020 can you talk a little bit about what maybe pushes you know what that would the high end of that range could be I mean historically its been eight to 12 just curious if it's is it actually.
Thank you maybe can't do 12 this year.
No I like the let's be really clear about this one our methodology our methodology in our messaging isn't changing we just found is saying eight to 12 was confusing because some years, we do more than 12 and then we're having to ask you know answer question why went over 12. So over the last year, we've been telling people that were just going to go now to say more than eight because it really is the same.
Statement and when it's less confusing but are feeling of our ability to open stores has not changed okay. That's great and then maybe just finally I just wanted to clarify Craig's your commentary around that's DNA and gross margin did I understand correctly that you know the SGN a rate and the gross margin percentage for 2019 as a good.
Proxy for you would expect going forward or is it still fair to assume that you could you could still see leverage on yesterday as you drive further sales growth.
Yeah, I'd say, let's do the I'd say on the margin or the margin profile in gross margin is.
Good good proxy and now were on the SGN a we are in a year of transitioning our ERP system. A release two will be throughout the year and there's a different license component to the new ERP. So I think in terms of levering in that area in a in.
2020, I would say that that would not I'd say, we probably won't see a signal a levering I wouldn't see outside offices and the other side, we shouldn't see a or a significant de levering in any regard as well. The only difference is that we will continue to have a full year of Andy rolling through that does have a or a lower.
EBITDA margin, but we also had that in 2000 and a and 19.
The main difference as.
Where we did see some additional investments in Q3, specifically around the brand Yeah, Vandy I think we will see some opportunity.
On the on the marketing side of the business and that's why we've kind of said that that end of year percentage of sales for from marketing is a is that good is a good kind of I guess measurement to go buy on that marketing spend side. So you will see a little bit of a you know efficiencies there on the growth in sales.
The business, but outside of that I'd say, it's going to be.
Pretty fair proxy of where the business is that with some pressures from the ERP investment on licensing, but some a little bit a pickup on on the marketing side of the any business.
Okay, and then just on the gross side the gross margin side.
You know would you not expect to see higher gross margin as you increase your proportion of accessory sales.
Yes, there will be it like I said I think in terms of mix and we do see <unk>, we are seeing double digit growth compounding over over strong growth in the accessories piece that you will see you should expect some efficiency there I think that's a fair statement.
Yeah, so it might be a little bit of opportunity there.
Okay, and the only thing I'd like to add to that as is our gross margin percentages.
For our product margins are quite healthy and we want to make sure that we have the good mix of that so again, we're not.
Not taking away from what Craig cities completely accurate, but it's our gross margins are already quite high and we just want to make sure we're cautious on that.
Right. Okay. Okay, and then maybe just one more if I could Craig in the last call you mentioned, some more putting some more discreet parameters around DNC IB and the dividend is that something that your.
In a position to share this blenders.
For future quarters.
Yeah, So a will when one I'll touch on there because we didn't touch on in the prepared remarks is as you can see we did act on our end see I'd be good quarter for us. So we did buy back over 500000 shares I'm. So obviously that did move up in terms of the priorities of our capital allocation and then in terms of the broader strategy, which we do.
Intend to a you know come to the market with some.
Some ranges in the future around how we think about dividends debt repayment NC IB program, we will have more to share and I not coming quarters and then we did also a get a you know approval by the GSX and released the.
The renewal of the up at the end Sabby program as we put that in place for the next year as well, so I'd say more to come in the future Abbott and JV has been a priority that we did see in Q4. It we did act on that.
Okay. That's great. Thank you.
Our next question comes from Brent Morrison from TD Securities. Please go ahead.
Hi, Brian Hey, good morning.
If I could just follow up on that question. The buyback maybe you could just talk to us about what your target Leverages.
Again, I think when when we look at the cap allocation strategy. We will also be looking at a and sharing our comfort levels around leverage as well as them. Some of the opportunities we see with working capital right. Now we do not feel we are Oh, you know levered, we it to extent, where we may be.
Would be in the future, but we're also very comfortable footwear right. So I again, I'm I I'm not trying to kick the can on this one basis. They will have more to share on the next call around some of the parameters around capital allocation, but also as it relates to our comfort around around leverage and a more cohesive plan going forward. So that we can be a little bit more seats in our message.
Turning to investors into the market.
All right and then just one follow up question I don't mean to.
Repeat something but with respect your operating margin I hear all the pluses minuses now that we have I have for 16 and all the impact of comparable is behind us as a message here that operating leverage and I'm, specifically talking to the EBIT margin. The operating margin should be flat as we look at 2020 and then can you maybe just talk about your approach to me in advertising I see that sequentially there.
Growth was down in Q4, I presume, that's just a timing issue, but if the economy is to remain challenged your approach to media and advertising how that will play out.
Yeah, I'll all talk to the EBITDA pieces of business and then David maybe some color around market. The a I think you I think your comments are fair, we should see our operating EBITDA.
In a very very similar range again, where we see some some items within the DNA stack, specifically, where there will be some differences from this year would just be an increase in licensing costs on the new ERP not that significant but that's one area that would be have a little bit of pressure on us, but then we do see some.
Total opportunity with the Andy business in the marketing percentage, there and investment on that front. So overall they should you know I think we'll see probably a fairly almost canceling out of those too. So I would expect that similar EBITDA operating EBITDA margin for 2020 to fair Fair estimate.
And you only going to add to that Craig C. I know you said earlier, but just so everybody understands it when craig's talking about the extra licensing fees.
That is.
Really because we have double the fees for Twentytwenty and that's because we are running too easy you know, we're running our double ERP system, because we want to make sure that we're we have the our belt and suspenders on as we rollout our new ERP and that will start to fade away in 2021 correct.
On the marketing side, just to give a quick reminder, and an overview in 20.
2017 in 2018, we made investments into sleep country marketing and we let the market know that you know at the end of the 2018 that we would have a similar type of percentage of sales spend going forward, because we didnt need to continue to up that and that kind of was the case. We also then said, though that in 2019 were going to see an increased due to the Andy business.
Yes, because it was new to us, which we did see and now at the ended the year. We're at the end of 2019, we say that you know that is a good proxy for the type of.
Levels that we're spending.
Now hopefully we grow faster and we lever that which has always been our plan because you know we want to for 25 years. Our mantra has been to grow a profitable business not just grow business and that hasn't changed what I will also say is that.
You know when it comes to how we're going to react to the ups and downs in business, whether it be do the corona virus or just the marketing or market in general.
We're always looking at where we can cut costs, where we can shift cost we look at on a regional basis.
And we were already looking at that it had throughout the year, we don't want to cut marketing too quickly in an event because generally we find that we can take market share and be stronger by being strong, but the fact is if things get.
We're not opposed to doing that either as we evaluate the situation.
Thanks for the color.
No problem.
As a reminder, at star one in order to ask the question.
Our next question comes from Patricia Baker from Scotia Bank. Please go ahead. Good morning, Good morning, Patricia Hi, there I'm I've two questions for you I wanted to delve a little deeper into the online experience I know when you initially launched the online platform you talked a lot about the fact that particularly with respect to the.
No matter what it was doing was the online presence was driving traffic to your stores. Just wondering if that experience has has shifted has shifted.
No I you know I will say that well first of all let me just go back a step and say, we think that our new system is and enhance system over the last system on every front and yet we still think that we have room to improve this new system that make even better and we're working on that every day, but as far as is our new system driving traffic away from the store or we don't have a.
Reason to believe that's the case.
Okay, and and so specifically Dave though.
You do you do at the beginning you did talk about people would go online than they would search the mattress online, but then would go into the stores.
Tobias you're still seeing that doors that diminish somewhat.
Hey, Patricia its toward I will say that.
We have seen a different price points different behavior, so at lower price points below $500, which is accelerating is more of an online exclusives type of a purchase but.
Pleasantly surprising to us as we go 502000 and north of $1000.
The that path. The journey may begin on their phone a were seen a drive of traffic into the store, which we are following through our geo fencing and transacting either at store or after they leave the stores. So we're actually quite encouraged by the track that it's dry.
Moving.
Into our stores <unk>.
Excellent and then in the press release and then also in your remarks, you mentioned, the fact that you're seeing growth from both new and loyal customers. So I'd really like to know little bit more about your loyal customers. How do you define your loyal customers and how are you tracking your loyal customers.
Well well here's your one of the reasons, we're rolling out a new ERP is so we can get even more finite and that's because that's been an area, where we haven't had as much of a of visibility as we have but we do track it more internally rather than.
Scientifically and and so our ours loyalists have and we might do we do some outside resources for this from a different firms and what we're seeing is that our loyalists are very established Canadians and what our online as well as some other marketing that we're doing with accessories is.
Opening up the market to different subsets that are that haven't been as connected with us in the past and so were because we again one of the things we want to do you want to open up more to more ethnic.
Communities when open up more to even more rural communities, which is also part of a real estate play and we're seeing those.
Taking hold but when you look at the the urban customer that the suburban customer that has always been very loyal to us we're still seeing strengthen those.
Okay. Thank you that's helpful. Thank you.
Our next question comes from southern come from RBC capital markets. Please go ahead.
Thanks, just a quick one on the ERP can you let me give a timeline of sort of the next phase a rollout just more.
Focus on one the ERP goes live in store and your comment around running a dual system is that sort of to make sure that.
When it does go live in stores, even if there is issues. When you. One you have a backup system working just a little bit color on timing and the process.
Sure. So we're still working out the final planning on how the developed how we're developing the system and then when we're rolling it out but our plan is to roll out our first launch our first platform.
Over the next quarter and then as you know is that stabilizes just continue start rolling out region. After region after that and our hope is to have that done by the ended the year or little after that depending on how it starts the there's two things to your point about running dual systems number. One is we are not planning to throw the switch for all of our reach.
And at once so as we roll over we'll have some regions on the new system in some on the old. So that's why we have to have bull and to your to ask your answer. Your second question is yes, if we roll out a region and we find out that there for some reason is a challenge we can roll back to the old system. So as they said, we're really trying to make sure. This is as good as a smooth the rollout as possible and then it.
Can't hurt our business, even though it might make us pull our hair out it won't hurt our business.
Thank you.
Thank you.
Our next question comes from Stephen Macleod from BMO capital markets. Please go ahead.
Hi, just one follow up question you talked about your expectation or your outlook for sort of continued market share gains in terms of your outlook.
Can you talk a little bit of can you just.
Prioritize or maybe give us color around where you see the largest market share gain opportunity whether its E commerce.
Accessories et cetera.
So when we talk about market share, we we have to break it into two different.
Actually even probably more than two categories, but in a big stroke, we would have one being mattresses at one being accessories and as we've always said our accessories. We don't really have a great understanding of what our market share is because there is no unified source of that data we have better understanding of how strong we are in pillows.
The sheets and so on and so forth, but when you look at mattress is that's where statscan data helps us peg that a bit more now it's not 100% perfectly accurate either but we it's a very good trending system and using the same parameters on mattresses. We just you know at the end of 2019 feel that on a dollars bases crossed.
Cross the 33.5% market. So margin. So we're at the end of last year using the same parameters, we were at 31 and a half and this year 33, and a half and.
So that's an interesting dynamic for us that one out of every $3 spent on mattresses in Canada is with US and we still think we have room to grow there. We think we have more room to grow on the accessory side because overall it smaller.
And by the way online will play a role in that in solar stores.
Great. Thank you.
Thank you.
Okay.
And we have no further questions in queue at this time I'll turn the call back for any closing remarks.
Well sorry, thank you very much for all the great questions and we look forward to talking to you at the release of our next results have a great day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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