Q4 2020 Sleep Country Canada Holdings Inc Earnings Call
Welcome decision. Please hold for the next available operator revenue S. Israel. The pass you on tape on a portion of your heart the disappointing blue.
[music].
Good morning.
I sure at sleep country, Canada Holdings.
I'm sorry.
Alright.
Your first.
Alright.
At <unk>.
Yes, Rachel Art, a C H E L.
Smith S M I T H. Thank you.
And your company name.
A year at a I E R E.
Thank you very much.
They just got started.
Thank you.
Youre welcome.
Yeah.
At this time I would like to welcome everyone.
One of the sleep country, Canada, Q4 end 'twenty 'twenty year end results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during that time simply press star of the number one on your telephone keypad.
To withdraw your question. Please press the pound key we ask that you limit your time to one question plus a follow up question before cycling back into the queue.
Yesterday sleep country, Canada released their financial results one of the fourth quarter in fall of 'twenty 'twenty a copy of the earnings disclosure is available on their website and includes cautionary language about forward looking statements risks and uncertainties, which also apply to the discussion during today's conference call I would now like.
To turn the call over to day Freedman Chief Executive Officer. Please go ahead Sir.
Thank you and welcome everyone.
I hope, you're all well and healthy.
With me on the call today are stewardship of our Chief business Development Officer, and Craig The Prato, our Chief Financial Officer.
We are very proud to announce at Q4 was the best quarter in sleep country's 26 year history closing out of successful year as Canada's leading omnichannel sleep retail.
Over the past several years, we are strategically focused on building out our ecosystem and purposely adding new layers onto our powerful business, creating a direct diversified model that serves Canadian sleep needs well across all channels brands assortment and experience our twin investments of developing a.
Fully transactional sleep country, Canada, Dormie Blue website, which launched in November 2019, and our acquisition of Endy in December of 2018 have proven to be two of the most successful investments that we have ever made.
While compelling on their own the combined impact is firmly positioned us as the most successful e-commerce and brick and mortar reached sleep retailer in Canada.
Further to those investments are exclusive partnerships with some of the world's premier direct to consumer bedding of box players like purple and simple <unk>.
Complementing our existing assortment of relevant mattress brands have solidified our competitive advantage by providing our customers with Canada's largest selection of sleep solutions through our web sites and stores.
Yeah.
I would be remiss, if I did not mention our marketplace partnership with Walmart partnering up with the largest retailer in Canada and their powerful E. Commerce business has served us well on expanding our reach to a wider and broader customer broader customer segmentation.
Finally, our enhanced model of service and our logistics machine that spans across the country with 18 strategically located fulfillment centers has delivered unparalleled results delivering to that last mile setting us apart from our competitors and placing us in the league of our own.
We are exceptionally pleased of our 2020 performance across the board and could not have achieved these results without our dedicated and hard working teams at sleep country Domingo and Andy plus our suppliers landlords and media partners, each of whom went above and beyond for us in these turbulent times.
Yeah.
Now onto some financial highlights a few fourth quarter achievements include revenue, which grew by a powerful 33, 4% net.
Net income, which increased an impressive 89, 4%.
Same store sales, which grew 32, 4% at.
And diluted EPS, which increased 89, 5% from 38 to 72.
In addition to these notable successes we were able to expand our gross profit and operating margin Ebitdas margins.
We closed the quarter on a note of financial agility with the cash position of $38 $3 million and a further $182 million and liquidity available under our credit agreement.
Our results in the fourth quarter and fiscal 2020 are a testament to the strength and flexibility of our enhanced business model our.
Our success spans across every aspect of our business with a customer centric view on how to best service their needs and create an exceptional and seamless seamless customer experience from.
For context, only a short few years ago, almost all of our revenue was acquired via in store sales as a result of strategic investments in innovation Q4 revenue from digital channels drove 21% of our revenue while at the same time, our growing network of stores also contributed to our best ever.
Store sales growth.
This gross growth was achieved while accelerating our profitability with net income increasing 89, 4%.
With these results we believe that our enhanced model is working exceptionally well and anticipating and delivering on every Canadians sleep needs.
We are still early in our ecosystem journey and are bullish on our ability to grow on business and take market share.
No matter, where our customers journey ends or begins we want to be there for them to serve their needs for all things relating to sleep.
One example of a highly successful innovation that we introduced this past year. During the March 2020 shutdowns was bringing the in person sleep expert experience to our online platforms with the introduction of our Dream line chat team.
This team was successful in serving our customers and raising the average average unit selling price that has now become a permanent addition to our ecommerce experience.
Of this capability resonated extremely well with our new and loyal customers as evidenced by nearly 100000 chats and calls taken since June of 2020.
Our innovative and future proofed ecosystem is defining how Canadians will choose to shop for sleep solutions for years to come and we are extremely proud of what we have been able to accomplish over such a short period.
What is particularly remarkable about our Q4 results is at the occurred in a highly tenuous period with 65% of our stores temporarily closed due to the mandated closure of nonessential businesses as at December 31.
Accounting for 10, 5% of our actual quarters operating days being closed.
The closures persisted over boxing one of the most significant retail weeks of our calendar. Despite these conditions. The unparalleled trust. We have earned over the past 26 years combined with our convenient touch touch points across digital store chat phone and curbside pickup allowed new and loyal customers to engage with our brand on their own terms in Q4.
Customers entered our stores with a clear intent to purchase with trust and confidence in sleep country and dorm.
As the sleep retailer of choice as evidenced by record conversion levels.
Now more than ever Canadians are prioritizing their sleep is a core pillar of their health and wellbeing I.
I am proud the sleep country serves as Canada sleep connect Canadian sleep partner on their wellness journeys by offering superior product expertise sleep expertise combined with the world's most innovative and high quality solutions to fit every unique needs.
Further to this relentless pursuit of serving Canadians sleep and wellness needs a critical driving force behind our strategy is the clear differentiator with the Canadian sleep landscape.
Is our is our partnership capability, we continue to secure exclusive partnerships with the world's leading sleep brands, ensuring we have excuse me and serve ensuring we serve as each Canadians partner across Premier Global sleep products. In November 2020, we successfully launched an exclusive partnership with purple innovation the U S.
<unk> and bedding leader known for the celebrated purple mattress, we are the only destination in Canada for the covenant of my products, which have amassed a cult like following with virtual viral marketing campaigns racking up more than 1 billion views and wildly breaking through with today's consumers the.
This partnership has generated excellent results in our first few months and our web in our website and stores. We are extremely optimistic about the future purple innovation at the latest brand to add to our exclusive portfolio, which includes reach of recent partnerships with leading international brands like Maloof, Simba and blank Quill.
Our business Future's bright as we continue to grow and optimize our enhanced service model and deepen our position as Canada destination of choice the.
The past year's results are a testament to our strategy and our team's unmatched ability to predict and service Canadians needs meet any of them with the perfect solution to suit their sleep and wellness journey no matter, how they choose to shop.
I will now turn the conversation over to Craig.
To discuss our financials.
Thank you, Dave and good morning, everyone.
I would like to reiterate the we're extremely pleased with our record Q4 results.
These positive results. Despite our total store closure of network being closed for 10, 5% of total operating days during the quarter.
And having two of our largest markets, Ontario, and Quebec closed down for boxing day week continues to demonstrate the strength of our business model strategic investments and most importantly, our associates, serving our customers and of safe manner.
Now onto some of the quarter's highlights let's begin with revenue in the fourth quarter, our revenues increased by $62 4 million or 33, 4% from $186 5 million in Q4 2019 to $248 9 million in Q4 2020.
The increase was primarily driven by 32, 4% increase in same store sales to new store openings and our wrap stores, 21% of revenues was earned through our e-commerce platforms.
Our mattress revenue increased by 56 million from $146 2 million in Q4, 2019 to $196 8 million in Q4 2020.
Our accessories revenue has increased by $11 8 million from $40 3 million in Q4 2019 to $52 1 million. In Q4 2020, we are extremely pleased with the accelerated growth we are experiencing in both of these categories.
During the fourth quarter gross profit increased by $22 5 million from $59 7 million of Q4 2019 to $82 2 million of Q4 2020, our gross profit margin increased by 1% from 32% in Q4, 2019% to 33% in Q4 of 2020.
These margin increases are primarily due to leveraging fixed distribution costs occupancy costs and depreciation costs. The increase was partially offset by slightly higher delivery costs during the quarter.
Moving on to the G&A expenses or G&A expenses for the fourth quarter increased by $8 9 million or 25, 6% from $34 8 million in Q4 2019 to $43 7 million in Q4 2020 as the percentage of revenue our G&A expenses decreased from 18, 6% in Q4 2019.
To 17, 5% at Q4 2020 the.
The change was mainly driven by an increase in our compensation advertising expenses, our advertising expenses, though are larger in dollar or in line with the prior year as a percentage of sales.
Moving on from G&A, our Q4 operating EBITDA increased by $12 5 million or 34% from $41 3 million for Q4 2019 to $53 8 million for Q4 of 2020. The increase is primarily due to strong revenue growth in Q4.
Combined with an improved gross profit margin and partially offset by an increase in G&A expenses.
It was also favorable favorable favorably impacted by lower adjustments related to onetime ERP implementation costs and share based compensation expenses as compared to Q4 2019.
Our Q4 net income increased by $12 6 million from $14 million or <unk> 38 per share in Q4, 2019 to $26 6 million or <unk> 72 per share in Q4, 2020, representing 89, 5% growth year over year as Dave mentioned earlier are.
Our adjusted net income increased by $11 8 million from $15 7 million in Q4 2019 to $27 5 million in Q4 2020 adjusted diluted earnings per share increased by 32 cents per share from 42 sets of per share in Q.
Sorry, Q4, 2019 to 74 cents per share in Q4 of 2020, representing 76, 2% growth.
On an annual basis, we experienced a net decrease in cash of $5 seven 7 million net cash flow provided by operating activities in 2020, or $173 7 million and cash flow is using invests in investing activities was $17 7 million and lastly at cash flows used in financing activities were $161 8 million.
Much of the cash flows used in financing was due to our repayment of $97 8 million on our long term debt facility the facility, thereby reducing our debt balance from $175 1 million as at 2000 as of December 31 2019.
The $77 3 million as of December 31, 2020.
We currently have access to $182 million in liquidity under our credit facility.
As mentioned previously our cash position at the end of Q4 was $38 3 million compared to $44 million in the same period last year at our net debt position improved to $39 million down from $131 1 million at the same time in the prior year.
An update on our capital allocation on February nine 2021, the board declared a dividend for $19 five per share on the company's common shares. Additionally, we have filed the notice of intention to the T. S X to pursue an end CIB where purchases may commence March nine 2021.
That completes the overview of our financial results back over to you Dave for closing remarks.
Yeah.
Thanks, Craig.
To say, we're proud of our success over the last quarter and really over the course of the past year is an understatement. It is the reward at is rewarding to see our efforts yield such phenomenal value for our 26 year old profitable and growing business.
Moving forward, we remain committed to our strategy of one delivering world class experience across all channels and touch points, providing Canadians.
Canadians with exclusive access to the world's leading sleep products and using our sleep expertise to help Canadians achieve their best sleep is a pillar of their health and wellbeing.
I would once again like to express my appreciation to our extraordinary teams at has been an exceptionally challenging year and I am so privileged to work with our amazing teams, who stop at nothing in the pursuit of excellence for our customers.
I would also like to congratulate Alexandra Vojvodina for her promotion from <unk> CFO to end, the GM and president of.
<unk> as a key member of end user early stage growth team in 2016, and we're thrilled to work alongside her as we continue to grow this incredibly successful Canadian brand.
In other <unk> news, we are proud to share that in Q4 and Easter past. The accumulative total of 250000 mattresses sold since the inception in 2015 with an outstanding average four nine out of five star rating based on 20000 customer reviews. Further the end you know donation project.
Reached a milestone of 10000 mattresses donated since founding in 2015.
This wonderful milestone builds on sleep country's commitment to repurpose sleep sets from our donated bed program to those less fortunate with over 340, 304000, mattresses and foundations donated and another 662000 recycled over the same timeframe. These.
These are products that we pick up from our customers and divert from landfills.
In closing I'll reiterate that I believe the future of sleep country Domingo and Andy is bright and we are better positioned for profitability growth and market share expansion than ever.
We are energized and focused on continuing to execute against our growth strategy and service of expanding our leading position as Canada's sleep destination of choice as ever we are laser focused on building value for our customers employees communities and shareholders and a record breaking Q4 results demonstrate we are doing just that.
With that we conclude our remarks and open the floor for questions.
Thank you.
Ladies and gentlemen, as a reminder of you wanted to ask a question. Please press star followed by the number one on your telephone keypad.
The star one well pause for a moment of capacitor Q&A roster.
Okay.
Your first question is from the line of Martin Landry with Stifel.
Good morning Martin.
Hi, Good morning, guys and congratulations on your strong results.
Thanks.
I'm trying to understand the driver behind your your strong Q4, and I know there was some pent up demand from from the spring when the stores were closed.
Also no you know home renovation has been of hot sector. So so I understand these these drivers, but I wondering did you run a specific promotion this quarter debt that would have gotten a lot of traction with shoppers.
Well, we ran many specific programs and I I think that we did gain traction with consumers because of our promotions because of our dream line because of all of the different innovations we've done and.
I believe that again as I've said in the past market share is kind of a lagging indicator that we will find out more later, but I believe that yes to your point I think there was some pent up demand in the market. I also think that people are spending more on their house, but we're convinced based upon conversations with our suppliers and so on that we took share as well.
You would also finding of the numbers Martin for the quarter, we took the calculated risk by increasing our AD spend our belief was that the consumer was out there and ready to buy.
And the investment on that at spreads seem to have paid off very well for us.
Okay. Thank you that's helpful.
And I'm looking at Q1, you disclosed the helpful table in your MD&A, which showcases the you know at the store close end reopening dates.
And I know that the Toronto appeal stores are still closed but as of today you know if I do my math and I'd like you to just double check my numbers here, but I'm getting.
Your stores would would be closed for an effective 30 days so far in the quarter does that not make sense.
We'll do will run all of that math firmly once the stores reopen but that is close of Stewart might have a little bit more on that.
Go ahead, Steve did you have a comment so 65% of our you're talking about Q1, right. Martin Yes, yes, it was 65% of our stores of or 282 stores.
We're closed up until February eight when the problems of Quebec.
Reopens.
On February 16th.
Ontario reopen minus.
The GTA area, which I think is 38 or 39 stores guys. We're currently right now at 13% of our stores are closed yet.
Yes, so 13% that would be about right. So up until February February at 65% as of February eight.
The back open which is 62 stores as of February 16th, Ontario opened minus the 38 39 stores.
Okay. If we could have looked like at.
On an actual number of similar to what you've shared for Q4 and that would be helpful. Assuming.
As of today that would be helpful. But and then can we can we assume debt online penetration in Q1 has been similar to Q4.
Yeah, our online business our online business continues to be very strong on all channels, yes and to your point on Martin we will share that information. We just we wanted to wait until we had all of our stores openings were not even 100% sure. When our stores are going to opened but we can get that info on follow up.
Perfect. Okay. Thank you very much thank you mark.
The next question is from the line of the share of Sri <unk> with National Bank.
Good morning, Sean.
Good morning, Thanks for taking my questions I'll.
I'll start off with the this question might be at the tricky to answer, but it's on the minds of investors.
Just wondering how management assesses just given the strong revenue number how much sales were pushed for how much was market share gains.
What was the change in the view of the customer maybe they're buying mattresses every five years instead of that'd be eight to 12.
If I look at those variables is there any way you can help me understand what's going on with the market right now.
So, let's kind of break this and I'll try and answer it in different buckets for you. So first and foremost just I'll start with market share as I said, we'll have the are the market share gains will become more and more clear as we get further down the road because again, it's a backward looking calculation.
But we have no reason to believe that we werent, taking significant we werent taking share in Q4.
Secondarily when it comes to pushing forward on pent up demand or pulling back the.
The market in Canada.
<unk> did have a big hole in it when you looked at the middle of the year with the first lockdown.
A lot of it was refilling that thirdly, the people are spending more on their.
Houses in general and that probably does benefit us and I think in that category. We've talked in the past about as the specialty retailer with a very strong E. Commerce platform, we're really well positioned to capitalize on that more than others and and so it's very difficult for us at this point in time to say that theres been a fundamental shift in how often.
People are buying mattresses, but what I can tell you that we feel that we are capitalizing on it as much as we can and as we continue to move forward, we will get a feel if we will get a better feel as to whether this is a <unk>.
<unk> for good or a shift for the time being at.
And we will continue to talk about health and wellbeing because people are starting to also understand more and more of that of Goodnight sleep helps with their overall health and they are investing in that and so that's the big positive that we'll continue to talk about as well.
Thank you for that.
Moving on to another topic <unk>.
Of the country and you provided some color on your disclosure material, but the country indicated to open at a minimum of six stores this year.
At solely due to COVID-19 uncertainty or is that also because of the rapid growth of E. Com on the of change and focus on your network.
So the more so at <unk>.
To the leaves that we experienced with the closures what what is clear to us probably than ever before is that for our business. When it comes to this tactile item of the mattress our customers' journey at one point involves the visit to our stores or of conversation, even with our new the chat lines of our sleep experts.
On the convenience 100 per cent and we've seen that more than ever during this pandemic drives them a better experience of the customer when and when they go to our stores drives a higher conversion of.
And a better return on our AD spend and no matter, where a customer decides to conclude that transaction, whether it's online on their phone or actually in the store at.
That store has definitely become even more important in our thinking the openings of our new stores. Because we did opened some stores somewhere delayed at war Windsor was the new brand new market for us the most powerful opening at the.
That we've had in years a lot with lineups.
In front of the store so our plans have not changed at all in terms of trying to open up eight.
Eight to 12 strategically well located.
Box and I would say that the pandemic has been good for some and not so good for other retailers and the opportunities that are presenting itself over the coming years, because we do get a little bit of a view of the pipeline in terms of the premier locations are at.
Is looking very interesting for us.
And Vishal I there is a data point that really was pointing to me. So I'll just share. It. If you go back to Q3, a 100% of our stores were opened and doing very well as you remember we had a good Q3 in our in our E. Commerce business was very strong as well so everything was kind of.
Working.
Working and we're still in the middle of the pandemic without a of vaccine and we were really excited at 18% of our business was done on line.
But that also means that in the middle of the pandemic with no vaccine, 82% of the people, we're still going to the store to buy and so that was something that really was.
It's not surprising to us, but it was a data point that was kind of pointing at.
Okay. Thank you for providing that color and maybe just on your thoughts on real estate and on the topic of finding better locations or.
Potentially finding better locations in the future.
Our mall stores still.
On a priority in the thinking of management in terms of.
In terms of the network and focusing more on growing that aspect.
At its.
Nothing has changed in terms of our thinking.
That's the question keep in mind that at our network of 282 stores only 11 of our.
Stores are in the malls, we will continue to look at the AAA malls.
But the convenience and.
And the shift of a lot of of people.
People.
Outside of the cities has definitely given some opportunities on main on main where at she has still been traditionally our strongest areas from a retail but the malls are still on on the on the on the plan.
Thank you.
Thank you.
Your next question is from the line of Stephen Macleod with BMO.
Good morning, Steven.
Thank you good morning, guys.
Congratulations on a really strong finish to the year.
Thank you.
I just thought of a couple of questions.
On the store the store color of that you just gave some of it was very helpful.
Can I just ask a little bit about how you saw sales evolved through the quarter end.
And if youre able to give any color on how you've seen them evolve thus far into Q1, given the fact that there have been some store closures.
But it's.
A lot of the things the patterns that we see are continuing so once our stores reopened after the original locked down they started making up ground very quickly and at.
And that will and that's what we continue to see the the other side of that aspect as the stores that never closed and I will say that the stores at remained open we.
Don't we don't really talk about in quarter things, but I can tell you. They were very strong right up at the end of last year.
Sort of at the stores.
The stores that were closed were very strong right through the end of the year.
I'm, sorry, I may not have been clear lets break this into categories. The stores at never closed at the end of the year. They remained strong up to the last day of the year like there was no drop off.
At the stores that didn't close what we're we haven't we take a lot of comfort in the fact that throughout 2020, we saw that when closed stores reopened it was really more of a deferred purchase at rather than the loss purchasing they started making up ground and we have no reason to believe that that won't continue.
Right Okay. Okay. That's helpful.
And I know that you know I know that you're on Omnichannel retailer and you've done the U.
We've taken very significant strides in building out the e-commerce side of things.
But have you noticed any differences in profitability between an e-commerce sale versus an in store sale or the channels. So intertwined, but you can't disaggregate that.
At that week.
We can.
And clearly that's evolving.
The AD spend that we drive at.
Our E Commerce site is more aggressive than we have done in our traditional business as we as we take more and more market share online.
That being said the offset is there is no rent the sales commission is not there and and on the fulfillment side.
It's pretty equal because for us on delivery, whether we're delivering through Fedex or a white glove delivery service, we could do the same thing across the country.
Almost at the same cost so at the offset of the increase on the AD spend is the offset of the commission and the rent so.
It's been quite profitable.
I would just add one.
Just add one thing to that is.
On the preference in terms of average ticket driving that would always tend to be in the in store at the assisted sale.
But versus the straight e-commerce.
The sale, but.
We are we have at evolving that on the online through the our sleep chat system, which we do see a good uptick in average ticket, but so there is puts and takes as Stuart indicated, but obviously, we do see some differences in average ticket between the three channel.
And by the way to add to that Craig the nice thing about it is we've been really looking to and we've talked about this over the last couple of years, we've been looking to get stronger in the below $1000 category and our online presence as well as our end stores that we've really seen an uptick in that and the nice thing that really again, the only thing I would worry about the worry is about an uptick in below 1000.
Is if we saw degradation of above 1000, but we're not so these are incremental customers, which is very beneficial to us rather than trading down.
Right. Okay. That's the that's really helpful.
And then maybe just finally.
Dave you referenced the underlying market.
You referenced.
At the fact that you think you've taken market share in Q4, and you've seen on from your suppliers can.
Can you can you give a little bit of color on what the underlying market how it performed in Q4.
Well, our expectation is that it performed well like we don't know how well yet and we'll get more information on that but like we don't feel that the market went down while we went up 34%, but but we do feel that we were we grew at an outsized way.
But again as I say, it's just too early to tell that at this point.
And Steven at the comparison is possibly another retailer that you're covering without mentioning any names.
Right. Okay. That's helpful. Okay.
Thanks Stu.
Okay, great well. Thanks. Thank you so much guys.
Thank you. Thank you.
Yeah.
Tushar are there any of their colors.
Yes. Your next question is from the line of Megan and net with TD Securities.
Hi.
Hi, Megan.
Hi, good morning, good morning.
Looking at the the high level of outlook that was provided for 'twenty 'twenty, one and some of the strategic initiatives highlighted there I'm. Just wondering if you can expand on a few of those so first off on the digital side. How are you looking at expanding in digital marketplaces.
And then secondly can you just talk a bit about your approach to expanding the sleep product offering and also your approach to in house of innovation what that means.
And so we haven't announced any other partnerships as it relates to marketplace. So Unfortunately, I can't say anything to that now, but I will tell you that is in the plans at.
So the the opportunity for us to be able to expand our brand with our partners with different marketplaces to grow our reach to grow our customer segmentation to be able to fulfill on the logistics side of it are probably better than anyone could at.
In the space.
Is definitely part of the plan.
'twenty 'twenty, one we're going to continue to reinvest in our own websites the sleep country in the door, maybe the websites as well as our websites with purple and.
Simba and the Blackwill, so that will continue as we build up our teams and which as we've been doing over the the last six months successfully so there's a still a strong pushing our and initiative.
<unk> as well as we are rolling out our next phase of our ERP and our POS system, which will also include our enhanced e-commerce platform on which which launched originally November 2019 of the second part of that is coming now.
Does that answer your question.
That's perfect. Thank you.
And then secondly on capital allocation.
The potential to the active with the in CIB and and also thinking about M&A I'm wondering if you can discuss how youre looking at potential transactions like what verticals, you're looking at geography size them. If you were to further explore something within the e-commerce space, what would that look like from.
From an acquisition standpoint.
As of what will probably addresses into two ways I'll cover off some of the capital allocation items, and then I'll pass it over to to Sue and Dave on some of the M&A pieces.
Right now, we're a strong cash and liquidity position.
So we are we have put back back in place the in CIB and we have reinstated the dividend.
So we will continue to invest in capital strategic capital investments internally.
We've put the NCI be in place to be able to act on that if we see an opportunity opportunity and.
And on the dividend side.
We'll be doing our annual review of that coming up end and working with the board to see how that will evolve throughout the year, but.
And outside of that at really drops into opportunities with M&A. So I'll pass the just over to Stu just to address a few things on that from.
M&A is always the consideration for us.
Yeah, that's shared with ideas with our board at the end of the day as you look at our landscape of our business over the last five years and the expansion that we've had in terms of the accessory side, which has become a very important part of our business that does open up the opportunity more so than ever for us as with sleep related products.
Nothing that we can speak to at the moment, but we are looking for innovative brands and talented people because people drive our business and if anything mm mm comes up that is interest at falls within our sleep universe that we're trying to create a it would be of consideration.
That's great. Thank you very much.
The Q.
And then a collection of spend.
Yeah.
Your next question is from the line of Patricia Baker with Scotiabank.
Hi, good morning, everyone of them.
I'm curious on I just wanted to follow up on a couple of a couple of things I just I don't know.
Not necessarily Stuart that I want to put words in your mouth on I want to make sure that I'm interpreting something you said earlier on correctly and that was with respect to operating.
Operating the.
The the notion of the the network on the importance of stores. So if we think about E. A sleep country, having operated through these very anomalous.
At times, you know with the with the pandemic would it be fair to say that you've learned are or what you've learned a lot and in fact operating through these times of kind of reinforced your belief that the physical store is critical to your in the tier overall strata.
Despite the an omni channel retailer in other words, you know you may have had that belief going in but its now more and more reinforced from some of the things the teen operating through the pandemic.
110% Patricia of more than ever I mean to Dave's point earlier, and I'm not going the same shockingly, but we were pleasantly surprised when the stores did reopen after the first closed down.
In the midst of the sphere.
At very quickly our customers came in droves the back door stores, they had the option to shop online or the online business.
Loaded during the shutdown when there was no other option, but as soon as those stores opened they came back and it's and the continued at it Didnt, let up and we can watch the journeys, it's unbelievable as we get.
Gets better in the space, because we are still new within the space and watch of that journey of the customer and when that journey begins and when that journey concludes but we could tell through our own geo fencing of what happens and how often and how important that's that the visit to the store as I will also.
Say there's.
The difference of two world and the Craig alluded to it.
On the.
The below 500 dollar price point.
<unk>, which is an area that we want to capture all areas, we want to capture definitely exploded for us on the online where the expectations.
Of the bad debt, you're getting maybe a little bit lower or it may not require the same type of visits and that is an area that we've been strong end, but not as strong as potentially that we would like to be.
Above 500, 600, and I would tell you envy does an absolutely fabulous job at the Premier player in that space.
On a further $850 of N D at Super Bad, but above the as you get above $1000.
Of that journey.
So at this tactile item is more important than ever and.
At the relationships that we've created with Simba and purple to Fabless.
The D to C retailers that teamed up with us because they understand that that path to profitability relies on the customer.
Coming into the store end and testing of the bad at the end of the day, we're channel agnostic, we don't care if the transaction in the store, we don't care if the transact on your phone as long as the transact within our ecosystem and more than ever yes. It's that store has become an important part of our our belief going forward.
Thanks for that that's very helpful.
Yeah I just wanted to add one small thing like you says we're channel agnostic, which we are we totally agree with it but we actually we actually look at at more like it's it's not one plus one equaling two it's one plus one equals Oh I'm sorry, it's one plus one plus one because we of our dream line chat.
One plus one plus one doesn't equal three of its equaling the something higher than that.
Understood and so just kind of go back to the at the strategic outlook for for the year end. You know you did the notice of Megan alluded to at that you are looking at in house. The innovation, that's not something you've talked about a lot in the past I mean, the the sleep chat would be one example, but can you talk about.
You were approached in how sanitation and perhaps give us some examples of things that you've done.
Uh huh already because it seems to me that that is going to become even more prominent does not go forward.
Yeah, I can start and then Steve will probably have others, but just I mean, when you think about innovation.
We're in kind of a sleepy business, but we've kind of been innovating all of them off and you know.
The the introduction of a very successful.
The style based program over the last few years has been innovation, adding new products has been innovation, our new store appearances have been innovation, putting out our new ERP was innovation, which is going to continue to expand you mentioned the dream line, which was a big move forward on that side. So that's just the name of few but Stuart I don't know if you had any others just to add to that.
Yeah sure. So definitely products has been an evolving them over the years in terms of the if you look at some of the categories their businesses within themselves are of pillows or of sheets or mattress covers of our lifestyle, our headboard business has exploded.
Over the last six seven months as we expand into that.
E Commerce for sure is.
It's still new to US we launched our first fully transactional website November 2019, it's barely a year old and the team there is young and new and growing and with unbelievable exciting creative ideas on the marketing at the world of digital.
It's still very new to us and powerful the world of Influencers, which is being led by our teams is very powerful in the new way to engage with the consumer than we've ever engaged before and youre going to see more of that as we developed certain things it'll be talking about over the next few months and the partnerships that is a huge part.
Part of it and we look at it very carefully on on both sides of it has to be good for us as well as for our partners, but more important if it's customer centric does it fit within our ecosystem is it going to enhance the overall sleep experience will keep us top of mind for multiple reasons. So many times when we launched the originally the.
Accessory business years ago at the.
Main reason, we did that is that we wanted sleep country to be top of mind not once every eight to 10 years. When you change your mattress, but hopefully every year as you were changing other products and that's the way. The team is thinking so that's that youll see a lot more of that unfolding over the over the next six months.
Okay. Thank you and I didn't mean to imply that you haven't been an innovative at the company of course, you're absolutely have but its just the wording in the wording in the press release just.
Made it seem to me that you were talking specifically about in house innovation around the product assortment. So I was just interested in new product development as opposed to all of the other broader strategic innovations that you've Patricia I just wanted to clarify.
I never I'm, I'm I'm going to give one callout that the the benefit of Covid in the zoom world that we all seem to live and where the teams are getting together every single day from seven a M to eight P. M on zoom calls and in many ways. These conversations and these meetings with this leadership team.
And throughout the organization, which they've been incredible seven days of week, it's become a little bit more of an intimate conversation on the allowed the opportunity just to brainstorm a lot of talented people coming together about this business that they are passionate about and brainstorming in ways that we never seem to have.
Of the time to do before so there is some good that comes out of this this crazy time that we're living through.
Okay that makes a lot of sense. Thanks, a lot of and Patricia just you know I didn't take it that way at all I, just I'm always someone who gets a little history lesson.
[laughter] understood [laughter].
[laughter].
And your next question is from the line of SAP I had the con with RBC capital markets.
Good morning.
Hey, good morning, and thanks, I just wanted to get a little bit more color on the Walmart partnership just given the growth in ecommerce just wanted to understand how.
All of the sales through that partnership or the earnings kind of flow into income state mandates at some sort of of royalty model.
Sort of how has that grown over the last year and within the E Commerce overall.
So the the Walmart transaction of the straight revenue at in term of business there's.
A small and I'm not going to go into the details of the deal, but there is a percentage that goes to Walmart.
It's all in the E Commerce numbers I will say that the strongest benefit of the partnering up with the largest retailer whose key focus and raise on death at end of life is to grow their E. Commerce business has been a wonderful learning experience, it's broadened our customer segmentation, which has been.
Very important part of this partnership to be able to expand our reach our brand to more Canadians in more different and more different places and it continues to unfold and at.
The team at sleep country, and which is led by our sales Bezner end jewelry, Solomon who have been doing an exceptional job within our team continue month by month of enhancing that relationship. So we're we're excited about this relationship and we're hoping that it's going to expand in new ways that we have even imagined.
Okay. Thanks, and then I guess given given your the time spent with the platform are you potentially considering other third party marketplaces or how have you found the business model overall now that you have Andy and you've got your on E. Commerce platform up and running is that another of the veterinary of maybe expand further.
Yes, yes, definitely if the opportunity presents itself with a premier partner, because we wanted to make sure that we do it with the right partners Walmart was an honor to team up with them and so the partners that we choose are very important but yes for us it's about expanding our reach.
Both on with brands with distributions to be able to expand ourselves and as many touch points as we possibly can to make the convenience of shopping for a mattress in Canada and sleep country indoor and maybe <unk> and N. The.
Easy at the fingertips or at the footsteps of our customers.
That's helpful. And then just there was some discussion earlier on just kind of margins across channel and so on.
On the go to understanding of I guess, you're on during the quarter what were the drivers it looks like the margins are slightly below last year in the understand who is the investment going on behind the ecommerce channel, but should we expect kind of the margins through brick and mortar online to converge overtime and where are you on that journey or is it with things like Andy the the SG&A side might always be a little bit of high given how the drive the business.
Yeah. So on the gross profit side, there is a little bit of a sort of efficiencies on the year over year basis, because we have pivoted and shifted some of our sales to online which is due alluded to earlier do not attract.
Commissions and occupancy costs, and so forth, which for our stores are up at that kind of gross profit piece.
When we move down to G&A.
Again, when we look at the year over year basis, we're very much the level on a from a percentage of sales basis.
There was some additional dollars spent in Q4 and again, that's the alluded to earlier those dollars were put to good use from an absolute dollar perspective, but we still held at didn't delever on the marketing side of the of the business and at as we continue to see the puts and takes.
You know the throat the model.
There will be.
Shifts in that marketing spend area of on that as E. Commerce continues because there is a different marketing.
Percentage of required to run those those businesses.
You have efficiencies.
Top or in other areas. So as we look at our margins at EBITDA level, we feel very comfortable that.
We shouldnt see much pressure on that front end and that's really the function of those puts and takes between these two channel that they continue to evolve I'd say one of items. That's just an interesting point is.
Dave discussed earlier that the below 1000 is at.
It has expanded while we've held and expand at held their own end expanded on the above 1000, and we will continue to see a little bit of pressure, which we saw an end mentioned in our in our energy or in our records on on delivery cost because it does cost the same amount, but it's very very slight and so overall, we don't think.
There's going to be too much pressure to EBITDA is everything kind of flow through.
Okay, well, thanks for that color. So I guess in terms of the year over year EBITDA margin change, it's more probably attributable to the channel versus maybe product mixes at the right way to think about it.
Yeah, I would say that that's that's fair, but again, we did not see like I'm looking year over year on straight EBITDA.
Slight leverage.
On the full year and then on operating EBITDA.
On a slight leverage so it's we're very very much in sync on on the on the.
But overall.
But it's.
Again, just moving a little bit of those puts and takes.
Okay.
I will just add on channel mix product mix still on the accessory part of our business. It is a margin expansion for us compared to our mattresses by.
Approximately 10 points.
And that should continue I will also note in the fourth corridor.
Even though we weren't so detrimentally affected clearly by the the numbers that we had of because we were closed as of boxing day.
Because the good portion of the business that gets delivered into the following a month, which is January on the accessories side of our business that week between December 20 exist and the December 31st traditionally and leading up to it also is Christmas boxing day.
<unk> and huge part of our accessory business and.
And that work in cash and carry business.
During that period of time in that 65% of our stores. Unfortunately, we didn't get did we get it on line, possibly but there was definitely.
I'm a little bit of the.
A little bit of a loss of <unk> of that not having that in the last week.
Okay. So just maybe following up there I guess with your online platforms and there's presumably heavily weighted toward mattresses. How would you describe the mix through whether it's through the Walmart partnership of through your own E. Commerce websites. The mix of the mattresses bursts of accessories on have you seen that shift over the last year.
We don't break it down for competitive reasons as a percentage, but interestingly enough the ship the the split between the mattresses and accessories.
On between our Walmart marketplace and our own websites.
It's very similar I will say that N D is focusing on some of their products and the expanding their accessories, because whatever they brought in as the accessories sells out all the time. So they have been not doing at an exceptionally great job. So look for more of that to happen, but that will be decided the by allergan and that team.
And.
We'll say that.
Well on the closure of the first closure and the second closure at <unk>.
Specifically, the first closure accessories exploded disproportionately as people who are beginning to cocoon happened again, a little bit during the Christmas holidays, probably as the people work of Kuhnian or if they were having some visitors I'm not sure if they were they weren't but.
But then it went back to what it was before which is still a strong mix.
Alright, great and then if I could just squeeze one last one and I guess on some of the store closures are you getting some of those rent breaks from the landlords or I guess with Q1 with the larger number of stores closed how are the landlords are cooperating with regards to breaks on the stores, particularly in the malls, where the rent may be a little bit of elevated.
So I would say of the landlords.
During this entire time and all of our partners and the end and I and also of Big Callout for our media partners had been at.
As good as the potential as they possibly can in these difficult times, because it's difficult as it was for us a.
Because retail is meant to be opened on them at our stores are closed them end to end thats a huge overhead now but it is also the revenue. So the landlords were very good with us and deferring rents.
And I'm not.
I'm not eliminating the rents I will say, though on a go forward basis.
The one of the analysts asked the question has anything changed in our viewpoint in terms of opening in real estate and as Patricia mentioned.
You mentioned in terms of of the importance of the store, it's more important than ever that being said.
As the business does shift and more grows on line and that's how we look at our rent rolls throughout Canada.
Canada.
And as the supply comes on the market as other stores retailers.
How the emptied out and May continue to empty out.
We hope to see some greater efficiencies.
In our rents as.
As we negotiate at certain deals answered at renewals.
So just a quick one there I guess sort of in Q1, where a lot of stores might be closer than you might be getting some rent deferrals, how would you account for that or those cost of Rex.
The United in period, do you kind of push them out of it until the cash flow leaves how of those show up in your Q1 results yes.
Yeah. So.
On that the.
You can assume that for anything that happened last year, we've worked through the.
The deferrals from both the cash basis and at the expense basis. So the results that you see are our with there's there's no impact.
Throughout the year, we've so that's the last year and then in Q1, we are always in conversations when there's areas of the business that are under pressure from closure of perspective, but at this point in time.
You can assume that we have there won't be any Q1 impact from from deferrals from the current set of closures in the stores that are closed at this time so.
You can just expect that there would be no impact of Q1 or how you should view Q1 from a rent deferral of perspective.
Great. Thanks, so much for all of the color I appreciate it.
Your next question is from the line of Matt Bank with the CIBC.
Good morning, Matt.
Hey, good morning.
I'm curious about the source of market share and specifically I'm thinking about you know independent specialty sleep competitors I guess.
Has that been a significant source of share.
Particularly you know online I would assume that they don't have the resources at you do and also have you seen any any or have you seen a significant amount of them shut down.
So.
As far as again market share is very difficult to put your finger on at exactly it's a bit of a it's a little more opaque, but we you know this is more of an acceleration of what we've been seeing for a long time, the independent market is probably somewhere between 30% to 40% of the industry and they have been giving share up for quite a while and I think that continues especially to your point.
They don't have the resources to have as good of an online presence and so on and so forth.
So that's been beneficial the.
The thing is as of specialty retailer, who may also be benefiting because people would rather go to a smaller more intimate store rather than.
Our Super center or something like that to do the acquisition of their products and.
And frankly fundamentally I think we've really done a good job of tapping into the consumers thinking about health I'm thinking about sleep and thing and really making it relevant purchase rather than a grudge purchase and we're going to continue to work down that path as we move forward, but it's hard to quantify at so I would generally say that it's probably from many different fronts.
On the.
And by the way in our online business is growing dramatically as you know and so on and on the other front at <unk>.
It's rare to see mattress retailers actually closed their doors, because it's easy for them to stay in business through this they're not.
They're not as effective they probably don't have the resources to be as strong as they were before at but it's pretty easy for them to stay in business through this so we don't expect to see a lot close but that doesn't mean, they're not weaker.
Okay, and then I just have a few a few quick ones as well. So first just a follow up on all of this margin conversation I must say I must say read it wrong. It looked like sales incentive expenses were actually up even though all of mine was at a significantly higher percentage of sales. So can you just explain that please.
Yeah. So.
In our compensation expense line.
It went it was.
Down just slightly because of that shift.
Sorry, I'm just looking through the the thing they're.
There was actually sorry in terms of the normal operating business we.
We did have efficiencies from the shift in e-commerce.
There was certain costs.
Costs for severance that we're lumped in that were one time, obviously that we did not not shave out of knows where costs just for.
Associates that could at returned to stores safely just due to capacity restraints at the stores.
And it was an item that we.
Didn't didn't pointed out is the normalization just because there is a lots of puts and takes for at the year with with the with the pandemic, but that would when you normalize for that we would've seen of reduction in overall compensation expense.
Okay. Thanks, and then working capital was a it was the significant parts of this year. It looks like it was mostly from payables is that something that you would expect to swing back the other direction in 2021 are at or at sustainable.
So I mean, we are doing some things on on the payables side, but it also to the function of some somewhat of the the significant lift in volume of our of our business.
Through through Q4, so with it with the Big increase there is obviously a larger larger pick up there in addition to that.
Apart from of working capital perspective as customer deposits.
Sales levels at that level.
That money is we did have higher collections for goods that would be delivered.
Subsequent to year end.
But I think that you can expect that we will continue to look to drive a more effective working capital and.
Look to opportunities with in payables and working with our vendors.
And creative ways to continue to optimize working capital over time, but so I'd say early innings on on what we're doing on that front, but.
Yeah, let's just some color there.
Thank you.
Thanks, a lot of map.
Yes.
And your final question is from the line of Gary Chapman with Guardian capital.
Hi, good morning.
Just wanted to get a sense of online sales of it.
On my Memory's, correct or indeed, it doesn't matter of mattresses are within the within the stores.
Can you give a sense of what the.
The growth of online sales for Andy were relative to.
Our online sales for.
And at the mattress products.
To have the.
Store.
Presentations on the.
I recognize that the online sales or on the omni channel side of things are hard to tell whether it was pure e-commerce or otherwise, but can you just give a sense of what the difference in growth rates might be between the Andy on the.
The rest of the e-commerce sales.
I know, we don't break that out for competitive reasons, but in an overall way I can tell you that as we said in our conversation as we said on our opening just a couple of years ago, a very small percentage of our revenue was driven by online, whereas you fast forward to Q4, 21% of our <unk>.
Total revenue came from online, which again again to the other side of that still means that at this point in time, almost 80% of at came through the stores, but the 21, 21% is a very large gross and you can assume that both sleep country and the <unk> who contributed to that.
Okay. Thank you.
That's it from me.
Alright, thank you.
At this time there are no further questions I would like to turn the call back over for closing remarks.
But we just wanted to thank everybody for the great questions and supporting us over the years of we look forward to of getting together with our Q1 results.
Have a great day, everybody and stay safe.
Thank you, ladies and gentlemen from participating in today's call you may now disconnect your lines.
Okay.
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