Q3 2022 Sleep Country Canada Holdings Inc Earnings Call
Good day, I would like to welcome everyone to sleep country's Q3 2022 results conference call.
On Friday November 4th.
Country released financial results for the third quarter of 2022.
A copy of the earnings disclosure is available on their Investor Relations website and includes cautionary language about forward looking statements risks and uncertainties, which also applies to the discussion during today's conference call.
Now I'd like to turn the call over to Stewart Schaefer, President and CEO . Please go ahead.
Thank you Michelle and good morning, everyone I hope, you're all keeping well in these beautiful November morning, with me today is Greg the plateau our CFO .
As we reflect on the quarter, the sentiment and consumer spending changed rapidly as the quarter progressed, while we still believe that the consumer remains healthy consumer confidence has deteriorated during the period that has seen the fastest space and interest rate hikes in decades.
In light of the macro challenges we are very proud of this sustained growth and market share that we have achieved over the past three years.
As we lap considerable growth from Q3 2020 in 2021, where we delivered a two year stacked same store sales growth at 25, 1%. We took a step back in Q3 2022.
We are pleased with our year to date revenue growth of five 6% in this environment and our three year same store sales stack growth of 14% at.
I admit rapidly shifting macro environment and inflation hitting 40 year highs. We are proud of our teams who continue to do a great job navigating our business and staying focused on our purpose driven strategy through a very difficult environment that is filled with a lot of uncertainty.
Successfully managing our inventory with the continued supply chain disruptions, coupled with a rapidly depreciating Canadian dollar has been no easy task, but we have positioned ourselves well going into the fourth quarter.
Despite our current share price that is trading at a historically low valuation multiples. We are very confident in our strong balance sheet, our continued dividend growth and the most aggressive share back share buyback program in our company's history with a proven track record as a publicly traded company with exceptional.
Same store sales revenue EBITDA and EPS growth since our IPO, we remain excited for our future prospects notwithstanding the uncertain macro environment that we're all experiencing.
This quarter, we expanded our retail footprint with sleep country, <unk> store openings and St Thomas Ontario in August .
Gripping town in Montreal in early October for a total store count of 288 locations are.
Our retail network continues to be a critical part of our multichannel strategy, where our customers can experience our range of products with the help of our trusted sleep experts.
Add to that our beloved harsh brand opened our first ever pop up retail experience at York Dallas Shopping Center last week, bringing its popular online sleep brand to life for our customers. The in store experience will feature a sensory harsh room for visitors to immerse themselves in house wide range of.
Sleep improvement products.
Round. This time last year, we began the rollout of our sleep country Express stores and Walmart Super centers across Canada. We are pleased to expand the successful pilot project with the addition of five locations in Western Canada, and two more in Ontario, This year, bringing our sleep country Express.
National store count to 17 locations with these innovative new concept stores, we extend our reach and product lineup to new customer segments and.
In the months ahead, we will continue to expand our footprint build our relationship partnerships with Walmart, Canada and further enhance our in store customer experience to strengthen our brands and reinforce our position as Canada's leading specialty sleep great retailer.
Our E Commerce sales represented 18, 5% of our total revenues staying consistent with last quarter and reinforcing the importance of our digital channels across all our brands and online partnerships.
Our purpose of transforming lives through sleep continues to be our north star, we supported Ukrainian families in need with a donation of more than $375000 of mattresses sheets pillows embedding Judy Ukrainian Canadian Congress in Quebec. This brings our total donation of sleep.
Essentials and supportive community partners to $640000. In addition, we donated $100000 to the Canadian Mental Health Association to support our back to school campaign that reinforce sleep as an essential school supply.
Following the release of our first environment, social and governance ESG report in July and our ESG strategy, we forged a partnership with Brainbox AI, a groundbreaking AI technology to help reduce our CEO to emissions and support our commitment to achieve our sustainability goals.
Looking ahead, our sentiment around our growth plans remains bullish as we continue to be focused on delivering our long term strategic plan. While also building shareholder value. Thank you to our sleep country <unk>, Andy and Hush teams in all of our partners for their continued commitment.
To our business and customers.
With that I'll now turn the conversation over to Craig to discuss our financial results.
Thank you Stuart and good morning, everyone.
We continue to be pleased with our fiscal 2022 results with year to date revenue growth of five 6% and year to date diluted EPS growth of 13, 2%, while we saw a decline in Q3 2022 revenues of eight 3%.
This quarter our results were impacted by a few unique dynamics.
You recall last year in Q2, our stores were closed for approximately 33% of their normal operating days due to COVID-19 restrictions.
As these restrictions eased 115 of our stores reopen in the second half of June and we saw an influx of written orders from the pent up demand.
A significant portion of these written orders were only delivered in Q3, which led to a shift in earned revenue from Q2 to Q3 2021.
In addition, we saw the pent up demand period for these 115 stores contribute higher than usual sales for the first four weeks of July .
This dynamic had a negative impact on our Q3 2022 revenues by approximately 4% in.
In Q3, 2022, we werent impacted by any store closures and sales return to seasonal patterns more in line with pre pandemic times.
Our Q3 revenues were 250 $51 million versus $273 8 million in Q3 2021. This decrease of $22 8 million or eight 3% was mainly driven by a decrease in our same store sales by 11, 1% and partially offset by the following items.
Incremental revenue from harsh, which we acquired in Q4 last year to net new store openings in year to date, 2022, 10, Walmart <unk> Express store locations and wrap stores as.
As noted earlier in the call and as a reminder of our strong growth over the past few years. Our same store sales were comping over a two year stack same store sales growth.
Q3, 2020 in Q3 2021 of $21 five or 21, 1%.
And which we achieved a three year same store <unk> growth of 14% for the period ended Q3 2022.
Additionally, as Stuart noted earlier in the call there were multiple macro environmental factors that negatively impacted our business, including the decline in consumer confidence leading to certain customers to defer big ticket purchases such as matter mattresses to a later time.
However, we believe our sustained growth and market share over the last three years, we are well positioned to capture the deferred purchases as the customers confidence returns and they are ready to make their sleep purchases, we expect a negative customer confidence and other macro environmental factors to continue to impact our business in Q4 of this year.
Moving on to gross profit our gross profit margin increased by 100 basis points from 37, 5% in Q3 2021 to 38, 5% in Q3 2022, mainly as a result of a series of strategic price increases a significant portion of which was completed in the latter part of 2021 and.
Into Q1 2020 to.
The margin efficiency from higher AOSP was partially offset by the deleveraging of occupancy and depreciation expenses and higher delivery and transportation cost as well as higher product costs that included the abnormally high freight costs that were incurred in the latter half of 2021 in the earlier part of 2022 Azure as a result of global <unk>.
Apply chain challenges, although we have started to see some relief in freight costs in our recent inventory purchases, we expect to continue to face pressure on our gross margin efficiencies in the upcoming quarters as we continue to sell through our more expensive inventory on hand.
Total G&A expenses increased by $1 million or 2% from $48 8 million in Q3 2021 to $49 8 million in Q3 2022. The increase was primarily as a result of an increased dollar spend in media and advertising and an increase in depreciation expenses, partially offset by lower compensation.
Professional fees credit card and financing charges as a reminder, in pre pandemic times Q3 was generally the quarter with our highest advertising spend during the year. In addition, the advertising expense for harsh was incremental in Q3 as we acquired the highest business in Q4 fiscal 2021.
EBIT decreased by $5 7 million or eight 3% from $69 4 million in Q3 2021 to $63 7 billion in Q3 2022, adjusting our EBITDA for al tip ERP related costs. In addition to nonrecurring harsh related acquisition costs in Q3 2021.
Our operating EBITDA decreased by $8 1 million or 10, 9% from $73 7 million in Q3, 2021 to $65 6 million in Q3 2022 it.
It should be noted that Q3 2020 to normalization at $1 9 million came in lower versus the $4 2 million in Q3 2021. This resulted in our adjusted EBIT margin decreasing by 90 basis points year over year.
Finance related expenses increased by $2 3 million from $4 million in Q3, 2021 to $6 3 million in Q3 2022. This change was mainly due to an increase in accretion expense for the redemption liabilities related to the <unk> acquisition in Q4, 2021 and was partially offset.
By the unrealized gain in the company's interest rate swap.
We experienced an increase in our effective tax rate by 120 basis points from 26, 9% in Q3 2021 to 28, 1% in Q3 2022. This.
This tax rate increase is mainly driven by the accretion expense for the redemption liabilities related to the harsh acquisition in Q4 2021 that is not deductible for tax purposes.
Net income attributable to the company decreased by seven points seven.
$7 6 million from $36 5 million in Q3, 2021 to $28 9 million in Q3 2022, adjusting for Altair ERP costs Hush related accretion expense and related acquisition costs. In Q3 2021, adjusted net income attributable to the company decreased by $7 2 million from $39.
$7 million in Q3, 2021 to $32 5 million in Q3 2022.
Diluted earnings per share decreased by 19 or 19, 4% from 98 in Q3 2021 to 79 in Q3 2022 diluted adjusting adjusted earnings per share decreased by 18 or 16, 8% from $1 <unk> in Q3 2021 to 89 in Q3 2022.
Regarding our caps, our capex spend for the remainder of the year. We plan on opening an additional sleep country store later in Q4, bringing our total new stores in 2022 to five we plan on deferring all store renovations into the new year as we finalize our new store design, which is which is in its final strides.
Onto some capital allocation items on November four 2022, the board declared a dividend of $21 five per share, which is payable on November 32022 to shareholders of record at the close of business on November 21, 2022 during the third quarter, we repurchased for cancellation approximately 527000 common shares.
Shares at an average price of $26 16 for total consideration of approximately $13 8 million on a year to date basis as at September 32022, we repurchased for cancellation approximately 136 million common shares at an average price of 26 26 for total consideration of approximately.
<unk> $35 8 million and subsequent to the quarter, we continued to repurchase shares and as at Friday November 22nd Sorry November 4th 2022 on a trade basis repurchased an additional 500000 common shares at an average price of $22 44.
For total consideration of approximately $11 2 million.
As Q4 progresses, we plan to continue to X again execute against the target. We set earlier this year of deploying $50 million towards around CIB.
And I'll now pass the call back to Stuart for closing remarks.
Thanks, Greg our strong performance is sustained growth and market share over the last three years demonstrates the power and resilience of our sleep ecosystem and our team's ability to deliver for our customers.
Despite the challenging market conditions and rapidly shifting business environment, we've been operating over the last number of months, we remain focused on executing against our strategic plan to build on our deep foundation of sleep expertise expand our reach and grow our channels and invest in the most innovative and <unk>.
Passive product assortment in Canada, driven by our purpose and vision, we are committed to delivering profitable growth, while helping Canadians achieve their best night's sleep in support of their health and wellbeing with that we conclude our remarks and open the floor for questions.
Thank you ladies and gentlemen, we will now begin the question and answer session.
Should you have a question. Please press star followed by the one on your Touchtone phone.
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One moment. Please for your first question.
The first question comes from Stephen Macleod of BMO capital markets. Please go ahead.
Thank you good morning, guys.
Good morning, Steve how are you good.
Good Thanks, how are you.
Good thank you.
Yes.
Just wondering if you could just give a little bit of color around sort of how you saw things evolved through the quarter.
You'd mentioned that it felt like the macro headwinds accelerated a little bit.
Maybe subsequent to the quarter, what youre seeing on a on a quarter to date basis.
Sure Steve.
So as we mentioned in on our July 28.
Q2 earnings.
There was some choppiness that was starting to occur in July .
Can.
<unk> again in August .
I would say for most of the entire year.
We've mentioned that our low end of our business below $1000 was slowing down a little bit but the mid to high end was holding up very well in fact, it was continuing to grow September we saw all metrics.
Decrease and decrease rapidly.
And I can say that we saw that continuing into the month of October .
Okay, Okay I see.
That's helpful. Thank you and then and then I guess.
Secondly, just with respect to the gross margin outlook. You mentioned you expect some pressure into Q4 and I'm. Just curious if you could if you could give a little bit of maybe maybe color around what sort of magnitude just as you sell through those more expensive inventories that you have on hand.
Yes, Hi, Steven.
As we look into Q4, we do expect to continue to flip over those higher priced accessory items and certain mattresses, though.
I would expect about 100 basis points.
Downward shift our pressure in <unk>.
For this year.
Okay.
Great and then maybe just one more if I could I'm not sure. If you can talk about it yet, but just curious if you could give a little bit of color as to what we should expect with the new format stores that you're currently sort of finalizing.
Plans for.
So we're gonna save most of it but that I guess, a heightened experience for the customer.
More tactile opportunities and I don't want to go too deep.
Detail on that.
And endless aisle.
Component to expand on our accessories more square footage for accessories.
And some of the other.
Jordan cultural and messaging that we think is very important in terms of our health and well being.
Our strategic initiatives that will be felt through the store.
Okay.
Great. Okay. Thanks, guys Thats it from me.
Thanks, Steve Thank you.
Thank you.
The next question comes from Martin Landry of Stifel. GMP. Please go ahead.
Hi, good morning, guys.
Good morning, Martin Good morning.
I was wondering if you could elaborate a little bit more on the consumer dynamic that youre seeing.
I'm, just trying to better understand a little bit.
The puts and takes in your same store sales and I was wondering if you could give us some.
Some details.
More a reduction in traffic or if it's more a reduction in like a trade down pattern and a reduction in your average unit selling prices a bit of color on that would be it would be super helpful.
Yes.
Actually a great question Martin.
The macro headwinds and the negative wealth effect that we've seen over the last.
A few months and especially in September October the one area that we always watch for is whether to your question our customers trading down or are they pausing on their purchases.
Believe it or not we prefer the pause than the trading down because.
In past recessions, if we're going there or slowdowns.
It's a purchase that is put off it's not the restaurant business or a fashion industry in terms of clothing, where you Miss a season they push it off so if a customer trades down from a 500 dollar beds to $1000 bad and they now exited the market for the next eight to 10 years.
That concerns us.
So even though it's painful when things slow down a little bit we have not seen trading down.
We have seen slower foot traffic.
Our accessories still seem to hold up well and traditionally in past recessions <unk> nine and all the little blips that we've had since then.
We have the.
At the mid <unk>.
How should I call it.
Luxury purchases, where people still want to engage with the brand.
By themselves are nice.
Accessories sleep accessory.
And which is fabulous and usually your returns and the benefits to our business months later when consumer confidence returns.
Okay.
Helpful.
I wanted to touch as well on your new store concepts.
Can you tell us a little bit what kind of timing you are thinking about in terms of rolling it out and then what's what's going to be the pace of the rollout.
Two to your broader network.
So.
The plan.
Without holding myself to it but the plan is that it will begin in Q1.
And we want to get this right. We are I mean, our stores currently are in great shape, and it's performing very well. So there has to be a noticeable difference in terms of the stores to make the investment always.
Accretive to our to our shareholders.
And I would say this is probably going to rollout quicker than the past renovation because our head of that business development. Phil Bezner has come up with an a b and C model in terms of our stores, where it will be a certain amount of investment on our top eight stores little lesson.
Our bees and lessen our CS, but that also will change the timeline of how many stores we could rapidly do so again.
Probably more color on the timeline Martin in by mid next year, but we should begin to rollout in Q1.
Okay.
Just last question for me.
I was wondering if you can discuss the performance of harsh blankets, it's been roughly a year since you've acquired debt and when we look at the website traffic. It looks like it's down on a year over year basis. I was wondering if you can provide color on how does sales of harsh blanket that evolved since you've bought it.
I would say that the blank.
Blankets or slow down a little bit as expected and as seasonable purchase this extended warm November .
In October and September has not necessarily help our hush blankets or our own duvet type of business, which usually triggers ticks up win when things start getting gold that being said some of the other products that how she has been introducing other accessories like our <unk> and our new <unk>.
Pillows has been flying off the shelves, saying, we can't even keep them in stock and just to remind everyone that hush.
He is an expansion in terms of our accessory collection, where you'll be seen innovative sleep products being introduced over the coming year.
Okay. That's it for me thank you.
Thanks Martin.
Thank you. The next question comes from John <unk> of CIBC. Please go ahead.
Thanks, Good morning.
Good morning, John .
I wanted to start on the industry at large and one of your U S. Peers have suggested that unit sales in Q3 excuse.
Excuse me new sales in Q3 were down roughly 25% I Wonder what's your view on how Canada performed in the quarter.
We don't break out our units, but I will tell you that our units are down.
Not as much as 25%.
It seems as though in the United States is always six months before us. So I sure hope that doesn't happen within this landscape and I really don't think it will but again nobody has a crystal ball.
<unk>.
In our business, which is on the mid to high and as I said, a little bit earlier that started to slow down a little bit in this quarter and went negative on everything except the top top tier of our mattress bands.
And but I would say on the low end, John and I've mentioned this now throughout the entire year on the low end below a 1000 and more and more particularly below $500 I would probably say that unit wise has dropped anywhere between <unk>.
And 20%.
Okay. That's helpful. Thanks, So when you talk about the deferral and the acceleration of that deferral of purchases subsequent to the quarter. There is a discernible difference where value is underperforming creek is that fair.
100% value has been underperforming since the turn of the year.
And I.
Im not going to say, that's not important to our business because every single range.
And category and price band is important to our business. Our business has always been made up of the mid to high end and we do want our unfair share of the economy pricing our relationship with Walmart has helped with that but obviously with inflation, where it is and <unk>.
Rates and just the whole negative wealth effect and stretching of the dollar that category is the first usually.
To feel the impact.
Okay. That's helpful.
I wanted to get a sense of your positioning for a potential recession.
If we look back at the period from <unk> seven to one nine so your country actually grew sales and EBITDA through that time. So can you remind us what were the tactics that led to that in that period, and then thinking about the current time, how would you plan to operate in a likely softer period for consumer spending over the next year or so.
Sure.
<unk>.
In 28 years in this business I can't keep track of how many recessions and market corrections I lived through all I can say is with our strategic initiatives.
The cash that we generate our profitability, our dividend or buybacks and our growth prospects, we will emerge stronger and ready when the consumer confidence returns add back to purchasing mattresses at nothing.
Thats changing in terms of our strategic initiatives and many times within recessions, we actually invest more in our brand where we believe some others may be pulling back on the one big lever which is advertising.
Has always worked well for us in terms of gaining market share for us. It's all about market share. We don't we we were not as fast if the customer pauses. We are very fast if we think we're losing share from others. So in times of recession.
We do think it's a great opportunity to take more market share.
Got it Okay. That's helpful and then one housekeeping question.
Greg I think it was Stuart your comments had referenced.
Headwinds, but I wonder if you can give some sensitivity here either what the financial impact of that was in the quarter or say, what a 1% move in the Canadian dollar versus the U S. Dollar has on the business.
It's pretty hard to say because of.
Our how we our inventories which is our FIFO method as well as.
The flow of containers, but if.
If you consider on an annual basis.
This is probably going to make it even harder for you John but on an annual basis at 25% of all our purchases.
And that is remember that a good portion of that is our accessory business.
Is in U S dollars, including some of our partners our mattress partners in the U S like a purple so.
I don't even want to guess, but Craig could get back to you and let us do a little work on that and give you a solid answer.
Okay. That's helpful. That's all for me. Thank you very much.
Thank you once again, ladies and gentlemen, if you do have a question. Please press star one at this time.
The next question comes from Vishal Shah.
National Bank. Please go ahead.
Hi, Thanks for taking my questions.
I was hoping you could update us on your thoughts on acquisitions during periods of tougher market conditions.
<unk> still think theres opportunity there or is the focus of preserving cash or buying back stock how would you prioritize them.
Well.
We're always cautious with our cash that's who we are and it's served us well for the last 28 years, all that being said.
We.
I think that our balance sheet as it is the strongest in our company's history right now and we have a strong war chests that up so we are aggressively looking for opportunities as well as returning.
Value to our shareholders with this $50 million buyback.
As well as wanting to be the ones, who always increase our dividends, which hopefully in the new year. The board will approve another dividend increase that being said the interesting thing as you look at our stock which is trading at.
Ah.
Like.
Unjustifiable lows. So are other companies, who we have looked at in the past that have had frothy multiples and their multiples have come down dramatically too.
And so that does create more interesting opportunity for a company like ourselves.
Who has the cash in the balance sheet that we do so we are looking and it has to be the right deal and be smart in terms of our strategic initiatives and our growth plans.
So we're on the hunt for great companies.
Okay.
Can you give us.
Your your historical playbook in terms of merchandising changes, maybe changes to store growth cadence during prior periods of.
Economic weakness.
Sure.
Probably a big part of that would probably lead into our marketing initiatives, which we are right now in the midst of planning our 2023 marketing plans.
<unk> for US we truly believe as a lead in.
It's to engage with the customer never mind, that's transactional that 1000 basis points higher.
And it's a very profitable part of our business. So we are and without disclosing too much to our competition.
We expect to expand on certain areas within our accessory portfolio in terms of our media mix to be able to continue to gain engage and transact with our customers.
And what potentially could be a difficult 2023.
Okay. So what I was trying to get at is should we anticipate to see.
Maybe in 2023, I know youre going to focus on the store retrofits, but less store growth or maybe less marketing dollars at the end.
Mattresses, maybe not chasing sales that aren't there as much.
Some way to create less pressure on the SG&A line is that something that management is contemplating or is that not a prudent move in your in your view.
Yeah.
Uh huh.
I'm going to say.
We're always aware and watching the macro environment, how things unfold.
If things accelerate it may change our perspective.
At this moment.
Our healthy balance sheet is not suggesting that we are going to change anything strategically in fact, we're.
We're hoping that if we do go into recession.
And don't get me wrong, nobody wants a recession, but if we do go into a recession. They may create greater opportunity for a property. So we're looking to expand our selection of real estate, just as quickly and hopefully even maybe quicker once we get our new store design underway, because thats whats been holding us back a little.
<unk>.
And in terms of marketing like I said on the.
On the call with John .
This is a time, where we believe investing in our brand is very important on the long term.
In terms of growing market share.
Sure earlier.
Earlier, it was mentioned that there would be about 100 bps of gross margin pressure in Q4 was that a sequential comment or a year over year comment.
It is a if you look at last year's gross margin.
It would have a little bit of a price efficiencies coming through so I would take that as if you look at last years margin.
Probably about half of that on a year over year basis and sequentially would be down.
So in that range of about.
About one 1% sequentially and then year over year I think that that's about half of that difference on a year over year basis.
Thank you.
Thanks Michelle.
Thank you there are no further questions at this time, please continue with closing remarks.
So we want to thank you all for your support and your commitment.
We look forward to having a chat with you guys.
At the end of Q4 have a good day.
And a good winter.
Ladies and gentlemen, this does conclude your conference call for today, we thank you for your participation and ask that you. Please disconnect your lines.
Okay.
[music].
Sure.
Yes.