Q2 2023 Sleep Country Canada Holdings Inc Earnings Call
I would like to old Navy, what you sleep country's 23 three results conference call yesterday sleep country released its financial results for the second quarter of 2023, a copy of the earnings disclosures available on the Investor Relations website and please cautionary language about forward looking statements.
It's getting certain cheese, which also applies to the discussion during today's conference call.
I would now like to turn the call over to Stewart Schaefer, President and CEO . Please go ahead Sir.
Thank you and good morning, everyone. Thank you for joining US today with me is Greg the Presto, our CFO I am pleased to discuss one of the strongest second quarters in our company's history second in revenue only to the same period last year, which was up over 18%.
These results were delivered against challenges in a less favorable macro environment than we expected the impact of which was partially mitigated by the company's proactive strategic initiatives around cost controls direct sourcing and targeted advertising for more profitable segments of our business.
As Canadians adapt to an environment of higher interest rates and inflation, we continue to see a slowdown in consumer spending on large discretionary goods that began in the second half of 'twenty to 'twenty two.
We still feel that the consumer spending is cautious, but healthy, albeit our mid to lower end of the business is softer down high single digits, but holding up better than the industry, which has reported to be down 20% to 25% in units.
We're still near record low unemployment, we believed that there was no material change in the competitive landscape and held our share of market and remain focused on.
Executing on our strategic initiatives as our customers temporarily shift their spend away from large ticket purchases in favor of travel and leisure, while also navigating higher food rent and mortgage payments.
Our digital platforms continue to experience softness as customers come back into our retail stores post pandemic. The shift we have experienced between our digital platforms and our brick and mortar over the last few years only reaffirms our long term strategic plans to build a seamless omnichannel experience.
And allow our customers to shop, how they want when they want and where they want.
After some positive growth highlights for the quarter first off during the quarter. Our big focus was on our two recent acquisitions silken snow in Casper, Canada, and I'm very happy to report that our plans are well underway to enhance and grow the value of these two powerful brands, we couldnt be happy.
Here with the team at silk and snow and the results. They are delivering and are excited to see a strong aligned that has been formed between the teams at endy silken snow Hush and Casper, Canada as a organically share best practices to drive our business is <unk>.
Second this quarter, we signed off on the final plans to open up our very first Andy and Silicon Snow retail locations with these two new store openings planned for Q4, we are excited to bring these digital brands into a tactile environment.
Third at Casper, Canada, all of our teams have been working closely together to execute on our four stage plan to relaunch Casper, Canada and enhance this valuable asset for years to come as we said last quarter cash burn will be a 2024 story as we put our plans into place for the remainder of this year.
That being said I am pleased to report the progress of our plan, which was to discontinue the 2022 lineup in our 289 sleep country Indoor me Lou stores and reintroduce a Canadian inspired collection with lower prices and expanded margins, which is well underway.
<unk>.
Number two re platforming both re platforming, both the site and our Pos systems to be independent of Casper USA and over to a new platform controlled and managed by our teams in progress and to be completed in Q3.
Three realign our marketing and AD campaigns to our targeted strategic approach that we have successfully implemented with our Canadian digital brands in progress also and we will flip back switch when our new platform launches and four we continue to double down on our investment in the Casper people who are hard at.
Work everyday and share with them the enhanced magic that all our teams will bring to their skill set in both their digital and brick and mortar business. We are well underway and are happy with the progress we are see.
Once we secure the foundation of this powerful brand, we look forward to methodically and thoughtfully rolling out an expanded footprint at this business across the country.
Looking ahead to the second half of the year. We will also be redefining the definition of luxury asleep with the introduction of our newest concept our high end luxury category of sleep called the rest opening in November in New York, Dallas Shopping center, the rest will redefine luxury.
Sleep with a bespoke sleep experience.
And lastly, we expanded our partnership with Walmart, Canada with the opening of two additional sleep country Express stores and Walmart Super centers, bringing the total number of express locations to 19.
And we continue to build out our full service sleep country retail footprint with four new stores planned to open in the back half of this year.
Along with the growth of our retail footprint. We continue we continue to build the most innovative product lineup, a sustainable sleep essentials and create opportunities for product sourcing across all of our brands in Q3, we will begin offering new hush silken snow and Casper.
Products in our sleep country <unk> stores and we are currently rolling out three new Casper mattress models to all of our sleep country <unk> stores that we expect will be hugely popular with our customers.
At the same time, we are focused on managing costs and driving efficiencies throughout our organization and see great opportunities to leverage our infrastructure and scale as consult as a consolidated company across the three acquisitions that we've made in the last two years.
In May we opened our largest and most technologically advanced distribution center to date in Kitchener, Ontario, Tripling, our warehouse capacity to meet the growing needs of our customers and business. We continued to transform our digital capacity and build new technology that will integrate our systems and.
Enhance our Omnichannel service with a planned launch in Q3 of our newest digital platform powered by Big Commerce are our technology and transformation teams are hard at work building, our integrated systems of the future that will harness our data with Advair.
<unk> AI customization tools to maximize our engagement in row asked with our customers.
We are proud to be releasing our second ESG report. This month. This report outlines the progress we've made on our commitment to being a purpose led sustainable business focused on helping people enhance their overall health and wellbeing building a best in class culture, and supporting positive social change and social.
Change in protecting our planet.
As always we are incredibly grateful to our entire teams who proudly represent all of our fantastic brands and have worked tirelessly over the last few years to transform the sleep industry in Canada, and our businesses, making us candidates favorite and most trusted sleep expert looking ahead, we remain calm.
Actually optimistic for the second half of 2023 and beyond as we continue to focus on optimizing our investments delivering a seamless customer experience across all our brands and channels and driving growth in our business and value for our shareholders with that I will now turn it over to Greg to dish.
Our financial results.
Thank you Stuart and good morning, everyone.
We continue to be pleased with the financial performance of our business, including our Q2 2023 results. We saw a decrease in our revenues by $10 4 million or four 6% from our highest Q2 revenue ever at $227 6 million in Q2 2022.
So $217 2 million in Q2 2000 22023.
This change was mainly due to a decrease in same store sales, which was partially offset by wrap stores opened in 2022 as well as incremental revenue earned from our acquisitions of Silicon Snow in January 2023, and Casper candidates in April 2023.
Our Q2 2023 same store sales were negative 10, 9% coming off of same store sales growth of 15, 1% in Q2, 2022, and 65, 5% in Q2 2021.
If we were to normalize our Q2 2023 revenues and remove the incremental revenue earned from Silicon Stowe in cost for Canada from our results. We would have still achieved the second highest Q2 revenue in the Companys 29 year history.
Q2 revenues from our E Commerce platform increased by 320 basis points from 18, 1% in Q2 2022 to 21, 3% in Q2 2023.
Taking a step back and looking at our total revenues over the last four years from 2019 to 2023, we have achieved a strong CAGR of six 5%.
Moving on our gross profit gross profit decreased $2 7 million from $81 7 million in Q2, 2000 $22 million to $79 million in Q2 2023.
Our gross profit margin increased 50 basis points from 35, 9% for Q2 2022 to 36, 4% for Q2 2023, mainly due to higher average unit selling prices and lower product costs, partially offset by higher sales and distribution compensation costs and deleveraging too tight.
Tied to our occupancy and depreciation costs.
Our improved gross margin this quarter was negatively impacted by our deleveraging tied to our G&A expenses.
Total G&A expenses increased by 9 million or 19, 7% from $45 7 million in Q2, 2022 to $54 7 million in Q2, 2023 of which $2 1 million of the $9 million increase was due to incremental media and advertising expenses at 2.6 million was due to compensation costs.
Both increases were primarily tied to incremental spend from yourself can sell in Casper acquisitions.
Additionally, total G&A expenses were impacted due to higher professional fees driven by the acquisition of Casper and intangible depreciation costs, which were largely tied to our recent acquisitions.
As a reminder, our D to C brands, such as harsh as Duncan snow, which are earlier in their growth cycle have higher marketing in fixed costs as a percentage of total revenues and therefore cause the deleveraging impact at the consolidated level.
Taking a step back EBIT decreased by $10 5 million or 21% from $51 9 million in Q2, 2022 to $41 4 million in Q2 2023.
Adjusting our EBITDA for al tip, ERP and acquisition related costs, our operating EBIT decreased by 9 million or 17% from $53 2 million in Q2 2022 to $44 2 million in Q2 2023.
Operating EBIT margin for the quarter decreased 300 basis points versus the prior year.
Finance related expenses increased by $1 3 million from $5 3 million in Q2, 2022 to $6 6 million in Q2 2023, mainly due to the decrease in an unrealized gain on our company's interest rate swap and an increase in interest expense on the company's lease obligations and its senior secured credit facility facility.
<unk>, which is impacted by higher interest rates and debt levels.
Changes were partially offset by a decrease in accretion expense as a result of lowered edson liabilities related to the Hajj acquisition.
Net income attributable to the company decreased by $10 million from $22 7 million in Q2, 2022 to $12 7 million in Q2 2023.
Adjusting for al tip, ERP and acquisition acquisition related costs as well as accretion expenses related to the redemption liabilities for harsh and silicon snow adjusted net income attributable to the company decreased by $10 9 million from $25 7 million in Q2, 2022 to $14 8 million in Q2 2023.
Diluted earnings per share decreased by 25 or 41% from 61 cents in Q2, 2022% to 36% in Q2 2023.
The change in diluted EPS of <unk> 25 was.
It was mainly impacted by a 28% decrease in EPS due to lower EBITDA as discussed as well as seven cent decrease in EPS due to higher interest expense on our senior secured facility and leases and four cent decrease in EPS due to higher depreciation and amortize expense, mainly driven by the intangible depreciation.
<unk> as a result of the acquisitions of silk and snow in Casper, Canada.
These decreases were partially offset by lower accretion expense of <unk> <unk> per share and a decrease in income taxes of 11 cents per share income taxes decreased due to lower taxable income. In addition to a lower effective tax rate by one 2% from 28, 4% in Q2 2022 to 27, 2% in.
Q2 2023.
As at June 30th 2023, our cash balance was 41 or $48 1 million with an additional $90 9 million of liquidity liquidity available to us. This does not include the $100 million accordion available to us through our credit facility.
I understand capital allocation items during the second quarter, we did not purchase any of our common shares under our in CIB, we suspended the repurchases during the acquisition process of Casper, Canada, which closed in mid April and while we put an automatic share purchase plan ahead of our Q2 blackout the share price remained above our predetermined purchase threshold.
We do intend to execute our N CIB as opportunities arise in the second half of 2023 and I'd like to remind everyone that nearly two thirds of our repurchases in 2022 occurred in the second half of the year as we enter our seasonally higher sales periods.
On August 10, 2023, the board approved a quarterly dividend of <unk> 23.7 cents per share, which will be payable on August 31, 2023 to shareholders of record at the close of business on August 25 2023.
Regarding our Capex for 2023, we continue to plan on opening a minimum of six new sleep country door maybe stores.
And due to store renovations to our new store concept in Q2 2023, we opened a new warehouse in Ontario, and consolidate its operations with an existing warehouse. Additionally, we continue to invest in our ERP and technology to further enhance our digital capabilities and omni channel experience and we spend approximately 1% of revenue.
For ongoing store and DC maintenance.
And I'll now pass the call back over to Stuart for closing remarks.
Thank you Craig.
Accomplishments in the quarter are testament to our unwavering commitment to our strategic plan to build the country's best sleep ecosystem, along with the adaptability and resilience of our team. Our continued investment in an incredible portfolio of brands with an expansive and innovative product lineup while expanding.
Our distribution channels and touch points has enabled us to create the most robust omnichannel sleep experience in Canada. This quarter sleep country was one of the many organizations affected by the previously unknown vulnerability in the widely used it move it software our organization.
Determined that no meaningful sleep country, Canada customer information was affected our websites and payment portals, all remain safe to use I want to congratulate the technology and transformation teams for doing an excellent job in safeguarding our business looking ahead, we approached the remainder of the.
Year with cautious optimism for the macro environment, while we continue to focus on driving efficiencies in our results and managing our strong balance sheet, we remain committed to identifying opportunities that align with our long term strategic goals, while delivering growth and value to our shareholders.
Thank you once again to our fabulous teams at sleep country, Dormie do Andy Hush silken snow in Casper and to all our partners for their commitment and support for all our customers and our businesses and have a good summer with that we conclude our remarks, and then open it up for questions.
Thank you, Sir ladies and gentlemen, we will now begin the question and answer session. If you'd like to ask a question. Please press star followed by the number one on your telephone keypad.
That would be announced that he would like to withdraw from the queue. Please press star followed by the number two and if you're using a speaker phone. Please lift your handset before pressing Eddie Keith one.
One moment, please will be compiled the roster.
Your first question comes from Mike Laundry with Stifel. Please go ahead.
Hi, Good morning, guys. Good morning Martin.
I would like to touch on your EBITDA margins.
Thank you.
The has eroded in recent quarters and that is partly as a result of the acquisitions that you've done some of them are a bit of a lower profitability at the EBITDA level.
So you know.
How much of the 300 bps margin erosion, we've seen in the quarter.
It comes from acquisitions any color on that would be helpful.
Yeah, Hi, Hi, Martin.
On the on the EBIT margin.
A large component of the deleveraging that we did see this quarter and we have seen over the last two.
Two quarters is there.
Those new investments do you have a deleveraging impact because of their fixed cost base at the G&A level is higher in addition, as we continue to grow those businesses.
Digitally the cost of marketing, which gets grouped into our G&A lines is.
Is higher it takes higher so I would look at it is these.
Businesses mature and then also as we go into seasonally higher selling periods in the back half of the year.
We should see less.
Less pressure on it.
At the G&A level.
And but.
Is it is mostly tied to the acquisitions and then the other thing that you always have to remember is taking a step back at G&A. We always will have a deleveraging in periods of time, where you have a decrease in sales year over year, which is tied to your occupancy cost and depreciation costs of our warehouse.
This quarter from.
From a store perspective, we did.
Renew approximately 24, new leases and under <unk> 16, there was do you get.
You know accounted for with the new more recent higher interest rates. So there is additional.
Pressure there and then at the G&A level on the warehouse side, we did open the new.
Warehouse in Kitchener.
And we also did take possession or not possession, but we are in the build out phase or fixed during the period of the Montreal warehouse and again those are valued at.
The higher interest rate environment. So we did see some pressure just tied to occupancy and depreciation as well in this quarter.
Yeah.
Okay. That's helpful. And then I mean, you touched a little bit on it but I mean, Kasper you just acquired Casper and I and I think that's a bit margin.
Dilutive for now at the EBITDA level.
Like when can we expect you guys to lap.
The dilution from from your acquisitions I know, there's some initiatives that Stuart you mentioned about improving the profitability of Casper. So if we can get maybe just some some some visibility as to.
When we turn that corner.
Yeah, No. That's a great question Martin we look at the 2020 for specifically for cost for 2024 is kind of that that year, where it'll be the kind of Casper story.
Now on the on the silk and snow, it's very similar I think 2024 is when you see.
As lapping and.
Looking at the margin in a more.
Normalized manner going forward. So I'd say, we will have a little bit of pressure in the back half of 2023 on those new investments.
It's up a little bit of Delevering impact, but in 2024 is when we kind of see.
More more level results on those and more predictable kind of margin profiles for those two investments scenarios do you have anything.
We all sat around adding component yes.
Just add back to I guess, the real question Martin is in terms of the plan and as we said right from the very beginning I mean, we're thrilled to now own this powerful brand with one of the highest awareness is in mattresses.
We were less impressed which is why it created an opportunity for us with how the business was managed in Canada and the first step what for US was to discontinue the American made mattresses that were designed for the U S and reintroduce a collection of mattresses that are suited for Canadians and theirs.
Not a ginormous difference, but there is a definitely a difference that we know very well.
Also Casper was one of our lowest margin.
Contributors and now hopefully it'll be one of our highest margin contributors and that's already starting to materialize with a new three beds that have rolled out.
The rack and rebuilds were doing on the Pos and the e-commerce sites.
You're live in Montreal Martin.
The <unk> the French website is a disaster and the new one will be fabulous because again, no disrespect to our southern France, but that wasn't therefore, K. So it'll go onto our new platform, which we're going to be going onto shopify.
For Casper.
And within our stores also on the assets that we're very excited about and having great conversations with them and once that's re platform, we're going to flip the switch on our advertising, which we completely pulled back also in the numbers.
And again, we didn't want to call it out because we don't want to make any excuses, but over a half a million dollars was in AD spend that we couldn't at the AD.
Campaigns were handled by an agency out of New York.
And so there was a transition phase and a timeline of when and what you can cancel that was already booked within the market. So there was a half a million plus of wasted.
And that was happening while we discontinued the floor models, so I'm I'm, saying the beginning of 2024 I'm optimistic for Q4, but I'd, rather under promise and over deliver so.
The first quarter of 2024.
Okay. That's super helpful guys. Thank you and I'll pass it along the line the line. Thanks Martin.
Thank you. Your next question comes from Stephen Macleod with BMO capital markets. Please go ahead.
Thank you good morning, guys.
Good morning, Steve.
Morning.
Thanks for that great color last couple questions very helpful.
Just wanted to ask a little bit about sort of how you saw.
<unk> spending in same store sales evolving through the quarter and if you're able to share any color on what youre seeing on a quarter to date basis.
Yes so.
I guess very similar to what we were seeing.
In Q1, I mean, the back half of Q2, everyone knows as old history.
The pressure is for sure on the lower end of the business are there are more.
Price sensitive consumer.
But.
I've been doing this for 29 years I've lived through I don't know, how many recessions and stock market crashes not that way that had a stock market crash, but.
We always see a little bit of a pause when there is a little bit of a pause on consumer confidence or a shift in terms of their overall spending.
Yes.
Yes.
We have not seen any signs of a recession.
This is for sure a recession within the mattress industry, especially within the United States and there's definitely a slowdown here, but these are still quite bullish normal numbers historically for our brand and usually if we see the slowdown we see it across all categories so to be specific.
It's our mid to lower end, that's having the biggest impact, but our mid to high but our high end mid and higher end, it's been fine and interestingly enough our accessories across the board, which is usually a gauge for us of consumer confidence because they are coming in they're interacting with.
With the brand, they're kicking the tires buying a a nice pillow and then creating a lead generator for us for when they are ready to buy a mattress, but maybe they're pausing a little bit more.
And.
We saw.
Like we we have said cautiously optimistic and we don't give guidance, but July came in better than June .
June finished so let me just say that.
And we are comping off of lower numbers from last year. So we have a lot of things on the go that are in place and we're hoping that as long as the consumer stays the way. They are in the macro environment doesn't get worse and people get used to the new world of 22 year high interest rates I think we'll be fine.
Okay great.
Could you just clarify the comment on accessories were you, saying that the tax rate.
Okay, and then obviously the growth was up year over year.
Yeah.
I mean.
That's a big part of our business people forget that in years ago, when we introduce the accessories, we introduced accessories.
What we used to call a lead generator. We just wanted to talk about across the lease line to experience sleep country <unk> may do.
And then became an incredibly profitable business and obviously, a big focus for us because we think theres lots of runway to grow there.
In previous recessions that I have lived through everything goes soft everything right across the board everything goes off so whether this is a recession or not or a slowdown just on discretionary spend or shift in spend on pause we have not seen that in our <unk>.
<unk> business, which we look at that as a very good sign and in fact, some of our categories have kicked up and for us that means our customers are still engaging with us on our smaller items, which are very profitable, which adds an impact also on our gross.
<unk> margin.
Which is one of the comments I made in my bad that our advertising campaigns, we're targeting some of our more profitable channels, which is the accessories, because we call. It the Starbucks effect theyre coming and they still want to see a little bit good.
Thinking about their health and wellbeing and maybe just at the moment they are pausing to buy a mattress.
Right. Okay. That's great. Thank you.
And then maybe just just on just on the gross margin comment.
We did see some growth on a year over year basis in Q2, and I'm just curious if you could give.
Is that sort of a new a new run rate.
We should expect I know last year's <unk>.
Two comps or are quite difficult, but I'm. Just wondering if you can give a little bit of color on how gross margins evolve over the next couple of quarters.
Yes Stephen.
I think youre talking about overall gross margins correct.
That's right yeah, yeah, yeah. So I think we've seen it we've said on previous calls as we kind of expect the leveling of our growth gross profit margin on a year over year basis, we did have a little bit of an.
An uptick this quarter very slight.
But I would expect a more consistent with year over year like a stabilization rather than counting on continued expansion.
Again, we're going to do all the things we can to continue to drive margin and we've got lots of things in the pipeline but.
If I was playing the back half of the year I, just look at kind of year over year similar.
That profile.
Okay. That's great. Thanks, Greg Thanks, Stuart appreciate it thanks, guys. Thanks.
Thank you. Your next question comes from James Umpire would you CIBC. Please go ahead.
Thank you good morning, guys. Good morning, guys. Good morning, John .
I'd like to get a better sense of consumer behavior, just wanted to follow up on some of the prior questions and clearly you think theres an opportunity with your higher end models and that's evident through launching the rest, but youre also leaning more into the Walmart partnership with the nine additional stores planned there. So when it comes to lower prices or lower price model.
Those are lower income consumers is it that you think there's an opportunity to take share even though that segment isn't performing as well as we'd like to better understand that dynamic.
Yeah.
I'm smiling John you can see me, but I always laugh, because it's always about taking share.
Les in bed, and we're happy with our 40% market share, but we wonder why 60% of the population are still not shopping with us. So we do believe that it's across all segments across all channels.
And we.
We don't manage the business.
Just on a quarterly basis, so nothing has changed or shifted in our mind strategically in fact.
In times like this there is an opportunity because of the strength of our balance sheet to accelerate.
Certain things and we think with the growing population of half a million.
Newcomers coming to Canada that that's.
A very important part that Walmart is a big component of introducing the brand even if it's not transaction, let the moment does give it an enormous amount of exposure and it is an area that we want to grow our unfair share are more difficult.
On a segment of the market to grow in a down market, which is what we have right now in that category, but again, we put these things in place for years.
And we're optimistic very optimistic in terms of when it turns we will be ready for them on the mid to high and that's our sweet spot and.
The acquisition of Casper as a big component of that.
That.
The mid to high end is definitely where the the biggest profitable part of our business is it costs us the same amount of money to deliver a $2000 mattress as it does at $200 mattress and all the other metrics that go along with that.
So.
Thats why were expanding on a regular store base, if we find great opportunities for Fabulous real estate.
That's.
That's in the pipe and a lot we have many stores in the pipeline that are that are hopefully coming up over the next three years and the high end. This is something that we've talked about for a long time.
Obviously, it will not be a huge expansion, but we do see an opportunity for this to grow to about six to eight stores strategically across Canada, and some very affluent markets, where we have customers that are asking for something.
A little bit more special.
<unk> seen this trend developing in the United States successfully in a few different areas and so we're going to be very careful and methodical as we enter into this space.
Europe down mall as you know is the Premier mall and that will be a good test in place for us and we're going to test test test and.
<unk> yeah.
What happens what we think's going to happen happen then we'll consider other markets.
Okay I appreciate that color sticking with York Dale I Wonder why harsh wasn't the brand that you plan to open with later this year given the test did seem quite successful and also accessories are outperforming mattresses in a moment.
Great question.
And so there.
There is still not far behind.
But it's more that we have to expand the merchandising selection. So harsh is a fabulous.
Brand for us and as they introduce other products under like everyone knows them as harsh weighted blankets, but theyre sheets are now they're they're cooling chiefs are probably the best sellers, they're selling mattresses now theres, new pillows that are rolling out so when you enter into the brick and mortar world.
You need to be able to fill up that square footage.
It's a little different in terms of how we transact online and what we transact per square foot within our stores and.
Mike Douglas our head of merchandising is overseeing this.
Mission for us for all our businesses and expanding the accessories and Hush is number one on that so.
Let's see what happens on the next call maybe I'll surprise you.
Okay fair enough.
Two more for me.
One the change in store renovations target.
Now youre down to two for the year is that a function of you just have a lot going on on the brick and mortar side you don't entirely know what the next generation of stores will look like or is it is there some other factor beyond that.
Yes, yes, and yes.
So we do like that.
When we put.
When we put this script together and we look around as a team and we are hitting on.
Parts of the macro environment for a second we're hitting on all cylinders in all the areas.
Strategic objectives that we laid out. This team has worked have been working like dogs in the last two years and we're really pleased and ahead of schedule on lot of the things that we're doing.
And this the remainder of this year is to buckle down and and really drive efficiencies and maximize the value of the investments that we have made.
And make sure that we are razor focused on executing that's what we're really good on and.
That's so we have our hands full there.
<unk>.
Add in the macro environment like we're also cautious.
Our balance sheet is still incredibly strong and.
But we like having a war chest because you never know what other opportunities pop up so on the renovation side, we could parse that a little bit and we'll reconsider that.
In Q1.
I also don't want to be doing renovations in the third quarter, which is one of our biggest quarter, especially if we're thinking that there's a bit of a pent up demand and your last comment on the two renovations and those are the two new store concepts that we've been mentioning so we're rolling out we're ready to rollout our two new store concepts, which is going to bring.
<unk>, a digital optimization component within our stores and a fresh new look and feel and an expansion of our accessories side of our business.
But again.
We like to test test test before we decide that if something is going to move the needle before we allocate capital to do it across the board.
Okay understood. That's helpful. And then my last question is on margins and you talked in your prepared remarks, and also the press release about the idea of managing costs and driving efficiencies.
And specifically the new DC in transforming your digital capacity are we right to think about it the benefits mostly being on gross margin rather than SG&A and is there anything you can say to help us frame the magnitude of that benefit whether it's dollars or percent.
Yeah, I mean on.
Think as we look at all of the different efficiencies that we can use from.
From a rollout perspective of the <unk> and centralizing certain departments, there will be an impact over that we'll see through 2024.
And that would hit G&A, because theres a lot of different synergies and that was.
Some of the reasons why we looked at these different acquisitions, so there will be some.
Benefit there and then again, we continue to look at our product sourcing roadmap.
Additional scale as we roll in some of these additional investments and there will be some.
We feel.
Margin opportunities, but I wouldn't count on that in the back half of this year, that's more of a 'twenty.
2024 story and I think the other component is also.
With some of the acquisitions like Kasper.
We saw a good.
A good opportunity to expand.
Our gross profit margin, while providing the customer with the.
Better pricing on are just as good or bad or better. So there's opportunities like that that we're going to continue to explore but so I could see relief in both buckets and then lastly, the marketing as we mature and those <unk> they do become more efficient as they grow up and.
And so we'll see some ism.
There is some opportunity there as well, but again this is more of a 2024 and beyond story, rather than 2023 back half and I just wanted to add John .
We don't make your job is easy and we get it and that's why we tried to be as transparent as possible and sometimes hard to read the tea leaves because some of the investments that we're making today, we wont reap the benefits until.
Further periods outwards, but every one of the acquisitions that we've done we're not buying these companies.
The buy it and they were buying them to grow them and we do believe each one of the brands that we've acquired can live within the sleep ecosystem as we expand out the footprint, both digitally and retail across Canada, we want Canadians to shop with one of our brands that are there.
Customers choose whatever that appeals to them and we just want to make it easier and more seamless.
For them and like even just the investment in the kitchen in our DC it triples, our capacity of our distribution.
But clearly that's not going to be filled for years to come more or two super hubs Belleville in Calgary, which support our direct sourcing part of our business as our margins expand.
They're not.
Anywhere near full capacity, but we have to plan. These moves so that while we're doing these acquisitions and why and while we're growing organically.
Country door meso business that we have the ability to service our customers in the way they are used to when they expect to be served.
Excellent alright, I appreciate the color and I'll pass it on thanks very much.
Have a good weekend.
Thank you. Your next question comes from Brian Morrison with TD Securities. Please go ahead.
Good morning, Stuart Good morning, Craig.
Hey, Brian Hey, Brian has it gone.
Good thanks.
Stuart I wanted to start off with your cautiously optimistic comment I know you don't provide guidance, but it sounds like July is off to a decent start especially for accessories.
Wondering if you might be able to just talk about how mattress sales.
The cadence of them maybe over the last six weeks you did have one of Canada's most representative retailers came out yesterday and say that they've seen a substantial decline in sales of the past six weeks.
Just wondering if youre seeing anything remotely similar to that.
I will say to you because I don't want to give you guys as much color as possible. So let's start with the easy one accessories seemed to be holding up still very nicely.
The mattress business is soft, but not as soft as Q2 at the moment.
And specifically to your question over the last six weeks and I said this to the board and again, we don't have a crystal ball. We're not economists you guys are better at that than us and we have no idea what tomorrow will bring but if you lay over days when the stock market is that but when the stock market is down it definitely has a play on consumer.
Confidence because these.
These last six weeks have been a bit of a yoyo we've had.
Strong up days, and we've had a big down days and.
What we usually see is consistency across the country.
Because I mean habits are the same from coast to coast, but we haven't been seeing that when oil debt down towards $70, Alberta got quiet as oil now pushes above $80 again, Alberta gets busy I mean, it's been really.
Funny times and trying to trying to plan on our advertising, but that's the one big lever that we always have to determine if we want to drive is the right time to drive even more people through our doors are are we going to get the efficiency on the span and that <unk>.
Only has answered if the customer is there. So we have been leaning a little bit more into our advertising on accessories, because that seems to be very healthy.
We're launching two new campaigns that we're very excited about.
Which is part of the additional advertising spend that was in Q2 as we create the content.
<unk> is launching a new awareness campaign called rice to shine, which is which is going to hit in Q3.
This quarter excuse me sleep country's launching a also a new campaign, that's focusing on our sleep experts with the tagline, we solve sleep. So work, we're going to we're going to roll the dice in terms of driving awareness and hopefully the customers out there in Q3.
With the ability to always pull it back if we're not seeing it there I know thats a long answer maybe not giving you what you need but that is our best guess.
I appreciate that second question, maybe for both of you.
This decision to integrate silk and Hudson Casper as opposed to into sleep country stores as opposed to keeping them independent and Craig with your earlier comment on these.
Banners, having a higher fixed cost structure, we should expect them to have a higher margin profile upon maturity such as Andy would that be correct.
That's correct, yes, yes.
And on the accessories side.
<unk> side of it.
We have an eye on the possibility of.
The wholesale component of our business. We believe these werent retail stores that we bought these were brands very powerful brands that have high awareness and affinity with Canadians and.
We.
Control, what the product is so our silicon snow or a hush or our cash for pillow doesn't necessarily or sheets or whatever it may be on the accessory side does it necessarily need to be the same product in casper store or silicon snow store or a hub store in the future.
And.
We have a captive audience that we believe.
Are willing to pay a premium dollar for a premium brand and if that helps elevate the overall experience for the customer to acquire a casper pillow, while they're buying a tempur pedic mattress, then we want to make sure that we make that opportunity for them.
Okay last question Craig.
Your message on the CIB in the second half of last year, obviously blacked out last period.
With a little bit more debt due to the acquisitions should we expect that kind of $50 million target to still be intact on the NCI D or should we look for some of the free cash flow to be allocated to.
Dennis debt instruments.
Yes, I think.
We're not I think that $50 million is still.
Doable again.
We'll always continue to be opportunistic with repurchases.
We have lots of access to liquidity.
And then we're coming into our seasonally higher sales periods, as well which generate.
Much much more of the free cash flow for our business. So we're not really changing our.
Our outlook on that at this time.
With the understanding that we will make the purchases and opportunistic way, we're going to make sure we optimize our shareholder value by.
Being opportunistic.
Whether it's in a buyback whether there is.
Any other new business, whether it's expanding our own footprint.
Raising the dividend, which was just done.
We want to be in May thank you.
We want to be we want to be able to be smart with our cash we like to have war chest, because you never know what tomorrow will bring.
And we have a long runway on things that were planning and so.
As we have in the last year and a half we have been very opportunistic and we will continue to be so.
Alright, good luck enjoy the rest of your summer. Thank you you too thanks, Brad.
Thank you gentlemen, there are no further questions at this time I will turn the call back to Mr. Shaffer for closing.
Well. Thank you again, everyone. We really appreciate your support has been a rainy summer, but hopefully we will get a little bit of a sudden for the remainder of August and you can enjoy the last part of it we will speak to you on the next call B well.
Okay.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.