Q1 2024 Sleep Country Canada Holdings Inc Earnings Call
I would like to welcome everyone to sleep country's Q1, 'twenty 'twenty four results conference call.
Yesterday sleep country released its financial results for its first quarter of.
Fiscal 2020 for.
A copy of the earnings disclosure is available on the Investor Relations website and includes cautionary language and about forward looking statements risks and uncertainties, which also applies to the discussion during today's conference call.
I'll now turn the call over to Stewart Schaefer, President and CEO. Please go ahead.
Stewart Schaefer: Thank you Joelle good morning, everyone and thank you for joining US with me today is Greg <unk>, our Chief Financial Officer.
Before we dive into the details of our Q1 performance I would like to take a moment to reflect on a remarkable three decades trajectory. This year marks sleep country's 30th anniversary and we are proud of our evolved business model the strength of our sleep ecosystem and our channel agnostic approach.
Stewart Schaefer: <unk>.
Our unwavering commitment to innovation operational excellence and exceptional customer experience has been the cornerstone of our legacy reflected in our strong performance and growth over the past 30 years as we look to the future. We are invigorated and remain as dedicated as ever to help Canadians get there.
Stewart Schaefer: Best Night's sleep.
This quarter, we delivered top line positive topline revenue results supported by our strategic multiyear plan and the dedication of our incredible team as we navigated in this challenging retail environment are.
Our Q1 revenues increased by one 6% and our same store sales decreased by one 6% from Q1 of last year.
Stewart Schaefer: Our omni channel strategy continues to positively resonate with Canadians are brick and mortar stores continue to perform well as our e-commerce sales continue to strengthen.
E Commerce sales this quarter increased by 220 basis points to 24, 5% in Q1 2024 from Q1 2023.
Stewart Schaefer: Our Q1 2024 results underscore the success of our omni channel strategy to ensuring a seamless customer experience that caters to the sleep needs of Canadians coast to coast, regardless of where and how they choose to shop.
Stewart Schaefer: We continue to see an improved gross margin by 50 basis points. In Q1 2024 from Q1 last year. This increase was primarily driven by better product costing resulting from continued strategic initiatives across all of our banners, including direct sourcing products while.
Stewart Schaefer: Also having more control over the development and production process of our innovative products.
Stewart Schaefer: This quarter, we did pull forward some of our advertising span in late March. In addition, we accelerated part of our annual merchandising cycles to Q1 and as a result, we incurred incremental sales compensation costs as we moved out discontinued.
<unk> to make way for this new at this year's new exciting lineup.
Stewart Schaefer: In Q1 2024, we continue to grow our retail presence opening two new sleep country stores in that Toby co in the Ottawa, Ontario, and two new <unk> stores in Outremont, they saw in Quebec, bringing our national store count across all banners to 305 stores.
Our retail stores for Andy Silken snow and the rash continued to perform well and we expect to roll out more stores under our D to C brands for the banner for the rest of this year.
Stewart Schaefer: Our strategic initiatives are moving our DTC banners warehousing and logistics and just sleep country's infrastructure continues to go well and we expect to see the cost synergies in the later half of this year.
This quarter, we continued our important collaboration with the Canadian Mental Health Association by donating $100000 in support of the medical well being of Canadians in March. We also introduced the hour back pledge, which generated over 100 million impressions acknowledging the.
<unk> setback to Canadians health and wellbeing, resulting from the loss of one hour sleep from daylight savings time.
As we look ahead to the next phase of our journey, we are proud to contribute to the sustainable future of both our company and community in line with our commitment to environmental stewardship and to help mitigate climate change. We recently launched a partnership with Varick Street to plant a tree every time, we complete.
Our green glove delivery.
Stewart Schaefer: We remain committed to executing our multiyear transformation, while staying true to our three key priorities innovation exceptional customer experience and operational excellence backed by a robust and adapt adaptable foundation built over three decades, we re.
Main extremely bullish about our future and stand ready to tackle the future with confidence.
Stability and scalability of our sleep ecosystem.
With that I will now turn it over to Craig to discuss our financial results.
Thank you Stuart and good morning, everyone I am pleased to share with you. Our Q1 financial results. This quarter, we continued to see volatility in sales as consumers navigate through these uncertain times. Despite this pressure we saw revenues increase by $3 2 million or one 6% from $206 5 million in Q1.
2023 to $209 7 million in Q1 2024.
This increase is mainly driven by incremental revenue earned from new stores wrap stores opened in 2023 as well as the incremental revenue earned by Casper, Canada, which was acquired in Q2 last year in April 2023.
This increase was partially offset by a decrease in our same store sales by one 6% from a channel perspective, our Q1 revenues on our E. Commerce platform increased 220 basis points from 22, 3% in Q1 2023 to 24, 5% in Q1 2024.
Stewart Schaefer: Moving on to gross profit our gross profit increased by $2 1 million from $70 8 million in Q1, 2023% to $72 9 million in Q1 2024, our gross profit margin increased by 50 basis points from 34, 3% for Q1 2023 to 34, 8% in Q1 2020.
Stewart Schaefer: Four due to higher average unit selling prices, coupled with lower product costs as we continue to source merchandise more efficiently.
This margin increase was partially offset by higher transportation costs sales and distribution compensation as well as deleveraging on occupancy and depreciation expenses tied largely to the incremental costs of the Casper stores.
Our improved gross margin this quarter was offset by deleveraging on our SG&A expenses total SG&A expenses increased by $4 7 million from $48 1 million in Q1 2023 to $52 8 million in Q1 2020 for this change was mainly due to an increase in SG&A costs, which was impacted by cost per can.
Stewart Schaefer: <unk>, which was acquired in April 2023. In addition, there was a pull forward of marketing costs at sleep country in late March These increases were.
Stewart Schaefer: Partially offset by decreased some decrease in professional fees.
Stewart Schaefer: Our EBIT decreased by $1 9 million from $39 7 million in Q1, 2023 to $37 8 million in Q1, 2024, which is primarily due to the increases in SG&A expenses, partially offset by improved gross profit margin.
Adjusting EBITDA for al tip, ERP and acquisition related costs operating EBITDA decreased by 3 million from $41 4 million in Q1 2023 to $38 4 million in Q1, 2024 operating EBIT margin decreased by 170 basis points from 20% in Q1 2023 to 18, 3%.
Stewart Schaefer: In Q1 2024, a key contributor to this decrease was also tied to the variance in normalization is on a year over year basis, which decreased by 1.1 million, causing operating EBIT EBITDA to delever by 60 basis points alone.
Finance related expenses increased by $1 8 million from $6 5 million in Q1 2023 to $8 3 million in Q1 2024. This increase was due to higher interest expenses on our lease obligations and senior secured credit facility impacted by higher interest rates and debt levels.
Stewart Schaefer: These increases were partially offset by a decrease in <unk>.
Kris and accretion expense and lower realized losses on our share repurchase plan under the auto share purchase plan as.
As a reminder to the market to manage its interest interest rate risk we entered into an interest rate swap in 2021 for a notional amount of $60 million for a fixed interest rate of one 1%. This interest rate swap expired on April one 2024 and to date, we have not replace this swap we expect our interest expense on our senior.
A secured credit facility to be 100% variable for the time being as we review our options on our facility.
Other expenses and income decreased by $1 1 million from expenses of <unk> 5 million in Q1 2023 to income of <unk> 6 million in Q1 2020 for this change was mainly due to interest income earned on the convertible note receivable and realized gains on foreign exchange, which were partially offset by unrealized losses on foreign exchange.
Stewart Schaefer: Unrealized losses on the fair value of convertible note and warrant.
Income tax income taxes decreased by 1 million from Q1 2023, <unk> to Q1 2024, our effective tax rate was comparable year over year with the decrease in income taxes being driven by the decrease in net income before taxes of $3 3 million from $15 7 million in Q1, 2023 to $12 4 million in Q1 2002.
Stewart Schaefer: 94.
Net income attributable to the company decreased by $2 6 million from $11 3 million in Q1, 2023 to $8 7 million in Q1 2024.
Adjusting net income for al tip, ERP and acquisition related costs as well as accretion expenses related to the redemption liabilities for hush in the earn out for Silicon Snow adjusted net income attributable to the company decreased by $3 6 million from $13 2 million in Q1, 2023 to $9 6 million in Q1 2024.
Diluted adjusted earnings per share decreased by nine cents.
<unk> 37 in Q1 2023 to 28 in Q1 2024.
The change in diluted EPS was mainly.
Impacted by lower operating EBITDA of eight cents higher interest rate expense on the senior secured facility and leases of six cents higher depreciation and amortization of <unk> and partially offset by lower expenses and income of <unk> as well as lower income taxes also oh at three times.
Taking a step back and reviewing domestic consensus on our adjusted EPS year over year were down approximately $3 3 million and this is largely tied back to the decreased EBITDA.
When we look at the operating metrics for the quarter sleep country continues to perform well with expanded margin of 50 basis points. This points to the effectiveness of our model and is a true reflection of whether or not we are operating better as a business.
Our business activities to sell and serve our customers.
Stewart Schaefer: This margin expansion is despite the Casper occupancy for six news or for the six stores being completely incremental in Q1 as they were acquired in Q2 in the prior year. Additionally, with our annual switchover of our mattress lineup, we made more significant for changes in the current year as compared to the prior year. This impacted.
Our sales commission line year over year with higher sales associate incentive programs to move floor models demos in Q1 2024.
We absorbed an additional compensation impact for this that holiday falling in Q1 this year as compared to Q2 in the prior year tied to the Easter weekend shift this alone was approximately $400000.
Stewart Schaefer: Marketing expense is twofold incremental dollar spend on the Casper business and a pull forward of approximately $1 million in yes, and FCC marketing from Q2.
Stewart Schaefer: To increase the radio frequency and a lower sales environment.
Lastly, moving on to G&A in Q4, we spent $36 1 million in G&A, excluding marketing and this quarter, we spent $35 5 million.
Stewart Schaefer: The percentage of overall SG&A, including marketing to sales held constant at 25, 2%. Despite Q1 being seasonally the weakest quarter as we continue to mature our D to C network, we will experience higher marketing costs, and we will and as we finalize our E. Commerce site that will be rolling out in Q2, we will have.
Stewart Schaefer: Pressure on our SG&A.
Stewart Schaefer: We would point to the sequential committed dollars quarter over quarter as largely a baseline in the percentage of sales will decrease in quarters, where hires where there are higher at higher sales and as we continue to optimize our shared services model, where we expect to see an impact in the back half of 2024.
Stewart Schaefer: Moving on to liquidity as at March 31, 2024, our cash balance was $31 $1 million with an additional $83 3 million available to us on our credit facility that does not include the $100 million accordion also available on our credit facility, we remain confident in our business's ability to generate strong free cash flow.
With the current operating environment, which remains fairly soft we expect our leverage to remain at the current level or slightly above two times post I for us in the coming quarters.
Yesterday on May seven 2024, the board approved a quarterly dividend of 23 seven cents per share, which will be paid on may 23, 2024 to holders of common shares of record as at the close of business on.
On sorry at close of business on May 20.
Stewart Schaefer: <unk> 2020 for.
Stewart Schaefer: The dividend rate remains unchanged from the prior quarter as we believe our dividend has been sufficiently caught up post COVID-19 following two consecutive 10% increases.
As noted in our outlook, we plan to open a minimum of six new stores as well as launch the pilots of our four point out of store and pending the results we intend to resume renovations in the back half of the year, we expect our 2020 for capitalized or cap capex additions to be in the area of 40 million for this year in regards to our M C.
We will continue to remain optimistic or opportunistic, but we'll be cautious in the first half of this year as we monitor how the economic environment evolves. Finally, we will continue continuously monitor for M&A opportunities as we have done over the past few years and remain focused on high growth profitable and EPS accretive companies with.
<unk> founders in the sleep ecosystem, the intention would be to fund any acquisitions with a mixture of cash on hand and incremental borrowing.
Stewart Schaefer: Lastly, subsequent to the quarter in April 2024, we completed our acquisition of the remaining 32% of outstanding common shares of harsh blankets, Inc.
Stewart Schaefer: Mind, you the market for the original agreement sleep country was to purchase only 16% of the outstanding common shares in 2024 with the final acquisition of the remaining 16% of outstanding shares to be completed in 2025, we're in the process of finalizing the cash consideration for the acquisition and we expect the estimated price to be in the range of $6 million to $7 million.
Thank you and I'll now pass the call back to Stuart for closing remarks.
One moment, please we are having technical difficulties.
Stewart Schaefer: Okay.
Stuart: Sorry folks my phone just dive in here.
Stuart: For the office.
Stuart: Thank you Craig as we navigate a challenging retail environment, we are confident in our ability to deliver consistent results in 2024 and beyond the solid foundation, we've established over three decades, coupled with our strategic vision.
Stuart: <unk> has to fulfill at the diverse sleep needs of our cherished customers anytime and anywhere.
As we close out the first quarter of 2024, I would like to extend my gratitude to our teams our customers and our shareholders for their continued support and look forward to executing on our 2024 plan to grow our market share as we build out our sleep asleep that ecosystem.
That's that's all for our comments over to you 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, you'll hear three tone prop acknowledging your request and your questions will be pulled in the order. They are received should you wish to decline from the polling process. Please press star followed by the two if you are using a speaker phone.
So the handset before pressing any keys one moment. Please for your first question.
Your first question comes from Martin Landry with Stifel. Your line is now.
Martin Landry: Hi, Good morning, guys good morning.
Stuart: Martin.
I was wondering if you could talk a little bit about it.
Your integration processes of your recent acquisitions.
Your you've talked about optimizing shared services.
You talked about where warehouse integration.
Would it be possible to quantify the synergies that you're expected to realize on all of the integration work you're currently doing on your recent acquisitions.
So a great question Martin and.
I'd rather.
I'd, rather I'd, rather put that question to next quarter because.
Until we see right now we're going through an overlap so as we close out some of our <unk> relationships in terms of our distribution partnerships that we've had for our DTC brands. There's a period of overlap that we're going to experience in this quarter going into the next quarter.
Stuart: And at the.
Stuart: The rent component, which is.
Substantial is only one component there's a labor component that were starting to map out exactly to see what the increase in costs will be within our distribution network to manage the additional volume at the same time offsetting the fixed expenses of closing those those relationships. So.
Stuart: And we have an estimate then Craig discuss it with you offline maybe but.
It'll be more substantiated within the next probably 30 days.
Okay is it fair to say that there are some dual operation costs right now that you're incurring in.
In Q1, you will be incurring in Q2, yes, yes, it's already started so far.
Stuart: For example, Casper now is now as of April one is fully integrated into the sleep country network. So during Q1. There is a there is the cost of moving the inventory over winding down some of the old inventory.
Replacement and investment in our distribution centers to support it. So there was additional labor costs that we experience as well as transportation costs.
In that quarter the same thing.
Is happening right now with Hush.
Stuart: And soon to be Silicon Snow and Endy is also parse partially I would say halfway there in terms of.
Stuart: That move so we're ahead of schedule, which we're excited about.
But there is a lot of noise in those numbers right now that will be clearer bye.
By the end of Q2.
Speaker Change: Okay. Okay. That's helpful.
And.
I was wondering if you could discuss.
Speaker Change: Some of the consumer trends that are that youre seeing so far in Q2 in terms of consumer demand and traffic patterns.
Mascot size any any color would be helpful. Yeah.
I'm actually going to maybe add a little bit to that question because I do think it's important to talk a little bit about Q1, and I do think it's important to talk a little bit about the EPS and the EBITDA Miss.
Speaker Change: We were very excited about the outcome in terms of our topline revenue in this environment.
So.
But what we saw in Q1 January our sales for the company were down 8%.
Speaker Change: And traditionally.
We we.
Traditionally we are sorry, one second please.
Speaker Change: So sorry, I'm being corrected eight eight.
885% so.
Our strategic what we normally do.
Made a strategic decision in the month January that was 100% self inflicted that negatively impacted our EBITDA and our EPS.
But we were proactively reduced our FCC inventory and positioned our floors earlier in this year to benefit for the busy season that was approaching that is approaching very soon so traditionally just so let you under the covers a little bit more significantly we use Q1 and Q2 to liquidate our floor models.
We usually do that at a reduced price and are more expensive.
Smith component in terms of our sales Commission.
Speaker Change: We normally do that every single year for the last 30 years as we introduce our new innovative product for the year.
January this year, because sales were down 8%.
We decided that right. After this highly promotional period, which was.
Very very busy between the end of November right up until the first week of January.
That we needed to introduce and shift our advertising calendar.
And push in a more aggressive promotional calendar, we didn't want to do that with the new lineup that was rolling out. So we made a decision to accelerate the liquidation of all our floor models that if we're going to be change for the year, which gave us the ammunition.
For the promotional calendar.
And drive a more aggressive price point that was good for the consumers.
Speaker Change: We increased our advertising spend to support that in February and throughout March.
Speaker Change: To drive a higher top line sales, we didn't we were not impacted on our lineup in on gross margin of the new line up and traditionally.
Speaker Change: We see a flow through of that lower margin in Q1, and Q2, which you folks don't normally see because it's blended in a normal process. So this acceleration that we strategically did because we believe that we wanted to take an opportunity to be more aggressive in the marketplace and take market share.
Speaker Change: At the same time fed SaaS set us up with our new lineup.
Speaker Change: Going into the busy months and so we're excited about that because it really it worked really well in a drop of 8% in January was matched by a flat for February in February and March So and now we see we're seeing a look we did see a little bit of a tick up in terms of April but it's a it's very.
Speaker Change: Balancing the market.
Speaker Change: Rebecca.
Speaker Change: B C is a little bit down, Ontario is a little bit down the prairie's is up.
Speaker Change: As Saskatchewan, Manitoba is up so it's a little bit choppy all over the place.
Speaker Change: Everything that we did.
Speaker Change: We did have an impact on increasing spiff that we usually sell over a period of time and so it has a little bit of impact in terms of our cost to be able to move through that items, but we're very excited about where we're positioned right now.
Speaker Change: Okay. Thank you for the color and best of luck.
Speaker Change: Yes. Thank you.
Speaker Change: Your next question comes from Vishal <unk> with National Bank. Your line is now.
Vishal: Hi, Thanks for taking my question I just wanted to.
Vishal: You commented it off the top but I wanted to get your thoughts on balance sheet and capital allocation.
Vishal: The dividend decision given your free cash flow generation and your balance sheet, just stood out a little bit. So maybe you can.
Vishal: Give us your thoughts on where you stand and how we should think about your capital allocation priorities.
Speaker Change: Yeah, I mean, we touched on the script, but we've done a consecutive increases because we were we felt we were lagging behind after the COVID-19 pause and and we held the rates.
Vishal: In after coming out of the pause.
Vishal: For a few quarters.
Vishal: So we did want to be more aggressive over the last two years to increase.
Vishal: Our metrics around the dividend in terms of free cash flow payout ratio.
Vishal: And then just EPS payout ratio and we feel that when we compare ourselves to the north American peer set.
Vishal: Were more in line or.
Vishal: <unk> best in class in that in that in that area. So we're happy with the increases we've done over the last two years, but at this point given the cost of borrowing and.
Vishal: Our investments in the in the network.
Vishal: We felt that pausing and at this point are holding.
Vishal: This was the right decision.
Vishal: In terms of N. CIB. We continue we will continue to be opportunistic again, we always weigh the cost of borrowing and the return that gives us to EPS versus.
Vishal: A share price at a an appropriate amount and we run sensitivities on that so we'll have probably a better update but it would be back half loaded just like it was last year last year, we did about $37 million in the back half.
Vishal: So if we do go out and execute against the <unk> and CIB the expectation would be on the back half that we commit capital to that.
Vishal: And then and then lastly on our Capex our Capex. This year is going to run in the.
Vishal: $40 million range, assuming we get most of our.
Vishal: Renovations out but the thing is we are pausing at this point on the 4.0 store because they're rolling it to we're going to see how they operate we're going to see how what the return metrics are against the investment and then we'll decide from there if we roll out more aggressively or not on the back half with the renovations so.
Vishal: That's kind of our priorities and US obviously, we're always opportunistic in reviewing M&A opportunities obviously, there's.
Vishal: More opportunities in a softer market because Q1 is always typically a very tight cash flow generating quarter for businesses in our industry and so there are opportunities to take a take a look at and we are now.
Vishal: We're reviewing opportunities consistently on that front as well.
Vishal: Okay, and maybe we can.
Vishal: Get some thoughts on in terms of the acquisition opportunities in terms of regions that focus and products.
Vishal: Yes.
Speaker Change: At I'm sorry, the question specifically to what are we looking at or the areas that we're looking at.
Speaker Change: Both.
Speaker Change: Both.
Speaker Change: As we've said.
Speaker Change: Before on our calls are our number one focus is to grow our market share within this industry and make sure that we take a agnostic approach to always selling the most relevant brands as well as building.
Speaker Change: Building out our ecosystem with our accessories, so anything that we look at.
Speaker Change: It will continue down that path in terms of.
Speaker Change: How can we expand our overall mix and.
Speaker Change: Joyce of products to our customers how do we bring in new innovative products.
Speaker Change: How do we work with maximizing our gross margin.
Speaker Change: And so it will always be within the accessory sleep accessories as well as our mattress category.
Speaker Change: I'm not sure if that answers your question.
Speaker Change: We're asking something specific.
Speaker Change: Yes, no I appreciate it okay in terms of regions regions of focus should we think there'll be a tilt towards the U S.
Speaker Change: The U S has never been off the market.
Speaker Change: Uh huh.
Speaker Change: And as it has always been a consideration our focus has always been growing out our network within Canada and building.
Speaker Change: Well, what we believe has positioned us as the number one leader in the space, if an opportunity even the Casper acquisition within Canada was it relationship from our partners in the U S. If something presented itself in the U S or anywhere else that met our requirements we would be.
Speaker Change: To take a look at it.
Speaker Change: Okay and.
Speaker Change: Just quickly maybe you can give us your thoughts on accelerating the Hush acquisition.
Speaker Change: Sure so.
Speaker Change: We've owned <unk> now for two years.
Speaker Change: The integration within our organization has been Fabulous the team has been doing an amazing job in Q4 of last year, we decided to introduce some hush products within the sleep country network.
Speaker Change: The <unk> products are performing exceptionally well.
Speaker Change: Consumers are gravitating to the brand.
Speaker Change: And there was an earn out component.
Speaker Change: On the remainder of year and <unk>.
Speaker Change: The agreement that we had with our our partners.
Speaker Change: Who were.
Speaker Change: Part of that earn out.
Speaker Change: We negotiated a deal that was.
Speaker Change: Part of the original agreement to accelerate that because we believe that we have a greater opportunity over the next year to drive a higher top line revenue growth and gross margin between the Hush building out its own model as well as Hush being introduced in our stores, which was the original plan.
Speaker Change: Thank you.
Speaker Change: Okay.
Speaker Change: Your next question comes from Stephen Macleod with BMO capital markets. Your line is now.
Stephen MacLeod: Thank you good morning, guys.
Stephen MacLeod: Thank you Steven.
Speaker Change: Morning.
Stephen MacLeod: I just wanted to follow ups on the SG&A.
Stephen MacLeod: Higher in Q1, I know you gave some good color on the on the call.
Stephen MacLeod: Prepared remarks, but I was wondering if you could break down maybe more specifically just the buckets of of the impact.
Stephen MacLeod: Related to the floor model changes and and the marketing expenses in Q1, and then I guess as a follow up to that.
Stephen MacLeod: It sounds like you expect Q2 to kind of trend in a similar way and then maybe decline a little bit in in.
Stephen MacLeod: In Q3, and Q4 is that is that is that the way to think about it.
Speaker Change: Yeah, well first of all let me apologize because there was a little bit of a fumble in terms of tech.
Speaker Change: Yeah, actually literally just turned off but that to answer it a little bit clearly Steven.
Speaker Change: As you know Q1 Q2, as I was saying, we normally traditionally sell off our floor models. During this entire period and it what it does in that Q1 and Q2 period. It reduces our gross margins. It also accelerates how we pay our sales associates because our sales associates are paid on gross profits.
Speaker Change: And.
Speaker Change: Because we're reducing the prices.
Speaker Change: We're trying to aggressively move out and sell floor models and offer a better price for our customers. We subsidize our sales associates earnings because they're making less gross profit by something that we call a spiff or a bonus so what it does it has.
Speaker Change: A negative impact on and increase sales.
Speaker Change: Compensation line, you would normally not even notice it because it was usually blended within Q1 and Q2 period of time, but we felt it was opportunistic to do it now because of the softer environment that we saw in January and what's a better way to create more.
Speaker Change: <unk> market share and drive more customers through our doors by offering a promotion that we normally we would've done over a six month period of time and try to drive it within the two month period of time.
Speaker Change: That being said so a good portion of those models are gone or inventory levels for the FCC are down I think approximately 12 12 million $12 million it positions us with our lineup. Our 2024 lineup that we're quite excited about that all have higher gross.
Speaker Change: Margin.
Speaker Change: Sure.
Speaker Change: Abilities and.
Speaker Change: You're seeing you saw some of it in April and it's probably.
Speaker Change: Almost done now where it would normally typically end by the end of June so youre going to have the benefit of it sooner.
Speaker Change: In June and July.
Speaker Change: And even probably part of the end of May which is the beginning of our busy season, where we had more traffic, which is a lot more important to them.
Speaker Change: Drive that gross profit in the <unk>.
Speaker Change: Second half of the year as you know in terms of our business. So we sacrificed a little bit the Q1 for topline growth.
Speaker Change: And Stephen just to kind of break down some of the buckets.
Stephen: At the gross profit margin.
Stephen: Level, we did see the pressure on compensation as Steve pointed out in.
Stephen: In addition to that Easter weekend flip so theres that pain it fell in this quarter versus last quarter.
Stephen: And in addition to that we also have the occupancy cost which is completely incremental on the six Casper stores that was not there in Q1 of last year. So at gross profit margin increased 50 basis points. Despite some of those one strategic headwind and then the other one being incremental costs that were just not there in the prior year.
Stephen: Similarly on the advertising spend were up $1 9 million I referred to the pull forward of about $1 million in sleep country tied to pushing out those demos for models more aggressively.
Stephen: And then in addition to that you've got your incremental cost of Casper again in terms of the marketing dollars that was not there in the prior year.
Stephen: I think when we when I when we take a step back and we look to a baseline for quarters coming up if you remove the variable cost of.
Stephen: Media or sorry, the marketing costs and you can kind of take a baseline of the.
Stephen: The SG&A net of marketing costs as kind of a little bit of us because if we look sequentially. We're actually down in terms of dollar spend it's a highly fixed cost area of our P&L and G&A. That's there are mattress recycling costs, and so forth, which are variable and financing credit card charges, but those arent going to be a big.
Stephen: Swinger, because those percentages don't ship too much. So I think in terms of a baseline for modeling going forward, we need to look at quarters sequentially around those fixed cost buckets because.
Stephen: Allergies and wages is not going to change it's not going to go down because you've got baseline changes for hires last year rolling into this year you do have new hires to build out the network and you have incremental labor costs of the Casper business was again is incremental so I just want to be clear.
Stephen: Because I think that's one area, where we continue to see pressure, but as a percentage of sales in the weakest quarter. We still match Q4 in terms of percentage of SG&A.
Stephen: Okay.
Speaker Change: Oh, Okay, Okay, and then when you say you.
Speaker Change: Can you take out the variable cost for marketing dollars is that net of the $1 million from pushing forward the floor models.
Speaker Change: Yes, yes, you could do net of that on the go forward yes.
Stephen: And the $1 million Stephen was not an incremental additional spend it was a pull forward so where we normally would've spent that million dollars part of our normal promotional calendar and budget.
Stephen: We pulled that forward and don't plan to spend that so that would normally have trinkle into.
Stephen: Q2, and even partially.
Stephen: <unk>.
Stephen: Would all be in Q2, so were right on target in terms of overall AD spend add this hasn't been an increase in budget in any way.
Speaker Change: Yeah, Okay. Okay no. That's that's helpful.
Speaker Change: And then and then you gave a little bit of color Stu around the performance of a month by month, but just curious if you're able to give any color around the price points or if that was a.
Speaker Change: A material factor in the quarter, just just just the differences in performance of different price points yet so.
Speaker Change: Same story, Unfortunately for the past year, the below $750 category.
Speaker Change: <unk> has been soft but on a positive note our digital brands accelerated this quarter in that capacity and grew.
Speaker Change: Believe market share as as as a percentage of sales you see so in the sleep country network that was a little bit softer, but the same pattern as normal.
Speaker Change: And or do you see brands actually accelerated a little bit so.
Speaker Change: Still same patterns, we saw last year. The one area that we that was new to us and once again self inflicted.
Speaker Change: It was our above 3000 dollar category because part of the pull forward was liquidating the 2023, Tempur pedic lineup and bringing in our new exciting Tempur Pedic 'twenty 2024 lineup.
Speaker Change: So we saw the above 3000 category ticked down, which we have not seen.
Speaker Change: Throughout the year, but again it wasn't the consumer we believe we believe it was because we were just liquidating the floor models and what happens is a floor mall has to be liquidated before the new model comes on the floor so that should recover.
Speaker Change: Positively in.
Speaker Change: In Q2, we've already started to see a little bit of signs of that.
Speaker Change: Okay, that's great and then maybe just finally.
Speaker Change: Just in terms of the liquidation.
Speaker Change: The pull forward of liquidation into Q1 do you think you pulled forward sales or do you think that was.
Speaker Change: Just a customer that that.
Speaker Change: It would have.
Speaker Change: Would've thought would've spent regardless.
Speaker Change: I think it was a customer that would have spent regardless I think being 30 years in the business traditionally we have customers that wait for certain events.
Speaker Change: And when we make a lot of noise around our events like our mix and match our floor model sales, we don't really advertise that for the <unk>.
Speaker Change: Six months like I said Q1, and Q2 as we normally are liquidating our floor models, we do that quietly we don't make a lot of noise around it. So it's not as though that created a huge awareness. What it did was we chose specifically certain items to be a little bit more promotional on.
Speaker Change: And that's deciding not to be promotional on something else. So in the eyes of the consumer I don't think that they noticed anything different except that.
Speaker Change: They were coming into the store and where where there would be maybe two or three floor models available to them to choose from now there was 10 or 12 at any given time. So it was just giving the customer a greater choice for a promotional item, but not driven not driving more traffic that.
Speaker Change: Being said I think we did outperform the market based on some of the numbers that we've been seeing from our.
Speaker Change: From the market and what we're hearing in the industry because we're hearing it a lot softer than that we actually achieved but yes.
Speaker Change: Yes, I don't think it was a pull forward this time.
Speaker Change: Okay. That's great. Thanks, guys appreciate it.
Speaker Change: Problem.
Speaker Change: Your next question comes from Brian Morrison with TD Cowen. Your line is now open.
Brian Morrison: Good morning, Sir Good morning, Craig Good morning, Brian.
Brian Morrison: I appreciate the color on the product changeover, the gross margin increase and reconciling the G&A costs, but if we take a little bit under the covers here I.
Brian Morrison: That explains the comp better than expectations, but on the flip side. The revenue did come in below consensus and when I do a bridge I don't think it's simply seasonality was there weakness in.
Brian Morrison: Kasper contribution or the new store or new store format contributions and maybe excuse me if I missed it but it does appear the Walmart store count declined year over year, maybe maybe you can just go through that.
Speaker Change: Yes, so two different questions and I'm going to answer.
Speaker Change: Answered them both for you first first of all.
Speaker Change: The macro environment. There is no question that a draw.
Brian Morrison: Of 8% and sales in January that.
Brian Morrison: It was a surprise to us.
Brian Morrison: So let me just start there with the recovery that we saw in February and March So I would say most of the damage in terms of the top line.
Brian Morrison: It happened.
Brian Morrison: In January and we're actually quite pleased what we saw in February and March, albeit it came at a higher expense to be able to drive that traffic, but I do think we actually one if I can if I can say that in this environment and based on the even the.
Brian Morrison: Figures that we're delivering and I respect your question around that but I think we actually won within that space and I've often said.
Brian Morrison: Recessions or slowdowns expect us to become more aggressive because our longer term aspirations is always to grow our market share and we believe that the LTV of our customer shopping through our network pays dividends beyond just the transaction.
Brian Morrison: That happened that day and that's what we go for on the second part of that in terms of the Walmart.
Brian Morrison: You're right there was a.
Brian Morrison: A couple of our locations that were up for renewal.
Brian Morrison: Renovating some of our Walmart stores and expanding some of the sizes and changing the format a little bit but that was less of a Walmart decision more of a casper and the silicon snow conversation.
Brian Morrison: And I alluded I think to it in the last call.
Brian Morrison: We opened up those stores at that mid to end of November.
Brian Morrison: So it was very early to talk about it without having a full quarter under our belt, we're actually quite excited about what we are seeing in terms of that.
Brian Morrison: The dollars per square foot and so we've shifted our focus to utilize our capital to grow that network quicker for that customer segmentation for that average unit selling price.
Brian Morrison: Over the Walmart so it is not a vote on Walmart, it's a vote on where do we maximize our capital and get the.
Brian Morrison: The greatest shareholder return.
Brian Morrison: Okay. Thank you for that was the Casper contribution or the new store format contributions where these slightly below your expectations this quarter.
Speaker Change: Well it was it was a little bit.
Brian Morrison: So the answer to that is yes, and once again self inflicted because we were changing out some of the old models that we inherited from Casper USA.
Brian Morrison: And we.
Brian Morrison: We were bringing in the new models and there were some delays in terms of bringing in the new models because of the covers that we were trying to get.
Brian Morrison: So that was definitely one part of it.
Brian Morrison: And.
Brian Morrison: Keep in mind that the Casper as a premium collection just like Tempur Pedic is a premium collection. So the amount of volume in the amount of units that you actually transact.
Brian Morrison: Compared to our lower end units, if you lose one or two sales on that high end because the floor model isn't physically in the store.
Brian Morrison: Or even physically available on the site.
Brian Morrison: Yeah.
Brian Morrison: That it has a greater impact on the top line revenue so.
Brian Morrison: Part of the economy, but I.
Brian Morrison: We will own that it was more of our own self infliction.
Brian Morrison: Okay. I mean, the gross margin performance is outstanding considering the changeover right.
Brian Morrison: And that's why and that's why we're accelerating accelerating Brian because just that and I'm glad you said at that point because I missed it.
Brian Morrison: I mean, that's the main reason why we're accelerating because our margins were.
Brian Morrison: Performing almost 18 to 20 points better on this new collection and so it doesn't pay for us to be sitting with the old stuff anymore, Let's just let's just flush it out in a highly promotional time of the year and get the new products in.
Speaker Change: Very good last question I guess.
Brian Morrison: Macro environment.
Brian Morrison: Referenced.
Brian Morrison: It remains challenging several times I just want to note here, though.
Speaker Change: Can you give us a little bit more detail on.
Brian Morrison: What youre seeing with respect to the flow through of the Canadian consumer or we're getting further stretch now or do you have any visibility as we lap a period of softer comps they were actually getting close to a trough and then just the potential for same store sales.
Brian Morrison: Or a comp inflection point later this year.
Brian Morrison: Yes.
Brian Morrison: No.
Speaker Change: I often read a lot of reports from TD, Bryan So you probably know better.
Speaker Change: You, probably know better than I, but.
Speaker Change: We've seen a slowdown in discretionary spending not just us the entire industry has seen a slowdown in discretionary spending.
Speaker Change: It's going on 18 months now a typical slowdown in discretionary spending from my 30 years of being in this business has a range between nine and 18 months.
Speaker Change: Excluding 911, excluding the financial crisis that we saw between now and 2010.
Speaker Change: We've seen.
Speaker Change: Areas in our business that are accelerating.
Speaker Change: Which tells me that the customer is still healthy.
Speaker Change: I will say the impact of the housing market, albeit hasnt seemed to have.
Speaker Change: Dropped even though everything I read.
Speaker Change: The vacancy rate, but the lack of movement.
Speaker Change: So less so the mortgages less so if the consumer's feeling confident because they still are well employed more so we're suspecting the lack of movement.
Speaker Change: Because people just aren't walking away from their properties with their mortgages to get new ones.
Speaker Change: It's had an impact.
Speaker Change: I think that impact has been a.
Speaker Change: Throughout North America, you see the results within the United States. So.
Speaker Change: It's funny because the consumer when they do buy they are still buying.
Speaker Change: I've, often said that I always get concerned if I see them trading down.
Speaker Change: <unk> seen them trading down.
Speaker Change: So it tells me they are healthy, but they are pausing a little bit on that purchase may because just like you and me. We don't know what is coming in when the bank of Canada is going to cut the rates.
Speaker Change: And for sure the pause on the moving of homes is having a little bit of an impact.
Speaker Change: Okay. Thanks, very much I appreciate the color. Thank you.
Speaker Change: Ladies and gentlemen, as a reminder, should you have a question. Please press star followed by the one.
Speaker Change: Your next question comes from John <unk> with CIBC Your line.
John: Thank you good morning good.
John: Good morning, John.
John: Good color so far but one question on strategy and then I wanted to.
John: Our focus on capital allocation on strategy in the press release, you made reference to serving a broader customer segmentation.
John: Wonder if you can elaborate on that does that mean, you are looking at products with lower price points to address lower income consumers, where you saw softer performance or is there something else to interpret with that statement.
Speaker Change: Pretty cool that you picked up on that Brian.
Speaker Change: John.
Speaker Change: <unk>.
John: So, yes, and yes so.
John: As we've gone through this transformation of our business over the last few years as we've acquired some fabulous different brands as we build out our.
John: Merchandising and introduce innovative product, we do look at our merchandising hierarchy and a broader customer segmentation. We do believe that we play a very active role in the cycle of Canadians at every single point within their life.
John: Yeah.
John: And we do think that sleep country, albeit 30 years still is the.
John: An unbelievable machine that will continue to grow that being said we have some now tools in our toolbox that we didn't have before and we think it will allow us to broaden our reach.
John: In terms of serving customers products that we haven't had before and in ways that we haven't take example, silicon snow.
John: The team Albert Kenneth and the team have been doing an exceptional job in growing out that business a large part of that business is our sleep accessories. If you look online.
John: Or visit our store in Ottawa that we opened up.
John: It's a beautiful aesthetic collection that can more Canadians are learning about to Craig's comments earlier about marketing we are spending more aggressively to build out the brand awareness around silicon snow and some of our newer brands because Canadians don't.
John: I know them as well as sleep country and every dollar that we spend is driving incremental.
John: Trajectory within those businesses so.
John: It's not dramatically different than what we've been saying for a while that we want to be able to serve more Canadians with more innovative products at more different price points watch for the brands as we build out that hierarchy and how we target our customers over time with these brands.
Speaker Change: Got it Okay. That's helpful and then getting into capital allocation or returning to it I wonder why not increase the new store target for this year, you've already got four open but youre sticking with the six just would like to better understand that yeah, great question.
Speaker Change: It's just a securing the real estate so.
Speaker Change: Phil Bezner, who oversees hush as well as our.
Speaker Change: Our business development and real estate has a long laundry list.
Speaker Change: Locations that we are trying to open.
Speaker Change: And.
Speaker Change: It depends on when those locations are available I've said in the past, we don't need to open up locations for the sake of opening we're quite excited about the stores that we open but timing is not us it's with the landlords most of the cases.
Speaker Change: Understood Okay.
Speaker Change: I wanted to come back to the dividend I appreciate the comments, so far but I wonder if you can elaborate on it is is they did not expect it to be revisited quarterly now and what metrics because the company want to send to investors on the dividend does it want to be seen as an annual dividend growth story is there a payout ratio that's targeted.
Speaker Change: How does this how does this mean.
Speaker Change: <unk> I suppose or are we supposed to interpret this as investors.
Speaker Change: Great question and a passionate conversation around.
Speaker Change: At the board table.
Speaker Change: You should interpret it with one word opportunity and.
Speaker Change: And I think at the end of the day.
Speaker Change: Our number one job.
Speaker Change: Besides serving up Canadians to get our best Night's sleep is to maximize our total shareholder return.
Speaker Change: And then in the past our model our sleep country model was a very repeatable model defined by the geography within the Canadian landscape I think over time and especially over these last few years, we've demonstrated that we could do.
Speaker Change: Yeah.
Speaker Change: A great <unk> by buying back our stock.
Speaker Change: We could do it by.
Speaker Change: Raising our dividend and we can do it by a strategic types of acquisitions.
Speaker Change: And.
Speaker Change: We want to make sure that we maximize our flexibility.
Speaker Change: And building up a little bit of gunpowder powder in this environment.
Speaker Change: To accelerate even the question that you asked before maybe our growth on some of our new brands.
Speaker Change: To search out on M&A that we've been quite.
Speaker Change: I am happy with what we've done so far maybe even to reduce debt as Craig commented are.
Speaker Change: Money is no longer free.
Speaker Change: And it's really opportunity in maximizing our flexibility that's it's a positive message and we'll make sure that we are clear with you and our shareholders as we move forward on this and John just to elaborate.
John: Elaborate on what we had intended to get to in terms of payout ratios.
John: We looked at the payout ratio to get in line with our North American peer set and we also separated Canada, specifically as well and they are averaging around 34.5.
John: Five and 36, 3% on EPS payout ratio and worse, we closed last year at $43 one so.
John: On a free cash flow basis for even higher so I think it's one of these things where we wanted to get to a spot where we were in that best in class amongst our peers and we feel like we've definitely got there and then some.
John: So that's another element in terms of the targets, we were aiming to do and achieve when we rolled out at this plan two years ago.
Speaker Change: Okay. That's good color and then one last one on the modeling side on the Capex number Craig.
Speaker Change: Are we right to assume that implies the usual, 1% ish of sales towards maintenance Capex and if so if you're sticking with the six stores target that seems to imply over $20 million towards the renovations plan, but it sounds like thats still a bit in flux. So can you just help us better understand the capex assumptions.
Speaker Change: Yeah, I think it's a 1% yes.
Speaker Change: We indicated a minimum of six store openings and to Steve's point, if we do have additional locations come where we can open them up in this year, we will push forward because of the locations have been looking to sell.
Speaker Change: Solidify.
Speaker Change: In terms of.
Speaker Change: Our renovations, we do always model.
Speaker Change: Estimate around 20 per year.
Speaker Change: The one difference this year and last year, we did kind of hold back because we haven't rolled out store four point out so as we look to how the store 4.0 reacts to the renovations and the upgrades.
Speaker Change: We will make a decision in the mall will either move.
Speaker Change: Fast and in line with that 20 on the back half or or we'll trim it down and we would communicate that in the next quarter. So I think it's a little bit early for us to be locking in but I always would like conservatively modeling.
Speaker Change: From a capex perspective, I would assume a <unk> renovation placeholder for now.
Speaker Change: Date next quarter and then the.
Speaker Change: The minimum six stores.
Speaker Change: And I'm just going to add John.
Speaker Change: There's a lot of interesting test that's going on right now.
Speaker Change: That we are.
Speaker Change: Experimenting on that are showing some very interesting results and so before we as you noted in the past we've done the 20 renovations our stores are in great shape Blake.
Speaker Change: Not a high traffic store and we don't renovate stores just to make them look prettier, we do it so that it's going to drive a higher level of incremental sales and higher basket size and as we've demonstrated over the last.
Speaker Change: 678 years as we renovated our stores have gone from about one eight to $2 four even with US building out the network that being said like one of the test that's happening right. Now is there's a silicon snow that we opened up within the store within a store in Ottawa.
Speaker Change: And Thats about that store right now and just to give a little bit of color that silicon. So it takes up 25% of the square footage in that store, but it's delivering on 35% of the revenue of that store right now and that store is now one of the top performing stores in Ottawa.
Speaker Change: Of that 35%, 75% is cash-and-carry accessories, which.
Speaker Change: You know our business well is a very profitable segment. So before we just make a cookie cutter decision as we've done in the past we're going to look very carefully.
Speaker Change: <unk>.
Speaker Change: The store within the stores, the new stores combined stores.
Speaker Change: And see where should we step on the gas.
Speaker Change: Quicker and I will sacrifice or not sacrificed put on hold renovations for growth.
Speaker Change: Any time, especially if we believe that the new stores that we add to the fold is going to drive.
Speaker Change: A higher rate of return.
Speaker Change: Okay I appreciate the insights on that I'll leave it there. Thank you.
Speaker Change: Thanks, John.
Speaker Change: Your next question comes from Stephen Macleod with BMO capital markets. Your line is now.
Stephen MacLeod: Thanks, guys I just had one follow up question.
Stephen MacLeod: Wondering if you could give a little bit color on sort of the gross margin trends you expect through the balance of the year.
Stephen MacLeod: Yeah.
Stephen MacLeod: We continue to expect that.
Stephen MacLeod: We're going to hold at least on a year over year basis, and as we continue to optimize some of the shared services that we discussed around internalizing the DC network from <unk> into our four walls.
Stephen MacLeod: We would expect a little bit of leverage on the back half for sure I mean this quarter. Despite all those pressures that we did have we still were able to increase on a year over year basis, but.
Stephen MacLeod: But we wanted to make sure that we're managing expectations.
Speaker Change: I would peg it on a year over year level and with opportunity to grow from there and we would communicate those growth.
Stephen MacLeod: A little bit more clearly for the back half in the next quarters call.
Stephen MacLeod: I think more than ever more than ever we have become a lot more tactical and strategical in terms of promotional pricing.
Stephen MacLeod: Rather than across the board.
Stephen MacLeod: This example that we've done in a in Q1 accelerating our our models, which is a promotion we call that part of our promotions.
Stephen MacLeod: Instead of doing it across the board in terms of discounts or promotions, we worked very hard to build and maintain fabulous value products to our customers that have expanded also our gross margins and we see that path continuing by also but with also introducing specific.
Stephen MacLeod: Areas to drive other categories that will drive traffic and promotion at reduced cost and promotions without impacting the longer term balance of our floor.
Speaker Change: Great. Thanks, guys.
Speaker Change: Thank you.
Speaker Change: Okay.
Speaker Change: Ladies and gentlemen, this concludes.
Speaker Change: There are no further questions at this time I will now turn the call over to management for closing remarks.
Management: Well. Thank you very much everyone for joining us for Q1, I apologize again for the technical difficulties that we had at the start of the call. We really appreciate all your support and we're looking forward to chatting with you all in Q2 B well.
Speaker Change: Okay.
Speaker Change: Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.
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