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Investing in Sleep Has Returned Almost 50% in 5 Months: Time to Invest?

An early investment in Sleep Country Canada Holdings Inc. (TSX:ZZZ) stock early on January 4, 2017, and held until June 23 has earned investors a good 43.32% total return. Picking the shares on January 30 could have earned investors a sweet 49.63%, and there is room for further stock price growth going into the second half of the year.

Sleep Country’s stock has rallied from $29.23 on January 4, 2017, to close at $41.58 on June 23, while a temporary consolidation at $28 a share on January 30 presented the best entry this year for a 48.5% capital gain.

The company has topped that with two quarterly dividends of $0.15 in February and $0.165 in May for a possible 49.63% total return over five months.

Who is Sleep Country Canada?

Sleep Country is Canada’s leading mattress retailer, and the only specialty mattress retailer with a national footprint. The company operates under two retail banners: Sleep Country Canada, the largest mattress retailer in the country, excluding Québec, and Dormez-vous?, the largest retailer of mattresses in Québec.

The retailer is fast growing its presence across all the country’s provinces. As at March 31, 2017, Sleep Country had 237 stores (there were 235 stores in 2016), all corporate owned, and 17 distribution centres across Canada.

The bedding giant also offers a wide assortment of complementary sleep-related products, including bed frames, pillows, mattress pads, sheets, duvets, headboards and foot boards.

What makes the stock tick?

Everyone loves to have a good night’s sleep.

Although the retail sector is highly competitive, Sleep Country has managed to coexist with Hudson’s Bay Co., Leon’s Furniture, IKEA, Costco Wholesale, and the BMTC Group, because it is the specialty mattress retailer and has managed to defend this niche for over 20 years through successful product differentiation.

Sleep Country has been generating impressive quarter-on-quarter revenue-growth rates. Total revenues in first quarter 2017 (Q1 2017) increased by 15.8%, driven by strong same-store sales growth of 11.9% on top of 11.7% in Q1 2016.

The company will see a possible 33.9% increase in revenues this quarter, and analysts anticipate that Sleep Country will grow revenues a further 11% in 2018. Earnings per share are expected to grow by 23.7% from $1.31 in 2016 to $1.62 this year and then increase by 16% to $1.88 for 2018.

To move in line with the online shopping trend, Sleep Country recently launched a new e-commerce platform that features a new exclusive “Bed in a Box mattress” and the full line-up of accessories.

While this will enable the retailer to give customers the convenience of shopping online, some shoppers are still inclined to have a physical look when buying a bed they will sleep in for a decade or so. The retailer may still enjoy some good in-store sales and visits for some time to come.

Sleep Country enjoys some pricing power in its mattress niche, and the company says that inflation is typically passed on to consumers.

The company controls a 25% market share across the country and has a strong and growing presence in nine provinces.

Moreover, consumer tastes are evolving in its favour, as Canadians’ preference for premium quality and larger mattresses is increasing given growing incomes, growing health awareness, and a preference for high-quality sleep

The retailer also enjoys sustained demand as an average customer changes to a new mattress every 10-12 years. During economic downturns, sales are not entirely lost, but just deferred.

Should you invest?

The company has been enjoying sustained quarter-on-quarter same-store sales growth since 2014, and profitability will grow in the coming years.

Sleep Country serves a growing niche market and has managed to defend its leading position for two decades, and there are no signs of any of its competitive advantages being eroded yet.

Most noteworthy, the company has increased dividends twice since initiating dividend payouts in late 2015. The current dividend is at $0.165 a quarter and yields 1.55%. The company increased its payout by 10% recently after another 15.38% to $0.15 a quarter for August 2016.

Prospects for further investment gains on this stock seem great over the next two to three years.

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*returns as of 5/30/17

Fool contributor Brian Paradza has no position in any stocks mentioned. The Motley Fool owns shares of Costco Wholesale.

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