When we think of Canadian retailers, Sleep Country Canada Holdings Inc. (TSX: ZZZ), a $1.2 billion market capitalization company with $524 million in revenue last year, is not the one that readily comes to mind.
These days, Canada Goose Holdings Inc. (TSX: GOOS)(NYSE: GOOS), with revenue of $403 million (a 165% increase since 2012) and a more than 50 times price to earnings multiple, is what’s getting more attention.
But should we shift focus?
As the only specialty mattress retailer in Canada, Sleep Country, with an above-industry ROE of 20% and a 57% increase in revenue since 2012, looks like a real contender in the retail world.
The company has a strong balance sheet, strong cash flows, and is still growing and expanding, with stores recently opened in Richmond Hill, Mississauga, and Owen Sound, Ontario. The company currently operates 244 corporate stores and is the number one mattress retailer in Canada.
Sleep Country has a 25% market share in a market that is highly fragmented, so there is a real opportunity for consolidation. The company estimates that the mattress replacement cycle is 10-12 years.
Mattresses are somewhat of an essential purchase, and the business is less sensitive to the economy, as opposed to the apparel industry that Canada Goose is in; its retail category is more competitive and is more susceptible to changing trends and fads.
The mattress category is also less vulnerable to online competition due to the nature of the purchase, which is very much reliant on “testing” the product as well as more difficult to return once purchased.
Back to the financials: the second quarter of 2017 saw a same-store-sales increase of 7.5%. This follows last year’s second-quarter same-store-sales increase of 12.2%. For the first six months of the year, same-store sales increased 9.5%.
Free cash flow was $14 million compared to negative $2 million in the same quarter last year.
And the company’s results have been better than expected in the last three consecutive quarters.
Sleep Country shares have a 2% dividend yield, a year-to-date return of 13%, and have returned 91% since the beginning of 2016. Canada Goose has a return of 13.3% since its IPO in March 2017.
Sleep Country should continue to benefit from its brand awareness and national scale as the company continues its expansion in Canada.
“Why buy a mattress anywhere else?”
Pizza Pizza Royalty Corp. (TSX: PZA) is also an interesting company which has provided investors something to smile about. Although the stock price has declined since January, it has increased 25% since early 2016, and, at this point in time, the stock offers a healthy dividend of 5.21%.
