The Motley Fool

Growth Investors, Take Notice: This High-Quality Retail Stock Is on Sale

Sleep Country Canada Holdings Inc. (TSX:ZZZ) shares declined a whopping 13% yesterday, as the company reported third-quarter results that were below expectations. Consensus expectations were for EPS of $0.66, and the company came in at $0.63.

As we can see, a miss of three cents is a big deal for a stock that is trading at the lofty valuations that Sleep Country has been trading at.

But that’s okay, and I will tell you why.

Firstly, this 13% decline means that we can pick up the stock at a bargain. Trading at $33.58 at close yesterday, the stock now trades at a P/E multiple of 21 times this year’s earnings — down from prior levels of over 23 times.

Secondly, Sleep Country actually deserves to trade at a premium, given its track record of above-average profitability and top-tier returns. In the latest year, the company reported an ROE of 20%, an ROI of 12.7%, and an ROA of 11% — all really strong numbers for any industry.

So, this quarter was disappointing relative to expectations, which, in fact, is the first quarter of lower than expected results in a long time.

Yet the company still posted very strong numbers. Same-store sales growth was 7.3% for the quarter, the gross margin was 33% versus 32.4% last year, and the company is ahead of schedule with its plan for new store openings.

Lastly, the demise of Sears presents a very big opportunity for Sleep Country, as Sears was Canada’s second-largest mattress seller. This leaves a gaping hole for Sleep Country to fill, and with its expansion plans already in full gear, it has a head start.

Another high-quality retailer that reported its results this week is Indigo Books and Music Inc. (TSX:IDG). With same-store sales growth of 2.8%, the company continues to see momentum in its online platform and merchandising revenue.

Indigo is also undergoing a major shift. The company is rolling out its newly re-imagined concept to transform the stores from a bookstore to a cultural department store for book lovers — the new age department store.

It’s perfect timing, as Indigo will surely also benefit from Sears’s demise.

And these new stores are seeing results that are blowing away the competition, posting an average revenue growth rate of 16% and improved retail metrics. The company maintains a healthy balance sheet that has cash and short-term investments of $171 million and no debt.

And in a bold move where many others before them have failed, Chapters has announced its intention to enter the U.S. market with a store in New Jersey, hoping to replicate its success in Canada.

3,985 stocks listed between the TSX & TSXV, but here are the 5 we’d buy right now!

Overwhelmed by how many public companies there are to choose from in Canada? Motley Fool Canada Director of Research Iain Butler has you covered. Once a month, Iain and the rest of our team at Stock Advisor Canada reveal their five favourite Canadian stocks for new money now.

Considering they’ve walloped a “stuck in the mud” TSX by 10% over the past 4 years with truly life-changing winners like Shopify (up 236%, more than tripling your money), you’ll probably want to have your front-row seat reserved when our next five “Best Buys Now” are released – exclusively on behalf of Stock Advisor Canada members.

To make sure your name is on the list, just click here now... before the curtain is lifted without you.

Fool contributor Karen Thomas owns shares of Indigo Books and Music Inc.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.