A tonne of North American retailers have been struggling to make ends meet with the rise of e-commerce. While many retailers may be dangerous to own at current levels, there are a select few retailers that will continue to thrive in spite of interference from digital disruptors.
With ample news on the death of the shopping mall and brick-and-mortar retail in general, it’s not a surprise that many investors have shunned the entire retail sector. Retailers are going to continue to face disruption from online competitors; some of them will adapt, but a large chunk of them may go under. As an investor, it’s important to remain within your circle of confidence.
If the future of retail bothers you, there’s no shame in avoiding the sector as a whole; however, value investors looking to capitalize on the fear of others may be interested in discovering some retailers that will likely have no trouble with the rise of e-commerce — a trend that’s here to stay.
Some retailers are immune to the Amazon.com, Inc. effect and will continue to thrive in spite of the fears of the general public. I’d like to highlight retail stock that many investors may have completely forgotten about since its IPO a few years ago.
I’m speaking of Sleep Country Canada Holdings Inc. (TSX: ZZZ), whose shares are down ~22% from the all-time high reached this summer following solid Q3 2017 results, which underwhelmed investors. The quarter saw mattress and accessory revenues increase 11.5% and 5.2%, respectively, with adjusted earnings per share (EPS) rising 8.6% on a year-over-year basis.
While operating margins slipped by 0.7%, I do not believe the post-earnings sell-off was warranted, I believe the negative trajectory of the stock was simply in response to the stock’s overvaluation and unrealistic expectations that investors may have had going into the earnings report.
The plunge caused many investors to lose sleep, but I think the dip is nothing more than an opportunity for value-conscious investors to get in on the action.
There’s still ample room for growth of its brick-and-mortar stores, which are pretty Amazon-proof. Although there are digital mattress distributors, like Casper and Leesa, for most consumers, you need to try a mattress to determine if it’s a buy. Some mattresses are too firm; others are too soft, and there’s a wide assortment that are in between. Everyone has their unique preference, and the mattress-buying process isn’t as simple as ordering a “one size fits all” mattress online.
While digital mattress distributors like Casper and Leesa have shown promise with millennials, this market is ridiculously small, according to David Friesema, CEO of Sleep Country Canada. Though it’s a small market, Sleep Country’s Bloom bed-in-a-box mattress is a direct response to the rising trend (or fad?) of online mattress orders.
The mattress industry is incredibly cyclical. Mattresses are expensive, and the average Canadian is carrying a tonne of debt, but I doubt this will stop them from racking up more debt if it means getting a better night’s sleep. But should another economic downturn happen, I’d tread on the side of caution, since shares of Sleep Country could experience a tough time relative to more defensive companies.
Bottom line
With the fall of Sears Canada (a major competitor), I believe Sleep Country will reap the rewards over the long term; however, recent liquidation sales at Sears may cause near-term pressures in the mattress and sleep accessory market.
In addition to brick-and-mortar store expansion opportunities, sleep-accessory growth is another huge opportunity for Sleep Country to beef up its top-line numbers, same-store sales growth, and average revenue per user over the next few years.
Shares of Sleep Country are still expensive with a price-to-earnings multiple of 22.37, but when you consider the longer-term growth profile and relative immunity to digital disruptors, I think it’s a wise decision to initiate a position today and on any further dips.
Rest assured, you probably won’t lose sleep by accumulating shares gradually over time.
Stay hungry. Stay Foolish.
