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A Multi-Billion-Dollar Industry Is Imploding: Sell This 1 Stock Now

Since 2015, shareholders of Sleep Country Canada Holdings Inc (TSX:ZZZ) have been through quite a ride. After achieving a 150% return by the summer of 2017, Sleep Country stock went on a steady decline, giving up nearly all the gains.

Today, investors have generated a roughly 40% return over four years. That’s not bad, but it’s definitely not overly impressive. Unfortunately, conditions are taking a turn for the worst. If you own Sleep Country stock, listen up.

Avoid this entire industry

Sleep Country owns 264 mattress stores and 16 distribution centers across nine provinces in Canada. Since 2007, they’ve opened more than 120 stores, making the past decade one of extreme growth.

On the surface, Sleep Country’s recent results aren’t too shabby. Over the past 12 months, the company has generated $106 million in EBITDA from $618 million in revenue, giving it an impressive 25% market share in Canada. You’re likely aware of their flagship brands: Sleep Country and Dormez-Vous.

Under the surface, however, trouble is brewing.

From 2014 to 2017, Sleep Country posted average quarterly same-store-sales growth of around 10%. Total sales growth was even higher, averaging about 14%, a result of the company’s expansion efforts.

But since the fourth quarter of 2017, something curious has been happening. For the last four quarters in a row, both same-store-sales growth and total sales growth have fallen. Last quarter, total sales growth hit just 4.3%, while same-store-sales growth was a paltry 0.2%.

Even worse, this sales growth came off the heels of higher selling prices, meaning volumes are struggling.

From 2011 to 2017, the average wholesale unit price for a mattress rose from $213 to $280, a 30% increase. Unit shipments, however, fell from 2.8 million to 2.7 million. Even the company admits that mattress volumes are struggling. “Unit demand in Canada has grown at only 0.6% CAGR over the past 13 years and 0.9% CAGR since 2009,” management reports in its latest investor presentation. “AUSP [pricing] has driven most of the growth.”

Looking ahead, conditions are about to get even more difficult.

The golden days are over

You’ve likely heard of the mail-order mattress craze. While it was once thought to be a fad, it’s clear that the bed-in-a-box industry is disrupting the entire mattress market. So far, the U.S. has led the shift. Tuft & Needle, for example, entered the market in 2012, while Casper began selling their products in 2013. In the following years, scores of copycat business models have sprung up.

Mail-ordered mattress have clearly been stealing volumes from traditional competitors like Sleep Country. To grow sales, brick-and-mortar retailers have been forced to raise prices. This has worked so far, but it’s not a long-term solution. Over the next few years, expect a pricing war.

“So many groups jumped into the space, I think there could be some kind of race to the bottom in terms of pricing when there isn’t much differentiation,” says Russ Whatcott, a director at Purple Innovation, a bed-in-a-box retailer. “There’s very little differentiation,” he continued, “the market is too crowded to continue this way for very long.

Sell and never come back

When traditional businesses get disrupted, they rarely make the leap to avoid full destruction.

The management team of Sleep Country seems intent on continuing store growth and raising prices. Recently, the company disclosed that price increases ” are typically passed through to consumers.” That’s not a sustainable strategy when low-cost competitors are sweeping the market.

Sell Sleep Country stock and don’t bother coming back.

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Fool contributor Ryan Vanzo has no position in any stocks mentioned.

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