Sleep Country Canada (TSX:ZZZ) has come full circle and is now trading below its 2015 IPO price of $17.
But since 2014, a lot has happened, and a lot of value was created by this company.
Revenue increased over 57% in this five-year period for a compound annual growth rate (CAGR) of 9.48%, the annual dividend paid to shareholders increased more than 42% for a CAGR of 7.31%, and cash flows have kept coming in strong.
So, what would you say if I told you that this is a retail stock that actually looks like it has a strong future ahead of it?
Would you be skeptical?
With Sleep Country Canada stock down almost 4% today at the time of writing after reporting weaker-than-expected results, I understand if you are.
So, this fall comes off the company’s reported first-quarter 2019 results, which showed another quarter of same-store sales declines and lacklustre earnings.
Same-store sales were hit partly by increasing competition in the space, mainly online competition, and earnings were hit by increased spending on Sleep Country’s own competitive positioning.
What I like
Revenue and earnings trends notwithstanding, Sleep Country continues to churn out cash flow, with strong free cash flow generation in 2018 ($41 million in 2018, or 6.5% of revenue) and again in the first quarter of 2019 ($15 million, or 10% of revenue).
The company has taken steps to increase its online presence, with the acquisition of mattress-in-a-box brands Endy and Bloom, its market share remains at over 20%, and this retailer’s opportunity to capture additional sales and market share as a result of the Sears closure here in Canada remain good reasons to own the stock.
What I don’t like
Clearly, the biggest issue here is the company’s same-store sales performance, which has been down in the last four or so quarters, placing into question the retail and competitive environment that Sleep Country is facing.
To recap, I would like to draw your attention to the fact that Sleep Country currently pays us a healthy, well-covered dividend yield of 4.44%.
I would also like to draw your attention to the fact that in 2018, the company generated $623 million in revenue and in 2015, the company generated $456 million in revenue.
This retailer is trading at a P/E ratio of nine times this year’s expected earnings, two times book value, and operates in a segment of the retail environment that should be relatively stable and growing as Canada’s population continues to grow and as Sleep Country captures sales that formerly went to Sears.
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Fool contributor Karen Thomas has no position in any of the stocks mentioned.