Canada Research Sleep Country Canada Holdings Inc.

Transcription

Canada Research
Published by Raymond James Ltd.
Sleep Country Canada Holdings Inc.
August 20, 2015
Company Report - Initiation of Coverage
ZZZ-TSX
Kenric S. Tyghe MBA | 416.777.7188 | [email protected]
Krisztina Katai (Associate) | 416.777.7060 | [email protected]
Consumer & Retail
Market Perform 3
C$16.00 target price
Current Price ( Aug-18-15 )
Total Return to Target
52-Week Range
Suitability
(Mattress) Size Matters; (Massive) Sheet Margins
Recommendation
We are initiating coverage of Sleep Country Canada Holdings (Sleep Country) with a
Market Perform rating and a $16.00 target price. While recent performance has been
impressive (underpinned by strong SSS growth, higher gross margins and improved
SG&A leverage), and long-term industry fundamentals appear attractive, we are
mindful of a number of key headwinds through our forecast window. While the longterm mattress industry fundamentals are at face value supportive of a more
positive bias (and the economics of the model are particularly attractive), the
nature of the business (big ticket and infrequent purchase) gives us pause (on tough
comps and a weak macro backdrop). The 2014 SSS increase of 8.3% was a on a weak
2013 comp of 1.0%, for 2-year stacked SSS growth of 4.7%. The 4.5% midpoint (longterm guidance is 3.0%-6.0%) imputes a further moderation (versus the 2-year comp)
of SSS momentum through our forecast. The new store format rollout and strong
(higher margin) bedding accessories traction, while broadly positive, are not without
risk in our opinion, as key competitors (most notably in the accessories category) are
going to try to steal back the duvet.
Analysis
 While industry fundamentals are solid, and Sleep Country is the leading specialty
bedding Retailer with a 23% national share, traffic remains a little challenged. An
improvement in SSS growth attribution would be incrementally positive.
Market Data
Market Capitalization (mln)
Current Net Debt (mln)
Enterprise Value (mln)
Shares Outstanding (mln, f.d.)
Dividend/Yield
10 Day Avg Daily Volume (000s)
Key Financial Metrics
2014A
2015E
P/E
25.9x
16.3x
EV/EBITDA
13.8x
11.3x
many a new entrant has discovered, Sleep Country is an adept competitor. The
revamped advertising strategy delivered compelling SSS improvements through 2Q15.
 We are conservatively modelling 2016E SSS growth of 4.3% (long-term guidance is
3.0%-6.0%) for 2016E EBITDA of $67.3 mln, to which we apply a 10.0x multiple. Our
EBITDA estimates are based on sales of $468.7 mln, modest further gross margin
expansion to 27.3% and improved SG&A leverage on margins to 12.9%.
Valuation
We are initiating coverage of Sleep Country with a Market Perform rating and $16.00
target price. Our target price of $16.00 is based on the average of our EV/EBITDA and
DCF valuation, for an implied value of $16.37. We apply a target EV/EBITDA multiple
of 10.0x to our 2016E EBITDA of $67.3 mln, which is essentially in-line with the US
mattress peer group average of 9.6x, and below US leading specialty mattress retailer
Mattress Firm’s 3-year average of 12.0x. See our Valuation & Recommendation
section for details.
2014A
1Q
Mar
2Q
Jun
3Q
Sep
4Q
Dec
Full
Year
Revenues
(mln)
C$0.03
C$0.10
C$0.26
C$0.30
C$0.58
C$396
C$51
EBITDA
(mln)
2015E
0.13A
0.20A
0.23
0.36
0.92
433
62
2016E
0.14
0.19
0.26
0.39
0.99
469
67
2017E
0.16
0.21
0.28
0.43
1.08
504
73
Source: Raymond James Ltd., Thomson ONE
Please read domestic and foreign disclosure/risk information beginning on page 27 and Analyst Certification on page 26.
Raymond James Ltd. | 2100 – 925 West Georgia Street | Vancouver BC Canada V6C 3L2
C$564
C$133
C$697
38.0
C$0.44/2.9%
104
2016E
2017E
15.2x
13.9x
10.4x
9.6x
Company Description
Sleep Country is Canada's leading mattress retailer
with a national footprint, commanding an estimated
23% national market share, under the Sleep Country
and Dormez-vous? Retail banners.
 The attractive economics of the model impute few barriers to entry, however as
EPS
C$15.02
7%
C$17.20 - C$14.76
Total Return
Canada Research | Page 2 of 31
Table of Contents
Sleep Country Canada Tear Sheet........................................................................................................................ 3
Executive Summary ............................................................................................................................................. 4
Company Overview.............................................................................................................................................. 5
Investment Thesis ................................................................................................................................................ 7
Financial Analysis & Outlook................................................................................................................................ 16
Valuation & Recommendation ............................................................................................................................ 18
Appendix A: Financial Statements ....................................................................................................................... 20
Appendix B: Management & Board of Directors ................................................................................................. 23
Risks ..................................................................................................................................................................... 24
Sleep Country Canada Tear Sheet
SLEEP COUNTRY CANADA
TSX:ZZZ
MARKET PERFORM 3
$14.76
$15.02
$16.00
$17.20
7%
$564
0
6.0
-2
5.0
4.0
-4
3.0
-6
2.0
-8
Financial Summary
F2013A
F2014A
F2015E
F2016E
F2017E
12/31/2011 12/31/2013 12/31/2014 12/31/2015 12/30/2016 12/30/2017
EPS (Diluted)
DPS
BVPS
$0.66
N/M
$3.44
$0.58
N/M
$2.86
$0.92
$0.11
$6.19
$0.99
$0.44
$6.51
$1.08
$0.44
$6.93
1.6x
22.7x
4.4x
1.4x
25.9x
5.3x
1.3x
16.3x
2.4x
1.2x
15.2x
2.3x
1.1x
13.9x
2.2x
FCF Yield
Dividend Yield
3.9%
0.0%
7.3%
0.0%
4.9%
0.7%
7.9%
2.9%
6.3%
2.9%
EV/Sales
EV/Adj. EBITDA
EV/EBIT
2.3x
17.7x
28.6x
37.5
2.1x
13.8x
21.1x
37.5
1.9x
11.3x
15.8x
37.5
1.7x
10.4x
14.4x
37.5
1.6x
9.6x
13.3x
37.5
$354
$39
$29
$26
$21
$396
$51
$39
$32
$22
$433
$62
$52
$46
$35
$469
$67
$57
$51
$37
$504
$73
$61
$56
$41
$35
$13
$22
$0
-$1
$48
$7
$41
-$7
$6
$37
$10
$28
-$4
-$9
$52
$7
$44
-$17
-$2
$43
$7
$36
-$17
-$3
$27
$440
$220
$311
$0
$41
$462
$258
$355
$0
$37
$448
$148
$216
$0
$52
$462
$148
$218
$0
$71
$480
$148
$220
$0
1.0%
6.4%
8.1%
11.1%
208
8.3%
11.9%
9.7%
12.8%
212
6.4%
9.3%
11.9%
14.2%
223
4.3%
8.2%
12.1%
14.4%
233
3.9%
7.6%
12.2%
14.4%
244
Valuation Metrics
Volume (mln)
ZZZ Share Price
Price
Target Price
52-week Range
Return to Target
Market Cap (mln)
Price/Sales
P/E
Price/BV
1.0
-10
0.0
Jul-15
Jul-15
Jul-15
ZZZ
Aug-15
Top 10 Institutional Holders
Birch Hill Equity Partners Management Inc.
Gunn, Stephen K.
Magee, Christine A.
Schaefer, Stewart
Friesema, David
Will, Sieg
Howcroft, Dave
Masson, Robert
Solomon, Eric
Cassaday, John M.
Aug-15
Shares (mln)
17.10
0.82
0.65
0.46
0.39
0.09
0.04
0.04
0.03
0.02
% Held
45.60%
2.35%
1.86%
1.31%
1.12%
0.26%
0.10%
0.10%
0.08%
0.06%
Investment Highlights
While recent performance has been impressive, and long term industry
fundamentals appear attractive, we are mindful of a number of key
headwinds through our forecast window. While the long term mattress
industry fundamentals are at face value supportive of a more positive bias
(and the economics of the model are particularly attractive), the nature of the
business (big ticket and infrequent purchase) gives us pause (on tough comps
and a weak macro backdrop). The 2014A SSS increase of 8.3% was a on a
weak 2013A comp of 1.0%, for 2-year stacked SSS growth of 4.7%. The new
store format rollout and strong (higher margin) bedding accessories traction,
while broadly positive, are not without risk, as key competitors are going to
try to steal back the duvet.
Market
Enterprise
Price
Cap.
Value
Company Name
Aug-18-15
(mln)
(mln)
Income Statement (C$ mln)
Sales
EBITDA (Adj)
EBIT
Pre-Tax Profit
Net Income (Adj)
Cash Flow (C$ mln)
CFO
CAPEX
Free Cash Flow (FCF)
Dividends
Δ in Working Capital
Balance Sheet (C$ mln)
Cash and Equivalents
Total Assets
Long Term Debt
Total Liabilities
Net Debt
Key Company Metrics
SSS Growth
Sales Growth
EBIT Margin
EBITDA Margin
Total Stores
LFY
1000
TSX:ZZZ 25.9x
Price/Earnings Ratios
FY1E
FY2E
1001
1002
16.3x
15.2x
FY3E
1003
13.9x
LFY
1002
13.8x
EV/ EBITDA Ratios
FY1E
FY2E
1000
1001
11.3x
10.4x
FY3E
1002
9.6x
$15.02
$564
$697
U.S. Mattress Retailers/Manufacturers
Mattress Firm Holding Corp.
Tempur Sealy International Inc.
Select Comfort Corporation
Group Average
$63.93
$78.03
$25.90
$2,255
$4,838
$1,327
$3,015
$6,393
$1,239
MFRM 50.4x
TPX 44.6x
SCSS 20.7x
38.6x
24.7x
24.6x
18.6x
22.6x
19.6x
20.7x
14.8x
18.4x
17.1x
18.2x
12.5x
16.0x
19.4x
18.6x
9.1x
15.7x
11.1x
14.1x
8.0x
11.1x
9.2x
12.6x
6.7x
9.6x
8.8x
11.6x
6.0x
8.8x
Home Décor Retailers
Pier 1 Imports, Inc.
Williams-Sonoma Inc.
Bed Bath & Beyond Inc.
Group Average
$11.19
$88.68
$63.55
$1,007
$8,103
$10,730
$1,116
$8,087
$11,538
PIR 13.6x
WSM 27.4x
BBBY 12.5x
17.8x
13.5x
25.5x
12.2x
17.0x
11.5x
22.1x
11.4x
15.0x
9.9x
19.6x
10.6x
13.4x
6.2x
12.7x
6.9x
8.6x
6.0x
11.9x
7.1x
8.3x
5.5x
10.8x
7.1x
7.8x
4.9x
9.9x
6.8x
7.2x
Home Furnishing Retailers
Leon's Furniture Ltd.
Haverty Furniture Companies Inc.
Ethan Allen Interiors Inc.
La-Z-Boy Incorporated
Group Average
$14.45
$23.63
$31.39
$27.25
$1,032
$533
$891
$1,382
$1,476
$513
$891
$1,283
15.0x
63.9x
24.7x
21.2x
31.2x
15.2x
17.9x
18.1x
17.9x
17.3x
13.9x
15.3x
15.5x
16.0x
15.2x
NM
13.6x
13.6x
13.5x
13.6x
10.2x
7.4x
10.7x
10.5x
9.7x
10.2x
6.9x
9.0x
8.9x
8.8x
9.8x
6.1x
8.0x
8.2x
8.0x
NM
5.5x
7.3x
7.0x
6.6x
29.2x
19.0x
16.2x
14.3x
11.3x
9.4x
8.5x
7.5x
Total Group Average
TSX: LNF
HVT
ETH
LZB
Note: estimates for Sleep Country are from RJL; all other estimates are from Capital IQ
Source: Sleep Country Canada Holdings Inc., Raymond James Ltd., Capital IQ
Executive Summary
Mattress Retailing’s Attractive Economics
The essentially blind mattress purchase affords retailers both relatively high product gross
margins and conversion (shopper to buyer conversion is approximately 59% at Sleep Country). In
addition to the attractive gross margins, the just in time relationship with suppliers supports a
negative working capital model, which helps fund growth. The reality is that the combination of
the simplicity of the business, the ease with which the model can be replicated, and the benefit of
the working capital of the model impute few barriers to entry (although size does matter in terms
of advertising support and volume rebates from suppliers). However, while tickets to the game
are cheap and plentiful, the incumbents are pretty adept players. As such, while the majors on
balance do a good job of defending share, they have struggled to increase share (other than
through consolidation). In terms of market concentration, the top 3 retailers in Canada command
an approximate 55% market share (Sleep Country is the largest with an estimated 23% national
market share). In comparison, the top 3 retailers in the US command a 33% share (Mattress Firm
is the largest with an estimated 17%).
Momentum to Moderate
The strong (relative to management’s 5-7 year guidance of 3.0%-6.0%) 2014 performance, with SSS
growth of 8.3%, is unlikely to see a repeat anytime soon, in our view. Sleep Country’s 2-year
stacked SSS growth is 4.7% (1.7% on a stacked 3-year basis). While our 2015 estimates are based on
SSS growth of 6.4% (above long-term guidance), our respective 2016 and 2017 estimates of 4.3%
and 3.9% are both more consistent with the 2-year stacked performance (and at the lower end of
management’s guidance). We believe that our conservative SSS estimates reflect the nature
(infrequent) and cost (big ticket) of bedding purchases. Mattress purchases are impacted by the
macro backdrop, as consumers can (if necessary) defer the purchase of a replacement mattress
(which accounts for approximately 75% of industry volume, with life cycle events largely
representing the balance of the market). We are also mindful that competitors will respond to
Sleep Country’s revamped advertising strategy (and increased advertising spend), potentially
increasing competitive intensity. While the increased advertising spend in market could increase
competitive intensity, a mitigating factor is the reality that a number of key competitors have either
curtailed (or scaled back) their planned bedding retail expansions.
Macro and Industry Growth
The Canadian market, despite its relative size, concentration and competitive intensity at Retail,
exhibits very similar characteristics to the US and, as such (given the granularity of the available US
versus Canadian data), we have largely referenced US data for the purposes of this report. While
bedding industry units and sales have a strong positive correlation with a number of key economic
variables, specifically, GDP, Consumer Confidence, and Housing, the replacement cycle nature of
bedding purchases has made the industry generally resistant to deep or protracted declines.
According to the International Sleep Products Association (ISPA), during the past 20 years, bedding
dollar sales have only decreased (on a year-over-year basis) in three years (2001, 2008, and 2009),
though unit volumes have decreased seven times. In addition to its steady long-term dollar sales
growth (with 20-year and 10-year US CAGRs of 6.0% and 4.3%, respectively), mattress (or bedding)
retail (as detailed above) boasts attractive economics due to relatively high gross margins, lean
inventory and meaningful support from manufacturers (in the form of both volume based rebates
and advertising dollars). Average Unit Selling Price (AUSP) dynamics are of particular reference,
with increases driven by a number of factors including larger mattress sizes (neither houses nor the
inhabitants have been getting any smaller), changing consumer preferences (pillow tops and higher
profile beds), and subsequent to the great recession (and the bifurcation of consumer) market
share gains by premium-priced specialty sleep (non-innerspring) beds.
Mattress Store Density
Sleep Country’s sales per average store in 2014 were $1.9 mln (versus $2.0 mln in 2009). While
sales per store have decreased, despite Sleep Country focusing its store openings on in-fill
markets, its store density (162,000 people per store) is relatively low. Management is targeting
growth in existing, satellite and new markets. The target growth of 50 to 70 net new stores over
the next 5-7 years appears reasonable (perhaps even conservative) against the above backdrop,
as it imputes exit density of 140,000 per store (versus US density of 84,000) across all markets. In
a mature Retail landscape, the new store growth opportunity is attractive.
Company Overview
Sleep Country is Canada’s leading mattress retailer (and the only specialty mattress retailer with a
national footprint), commanding an estimated 23% national market share. Sleep Country operates
under two retail banners: Sleep Country Canada and Dormez-vous? (the acquisition of Quebecbased Dormez-vous? was completed in January 2006). In 2014, Sleep Country reported revenue
growth of 11.9% (on SSS growth of 8.3%) to $396.1 mln, generating operating EBITDA of $50.6
mln for an EBITDA margin of 12.8%. Sleep Country’s average store is approximately 5,000 sq. ft.
and offers sleep products and accessories, which include bed frames, pillows, mattress pads,
sheets, duvets, headboards and footboards. Exhibit 1 details Sleep Country’s market in across
Canada by banner.
Exhibit 1: Largest Players in Canadian Mattress Industry (2014)
Dormez-vous?
17%
Sleep Country
24%
Others 33%
Others 38%
BMTC 13%
Leon's
Furniture
16%
The Bay 4%
Sears Canada
15%
IKEA 8%
Sears Canada
11%
The Bay 2%
Matelas
Bonheur 5%
IKEA 7%
Leon's
Furniture 7%
Source: Sleep Country Canada Holdings Inc., Raymond James Ltd.
The Sleep County concept was launched in Vancouver in 1994 with 4 stores. Today, Sleep Country
has 221 stores and 16 distribution centres across Canada, with 50 to 70 new stores targeted in the
next 5-7 years (since the beginning of 2007 they’ve opened 78 new stores). On the current
footprint of 221 stores, the population per store of 162,000 (with a 5-7 year target of 140,000)
imputes low absolute and relative store density (the US density is 84,000 across all markets). In
referencing the US, it is important to note that in an ill-conceived acquisition, Sleep America was
purchased for US$25.5 mln in March 2006, and later sold to leading US mattress retailer, Mattress
Firm Holding Corp. (MFRM-NASDAQ, RJA: Outperform), for US$12.5 mln in January 2015. In
addition to Mattress Firm, Raymond James & Associates (RJA) covers Tempur Sealy (TPX-NYSE,
RJA: Market Perform), Select Comfort Corp. (SCSS-NASDAQ, RJA: Strong Buy), Leggett & Platt
(LEG-NYSE, RJA: Market Perform), and Culp Inc. (CFI-NYSE, RJA: Market Perform) in the space.
Exhibit 2 details Sleep Country’s store network.
Exhibit 2: Sleep Country’s Store Network
Sleep Country was listed on the TSX (as an income fund) between 2003 and 2008, when it was
taken private at $22.00 per unit (a 37.1% premium to the trading price on August 13, 2008) by a
group led by Birch Hill Equity Partners for $356.0 mln (which equated to a 8.2x EBITDA multiple).
On July 16, 2015, Birch Hill Equity Partners and the co-investors again brought Sleep Country
public through an IPO of 47% of the outstanding shares at $17.00 per share, for total gross
proceeds of $300.0 mln (and a 11.8x EBITDA multiple). In connection with the offering, Sleep
Country Canada Holdings Inc. also completed the acquisition of Sleep Country Canada Inc. and
certain of its affiliates for an aggregate purchase price of $461.7 mln. The net proceeds of the
offering were used by the company to satisfy a portion of the purchase price (the balance was
satisfied by the issuance of shares and acquisition notes to certain of the shareholders of the
acquired entities).
Mattresses represented approximately 80% of 2014 revenues, and bedding accessories, which
include bedframes, pillows, mattress pad sheets, duvets, and headboards, accounted for 18%.
Bedding accessories revenue has more than doubled in the last 8-years, with Sleep Country
generating in excess of $73.0 mln in 2014, in what the company believes to be approximately an
$830 mln market in Canada. While Sleep Country’s market share is essentially unchanged from
when it was taken private in 2008 (an issue which we explore in the Investment Thesis section),
the share gains in accessories (which boast a higher gross margin) are an incremental positive.
Sleep Country is not only the largest specialty mattress retailer in Canada, but also one of its most
recognized brands. This is a business where scale is of particular reference, specifically vendor
relationships and advertising efficiency (Why Buy a Mattress Anywhere Else?). In addition, Sleep
Country (in theory anyway) is in a sweet (sleep) spot with the North American mattress retail
industry undergoing a fundamental shift in purchase preference to Specialty Retailers. In 2000,
specialty mattress retailers represented 32% of the market; in 2004, their share had increased to
36%, by 2008 to 42%, and by 2012 to 46%. The disconnect between the evolution of the US and
Canadian markets by distribution channel is (at best) intriguing, with Department Stores (the
biggest losers in the US) essentially maintaining share (by our estimates) in Canada. According to
Furniture Today, specialty share increased to 58% in 2013. As detailed in Exhibit 3, the North
American share gains of Specialty Retailers have been at the expense of Furniture Retailers and
Department Stores.
Exhibit 3: Bedding Sales by Retail Distribution Channel - US
Source: Furniture Today, Raymond James Ltd.
Sleep Country’s target (at the mid-point) revenue (based on SSS of 3.0%-6.0%) and EBITDA growth
CAGRs of 7.5% and 8.9%, respectively, for revenues of $610.0 mln and EBITDA of $85 mln appear
aggressive, in our opinion, in the context of: (i) the growth in the 5 years through 2014; (ii) the
current macro backdrop in Canada; and, (iii) the potential increase in competitive intensity in the
next 5 years. In the 5-year period through 2014, the revenue and EBITDA CAGRs were 3.7% and
2.5%, respectively. In addition, the 50 new stores (10-plus stores a year) target over the next 5years reflects acceleration from the 8 store per year average over the last 5 years.
Investment Thesis
Sizing and Economic Sensitivity
While the Canadian bedding industry is relatively small at an estimated $1.4 bln, it is an attractive
(steady growth) market, driven by an approximate 10-year replacement cycle. The Canadian
market, despite its relative concentration (and competitive intensity) at Retail, exhibits very
similar characteristics to the US and, as such (given the granularity of the available US versus
Canadian data), we will largely refer to US data for the purposes of this report.
Exhibit 4: Comparison of US and Canadian Mattress Sales
Source: Sleep Country Canada Holdings Inc., ISPA, Raymond James Ltd.
In terms of market concentration, the top 3 retailers in Canada command an approximate 55%
market share (Sleep Country is the largest with an estimated 23% national market share). In
comparison, the top 3 retailers in the US command a 33% share (Mattress Firm is the largest with
an estimated 17%). In addition to its steady long-term dollar sales growth (ISPA reports 20-year
and 10-year US CAGRs of 6.0% and 4.3%, respectively), mattress (or bedding) retail boasts
attractive economics due to relatively high gross margins, lean inventory and meaningful support
from manufacturers (in the form of both volume based rebates and advertising dollars). The lean
inventory relationship with manufacturers translates into Sleep Country benefitting from a
negative working capital business model. In addition, Specialty Retailers have been gaining market
share at the expense of other distribution channels, and represented approximately 58% of the US
market in 2013.
The nature (infrequent) and cost (big ticket) of bedding purchases is impacted by the macro
backdrop, as consumers can (if necessary) defer the purchase of a replacement mattress (which
accounts for approximately 75% of industry volume, with life cycle events largely representing the
balance of the market). While the industry has generally been resilient following a recession, it is
worth framing up the performance both through, and subsequent to a recession (or period of low
confidence), in order to understand the sensitivity of the mattress retail model.
The bedding industry units and sales have a strong positive correlation with a number of key
economic variables, specifically, GDP, Consumer Confidence, and Housing. In the last 20 years
(through 2014) the correlation between real GDP and bedding dollars and units was 0.72 and
0.70, respectively. Despite this positive relationship, the replacement cycle of bedding purchases
has made the industry generally resistant to deep or protracted declines. During the past 20 years,
bedding dollar sales have only decreased (on a year-over-year basis) in three years (2001, 2008,
and 2009), though unit volumes have decreased seven times. Exhibits 5 and 6 detail the bedding
dollar and unit sales, based on International Sleep Products Association (ISPA) data relative to
Canadian GDP over the last 20 years.
Exhibit 5: ISPA Dollar Sales and Real Canadian GDP
Source: ISPA, Statistics Canada, Raymond James Ltd.
Exhibit 6: ISPA Unit Sales and Real Canadian GDP
Source: ISPA, Statistics Canada, Raymond James Ltd.
While the performance of the bedding industry ahead of, during, and subsequent to the (great)
recession (and previous cycles) is important to note, so is the Average Unit Selling Price (AUSP)
dynamic through these cycles. AUSP increases are a function of a number of factors including
larger mattress sizes (neither houses nor the inhabitants have been getting any smaller),
changing consumer preferences (pillow tops and higher profile beds), and market share gains by
premium-priced specialty sleep (non-innerspring) beds subsequent to the great recession (and
the bifurcation of consumer). Exhibit 7 details the AUSP and the percentage change in AUSP of
bedding (mattresses and foundations) through 2014.
Exhibit 7: Bedding Industry Annual Shipments – Average Unit Selling Price (AUSP)
Source: ISPA, Raymond James Ltd. (ISPA Sample was revised in 2006 and again in 2011)
Prior to the recession, higher priced specialty sleep (non-innerspring) mattresses consistently
gained share, comfortably outpacing the growth of innerspring. While the specialty sleep segment
is defined as non-innerspring, the premium segment is defined as mattress above $1,000. During
the recession, this dynamics switched, with consumers who had to buy a mattress trading down.
Following the recession, specialty bedding was back in vogue, driven in large part by more affluent
consumers (and the product specific marketing push of premium product by Tempur Sealy, Select
Comfort and Serta). Exhibit 8 details specialty sleep as a percent of wholesale mattress shipments.
Exhibit 8: Specialty Sleep as % of Wholesale Mattress Shipments
Source: ISPA, Raymond James Ltd., Raymond James & Associates (ISPA Sample was revised in
2006 and again in 2011)
Competitive Intensity and Economics of the Mattress Retail Model
While both the Canadian and US mattress retail markets are fragmented, the US market is
significantly more fragmented (driving a higher competitive intensity) than the Canadian market.
In Canada, market leader Sleep Country has a 23% national market share, versus in the US where
Mattress Firm dominates with a 17% share. As detailed in Exhibit 9, while in Canada Sleep Country
is the only specialty sleep retailer of reference, the US bedding retail environment is markedly
different. In the US market the top 3 (Mattress Firm, Sleep Number and Sleepy’s) represent an
estimated 33% of the market, with no department store ranked among the top 10 retailers. In
comparison, Sears Canada ranks third in Canada behind Leon’s Furniture (which also owns The
Brick). As such, while US Specialty Retailers’ bedding share gains (in 2013 specialty represented
58% of the total bedding market) have been impressive in the last decade, the same cannot be
said of Canadian specialty bedding retailers (Sleep Country’s bedding share was in excess of 20% a
decade ago, versus 23% in 2014, according to company filings).
Exhibit 9: Canada vs. US - Bedding Retail Market Share (2014)
Source: Raymond James Ltd., Raymond James & Associates, Furniture Today
The reality is that the combination of the simplicity of the business, the ease with which the
model can be replicated, and the benefit of a negative working capital model all impute few
barriers to entry. However, while tickets to the game are cheap and plentiful, the incumbents are
pretty adept players. As such, while the majors on balance do a good job of defending share, they
have struggled to increase share (other than through consolidation).
Sleep Country has leading market share on both a regional and national basis (and is the largest
bedding retailer in Canada with LTM revenues of $416.2 mln), which allows it to lever supplier
relationships and market level advertising. In the LTM period, the average store in the Sleep
Country network delivered sales of $1.9 mln. The benefits of size include the obvious volume
based discounts and rebates, in addition to higher cooperative advertising dollars (from
suppliers). That advertising and promotion are particularly key drivers of the model is of no
surprise to anyone who has stayed tuned into a radio or television channel for more than 5
minutes (it’s hard to avoid an advert from one the majors).
The reason that this high level of marketing spend is an imperative is due to the infrequent
purchase and high ticket nature of the bedding industry (which engenders low loyalty). As such,
there is an acute price or getting a deal sensitivity surrounding bedding purchases. Sleep Country
spent $18.8 mln, or approximately 4.7%, of revenues on advertising in 2014, up from 4.0% in
2012. In comparison, leading US bedding retailer Mattress Firm spent 8.6% of revenues on
advertising in 2014, for a 3-year average of 8.6% versus Sleep Country at 4.5%. The disparity in
marketing spend between the leading US (Mattress Firm) and Canadian (Sleep Country) specialty
bedding retailers is we believe primarily attributable to the higher competitive intensity (and
more fragmented base) of US mattress retail. While we expect Sleep Country’s advertising spend
to ratchet higher, we believe that the competitive intensity in the Canadian market will not
necessitate the level of spend (as a percent of revenues) in the US market. Recall, Sleep Country is
the only specialty bedding retailer in Canada, while in the US the top 5 list includes Mattress Firm,
Sleep Number, Sleepy’s, America’s Mattress and Sit’n Sleep. Exhibit 10 details Sleep Country’s
absolute and relative advertising as a percent of revenues spent.
Exhibit 10: Comparison of Advertising Spend - Sleep Country versus Mattress Firm
Sleep Country
Mattress Firm
4.7%
4.8%
$25.0
8.7%
8.6%
$170.0
4.0%
$18.8
$20.0
$17.0
$15.0
8.7%
5.0% $190.0
$155.3
4.0% $150.0
$105.3
2.0%
$5.0
1.0%
$0.0
0.0%
8.0%
$87.2
$90.0
$10.0
8.4%
8.2%
$130.0
3.0% $110.0
$13.2
8.6%
7.8%
$70.0
7.6%
$50.0
2012
2013
Advertising
7.4%
$30.0
7.2%
$10.0
-$10.0
2014
2012
% of Revenue
2013
Advertising
2014
% of Revenue
Note: Sleep Country in C$ mln, Mattress Firm in US$ mln
Source: Sleep Country Canada Holdings Inc., Mattress Firm Holding Corp., Raymond James Ltd.
In response to increased competitive intensity (and in an effort to reignite traffic growth), Sleep
Country realigned its internal and external marketing resources in 2012 and 2013, not only by
increasing spend, but also by improving the mix of media used in its advertising strategy. Given
Sleep Country’s SSS (and EBITDA) performance through 2012, we are inclined to characterize the
advertising strategy revamp (and renewed spend growth) as playing (critical) defense. SSS in 2012
decreased 4.2% and EBITDA bottomed at $38 mln. Exhibit 11 details Sleep Country’s SSS
performance against the change in AUSP (using ISPA data) from 2012 through 2Q15.
Exhibit 11: Sleep Country’s SSS Performance versus Changes in AUSP
15%
15%
10%
9.1%
10.2% 10.5%
10%
Sleep Country Metrics
7.3%
5%
0.8%
3.8%
1.3%
7.7%
0%
0%
-0.1%
-5%
-2.5%
-5%
-3.9%
-10%
-7.4%
-10%
-15%
-10.2%
-20%
1Q12
2Q12
-15%
3Q12
4Q12 1Q13 2Q13
Implied Traffic
3Q13
4Q13 1Q14
Implied Pricing
2Q14
3Q14
SSS
4Q14
1Q15
2Q15
Source: Sleep Country Canada Holdings Inc., ISPA, Raymond James Ltd.
In addition to the advertising revamp, management also embarked on the following key initiatives
(which we explore in more detail later in this report), during the same timeframe:






5%
Broadened real estate footprint across Canada.
Implemented enhanced store design.
Redesigned and expanded accessories line.
Enhanced the sales and service training.
Upgraded logistics systems and software.
Divested Sleep America and exited the US market.
While SSS performance in 2014 was undeniably impressive, we believe viewing the SSS
performance on a 2-year and 3-year stacked basis is of greater reference (given the enormity of
the swings in performance through 2014). As detailed in Exhibit 12, Sleep Country’s SSS increased
4.7% and 1.7%, respectively, on a 2-year and 3-year stacked basis (versus best-in-class US
specialty bedding retailer Mattress Firm at 3.7% and 4.5%, respectively).
SSS Growth
11.1%
7.0%
Exhibit 12: SSS Performance – Sleep Country versus Mattress Firm
SSS % Summary
Q1
Q2
Q3
Q4
Year
Sleep Country Canada
2012
2013
2014
3.8%
-3.9%
1.3%
-10.2%
-0.1%
9.1%
-2.5%
0.8%
11.1%
-7.4%
7.3%
10.2%
-4.2%
1.0%
8.3%
Q1
Q2
Q3
Q4
-0.1%
-5.2%
-0.9%
-0.1%
Year
-1.6%
Mattress Firm Holding
2012
2013
2014
16.1%
-5.2%
4.3%
5.0%
-0.3%
9.7%
6.6%
2.9%
8.5%
-1.6%
6.5%
1.9%
6.1%
1.3%
6.1%
-1.3%
4.5%
6.0%
8.8%
5.5%
2.4%
4.8%
2.5%
-0.5%
4.7%
5.7%
4.2%
4.7%
3.7%
3.7%
2-year Stacked SSS
3-year Stacked SSS
Q1
Q2
Q3
Q4
Year
0.4%
-0.4%
3.1%
3.4%
5.1%
4.8%
6.0%
2.3%
1.7%
4.5%
Source: Sleep Country Canada Holdings Inc., Mattress Firm Holding Corp., Raymond James Ltd.
Bed retailing is unique; it is highly tactile, with a relatively infrequent (largely driven by a 10-year
replacement cycle) purchase profile, driven by the need for a good night’s sleep, that is not
particularly enjoyable (rolling around on a bed in a store, in front of sales associates, is not fun).
The unique attributes, aided and abetted by the lack of hard science on what bed improves sleep,
are what supports the attractive economics of the bedding retail model (and largely insulate
retailers from mass merchants and online threats). While the economics of the model are
attractive, woe is the retailer (Sleep Country in 2010 – 2012), who loses sight of the importance of
advertising spend (and maintaining mind share). The essentially blind mattress purchase affords
retailers both relatively high product gross margins and conversion (Sleep Country’s Market
Survey reports shopper to buyer conversion is approximately 59% at Sleep Country, compared to
50% at IKEA, and 44% at Sears Canada).
In addition to the attractive gross margins, the just in time relationship with suppliers supports a
negative working capital model, which helps fund growth. The model typically works as follows: (i)
Sleep Country is paid in full by the customer at POS, (ii) Sleep Country orders the mattress set
from its supplier the next day, (iii) the mattress set is received by Sleep Country within two days of
placing the order with the supplier, and (iv) Sleep Country typically has between 30-45 days to pay
its supplier following the receipt of the mattress. This cycle results in 33-48 days of negative
working capital as illustrated in Exhibit 13 below.
Exhibit 13: Sleep Country Working Capital Cycle
While the available Sleep Country data is limited, we believe it is worthwhile to both back test and
cross reference the negative working capital model. While Sleep Country’s cash conversion was a
negligible (and enviable in retail) 3 days in 2014, it was actually negative, with operating working
capital at less than 1% of sales since 2013. We estimate that Sleep Country’s mattress (or rather
inventory) turns are in the low teens (prior to adjusting for floor inventory). The adjusted turns
were in the mid-high teens in the last few years. Exhibit 14 details Sleep Country and Mattress
Firm’s inventory turns. We caution that Mattress Firm’s working capital is skewed by the large
number of acquisitions in 2014 and a change of its inventory accounting and, as such, are not
representative of its steady-state performance.
Exhibit 14: Cash Conversion Cycle
Sleep Country
Mattress Firm
2013
2014
1Q15
2Q15
Average
2013
2014
1Q15
2Q15E
Days Sales Outstanding
6.0
6.0
6.3
3.5
5.4
6.2
10.3
12.1
9.6
9.6
Days Inventory
37.1
32.9
37.9
34.1
35.5
39.6
53.4
48.3
41.5
45.7
Days Payables
41.9
42.1
42.2
36.8
40.8
35.1
48.9
46.8
41.0
42.9
Cash Conversion Cycle
1.2
(3.2)
1.9
0.8
0.2
10.8
14.9
13.6
10.2
12.4
10.8x
15.1x
10.6x
6.3x
10.7x
9.2x
6.8x
7.6x
8.8x
8.1x
Inventory Turnover
Average
Operating Working Capital
Accounts Receivable
$5.8
$6.5
$6.3
$4.0
$5.6
$20.8
$51.2
$67.3
$60.2
$49.9
Inventory
$27.0
$26.4
$28.9
$28.3
$27.7
$81.5
$163.5
$167.5
$161.1
$143.4
Accounts Payable
$30.5
$33.7
$32.2
$30.6
$31.8
$72.2
$149.6
$162.1
$159.0
$135.7
$2.3
($0.9)
$3.0
$1.7
$1.5
$30.2
$65.1
$72.8
$62.3
$57.6
0.7%
-0.2%
0.7%
0.4%
2.5%
3.6%
3.6%
2.7%
Operating Working Capital
Operating WC % of TTM Sales
Note:Estimates
Sleep Country
in C$ mln,
in US$James
mln & Associates; Sleep Country in C$ mln, Mattress Firm in US$ mln
Note:
for Mattress
FirmMattress
are fromFirm
Raymond
Source: Sleep Country Canada Holdings Inc., Mattress Firm Holding Corp., Raymond James Ltd., Raymond James & Associates
Building Out the (Mattress) Base and Increasing (Accessories) Thread Count
Sleep Country’s sales per average store in 2014 were $1.9 mln (versus $2.0 mln in 2009). While
sales per store have decreased, despite Sleep Country focusing its store openings on in-fill
markets, its store density (162,000 people per store) remains relatively low. Management is
targeting growth in existing, satellite and new markets.
The target growth of 50 to 70 net new stores over the next 5-7 years appears reasonable (perhaps
even conservative) against the above backdrop, as it imputes exit density of 140,000 per store
(versus US density of 84,000) across all markets. The Sleep America business was sold to Mattress
Firm Holdings for US$12.5 mln in a transaction which closed on January 6, 2015. Sleep America, in
what we characterize as a strategic misstep, was purchased for US$25.5 mln in 2006.
Management believes there is capacity to increase Canadian store density to one store per
approximately 100,000 people without oversaturating the market.
An existing market is a pre-existing region with established stores serviced by one or more existing
distribution centres. In-fill stores are typically cash flow positive within 6-months of opening and
typically do not require an increase in advertising, management or fixed distribution costs. A
satellite market is a new region/store which is in close proximity to a pre-existing built out region
which benefits from advertising spill and is serviced by the nearby distribution centre. Satellite
markets usually require an additional investment in advertising and also require additional logistic
costs to transport products to stores and customers beyond the normal range of the existing
distribution centres and are typically cash flow positive within the first 12-months of opening. A
new market is virgin territory, such as Sleep Country’s recent entry into New Brunswick, which
requires incremental advertising and distribution logistics, and is typically cash flow positive
within the first 24-months of opening.
The new store economics are compelling, with a new store typically only requiring modest capex
and working capital investments (net of tenant inducements) of approximately $325,000, with
maintenance capex at only 1.0% of sales from 2008 to 2014. Given the compelling new store
economics, and (i) the increased dependence on sales of accessories (bed frames, pillows,
mattress pads, sheets, duvets, headboards and footboards), (ii) the relative growth rates and
margin profiles, and (iii) key competitors upping the ante, we are perplexed by the slow planned
implementation of the new store design. As detailed in Exhibit 15, we estimate that by 2020
approximately 50.4% of stores will be converted to the new store design.
Exhibit 15: Sleep Country New Store Format – 2014 to 2020E
Beginning Store Count
New Stores (New Format)
New Format Conversions
Total Stores
Total New Format Stores
New Format as a % of Total Stores
2014A
208
3
212
2015E
212
11
12
223
2016E
223
10
12
233
2017E
233
11
12
244
2018E
244
12
12
256
2019E
256
10
12
266
2020E
266
10
12
276
3
26
48
71
95
117
139
1.4%
11.7%
20.6%
29.1%
37.1%
44.0%
50.4%
In the last 5 years, Sleep Country’s bedding sales CAGR was a relatively paltry 2.4% versus its
bedding accessories sales CAGR of 7.5%. The CAGR in the AUSP in the same period was 3.2% (on a
2.6% CAGR in unit volumes), according to ISPA data. In addition, the accessories category carries
an even more attractive margin, at an estimated 10% higher than mattresses. While Sleep
Country, on approximately $73 mln in accessories sales, has a modest 8.8% market share, neither
its growth rate nor its share gains have gone unnoticed by the market leaders. The bedding
accessories sections of key competitors have undergone (or are undergoing) the biggest refresh in
a generation based on our channel checks.
The experience is of particular reference in bedding accessories shopping, as linens, pillows and
duvets are seldom (if ever) on an average consumer’s fun day of shopping list. While the new
store design is competitive (and worlds removed from the old store design), it is not especially
compelling relative to offerings (and redesigns) by key bedding accessories competitors. As such,
we believe that Sleep Country is going to need to further refine its accessories model in order to
maintain growth trajectory (and share gains). Exhibit 16 depicts a typical Sleep Country store in
2006 and one of the 9 new format stores.
Exhibit 16: Sleep Country Store – Base 2006 Store versus Enhanced 2014 Store
Source: Raymond James Ltd., Sleep Country Canada Holdings Inc. (National Post)
Sleep Country prides itself on its highly-trained and dedicated workforce. Sleep Country provides
extensive initial and ongoing employee training and development in order to deliver a superior instore experience. The combination of Sleep Country’s enhanced employee training and
competitive compensation program (base salary and commission earned on gross margins) is the
driver behind its impressive average employee turnover rate of 16%, which is approximately a
third of the Retail industry average of 44% (according to a recent Mercer survey). The enhanced
sales and service training (which we suspect dovetails with tougher performance criteria) has,
however, resulted in a marked increase from the unsustainably low mid-single digit levels of 10
years ago.
The investments made in its sales teams enables Sleep Country to deliver a superior in-store
experience that results in high conversion of sales (59%), repeat business and superior sales per
associate metrics. Given that a mattress is an infrequent (and big ticket) purchase item with highly
personalized tastes, preferences, needs, budgets, and is a difficult product to compare (not to
mention the complex and constantly evolving product landscape), knowledgeable sales staff are
key. In addition, by offering 60-day price and comfort guarantees, Sleep Country strives to take
the worry out of the purchase decision.
While the conventional wisdom posits that Bricks have (and will continue) to dominate Clicks in
mattress retailing, with limited traction gained from online sales given the challenges in gaining an
understanding of the differences, falling asleep at your mouse doesn’t result in a good night’s
sleep (or growing share). While the Canadian mattress retail market is at a lower risk from online
cannibalization and showrooming than other retail categories, Sleep Country can ill afford to
become complacent about the threat.
Given that Sleep Country is the leading specialty bedding retailer in Canada, and has recently
revamped its advertising strategy (to bolster its traditional and online marketing strategies the
company increased its total expenditures on advertising and improved the mix of media that it
deployed in its advertising strategy), we decided it would be instructive to do a little online
shopping. The results of this exercise were disappointing. Our search of “mattress” generated
some surprising results. While we expected new entrants (and online-only players the likes of
Endy Sleep) to rank highly, we did not expect Sleep Country to rank below the line. The highest
ranking non-sponsored link was by The Brick. In terms of sponsored links, startup Endy Sleep was
top ranked, with both Sears Canada and Walmart Canada hard to miss.
Despite an online advertising presence (and website that appears designed to either frustrate
consumers into a Sleep Country store or the arms of a competitor), both Sleep Country Canada’s
banners enjoy market leading unaided brand awareness and share of traffic. We are of the
opinion that significant opportunity (from either a risk mitigation or share gain perspective) exists
in Sleep Country’s online capabilities, and we would look to see it become a leader (versus a
laggard), in terms of its online capabilities.
Exhibit 17: Consumers’ Brand Awareness
Financial Analysis & Outlook
2Q15 Results Summary
Sleep Country’s revenue increased 10.6% from $92.7 mln to $102.5 mln, driven by mattress sales
growth of 9.8% to $83.1 mln and accessory sales growth of 14.5% to $19.4 mln. The combination
of continued store refreshes (Sleep Country has converted 9 stores thus far to its new enhanced
design) and focus on improved merchandizing and sleep-related accessories is facilitating
particularly solid performance. In addition, the renovated stores have delivered a 22% increase in
SSS since their reopening.

Sleep Country’s revenue increased a strong 10.6% from $92.7 mln to $102.5 mln, reflecting
SSS growth of 7.7% (on a tough 9.1% comp). The particularly strong SSS increase marked the
th
8 consecutive quarterly SSS increase, reflecting the continued momentum of its strategic
initiatives.

Gross margin performance was also noteworthy, increasing a strong 188 bp from 24.5% to
26.3% (gross profit dollars increased 19.2% from $22.7 mln to $27.0 mln), driven by
improved mix, distribution efficiencies and leveraging of certain fixed costs.

Adjusted EBITDA came in at $13.4 mln, for an EBITDA margin of 13.0% versus 9.5% in the
prior-year quarter. The particularly strong 356 bp margin expansion reflects higher gross
margins and improved SG&A leverage (SG&A margins of 13.7% versus 16.3% in 2Q14).
Revenue
Sleep Country’s revenue increased a strong 10.6% from $92.7 mln to $102.5 mln, on mattress
sales growth of 9.8% to $83.1 mln and accessory sales growth of 14.5% to $19.4 mln. The revenue
growth reflects a particularly 7.7% increase in SSS (against a tough 9.1% comp), and the addition
of 6 new stores in 1H15.
Gross Profit
Gross profit increased 19.2% from $22.7 mln to $27.0 mln, for a gross margin of 26.3%. The strong
188 bp margin increase reflects a more favourable product mix, distribution efficiencies, and
leveraging of fixed costs. The improved mix reflects a higher proportion of (i) accessories and (ii)
specialty mattress in the mix, in addition to improved promotional efficiency. Sleep Country saw
further improvements in logistics costs, on improved communication stores and its distribution
centres.
EBITDA
Operating EBITDA increased 52.2% from $8.8 mln to $13.4 mln, for an EBITDA margin of 13.0%
(versus 9.5% in the year-ago quarter). The particularly strong 356 bp margin improvement reflects
the twin tailwinds of higher gross margins and better SG&A leverage (SG&A margins were 13.7%
versus 16.3% in 2Q14).
EPS
Adjusted EPS was $0.20, on adjusted net income of $7.5 mln.
Model and Estimates
We are initiating 2015E EPS of $0.92, 2016E EPS of $0.99 and 2017E EPS of $1.08. The
combination of continued store conversions (Sleep Country is expected to convert 10 to 15 stores
annually to its new enhanced design), and focus on improved product mix and higher-margin
sleep-related accessories, is expected to facilitate continued solid performance through our
forecast window. Our earnings forecasts are based on the following assumptions:
2015 Estimates

Revenue of $433.1 mln reflects a 9.3% increase from the prior year, driven by SSS growth of
6.4% and the opening of 11 net new stores. We expect total store count of 223 versus 212 at
the end of 2014.

Gross margin of 27.1%, for a gross margin expansion of 103 bp, reflecting our expectations of
improved product mix (higher proportion of accessories sales), distribution efficiencies, and
leveraging of fixed costs.

Operating EBITDA margin improvement of 146 bp to 14.2% (EBITDA of $61.7 mln), reflecting
our expectations of higher gross margins dovetailing with improved SG&A leverage. We
expect SG&A margins of 12.9% versus 13.9% in 2014.

EPS growth of 58.7% to $0.92, on net income of $34.6 mln and an expected effective tax rate
of 27.0%.
2016 Estimates

Revenue growth of 8.2% to $468.7 mln, which is primarily predicated on a 4.3% increase in
SSS and 10 net new stores (for a total store base of 233).

We expect a more modest gross margin expansion of 14 bp to 27.3%, on a tough 103 bp
expected increase in 2015. While favourable mix impacts are feasible through 2016E, they
are not explicitly baked into our assumptions.

An 11 bp increase in Operating EBITDA margin to 14.4% (EBITDA of $67.3 mln), on our
expectations of a 14 bp in gross margin increase and essentially unchanged SG&A leverage
(very modest 3 bp increase in SG&A margins of 12.9%).

EPS of $0.99, for a 7.2% increase from the prior year, on our expectations of net income of
$37.1 mln and an unchanged effective tax rate of 27.0%.
2017 Estimates

Revenue of $504.4 mln, for a 7.6% increase from the prior year, is predicated on a 3.9%
growth in SSS and 11 net new stores (bringing Sleep Country’s total store base to 244 by
year-end 2017E).

Gross margin of 27.3%, for a very modest 7 bp gross margin increase. While more favourable
product mix impacts are possible through 2017E, they are not explicitly baked into our
assumptions.

Operating EBITDA of $72.6 mln, for an EBITDA margin of 14.4%. The very modest 3 bp
EBITDA margin increase reflects our expectations of a 7 bp gross margin expansion, and
essentially unchanged SG&A leverage. We expect SG&A margins of 13.0% versus 12.9% in the
prior year.

EPS growth of 9.7% to $1.08, which is predicated on our $40.6 mln net income expectation
and unchanged effective tax rate of 27.0%.
Valuation & Recommendation
We are initiating coverage of Sleep Country with a Market Perform rating and $16.00 target price.
Our target price of $16.00 is based on the average of our EV/EBITDA and DCF valuation, for an
implied value of $16.37.
EV/EBITDA Valuation Methodology
We apply a target EV/EBITDA multiple of 10.0x to our 2016E EBITDA of $67.3 mln, which is
essentially in-line with the US mattress peer group average of 9.6x, and below US leading specialty
mattress retailer Mattress Firm’s 12.0x historical 3-year average. We believe our target multiple
appropriately reflects: (i) Sleep Country’s positioning in the Canadian specialty retail landscape, (ii)
compelling future growth opportunities, (iii) improved capital structure following its initial public
offering, and (iv) unseasoned public company risk.
EBITDA ($'mln)
Exhibit 18: EV/EBITDA Sensitivity Table – 2016E
$ 14.46
9.0x
9.5x
10.0x
10.5x
11.0x
$57.3
$10.26
$11.03
$11.79
$12.55
$13.31
$62.3
$11.47
$12.30
$13.13
$13.96
$14.78
$67.3
$12.67
$13.57
$14.46
$15.36
$16.26
$72.3
$13.88
$14.84
$15.80
$16.76
$17.73
$77.3
$15.08
$16.11
$17.14
$18.17
$19.20
Source: Raymond James Ltd.
Discounted Cash Flow Methodology
Our DCF estimate assumes a 7.5% cost of equity based on the 10-year GOC bond for a risk-free
rate of 2.25%, an equity beta of 0.52, and a 2.8% after-tax cost of debt, for implied weighted
average cost of capital (WACC) of 6.3%. We have assumed a 1% terminal growth rate given the
relatively stable nature of the bedding industry.
Exhibit 19 below depicts our sensitivity table for a range of WACC and terminal growth rate
assumptions, for imputed valuations in the range of $15.81 to $21.69 versus the average of our
DCF and EV/EBITDA valuation of $16.37.
Exhibit 19: DCF Sensitivity Table – 2016E
WACC
Termi na l Growth Ra te
1,828%
0.0%
0.5%
1.0%
1.5%
2.0%
5.3%
$21.35
$21.44
$21.52
$21.61
$21.69
5.8%
$19.61
$19.68
$19.76
$19.84
$19.92
6.3%
$18.14
$18.21
$18.28
$18.35
$18.42
6.8%
$16.89
$16.96
$17.02
$17.08
$17.15
7.3%
$15.81
$15.87
$15.93
$15.99
$16.05
Source: Raymond James Ltd.
Exhibit 20: Peer Group Comparison
Price
8/18/2015
Shrs
O/S
(mln)
Market
Cap.
(mln)
$15.02
37.5
$564
U.S. Mattress Retailers/Manufacturers LAST
$64.02
Tempur Sealy International Inc.
$78.13
Select Comfort Corporation
$25.88
Group Average
35.1
62.3
53.4
Company Name
Home Décor Retailers
Pier 1 Imports, Inc.
Williams-Sonoma Inc.
Bed Bath & Beyond Inc.
Group Average
Home Furnishing Retailers
Leon's Furniture Ltd.
Ethan Allen Interiors Inc.
La-Z-Boy Incorporated
Group Average
LAST
$11.18
$88.67
$63.51
LAST
$14.45
$23.63
$31.34
$27.18
LFY
Earnings
Per Share
FY1E
FY2E
1000
FY3E
0.58
0.92
0.99
1.08
$2,248
$4,867
$1,381
1000
1.27
1.75
1.25
1001 1002
2.60
3.27
3.18
3.77
1.40
1.75
1003
3.73
4.29
2.07
90.4 $1,011
94.6 $8,390
181.1 $11,504
1000
0.82
3.24
5.07
1001 1002
0.83
0.97
3.48
4.02
5.22
5.55
1003
1.13
4.51
5.97
1000
0.96
0.37
1.27
1.28
1001 1002
0.95
1.04
1.32
1.54
1.73
2.02
1.52
1.70
1003
1.74
2.31
2.01
82.3
23.0
29.2
52.3
$1,190
$542
$915
$1,423
Price/Earnings Ratios
LFY
FY1E
FY2E FY3E
Overall Group Average
* Estimates for Sleep Country are from RJL, all other estimates are consensus from Capital IQ
Source: Capital IQ, Raymond James Ltd.
LFY
1001
1002
EBITDA ('mln)
FY1E
FY2E
1003
FY3E
LFY
Enterprise Value /
EBITDA Ratios
FY1E
FY2E
FY3E
25.9
16.3
15.2
13.9
$51
$62
$67
$73
13.8
11.3
10.4
9.6
50.4
44.6
20.7
38.6
24.7
24.6
18.6
22.6
19.6
20.7
14.8
18.4
17.1
18.2
12.5
17.7
$155
$344
$142
$270
$456
$161
$327
$508
$192
$343
$554
$215
19.4
18.6
9.1
15.7
11.1
14.1
8.0
11.1
9.2
12.6
6.7
9.6
8.8
11.6
6.0
8.8
13.6
27.4
12.5
17.8
13.5
25.5
12.2
17.0
11.5
22.1
11.4
15.0
9.9
19.6
10.6
14.8
$182
$657
$1,793
$187
$702
$1,734
$205
$774
$1,744
$226
$849
$1,804
6.2
12.7
6.9
8.6
6.0
11.9
7.1
8.3
5.5
10.8
7.1
7.8
4.9
9.9
6.8
7.2
15.0
63.9
24.7
21.2
31.2
15.2
17.9
18.1
17.9
17.3
13.9
15.3
15.5
16.0
15.2
NM
13.6
13.6
13.5
13.6
$161
$70
$85
$125
$160
$76
$101
$148
$167
$86
$114
$160
$0
$95
$125
$187
10.2
7.4
10.7
10.5
9.7
10.2
6.9
9.0
8.9
8.8
9.8
6.1
8.0
8.2
8.0
NM
5.5
7.3
7.0
6.6
29.2
19.0
16.2
15.3
11.3
9.4
8.5
7.5
Appendix A: Financial Statements
Exhibit 21: Sleep Country Income Statement (C$ 000s)
(Year ended December)
Sales
Sales Growth (%)
Sales Seasonlity (%)
Cost of Sales
Gross Profit
Gross Profit Margin
Gross Profit Margin Growth (bp)
Selling and Administrative Expenses
SG&A Margin (%)
SG&A Margin Change Y-O-Y (bp)
Depreciation & Amortization
Total Operating Expenses
Operating Income
Same Store Sales (%)
F2014
$396,085
11.9%
100.0%
$292,665
$103,420
26.1%
122
$54,916
13.9%
(33)
$9,897
$357,478
$38,607
1Q15
2Q15
3Q15E
4Q15E
F2015E
1Q16E
2Q16E
3Q16E
4Q16E
F2016E
F2017E
$91,613 $102,520 $127,540 $111,407 $433,079 $99,205 $111,198 $137,211 $121,077 $468,691 $504,409
12.6%
10.6%
7.3%
7.9%
9.3%
8.3%
8.5%
7.6%
8.7%
8.2%
7.6%
21.2%
23.7%
29.4%
25.7%
100.0%
21.2%
23.7%
29.3%
25.8%
100.0%
100.0%
$69,380 $75,516 $94,039 $76,616 $315,550 $74,840 $81,821 $100,917 $83,266 $340,845 $366,486
$22,233 $27,004 $33,501 $34,791 $117,529 $24,364 $29,378 $36,294 $37,811 $127,847 $137,923
24.3%
26.3%
26.3%
31.2%
27.1%
24.6%
26.4%
26.5%
31.2%
27.3%
27.3%
259
188
60
45
103
120
30
70
0
14
7
$11,933 $14,069 $17,542 $12,299 $55,843 $12,955 $15,312 $18,926 $13,385 $60,579 $65,359
13.0%
13.7%
13.8%
11.0%
12.9%
13.1%
13.8%
13.8%
11.1%
12.9%
13.0%
(157)
(254)
(80)
(85)
(97)
26
34
29
14
3
3
$2,466
$2,525
$2,558
$2,581 $10,129 $2,592
$2,641
$2,673
$2,697 $10,603 $11,076
$83,779 $92,110 $114,138 $91,496 $381,522 $90,388 $99,773 $122,517 $99,348 $412,027 $442,921
$7,834
$10,410
$13,402
$19,911
$51,557
$8,817
$11,425
$14,694
$21,729
$56,665
$61,488
8.3%
10.5%
7.7%
3.8%
3.6%
6.4%
4.0%
4.6%
3.8%
4.9%
4.3%
3.9%
COGS & Operating Expense Growth (%)
Gross Profit Growth Y-O-Y (%)
SG&A Growth Y-O-Y (%)
10.1%
17.4%
9.3%
8.9%
26.1%
0.5%
7.9%
19.2%
-6.6%
7.1%
8.0%
6.5%
7.7%
8.4%
7.0%
7.8%
13.6%
1.7%
7.9%
9.6%
8.6%
8.3%
8.8%
8.8%
7.3%
8.3%
7.9%
8.7%
8.7%
8.8%
8.0%
8.8%
8.5%
7.5%
7.9%
7.9%
Operating Income Margin (%)
Operating Income Change Y-O-Y (bp)
Operating Income Growth (%)
9.7%
169
35.4%
8.6%
456
141.6%
10.2%
463
103.4%
10.5%
33
10.8%
17.9%
29
9.7%
11.9%
216
33.5%
8.9%
34
12.5%
10.3%
12
9.8%
10.7%
20
9.6%
17.9%
7
9.1%
12.1%
19
9.9%
12.2%
10
8.5%
$48,504 $10,300
12.2%
11.2%
28.1%
78.9%
155
417
$12,935
12.6%
70.3%
442
$15,960
12.5%
9.7%
27
$22,492
20.2%
9.2%
23
$61,686 $11,409
14.2%
11.5%
27.2%
10.8%
200
26
$14,066
12.6%
8.7%
3
$17,367
12.7%
8.8%
14
$24,425
20.2%
8.6%
(2)
$67,268
14.4%
9.0%
11
$72,564
14.4%
7.9%
3
Subtotal of Adjustments
$2,123
$418
Operating EBITDA
$50,627 $10,718
Operating EBITDA Margin(%)
12.8%
11.7%
Operating EBITDA Growth Y-O-Y (%)
28.5%
92.8%
Operating EBITDA Margin Growth Y-O-Y (bp)
165
487
$435
$13,370
13.0%
52.2%
356
$15,960
12.5%
5.6%
(21)
$22,492
20.2%
6.2%
(31)
$61,686 $11,409
14.2%
11.5%
21.8%
6.4%
146
(20)
$14,066
12.6%
5.2%
(39)
$17,367
12.7%
8.8%
14
$24,425
20.2%
8.6%
(2)
$67,268
14.4%
9.0%
11
$72,564
14.4%
7.9%
3
EBITDA
EBITDA Margin (%)
EBITDA Growth (%)
EBITDA Margin Growth (bp)
Finance expenses
Net interest expenses
$6,162
$21
$1,514
($149)
$834
$3
$1,492
$0
$1,487
$0
$5,326
($146)
$1,479
$0
$1,476
$0
$1,471
$0
$1,465
$0
$5,891
$0
$5,806
$0
EBT
EBIT Margin (%)
$32,424
8.2%
$6,469
7.1%
$9,573
9.3%
$11,910
9.3%
$18,424
16.5%
$46,377
10.7%
$7,338
7.4%
$9,949
8.9%
$13,223
9.6%
$20,264
16.7%
$50,774
10.8%
$55,682
11.0%
Income Taxes
Effective Tax Rate
$12,206
39.4%
$1,859
28.7%
$2,490
26.0%
$3,216
27.0%
$4,975
27.0%
$12,539
27.0%
$1,981
27.0%
$2,686
27.0%
$3,570
27.0%
$5,471
27.0%
$13,709
27.0%
$15,034
27.0%
Net Income
Tax Impact on Adjustments
Adjusted Net Income (Equity Holders)
$20,218
(558)
$21,783
$4,610
(110)
$4,918
$7,083
(14,538)
$7,518
$8,694
$8,694
$13,450
$13,450
$33,837
(14,648)
$34,580
$5,357
$5,357
$7,263
$7,263
$9,653
$9,653
$14,792
$14,792
$37,065
$37,065
$40,648
$40,648
$0.13
$0.20
$0.23
$0.36
$0.14
$0.19
$0.26
$0.39
$0.99
$1.08
EPS (Diluted)
$0.58
$0.92
Exhibit 22: Sleep Country Balance Sheet (C$ 000s)
Assets:
Current Assets:
Cash & Equivalents
Trade & Other Receivables
Due from Related Parties
Inventories
Prepaid Expenses
Assets for Disposal/Held for Sale
2013
2014
2015E
2016E
2017E
27,401
5,808
11
27,046
1,482
-
41,331
6,477
16
26,369
2,475
14,086
37,045
4,897
1,194
31,151
2,287
-
52,450
5,322
33,855
2,287
-
71,003
5,734
36,372
2,287
-
30,455
419
105,006
242,595
440,223
24,948
480
104,042
242,146
462,370
25,242
431
103,845
242,146
448,238
21,839
431
103,845
242,146
462,175
17,962
431
103,845
242,146
479,780
30,546
10,093
885
41,524
33,729
12,116
7,367
5,210
58,422
31,151
10,811
6,928
48,890
33,855
10,811
6,208
50,874
36,372
10,811
5,488
52,671
Other Liabilities
Deferred Tax Liabilities
Long-term Debt
Total Liabilities
7,078
42,541
220,115
311,258
6,965
31,820
257,838
355,045
6,985
11,429
148,487
215,791
6,985
11,429
148,487
217,775
6,985
11,429
148,487
219,572
Shareholders' Equity
Share Capital
Retained Earnings/Deficit
Currency Translation Reserve
Total Shareholders' Equity
Non-controlling Interest
Total Liabilities & Shareholder's Equity
123,994
(28,234)
80
95,840
33,125
440,223
123,603
(63,693)
428
60,338
46,987
462,370
207,583
24,863
232,446
448,238
205,102
39,297
244,400
462,175
205,102
55,105
260,208
479,780
Non-Current Assets:
Property & Equipment
Other Assets
Intangibles
Goodwill
Total Assets
Liabilities & Shareholder's Equity
Current Liabilities:
Trade & Other Payables
Customer Deposits
Current Portion of Long-term Debt
Liabilities of Disposal Group Held for Sale
Total Current Liabilities
Exhibit 23: Sleep Country Statement of Cash Flows (C$ 000s)
2013
2014
2015E
2016E
2017E
1,793
(14,140)
(40,022)
37,065
40,648
Depreciation
7,709
9,003
9,461
10,603
11,076
Amortization
2,192
1,629
668
-
-
Gain on Sale of Sleep America
-
-
(6,191)
-
-
Reversal of Brand Intangible Assets
-
(5,981)
-
-
-
Operating Activities:
Net Income
Non-Cash Items:
Share-based Compensation
Finance Expenses
Other Expenses
Deferred Income Taxes
Net Change in Non-Working Capital
Trade & Other Receivables
Due from Related Companies
Inventories
Prepaid Expenses
17
14
4
-
-
23,215
61,502
103,512
5,891
(5,806)
(408)
-
-
1,091
93
(10,721)
330
(20,391)
-
-
(1,127)
6,079
(9,365)
(1,935)
(2,929)
(425)
(412)
(711)
(951)
(3)
(5)
(1,178)
1,194
(4,975)
(2,608)
(4,782)
(2,704)
(2,517)
-
-
6,730
(3,159)
-
-
Customer Deposits
970
2,389
(1,305)
-
-
Other
501
584
-
-
-
34,983
47,715
37,268
51,624
42,990
(12,797)
(6,533)
(9,755)
(7,200)
(7,200)
(955)
(752)
(471)
-
-
-
-
Cash Flow from Operating Activities
(60)
188
-
3,055
Trade & Other Payables
36
1,580
Investing Activities:
Purchase of Property & Equipment
Purchase of Intangibles
Proceeds on Sale of Sleep America
Cash Flow From Investing Activities
(13,752)
(7,285)
14,984
4,758
(7,200)
(7,200)
Financing Activities:
Proceeds from IPO
-
-
281,194
-
-
Increase of Non-controlling Interest
8
-
-
-
-
242
-
(854)
-
-
Senior Secured Credit Facility
-
60,000
30,000
-
-
Repayment of Senior Secured Credit Facility
-
(3,250)
(1,625)
-
-
Financing Costs on Senior Secured Credit Facility
-
(1,409)
(128)
-
-
(60,502) (201,032)
-
-
Increase/Decrease of Class A & B Shares
Repayment of Series A & B Promissiory Notes
(6,361)
Repayment on Class A Convertible Shares
(1,139)
(7,035)
(37,212)
-
Redemption of Class A Shares from Birch Hill
-
-
-
-
-
Dividends Paid
-
(7,457)
(4,129)
(16,517)
(16,517)
Acquisition of Shares from Existing Shareholders
-
-
-
-
-
Subscribe to Additional Shares
-
-
-
-
-
(2,734)
(5,971)
(3,870)
-
-
(785)
(910)
(725)
(720)
(720)
(10,769)
(26,534)
61,619
(17,237)
(17,237)
10,462
13,896
103,644
27,186
18,553
27
41
-
-
-
Cash & Cash Equivalents at Beginning of Period
16,912
27,401
41,338
37,045
52,450
Cash & Cash Equivalents at End of Period
27,401
41,338
37,045
52,450
71,003
Interest Paid
Decrease in Other Long-term Debt
Cash Flow From Financing Activities
Net Change in Cash & Cash Equivalents
FX Impact on Cash Flows
Appendix B: Management & Board of Directors
Stephen K. Gunn, Executive Co-Chair
Mr. Gunn co-founded Sleep Country in 1994 and served as its Chief Executive Officer from 1997 to
2014. Prior to co-founding Sleep Country, Mr. Gunn held management consulting positions at
McKinsey from 1981 to 1987, after which he co-founded Kenrick Capital. Mr. Gunn also serves on
the Board of Directors at Dollarama, Golfsmith International, Cara, and Mastermind Toys. Mr.
Gunn holds an MBA from University of Western Ontario, and a B.Sc. degree from Queen’s
University.
Christine Magee, Executive Co-Chair
Ms. Magee co-founded Sleep Country in 1994 and served as its President until 2014. Prior to cofounding Sleep Country, Ms. Magee held various senior positions at Continental Bank and
National Bank between 1982 and 1994. Ms. Magee also serves on the Board of Directors of
SiriusXM Canada and Trillium Health Partners. In addition, Ms. Magee also serves on the Advisory
Board of the Ivey School of Business and the Women’s President Organization. Ms. Magee holds
an HBA from the University of Western Ontario.
David Friesema, Director and Chief Executive Officer
Mr. Friesema has served as Sleep Country’s Chief Executive Officer since November 2014. Mr.
Friesema joined Sleep Country in 1995, during which he held various senior positions such as Head
of Sales, General Manager and Chief Operating Officer. During his 20 year tenure at Sleep
Country, Mr. Friesema has led the company through various strategic initiatives, such as
developing sales training programs and creative marketing campaigns. Previously, Mr. Friesema
worked in the mattress industry in the United States. Mr. Friesema is the Chairman of the Better
Sleep Council of Canada. He attended the University of Detroit Business School and the University
of Missouri-St. Louis School of Psychology.
Stewart Schaefer, President of Dourmez-vous? and Chief Business Development Officer
Mr. Schaefer founded Dourmez-vous? in 1994 and managed the company until it was acquired by
Sleep Country in 2006. Prior to founding Dourmez-vous?, Mr. Schaefer co-founded Heritage
Classic Beds, a manufacturer and distributor of iron and brass beds. Prior to entering the bedding
industry, Mr. Schaefer worked as a commodity broker in Chicago, and at Dean Witter Reynolds
and Refco Futures in Montreal. Mr. Schaefer studied Finance and Marketing at Concordia
University in Montreal.
Robert Masson, Chief Financial Officer and Corporate Secretary
Mr. Masson has served in his current role since July 2013, when he joined Sleep Country.
Previously, he held the position of Chief Financial Officer at Second Cup, in addition to various
senior roles at IBM Canada, Manchuwok, Ernst & Young, Deloitte & Touche, and Sappi. Mr.
Masson holds a Bachelor of Commerce and a Post Graduate Diploma of Accounting from the
University of Kwa-Zulu Natal in South Africa. In addition, Mr. Masson holds the Chartered
Accountant designation and is a member of the Chartered Professional Accountants of Ontario.
David Howcroft, Senior Vice President of Sales
Mr. Howcroft joined Sleep Country in 1996 and has served in his current role since 2012. During
his tenure at Sleep Country, Mr. Howcroft has created various sales training programs and played
an integral role in the development and implementation of sales workshops, training programs
and sales processes. Mr. Howcroft has in excess of 20 years of retail sales experience, with the
ability to conceive new sales strategies and a well-recognized ability to mentor and motivate.
Sieg Will, Senior Vice President of Operations
Mr. Will joined Sleep Country in 2002 and has served in his current role since 2012. During his
tenure at Sleep Country, he has held various senior positions and played an integral role in the
development and implementation of standard operating policies and procedures across the
company. Previously, Mr. Will held senior positions in sales, operations and account management
at Canadian Tire and PepsiCo. He serves on the Humber College Supply Chain Advisory Board, is a
Team Leader for Sleeping Children Around the World and an Ambassador for the Pinehurst Club
Breakfast. Mr. Will holds a B.A. (Honours) from the University of Guelph, and a Master’s
Certificate in Supply Chain Management from the Schulich School of Business. He also has a
Professional Logistics Designation from the Logistics Institute.
Eric Solomon, Senior Vice President of Merchandising and Marketing
Mr. Solomon joined Sleep Country in 1996 and has served in his current role since 2012. During
his tenure at Sleep Country, Mr. Solomon played an integral part of increasing the company’s
brand awareness and diversifying Sleep Country’s product lineup with exclusive offerings. Mr.
Solomon also led the sales and operating functions of Sleep Country. Mr. Solomon attended
McMaster University.
Risks
General Economic Conditions
The company’s business and operating performance may be adversely affected by economic
forces beyond its control. Rising consumer debt levels and changes in consumer preferences and
buying patterns, as well as changes in unemployment rate and labour costs could negatively
impact the company’s performance. External factors that affect global and/or regional economies,
interest rates, exchange rates, or major segments of the economy could alter investor confidence
and investment prospects; an increase in minimum wage could have an adverse impact on
operating costs and earnings.
Competitive Landscape
The Canadian retail landscape is highly competitive and continues to attract new entrants. The
industry has been undergoing significant changes over the years, with both US and international
players entering the Canadian retail market. In addition, with the increasing prevalence of ecommerce, existing competitors may start offering mattresses online and new competitors with
an online presence may enter the bedding market. An increase in competition, both in-store and
online, may result in price wars, market share loss, and reduced sales and profitability.
Seasonality and Weather
Retail mattress sales are subject to seasonal patterns, with the highest level of sales occurring in
the second half of the year. Variable costs, such as certain selling costs and employee wages, can
be managed to match seasonal fluctuations. A large portion of retail costs, such as ret, are fixed
and cannot be adjusted to match seasonal demand. Unseasonable weather can result in lower
traffic to Sleep Country and Dourmez-vous? stores and deter consumer spending.
Supply Chain Disruption
Disruptions or delays in store inventory replenishment could negatively impact operations and
profitability. Factors resulting in disruptions of supply chain could include, but are not limited to,
shipping slowdown or disruption due to extreme weather conditions.
Product Cost and Inflation
The company’s operating results may be adversely affected by the prices of the components used
in the manufacture of the mattress and complementary sleep related products and accessories it
sells. These prices may fluctuate based on a number of factors outside the company’s control,
such as the price of oil, changes in supply and demand, general economic conditions and
consumer spending, labour costs, competition, import duties and tariffs.
Foreign Currency
A portion of the company’s merchandize purchases are denominated in USD. As a portion of the
company’s purchases are made in US dollars, unfavourable currency fluctuations relative to the
Canadian dollar may adversely impact the company’s profitability. Sleep Country currently has no
hedging instruments in place to mitigate the impact of fluctuating foreign exchange rates.
Company Citations
Company Name
Bed Bath & Beyond
Canadian Tire Corporation
Culp, Inc.
Dollarama
Ethan Allen Interiors
La-Z-Boy Inc.
Leggett & Platt
Pier 1 Imports Incorporated
Select Comfort Corp.
Tempur Sealy International, Inc.
Williams-Sonoma
Ticker
BBBY
CTC.A
CFI
DOL
ETH
HVT
LZB
LEG
MFRM
PIR
SCSS
TPX
WSM
Exchange
NASDAQ
TSX
NYSE
TSX
NYSE
NYSE
NYSE
NYSE
NASDAQ
NYSE
NASDAQ
NYSE
NYSE
Currency
US$
C$
US$
C$
US$
US$
US$
US$
US$
US$
US$
US$
US$
Closing Price
63.51
126.37
32.37
80.48
31.34
23.63
27.18
49.19
64.02
11.18
25.88
78.13
88.67
RJ Rating
1
2
3
2
1
2
1
3
2
1
1
3
3
RJ Entity
RJ & Associates
RJ LTD.
RJ & Associates
RJ LTD.
RJ & Associates
RJ & Associates
RJ & Associates
RJ & Associates
RJ & Associates
RJ & Associates
RJ & Associates
RJ & Associates
RJ & Associates
Notes: Prices are as of the most recent close on the indicated exchange and may not be in US$. See Disclosure section for rating definitions.
Stocks that do not trade on a U.S. national exchange may not be registered for sale in all U.S. states. NC=not covered.
IMPORTANT INVESTOR DISCLOSURES
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The information provided is as of the date above and subject to change, and it should not be deemed a recommendation to buy or sell
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ANALYST INFORMATION
Analyst Compensation: Equity research analysts and associates at Raymond James are compensated on a salary and bonus system.
Several factors enter into the compensation determination for an analyst, including i) research quality and overall productivity, including
success in rating stocks on an absolute basis and relative to the local exchange composite Index and/or a sector index, ii) recognition from
institutional investors, iii) support effectiveness to the institutional and retail sales forces and traders, iv) commissions generated in
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compensation levels for analysts at competing investment dealers.
Analyst Stock Holdings: Effective September 2002, Raymond James equity research analysts and associates or members of their
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positions five days after the rating has been lowered to Underperform.
The views expressed in this report accurately reflect the personal views of the analyst(s) covering the subject securities. No part of said
person's compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this
research report. In addition, said analyst has not received compensation from any subject company in the last 12 months.
RATINGS AND DEFINITIONS
Raymond James Ltd. (Canada) definitions: Strong Buy (SB1) The stock is expected to appreciate and produce a total return of at least
15% and outperform the S&P/TSX Composite Index over the next six months. Outperform (MO2) The stock is expected to appreciate and
outperform the S&P/TSX Composite Index over the next twelve months. Market Perform (MP3) The stock is expected to perform
generally in line with the S&P/TSX Composite Index over the next twelve months and is potentially a source of funds for more highly
rated securities. Underperform (MU4) The stock is expected to underperform the S&P/TSX Composite Index or its sector over the next
six to twelve months and should be sold.
Raymond James & Associates (U.S.) definitions: Strong Buy (SB1) Expected to appreciate, produce a total return of at least 15%, and
outperform the S&P 500 over the next six to 12 months. For higher yielding and more conservative equities, such as REITs and certain
MLPs, a total return of at least 15% is expected to be realized over the next 12 months. Outperform (MO2) Expected to appreciate and
outperform the S&P 500 over the next 12-18 months. For higher yielding and more conservative equities, such as REITs and certain MLPs,
an Outperform rating is used for securities where we are comfortable with the relative safety of the dividend and expect a total return
modestly exceeding the dividend yield over the next 12-18 months. Market Perform (MP3) Expected to perform generally in line with the
S&P 500 over the next 12 months. Underperform (MU4) Expected to underperform the S&P 500 or its sector over the next six to 12
months and should be sold. Suspended (S) The rating and price target have been suspended temporarily. This action may be due to
market events that made coverage impracticable, or to comply with applicable regulations or firm policies in certain circumstances,
including when Raymond James may be providing investment banking services to the company. The previous rating and price target are
no longer in effect for this security and should not be relied upon.
Raymond James Latin American rating definitions: Strong Buy (SB1) Expected to appreciate and produce a total return of at least 25.0%
over the next twelve months. Outperform (MO2) Expected to appreciate and produce a total return of between 15.0% and 25.0% over
the next twelve months. Market Perform (MP3) Expected to perform in line with the underlying country index. Underperform (MU4)
Expected to underperform the underlying country index. Suspended (S) The rating and price target have been suspended temporarily.
This action may be due to market events that made coverage impracticable, or to comply with applicable regulations or firm policies in
certain circumstances, including when Raymond James may be providing investment banking services to the company. The previous
rating and price target are no longer in effect for this security and should not be relied upon.
Raymond James Europe (Raymond Euro Equities SAS & Raymond James Financial International Limited) rating definitions: Strong Buy
(1) Expected to appreciate, produce a total return of at least 15%, and outperform the Stoxx 600 over the next 6 to 12 months.
Outperform (2) Expected to appreciate and outperform the Stoxx 600 over the next 12 months. Market Perform (3) Expected to perform
generally in line with the Stoxx 600 over the next 12 months. Underperform (4) Expected to underperform the Stoxx 600 or its sector
over the next 6 to 12 months. Suspended (S) The rating and target price have been suspended temporarily. This action may be due to
market events that made coverage impracticable, or to comply with applicable regulations or firm policies in certain circumstances,
including when Raymond James may be providing investment banking services to the company. The previous rating and target price are
no longer in effect for this security and should not be relied upon.
In transacting in any security, investors should be aware that other securities in the Raymond James research coverage universe might
carry a higher or lower rating. Investors should feel free to contact their Financial Advisor to discuss the merits of other available
investments.
Suitability Categories (SR): Total Return (TR) Lower risk equities possessing dividend yields above that of the S&P 500 and greater
stability of principal. Growth (G) Low to average risk equities with sound financials, more consistent earnings growth, at least a small
dividend, and the potential for long-term price appreciation. Aggressive Growth (AG)
Medium or higher risk equities of companies in
fast growing and competitive industries, with less predictable earnings and acceptable, but possibly more leveraged balance sheets. High
Risk (HR) Companies with less predictable earnings (or losses), rapidly changing market dynamics, financial and competitive issues,
higher price volatility (beta), and risk of principal. Venture Risk (VR) Companies with a short or unprofitable operating history, limited or
less predictable revenues, very high risk associated with success, and a substantial risk of principal.
RATING DISTRIBUTIONS
Coverage Universe Rating Distribution*
Investment Banking Distribution
RJL
RJA
RJ LatAm
RJEE
RJL
RJA
RJ LatAm
RJEE
Strong Buy and Outperform (Buy)
65%
56%
71%
40%
44%
22%
0%
0%
Market Perform (Hold)
34%
39%
29%
34%
22%
9%
0%
0%
Underperform (Sell)
2%
5%
0%
25%
33%
6%
0%
0%
* Columns may not add to 100% due to rounding.
RAYMOND JAMES RELATIONSHIP DISCLOSURES
Raymond James Ltd. or its affiliates expects to receive or intends to seek compensation for investment banking services from all
companies under research coverage within the next three months.
Company Name
Disclosure
Sleep Country Canada Holdings
Inc.
Raymond James Ltd - the analyst and/or associate has viewed the material operations of Sleep
Country Canada Holdings Inc.
Company Name
Disclosure
Raymond James Ltd. has managed or co-managed a public offering of securities within the last 12
months with respect to Sleep Country Canada Holdings Inc.
Raymond James Ltd. has provided investment banking services within the last 12 months with respect
to Sleep Country Canada Holdings Inc.
STOCK CHARTS, TARGET PRICES, AND VALUATION METHODOLOGIES
Valuation Methodology: The Raymond James methodology for assigning ratings and target prices includes a number of qualitative and
quantitative factors including an assessment of industry size, structure, business trends and overall attractiveness; management
effectiveness; competition; visibility; financial condition, and expected total return, among other factors. These factors are subject to
change depending on overall economic conditions or industry- or company-specific occurrences.
Target Prices: The information below indicates our target price and rating changes for ZZZ stock over the past three years.
Valuation Methodology: Our valuation methodology utilizes an average of our DCF valuation and EV/EBITDA multiple, on a peer
relative basis.
RISK FACTORS
General Risk Factors: Following are some general risk factors that pertain to the projected target prices included on Raymond James
research: (1) Industry fundamentals with respect to customer demand or product / service pricing could change and adversely impact
expected revenues and earnings; (2) Issues relating to major competitors or market shares or new product expectations could change
investor attitudes toward the sector or this stock; (3) Unforeseen developments with respect to the management, financial condition or
accounting policies or practices could alter the prospective valuation.
Risks - Sleep Country Canada Holdings Inc.
General Economic Conditions
The company’s business and operating performance may be adversely affected by economic forces beyond its control. Rising consumer
debt levels and changes in consumer preferences and buying patterns, as well as changes in unemployment rate and labour costs could
negatively impact the company’s performance. External factors that affect global and/or regional economies, interest rates, exchange
rates, or major segments of the economy could alter investor confidence and investment prospects; an increase in minimum wage could
have an adverse impact on operating costs and earnings.
Competitive Landscape
The Canadian retail landscape is highly competitive and continues to attract new entrants. The industry has been undergoing significant
changes over the years, with both US and International players entering the Canadian retail market. In addition, with the increasing
prevalence of e-commerce, existing competitors may start offering mattresses online and new competitors with an online presence may
enter the bedding market. An increase in competition, both in-store and online, may result in price wars, market share loss, and reduced
sales and profitability.
Seasonality and Weather
Retail mattress sales are subject to seasonal patterns, with the highest level of sales occurring in the second half of the year. Variable
costs, such as certain selling costs and employee wages, can be managed to match seasonal fluctuations. A large portion of retail costs,
such as ret, are fixed and cannot be adjusted to match seasonal demand. Unseasonable weather can result in lower traffic to Sleep
Country and Dourmez-vous? stores and deter consumer spending.
Supply Chain Disruption
Disruptions or delays in store inventory replenishment could negatively impact operations and profitability. Factors resulting in
disruptions of supply chain could include, but are not limited to, shipping slowdown or disruption due to extreme weather conditions.
Product Cost and Inflation
The company’s operating results may be adversely affected by the prices of the components used in the manufacture of the mattress and
complementary sleep related products and accessories it sells. These prices may fluctuate based on a number of factors outside the
company’s control, such as the price of oil, changes in supply and demand, general economic conditions and consumer spending, labour
costs, competition, import duties and tariffs.
Foreign Currency
A portion of the company’s merchandize purchases are denominated in USD. As a portion of the company’s purchases are made in US
dollars, unfavourable currency fluctuations relative to the Canadian dollar may adversely impact the company’s profitability. Sleep
Country currently has no hedging instruments in place to mitigate the impact of fluctuating foreign exchange rates.
Additional Risk and Disclosure information, as well as more information on the Raymond James rating system and suitability
categories, is available for Raymond James at rjcapitalmarkets.com/Disclosures/index and for Raymond James Limited at
www.raymondjames.ca/researchdisclosures.
INTERNATIONAL DISCLOSURES
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