Sleep Country Canada Holdings Inc., the nation’s leading mattress retailer, reported a modest revenue increase in the first quarter of Fiscal 2024, with a notable rise in e-commerce sales. Despite facing certain headwinds, the company demonstrated an improvement in gross profit margin and continued its expansion with the opening of new stores. Sleep Country's commitment to innovation and customer service, alongside strategic acquisitions and partnerships, underpins its confidence in future growth and market share expansion.
Key Takeaways
- Q1 revenue rose by 1.6% to CAD 209.7 million.
- E-commerce sales climbed significantly, reaching 24.5% of total sales.
- Gross profit margin improved by 50 basis points to 34.8%.
- Opened 2 new Sleep Country and 2 new Dormez-vous stores.
- Completed acquisition of remaining shares of Hush Blankets Inc.
- Declared a quarterly dividend of CAD 0.237 per share.
- Plans to open six new stores and launch pilot 4.0 Stores.
- Expects 2024 CapEx additions to be CAD 40 million.
- Remains cautious on share buybacks and open to M&A opportunities.
Company Outlook
- Sleep Country plans cautious capital allocation in H1 2024, with potential share buybacks in H2.
- CapEx for 2024 is anticipated to be CAD 40 million.
- Pausing 4.0 Store rollout to evaluate return metrics before further renovations.
- Open to M&A opportunities, particularly in the U.S. and other regions, if they align with company strategy.
Bearish Highlights
- Same-store sales saw a decrease of 1.6% year-over-year.
- EBITDA declined, although specific figures were not disclosed.
- Below-CAD 750 price point category experienced softness.
- Pull-forward of liquidation sales in Q1 did not significantly affect customer behavior.
Bullish Highlights
- Digital brands are showing growth.
- Above-CAD 3,000 category expected to recover in Q2.
- Strategy in place to serve broader customer segmentation with lower-priced products.
- New acquisitions like Silk & Snow are performing well and contributing to incremental sales.
Misses
- The company acknowledged weakness in January but noted improvement in February and March.
- The dividend has been paused due to the cost of borrowing and investment in the network, with a quarterly revisit planned.
Q&A highlights
- The company spent CAD 1 million in Q1 as a pull-forward from the normal promotional calendar, not an increase in budget.
- Store revenue increased significantly after renovations, from CAD 1.8 million to CAD 2.4 million per store.
- Silk & Snow store-within-a-store concept in Ottawa is generating substantial revenue, with potential expansion planned.
- Gross margin trends expected to hold steady year-over-year, with strategic promotional pricing and product value focus.
In conclusion, Sleep Country (TSX: ZZZ) is navigating the complexities of the current market with strategic initiatives aimed at bolstering its financial position and market dominance. With a clear focus on customer segmentation, product innovation, and prudent capital management, Sleep Country is poised to continue its trajectory of growth in the competitive bedding industry.
Full transcript - None (SCCAF) Q1 2024:
Operator: I would like to welcome everyone to Sleep Country's Q1 2024 Results Conference Call. Yesterday, Sleep Country released its financial results for its first quarter of Fiscal 2024. A copy of the earnings disclosure is available on the Investor Relations website and includes cautionary language about forward-looking statements, risks and uncertainties, which also applies to the discussion during today's conference call. I will now turn the call over to Stewart Schaefer, President and CEO. Please go ahead.
Stewart Schaefer: Thank you, Joelle. Good morning, everyone, and thank you for joining us. With me today is Craig De Pratto, our Chief Financial Officer. Before we dive into the details of our Q1 performance, I would like to take a moment to reflect on our remarkable 3-decade trajectory. This year marks Sleep Country's 30th anniversary, and we are proud of our evolved business model, the strength of our sleep ecosystem and our channel-agnostic approach. Our unwavering commitment to innovation, operational excellence and exceptional customer experience has been the cornerstone of our legacy, reflected in our strong performance and growth over the past 30 years. As we look to the future, we are invigorated and remain as dedicated as ever to help Canadians get their best night's sleep. This quarter, we delivered positive top line revenue results, supported by our strategic multiyear plan and the dedication of our incredible team as we navigated in this challenging retail environment. Our Q1 revenues increased by 1.6%, and our same-store sales decreased by 1.6% from Q1 of last year. Our omnichannel strategy continues to positively resonate with Canadians. Our brick-and-mortar stores continue to perform well as our e-commerce sales continue to strengthen. E-commerce sales this quarter increased by 220 basis points to 24.5% in Q1 2024 from Q1 2023. Our Q1 2024 results underscore the success of our omnichannel strategy, ensuring a seamless customer experience that caters to the sleep needs of Canadians coast to coast regardless of where and how they choose to shop. We continued to see an improved gross margin by 50 basis points in Q1 2024 from Q1 last year. This increase was primarily driven by better product costing resulting from continued strategic initiatives across all our banners, including direct-sourcing products, while also having more control over the development and production process of our innovative products. This quarter, we did pull forward some of our advertising spend in late March. In addition, we accelerated part of our annual merchandising cycles to Q1. And as a result, we incurred incremental sales compensation costs as we moved out discontinued products to make way for this year's new exciting lineup. In Q1 2024, we continued to grow our retail presence, opening 2 new Sleep Country stores in Etobicoke and Oshawa, in Ontario, and 2 new Dormez-vous stores in Outremont and Les Saules, in Quebec, bringing our national store count across all banners to 305 stores. Our retail stores for Endy, Silk & Snow and The Rest continue to perform well, and we expect to roll out more stores under our D2C brands for the rest of this year. Our strategic initiatives of moving our D2C banners' warehousing and logistics into Sleep Country's infrastructure continues to go well, and we expect to see the cost synergies in the later half of this year. This quarter, we continued our important collaboration with the Canadian Mental Health Association by donating CAD 100,000 in support of the medical well-being of Canadians. In March, we also introduced the Hour Back pledge, which generated over 100 million impressions, acknowledging the potential setback to Canadians' health and well-being resulting from the loss of 1 hour's sleep from daylight savings time. As we look ahead to the next phase of our journey, we are proud to contribute to the sustainable future of both our company and community. In line with our commitment to environmental stewardship and to help mitigate climate change, we recently launched a partnership with Veritree to plant a tree every time we complete a Green Glove Delivery. We remain committed to executing our multiyear transformation while staying true to our 3 key priorities: innovation, exceptional customer experience and operational excellence. Backed by a robust and adaptable foundation built over 3 decades, we remain extremely bullish about our future and stand ready to tackle the future with confidence, stability and scalability of our sleep ecosystem. With that, I will now turn it over to Craig to discuss our financial results.
Craig De Pratto: Thank you, Stewart, and good morning, everyone. I am pleased to share with you our Q1 financial results. This quarter, we continued to see volatility in sales as consumers navigate through these uncertain times. Despite this pressure, we saw revenues increase by CAD 3.2 million, or 1.6%, from CAD 206.5 million in Q1 2023 to CAD 209.7 million in Q1 2024. This increase was mainly driven by incremental revenue earned from new stores, wrap stores opened in 2023 as well as the incremental revenue earned by Casper Canada, which was acquired in Q2 last year, in April 2023. This increase was partially offset by a decrease in our same-store sales by 1.6%. From a channel perspective, our Q1 revenues on our e-commerce platform increased 220 basis points, from 22.3% in Q1 2023 to 24.5% in Q1 2024.Moving on to gross profit. Our gross profit increased by CAD 2.1 million, from CAD 70.8 million in Q1 2023 to CAD 72.9 million in Q1 2024. Our gross profit margin increased by 50 basis points, from 34.3% for Q1 2023 to 34.8% in Q1 2024, due to higher average unit selling prices, coupled with lower product costs as we continue to source merchandise more efficiently. This margin increase was partially offset by higher transportation costs, sales and distribution compensation as well as deleveraging on occupancy and depreciation expenses tied largely to the incremental costs of the Casper stores. Our improved gross margin this quarter was offset by deleveraging on our SG&A expenses. Total SG&A expenses increased by CAD 4.7 million, from CAD 48.1 million in Q1 2023 to CAD 52.8 million in Q1 2024. This change was mainly due to an increase in SG&A costs which was impacted by Casper Canada, which was acquired in April 2023. In addition, there was a pull-forward of marketing costs at Sleep Country in late March. These increases were partially offset by a decrease in professional fees. Our EBITDA decreased by CAD 1.9 million, from CAD 39.7 million in Q1 2023 to CAD 37.8 million in Q1 2024, which was primarily due to the increases in SG&A expenses, partially offset by improved gross profit margin. Adjusting EBITDA for LTIP, ERP and acquisition-related costs, operating EBITDA decreased by CAD 3 million, from CAD 41.4 million in Q1 2023 to CAD 38.4 million in Q1 2024. Operating EBITDA margin decreased by 170 basis points, from 20% in Q1 2023 to 18.3% in Q1 2024. A key contributor to this decrease was also tied to the variance in normalizations on a year-over-year basis, which decreased by CAD 1.1 million, causing operating EBITDA to delever by 60 basis points alone. Finance-related expenses increased by CAD 1.8 million, from CAD 6.5 million in Q1 2023 to CAD 8.3 million in Q1 2024. This increase was due to higher interest expenses on our lease obligations and senior secured credit facility impacted by higher interest rates and debt levels. These increases were partially offset by a decrease in accretion expense and lower realized losses on our share repurchase plan under the auto share purchase plan. As a reminder to the market, to manage interest rate risk we entered into an interest rate swap in 2021 for a notional amount of CAD 60 million for a fixed interest rate of 1.1%. This interest rate swap expired on April 1, 2024. And to date, we have not replaced this swap. We expect our interest expense on our senior secured credit facility to be 100% variable for the time being as we review our options on our facility. Other expenses and income decreased by CAD 1.1 million, from expenses of CAD 0.5 million in Q1 2023 to income of CAD 0.6 million in Q1 2024. This change was mainly due to interest income earned on the convertible note receivable and realized gains on foreign exchange, which were partially offset by unrealized losses on foreign exchange and unrealized losses on the fair value of convertible note and warrant. Income taxes decreased by CAD 1 million from Q1 2023 to Q1 2024. Our effective tax rate was comparable year-over-year, with the decrease in income taxes being driven by the decrease in net income before taxes of CAD 3.3 million, from CAD 15.7 million in Q1 2023 to CAD 12.4 million in Q1 2024.Net income attributable to the company decreased by CAD 2.6 million, from CAD 11.3 million in Q1 2023 to CAD 8.7 million in Q1 2024. Adjusting net income for LTIP, ERP and acquisition-related costs as well as accretion expenses related to the redemption liabilities for Hush and the earnout for Silk & Snow, adjusted net income attributable to the company decreased by CAD 3.6 million, from CAD 13.2 million in Q1 2023 to CAD 9.6 million in Q1 2024. Diluted adjusted earnings per share decreased by CAD 0.09, from CAD 0.37 in Q1 2023 to CAD 0.28 in Q1 2024. The change in diluted EPS was mainly impacted by lower operating EBITDA of CAD 0.08, higher interest rate expense on the senior secured facility and leases of CAD 0.06, higher depreciation and amortization of CAD 0.02 and partially offset by lower expenses and income of CAD 0.03 as well as lower income taxes, also at CAD 0.03. Taking a step back and reviewing the miss to consensus on our adjusted EPS, year-over-year we are down approximately CAD 3.3 million, and this is largely tied back to the decreased EBITDA. When we look at the operating metrics for the quarter, Sleep Country continues to perform well, with expanded margin of 50 basis points. This points to the effectiveness of our model and is a true reflection of whether or not we are operating better as a business in our business activities to sell and serve our customers. This margin expansion is despite the Casper occupancy for the 6 stores being completely incremental in Q1, as they were acquired in Q2 in the prior year. Additionally, with our annual switchover of our mattress lineup, we made more significant floor changes in the current year as compared to the prior year. This impacted our sales commission line year-over-year, with higher sales associate incentive programs to move floor models, demos in Q1 2024.We absorbed an additional compensation impact for the stat holiday falling in Q1 this year, as compared to Q2 in the prior year, tied to the Easter weekend shift. This alone was approximately CAD 400,000.Marketing expense is twofold: incremental dollar spend on the Casper business and a pull-forward of approximately CAD 1 million in SCC marketing from Q2 to increase the radio frequency in a lower sales environment. Lastly, moving on to G&A. In Q4, we spent CAD 36.1 million in G&A, excluding marketing. And this quarter, we spent CAD 35.5 million. The percentage of overall SG&A, including marketing, to sales held constant at 25.2%, despite Q1 being seasonally the weakest quarter. As we continue to mature our D2C network, we will experience higher marketing costs, and we will -- and as we finalize our e-commerce site that we'll be rolling out in Q2, we will have pressure on our SG&A. We would point to the sequential committed dollars quarter-over-quarter as largely a baseline, and the percentage of sales will decrease in quarters where there are higher sales and as we continue to optimize our shared services model, where we expect to see an impact on the back half of 2024. Moving on to liquidity. As at March 31, 2024, our cash balance was CAD 31.1 million, with an additional CAD 83.3 million available to us on our credit facility. This does not include the CAD 100 million accordion also available on our credit facility. We remain confident in our business' ability to generate strong free cash flow. With the current operating environment, which remains fairly soft, we expect our leverage to remain at the current level of slightly above 2x post IFRS in the coming quarters. Yesterday, on May 7, 2024, the board approved a quarterly dividend of CAD 0.237 per share, which will be paid on May 23, 2024, to holders of common shares of record as at the close of business on May 23, 2024. The dividend rate remains unchanged from the prior quarter, as we believe our dividend has been sufficiently caught up post COVID following 2 consecutive 10% increases. As noted in our outlook, we plan to open a minimum of 6 new stores as well as launch the pilots of our 4.0 Store, and pending the results we intend to resume renovations in the back half of the year. We expect our 2024 CapEx additions to be in the area of CAD 40 million for this year. In regards to our NCIB, we will continue to remain opportunistic, but we'll be cautious in the first half of this year as we monitor how the economic environment evolves. Finally, we will continuously monitor for M&A opportunities, as we have done over the past few years, and remain focused on high-growth, profitable and EPS-accretive companies with dynamic founders in the sleep ecosystem. The intention would be to fund any acquisitions with a mixture of cash on hand and incremental borrowing. Lastly, subsequent to the quarter, in April 2024, we completed our acquisition of the remaining 32% of outstanding common shares of Hush Blankets Inc. As a reminder to the market, for the original agreement Sleep Country was to purchase only 16% of the outstanding common shares in 2024, with the final acquisition of the remaining 16% of outstanding shares to be completed in 2025. We are in the process of finalizing the cash consideration for the acquisition, and we expect the estimated price to be in the range of CAD 6 million to CAD 7 million. Thank you, and I will now pass the call back to Stewart for closing remarks.
Operator: One moment, please. We are having technical difficulties.
Stewart Schaefer: Sorry, folks. My phone just died in the other office. Thank you, Craig. As we navigate a challenging retail environment, we are confident in our ability to deliver consistent results in 2024 and beyond. The solid foundation we've established over 3 decades, coupled with our strategic vision, allows us to fulfill the diverse sleep needs of our cherished customers anytime and anywhere. As we close out the first quarter of 2024, I would like to extend my gratitude to our teams, our customers and our shareholders for their continued support, and look forward to executing on our 2024 plan to grow our market share as we build out our sleep ecosystem. That's all for our comments. Over to you for questions.
Operator: [Operator Instructions]. Your first question comes from Martin Landry, with Stifel.
Martin Landry: I was wondering if you could talk a little bit about your integration processes of your recent acquisitions. You've talked about optimizing shared services. You've talked about warehouse integration. Would it be possible to quantify the synergies that you are expected to realize on all the integration work you're currently doing on your recent acquisitions?
Stewart Schaefer: So a great question, Martin. And I'd rather punt that question to next quarter. Because until we see -- right now, we're going through an overlap. So as we close out some of our 3PL relationships in terms of our distribution partnerships that we've had for our D2C brands, there's a period of overlap that we're going to experience in this quarter going into the next quarter. And the rent component, which is substantial, is only one component. There's a labor component that we're starting to map out exactly to see what the increase in costs will be within our distribution network to manage the additional volume; at the same time, offsetting the fixed expenses of closing those relationships. So we have an estimate, and Craig could discuss it with you offline maybe, but it will be more substantiated within the next probably 30 days.
Martin Landry: Okay. Is it fair to say that there are some dual operation costs right now that you're incurring in Q1 that you'll be incurring in Q2?
Stewart Schaefer: Yes. Yes. It's already started. So for example, Casper now as of April 1 is fully integrated into the Sleep Country network. So during Q1, there is the cost of moving the inventory over, winding down some of the old inventory, replacement and investment in our distribution centers to support it. So there was additional labor costs that we experienced as well as transportation costs in that quarter. The same thing is happening right now with Hush and soon to be Silk & Snow. And Endy is also partially, I would say halfway, there in terms of that move. So we're ahead of schedule, which we're excited about, but there is a lot of noise in those numbers right now that will be clearer by the end of Q2.
Martin Landry: Okay. Okay. That's helpful. And I was wondering if you could discuss some of the consumer trends that you're seeing so far in Q2 in terms of consumer demand, traffic patterns, basket size. Any color would be helpful.
Stewart Schaefer: I'm actually going to maybe add a little bit to that question, because I do think it's important to talk a little bit about Q1 and I do think it's important to talk a little bit about the EPS and the EBITDA miss. Because we were very excited about the outcome in terms of our top line revenue in this environment. But what we saw in Q1, January, our sales for the company were down 8%. And traditionally, we are -- sorry, one second please. Sorry. I'm being corrected. 8.5%.So what we normally do is we made a strategical decision in the month of January that was 100% self-inflicted that negatively impacted our EBITDA and our EPS. But we proactively reduced our SCC inventory and positioned our floors earlier in this year to benefit for the busy season that is approaching very soon. So traditionally, just to let you under the covers a little bit more, traditionally, we use Q1 and Q2 to liquidate our floor models. We usually do that at a reduced price and a more expensive spiff component in terms of our sales commission. We normally do that every single year for the last 30 years as we introduce our new innovative product for the year. In January this year, because sales were down 8%, we decided that right after this highly promotional period, which was very busy between the end of November right up until the first week of January, that we needed to introduce and shift our advertising calendar and push in a more aggressive promotional calendar. We didn't want to do that with the new lineup that was rolling out. So we made a decision to accelerate the liquidation of all our floor models that were going to be changed for the year, which gave us the ammunition for the promotional calendar and drive a more aggressive price point that was good for the consumers. We increased our advertising spend to support that in February and throughout March to drive a higher top line sales. We didn't -- we were not impacted on our lineup on gross margin of the new lineup. And traditionally, we see a flow-through of that lower margin in Q1 and Q2, which you folks don't normally see because it's blended in a normal process. So this acceleration that we strategically did, because we believed that we wanted to take an opportunity to be more aggressive in the marketplace and take market share; at the same time, set us up with our new lineup going into the busy months. And so we're excited about that because it worked really well, and a drop of 8% in January was met by a flat for February and March. And now we're seeing a little -- we did see a little bit of a tick up in terms of April, but it's very bouncy, the market. Quebec is up. BC is a little bit down. Ontario is a little bit down. The Prairies is up. Saskatchewan, Manitoba is up. So it's a little bit choppy all over the place. And everything that we did, did have an impact on increasing spiffs that we usually sell over a period of time. And so it has a little bit of impact in terms of our costs to be able to move through that items, but we're very excited about where we are positioned right now.
Operator: Your next question comes from Vishal Shreedhar, with National Bank.
Vishal Shreedhar: I just wanted to -- I know you commented on it off the top, but I wanted to get your thoughts on balance sheet and capital allocation. The dividend decision, given your free cash flow generation and your balance sheet, just stood out a little bit. So maybe you can give us your thoughts on where you stand and how we should think about your capital allocation priorities.
Craig De Pratto: I mean, we touched on it in the script, but we've done consecutive increases because we felt we were lagging behind after the COVID pause and we held the rates after coming out of the pause for a few quarters. So we did want to be more aggressive over the last 2 years to increase our metrics around the dividend in terms of free cash flow, payout ratio and then just EPS payout ratio. And we feel that when we compare ourselves to the North American peer set, we're more in line or best-in-class in that area. So we're happy with the increases we've done over the last 2 years. But at this point, given the cost of borrowing and our investments in the network, we felt that pausing it at this point, or holding, was the right decision. In terms of NCIB, we'll continue to be opportunistic. Again, we always weigh the cost of borrowing and the return that gives us to EPS versus a share price at an appropriate amount, and we run sensitivities on that. So we'll have probably a better update, but it would be back half-loaded, just like it was last year. Last year, we did about CAD 37 million in the back half. So if we do go and execute against the NCIB, the expectation would be on the back half that we'd commit capital to that. And then lastly, on our CapEx. Our CapEx this year is going to run in the CAD 40 million range, assuming we get most of our renovations out. But the thing is, we are pausing at this point on the 4.0 Store because we're rolling out 2. We're going to see how they operate. We're going to see what the return metrics are against the investment. And then we'll decide from there if we roll out more aggressively or not on the back half with the renovations. So that's kind of our priorities. And obviously, we're always opportunistic in reviewing M&A opportunities. Obviously, there's more opportunities in a softer market, because Q1 is always typically a very tight cash flow-generating quarter for businesses in our industry. And so there are opportunities to take a look at, and we're reviewing opportunities consistently on that front as well.
Vishal Shreedhar: Okay. And maybe we can get some thoughts on in terms of the acquisition opportunities in terms of regions of focus and products of focus.
Stewart Schaefer: I'm sorry, is the question specifically to what are we looking at? Or the areas that we're looking at?
Vishal Shreedhar: Both.
Stewart Schaefer: Both. So as we've said before on our calls, our #1 focus is to grow our market share within this industry and make sure that we take an agnostic approach to always selling the most relevant brands as well as building out our sleep ecosystem with our accessories. So anything that we look at, it will continue down that path in terms of how can we expand our overall mix and choice of products to our customers, how do we bring in new innovative products, how do we work with maximizing our gross margin. And so it will always be within the sleep accessories as well as our mattress category.I'm not sure if that answers your question or you were asking something specific of what we're looking at.
Vishal Shreedhar: I appreciate it. In terms of regions of focus, should we think there will be a tilt towards the U.S.?
Stewart Schaefer: The U.S. has never been off the market and has always been a consideration. Our focus has always been growing out our network within Canada and building what we believe has positioned us as the #1 leader in the space. If an opportunity -- even the Casper acquisition within Canada was a relationship from our partners in the U.S. If something presented itself in the U.S. or anywhere else that met our requirements, we would be excited to take a look at it.
Vishal Shreedhar: Okay. And just quickly, maybe you can give us your thoughts on accelerating the Hush acquisition.
Stewart Schaefer: Sure. So we've owned Hush now for 2 years. The integration within our organization has been fabulous. The team has been doing an amazing job. In Q4 of last year, we decided to introduce some Hush products within the Sleep Country network. The Hush products are performing exceptionally well. Consumers are gravitating to the brand. And there was an earn-out component on the remainder year. And from an agreement that we had with our partners who are part of that earnout, we negotiated a deal that was part of the original agreement to accelerate that because we believe that we have a greater opportunity over the next year to drive a higher top line revenue growth and gross margin between the Hush building out its own model as well as Hush being introduced in our stores, which was the original plan.
Operator: Your next question comes from Stephen MacLeod, with BMO Capital Markets.
Stephen MacLeod: I just wanted to follow up on the SG&A being higher in Q1, and I know you gave some good color on the call in your prepared remarks. But I was just wondering if you could break down maybe more specifically just the buckets of the impact related to the floor model changes and the marketing expenses in Q1?And then I guess as a follow-up to that, it sounds like you expect Q2 to kind of trend in a similar way and then maybe decline a little bit in Q3 and Q4. Is that the way to think about it?
Stewart Schaefer: Well, first of all, let me apologize because there was a little bit of a fumble in terms of technical here, in that we lost power. So some of my notes literally just turned off. But to answer it a little bit clearly, Stephen, as you know, Q1 and Q2, as I was saying, we normally traditionally sell off our floor models during this entire period. And what it does in that Q1 and Q2 period, it reduces our gross margins. It also accelerates how we pay our sales associates, because our sales associates are paid on gross profits. And because we're reducing the prices, because we're trying to aggressively move out and sell floor models and offer a better price for our customers, we subsidize our sales associates' earnings because they're making less gross profit by something that we call a spiff or a bonus. So what it does is it has a negative impact on an increased sales compensation line. You would normally not even notice it because it was usually blended within a Q1 and Q2 period of time. But we felt it was opportunistic to do it now because of the softer environment that we saw in January. And what's a better way to create more market share and drive more customers through our doors by offering a promotion that we normally would have done over a 6-month period of time and try to drive it within a 2-month period of time. That being said, so a good portion of those models are gone. Our inventory levels for the SCC are down, I think, approximately CAD 12 million. It positions us with our lineup, our 2024 lineup that we're quite excited about, that all have higher gross margin abilities. And you're seeing -- you saw some of it in April, and it's probably almost done now, where it would normally typically end by the end of June. So you're going to have the benefit of it sooner in June and July and even probably part of the end of May, which is the beginning of our busy season where we have more traffic, which is a lot more important to drive that gross profit in the second half of the year, as you know, in terms of our business. So we sacrificed a little bit of the Q1 for top line growth.
Craig De Pratto: And Stephen, just to kind of break down some of the buckets, at the gross profit margin level we did see the pressure on compensation, as Stew pointed out, in addition to that Easter weekend flip. So there's stat pay that fell in this quarter versus last quarter. And in addition to that, we also have the occupancy cost, which is completely incremental, on the 6 Casper stores that was not there in Q1 of last year. At gross profit margin, we increased the 50 basis points despite some of those one strategic headwind and then the other one being an incremental cost that were just not there in the prior year. Similarly, on the advertising spend, we're up CAD 1.9 million. I referred to the pull-forward of about CAD 1 million in Sleep Country tied to pushing out those demos, floor models more aggressively. And then in addition to that, you've got your incremental cost of Casper again in terms of marketing dollars that was not there in the prior year. I think when we take a step back and we look to a baseline for quarters coming up, if you remove the variable cost of media -- sorry, the marketing cost and you kind of take a baseline of the SG&A net of marketing costs, it's kind of a little bit of [indiscernible]. Because if we look sequentially, we're actually down in terms of dollars spent. It's a highly fixed-cost area of our P&L in G&A. Yes, there are mattress recycling costs and so forth which are variable and financing and credit card charges, but those aren't going to be a big swinger, because those percentages don't shift too much. So I think in terms of a baseline for modeling going forward, we'd need to look at quarters sequentially around those fixed-cost buckets because salaries and wages is not going to change. It's not going to go down, because you've got baseline changes for hires last year rolling into this year, you do have new hires to build out the network and you have incremental labor costs of the Casper business, which again is incremental. So I just want to be clear, because I think that's one area where we continue to see pressure. But as a percentage of sales in the weakest quarter, we still matched Q4 in terms of percentage of SG&A.
Stephen MacLeod: Okay. Okay. And when you say you take out the variable costs for marketing dollars, is that net of the CAD 1 million from pushing forward the floor models?
Craig De Pratto: Yes, you could do net of that on the go-forward, yes.
Stewart Schaefer: And the CAD 1 million, Stephen, was not an incremental additional spend. It was a pull-forward. So where we normally would have spent that CAD 1 million, part of our normal promotional calendar and budget, we pulled that forward and don't plan to spend that. So that would normally have trinkled into Q2 and even partially -- actually, it would all be in Q2. So we're right on target in terms of overall ad spend. This hasn't been an increase in budget in any way.
Stephen MacLeod: Okay. Okay. That's helpful. And then you gave a little bit of color, Stew, around the performance of month-by-month. But just curious if you're able to give any color around the price points or if that was a material factor in the quarter, just the differences in performance at different price points.
Stewart Schaefer: So same story, unfortunately, for the past year. The below-CAD 750 category has been soft. But on a positive note, our digital brands accelerated this quarter in that capacity and grew, I believe, market share as a percentage of sales you see. So in the Sleep Country network, that was a little bit softer. But the same pattern is normal, and our D2C brands actually accelerated a little bit. So still same patterns we saw last year. The one area that was new to us and once again self-inflicted, it was our above-CAD 3,000 category. Because part of the pull-forward was liquidating the 2023 Tempur-Pedic lineup and bringing in our new exciting Tempur-Pedic 2024 lineup. So we saw the above-CAD 3,000 category tick down, which we have not seen throughout the year. But again, it wasn't the consumer, we believe. We believe it was because we were just liquidating the floor models. And what happens is a floor model has to be liquidated before the new model comes on the floor. So that should recover positively in Q2. We've already started to see a little bit of signs of that.
Stephen MacLeod: Okay. That's great. And then maybe just finally, just in terms of the pull-forward of liquidation into Q1, do you think you pulled forward sales? Or do you think that was just a customer that would have spent regardless?
Stewart Schaefer: I think it was a customer that would have spent regardless. I think being 30 years in the business, traditionally, we have customers that wait for certain events, and we make a lot of noise around our events like our Mix & Match. Our floor model sales, we don't really advertise that for the 6 months. Like I said, Q1 and Q2, we normally are liquidating our floor models. We do that quietly. We don't make a lot of noise around it. So it's not as though it created a huge awareness. What it did was we chose specifically certain items to be a little bit more promotional on, and that's deciding not to be promotional on something else. So in the eyes of the consumer, I don't think that they noticed anything different, except that they were coming into the store and where there would be maybe 2 or 3 floor models available to them to choose from, now there was 10 or 12 at any given time. So it was just giving the customer a greater choice for a promotional item but not driving more traffic. That being said, I think we did outperform the market based on some of the numbers that we've been seeing from the market and what we're hearing in the industry, because we're hearing it a lot softer than that we actually achieved. But yes, I don't think it was a pull-forward this time.
Operator: Your next question comes from Brian Morrison, with TD Cowen.
Brian Morrison: I appreciate the color on the product change over the gross margin increase and reconciling the G&A cost. But if we dig a little bit under the covers here, I think that explains the comp better than expectations, but on the flip side, the revenues did come in below consensus. And when I do a bridge, I don't think it's simply seasonality. Was there weakness in the Casper contribution or the new store or new store format contributions? And maybe excuse me if I missed it, but it does appear the Walmart (NYSE:WMT) store count declined year-over-year. Maybe you could just go through that.
Stewart Schaefer: Two different questions, and I'm going to answer them both for you. First of all, the macro environment, there's no question that a drop of 8% in sales in January was a surprise to us. So let me just start there with the recovery that we saw in February and March. So I would say most of the damage in terms of the top line happened in January. And we're actually quite pleased what we saw in February and March, albeit it came at a higher expense to be able to drive that traffic. But I do think we actually won, if I could say that in this environment and based on even the figures that we're delivering, and I respect your question around that, but I think we actually won within that space. And I've often said recessions or slowdowns, expect us to become more aggressive. Because our longer-term aspirations is always to grow our market share, and we believe that the LTV of a customer shopping through our network pays dividends beyond just the transaction that happens that day. And that's what we go for. On the second part of that, in terms of the Walmart, you're right, there was a couple of the locations that were up for renewal. We're renovating some of our Walmart stores and expanding some of the sizes and changing the format a little bit. But that was less of a Walmart decision, more of a Casper, Endy, Silk & Snow conversation. And I alluded, I think, to it in the last call. We opened up those stores at the mid to end of November. So it was very early to talk about it. We now have a full quarter under our belt. We're actually quite excited about what we are seeing in terms of the dollars per square foot. And so we've shifted our focus to utilize our capital to grow that network quicker for that customer segmentation for that average unit selling price over the Walmart. So it's not a vote on Walmart. It's a vote on where do we maximize our capital and get the greatest shareholder return.
Brian Morrison: Okay. Was the Casper contribution or the new store format contributions, were they slightly below your expectations this quarter?
Stewart Schaefer: Well, it was a little bit -- so the answer to that is yes. And once again, self-inflicted, because we were changing out some of the old models that we inherited from Casper USA and we were bringing in the new models. And there were some delays in terms of bringing in the new models because of the covers that we were trying to get. So that was definitely one part of it. And keep in mind that the Casper is a premium collection, just like Tempur-Pedic is a premium collection. So the amount of volume and the amount of units that you actually transact compared to our lower-end units, if you lose 1 or 2 sales on that high end because the floor model isn't physically in the store or even physically available on the site, that has a greater impact on the top line revenue. So part is the economy, but I will own that it was more of our own self-infliction.
Brian Morrison: Okay. I mean, the gross margin performance is outstanding considering the changeover. I guess one...
Stewart Schaefer: And that's why we're accelerating, Brian, because just -- and I'm glad you just said that point because I missed it. I mean, that's the main reason why we're accelerating. Because our margins, we're performing almost 18 to 20 points better on this new collection. And so it doesn't pay for us to be sitting with the old stuff anymore. And let's just flush it out in a highly promotional time of the year and get the new products in.
Brian Morrison: Very good. Last question, I guess, the macro environment. You've referenced that the environment remains challenging several times. I just want to note here, though, can you give a little bit more detail on what you're seeing with respect to the flow-through of the Canadian consumer? Are we getting further stretched now? Or do you have any visibility as we lap a period of softer comps that we're actually getting close to a trough and then just a potential for same-store sales or a comp inflection point later this year?
Stewart Schaefer: So I often read a lot of reports from TD, Brian. You probably know better than I, but we've seen a slowdown in discretionary spending. Not just us. The entire industry has seen a slowdown in discretionary spending. It's going on 18 months now. A typical slowdown in discretionary spending from my 30 years of being in this business has ranged between 9 and 18 months, excluding 9/11, excluding the financial crisis that we saw between '08 and 2010.We've seen areas in our business that are accelerating, which tells me that the customer is still healthy. I will say the impact of the housing market, albeit it hasn't seem to have dropped, even though everything I read about the vacancy rate. But the lack of movement, so less so the mortgages, less so if the consumer is feeling confident because they still are well employed. More so, we're suspecting the lack of movement, because people just aren't walking away from their properties with their mortgages to get new ones, has had an impact. And I think that impact has been throughout North America. You see the results within the United States. It's funny because the consumer, when they do buy, they're still buying -- like, I've often said that I always get concerned if I see them trading down. I'm not seeing them trading down. So it tells me they're healthy, but they are pausing a little bit on that purchase maybe because, just like you and me, we don't know what is coming and when the Bank of Canada is going to cut the rates. And for sure, the pause on the moving of homes is having a little bit of an impact.
Operator: [Operator Instructions] Your next question comes from John Zamparo, with CIBC.
John Zamparo: Good color so far, but one question on strategy, and then I wanted to focus on capital allocation. On strategy, in the press release you made reference to serving a broader customer segmentation, and I wonder if you can elaborate on that. Does that mean you're looking at products with lower price points to address lower-income consumers where you saw a softer performance? Or is there something else to interpret with that statement?
Stewart Schaefer: Pretty cool that you picked up on that, John. So yes and yes. So as we've gone through this transformation of our business over the last few years, as we've acquired some fabulous different brands, as we build out our merchandising and introduce innovative product, we do look at a merchandising hierarchy and a broader customer segmentation. We do believe that we play a very active role in the cycle of Canadians at every single point within their lives. And we do think that Sleep Country, albeit 30 years, still is an unbelievable machine that will continue to grow. That being said, we have some now tools in our toolbox that we didn't have before, and we think it will allow us to broaden our reach in terms of serving customers products that we haven't had before and in ways that we haven't. Take, example, Silk & Snow. The team, Albert, Kenneth and the team, have been doing an exceptional job in growing out that business. A large part of that business is our sleep accessories. If you look online or visit our store in Ottawa that we opened up, it's a beautiful aesthetic collection that more Canadians are learning about. To Craig's comments earlier about marketing, we are spending more aggressively to build out the brand awareness around Silk & Snow and some of our newer brands because Canadians don't know them as well as Sleep Country. And every dollar that we spend is driving an incremental trajectory within those businesses. So it's not dramatically different than what we've been saying for a while, that we want to be able to serve more Canadians with more innovative products at more different price points. Watch for the brands as we build out that hierarchy and how we target our customers over time with these brands.
John Zamparo: Got it. Okay. That's helpful. And then getting to capital allocation, or returning to it, I wonder why not increase the new store target for this year. You've already got four open, but you're sticking with the six. I just would like to better understand that.
Stewart Schaefer: Great question. It's just securing the real estate. So Phil Besner, who oversees Hush as well as our business development and real estate, has a long laundry list of locations that we are trying to open, and it depends on when those locations are available. I've said in the past we don't need to open up locations for the sake of opening. We're quite excited about the stores that we open. But timing is not us; it's with the landlords, most of the cases.
John Zamparo: Understood. Okay. I wanted to come back to the dividend. I appreciate the comments so far, but I wonder if you can elaborate on it. Is the dividend expected to be revisited quarterly now? And what message does the company want to send to investors on the dividend? Does it want to be seen as an annual dividend growth story? Is there a payout ratio that's targeted? How does this messaging, I suppose, or how are we supposed to interpret this as investors?
Stewart Schaefer: Great question and a passionate conversation around the board table. You should interpret it with one word: opportunity. And I think at the end of the day, our #1 job, besides serving up Canadians to get a best night's sleep, is to maximize our total shareholder return. And in the past, our model, our Sleep Country model, was a very repeatable model defined by the geography within the Canadian landscape. I think over time, and especially over these last few years, we've demonstrated that we could do a great TSR by buying back our stock, we could do it by raising our dividend, we could do it by strategic types of acquisitions. And we want to make sure that we maximize our flexibility and building up a little bit of gun powder in this environment to accelerate, even the question that you asked before, maybe our growth on some of our new brands, to search out on M&A that we've been quite happy with what we've done so far, maybe even to reduce debt. As Craig commented, money is no longer free. It's really opportunity and maximizing our flexibility. It's a positive message. And we'll make sure that we are clear with you and our shareholders as we move forward on this.
Craig De Pratto: And John, just to elaborate on what we had intended to get to in terms of payout ratios, we had looked at a payout ratio to get in line with our North American peer set, and we also separated Canada specifically as well. And they're averaging around 34.5% and 36.3% on the EPS payout ratio, and we closed last year at 43.1%. And then on a free cash flow basis, we're even higher. So I think it's one of these things where we wanted to get to a spot where we were in that best-in-class amongst our peers, and we feel like we've definitely got there and then some. And so that's another just element in terms of the targets we were aiming to do and achieve when we rolled out this plan 2 years ago.
John Zamparo: Okay. That's good color. And then one last one on the modeling side. On the CapEx number, Craig, are we right to assume that implies the usual 1%-ish of sales towards maintenance CapEx? And if so, if you're sticking with the 6 stores target, that seems to imply over CAD 20 million towards the renovations plan, but it sounds like that's still a bit in flux. So can you just help us better understand the CapEx assumptions?
Craig De Pratto: Yes. I think -- so 1%, yes. We indicated a minimum of 6 store openings. And to Stew's point, if we do have additional locations come where we can open them up in this year, we'll push forward, because those are locations we've been looking to solidify. In terms of our renovations, we do always estimate around 20 per year. The one difference this year -- and last year, we did kind of hold back because we hadn't rolled out Store 4.0. So as we look to how the Store 4.0 reacts to the renovations and the upgrades, we'll make a decision, and then we'll either move fast and in line with that 20 on the back half or we'll trim it down. And we'd communicate that in the next quarter. So I think it's a little bit early for us to be locking in, but I always would like -- conservatively modeling from a CapEx perspective, I would assume a 20 renovation placeholder for now, with an update next quarter, and then the minimum of 6 stores.
Stewart Schaefer: And I'm just going to add, John, there's a lot of interesting tests that's going on right now that we are experimenting on that are showing some very interesting results. And so before we -- as you noted, in the past we've done the 20 renovations. Our stores are in great shape. Like, we're not a high-traffic store and we don't renovate stores just to make them look prettier. We do it so that it's going to drive a higher level of incremental sales, a higher basket size. And as we've demonstrated over the last 6, 7, 8 years as we renovated, our stores have gone from about CAD 1.8 million to CAD 2.4 million, even with us building out the network. That being said, like one of the tests that's happening right now is there's a Silk & Snow that we opened up within a store within a store in Ottawa. And that store right now, just to give a little bit of color, that Silk & Snow takes up 25% of the square footage in that store, but is delivering on 35% of the revenue of that store right now. And that store is now one of the top performing stores in Ottawa. And of that 35%, 75% is cash & carry accessories, which, you know our business well, is a very profitable segment. So before we just make a cookie-cutter decision as we've done in the past, we're going to look very carefully at the store within the stores, the new stores, combined stores and see where should we step on the gas quicker. And I will sacrifice, or not sacrifice, put on hold, renovations for growth anytime, especially if we believe that the new stores that we add to the fold is going to drive a higher rate of return.
Operator: Your next question comes from Stephen MacLeod, of BMO Capital Markets.
Stephen MacLeod: I just had one follow-up question. I was just wondering if you could give a little bit of color on sort of the gross margin trends you expect through the balance of the year.
Craig De Pratto: We continue to expect that we're going to hold at least on a year-over-year basis. And as we continue to optimize some of the shared services that we discussed around internalizing the DC network from 3PL into our 4 walls, we would expect a little bit of leverage on the back half, for sure. I mean, this quarter, despite all those pressures that we did have, we still were able to increase on a year-over-year basis. But we want to make sure that we're managing expectations. I would peg it on a year-over-year level and with opportunity to grow from there, and we would communicate those growth a little bit more clearly for the back half in the next quarter's call.
Stewart Schaefer: And I think more than ever, we've become a lot more tactical and strategical in terms of promotional pricing rather than across the board, like this example that we've done in Q1 accelerating our models, which is a promotion -- we call that part of our promotions. Instead of doing it across the board in terms of discounts or promotions, we've worked very hard to build and maintain fabulous value products to our customers that have expanded also our gross margins, and we see that path continuing, but with also introducing specific areas to drive other categories that will drive traffic and reduce costs and promotions without impacting the longer-term balance of our floor.
Operator: Ladies and gentlemen, there are no further questions at this time. I will now turn the call over to management for closing remarks.
Stewart Schaefer: Well, thank you very much, everyone, for joining us for Q1. I apologize again for the technical difficulties that we had at the start of the call. We really appreciate all your support, and we're looking forward to chatting with you all in Q2. Be well.
Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
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