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Good morning, and welcome to the Sleep Country Canada's Financial Results Conference Call for the First Quarter ended March 31, 2018. We will begin today's call with management's discussion, followed by a question and answer period open to investors and financial analysts.For your convenience, the first quarter earnings release, the first quarter financial statements and management's discussion and analysis are available on the Investor Relations section of the company's website at sleepcountry.ca. They are also available on SEDAR. The results were released yesterday after the market closed. Please note that results on this conference call may contain forward-looking statements about Sleep Country Canada's current and future plans, expectations, intentions, results, levels of activity, performance, goals or achievements or any other future events or developments. Forward-looking statements are based on information currently available to management and on investments and assumptions based on those factors that managers believes are appropriate and reasonable in the circumstances. However, there can be no assurance that such estimates and assumptions will prove to be correct.Many factors could cause actual results, levels of activity, performance, achievements, future events or developments to differ materially from those expressed or implied by the forward-looking statements. As a result, Sleep Country Canada cannot guarantee that any forward-looking statements will materialize, and you are cautioned not to place undue reliance on these forward-looking statements. Except as may be required by law, Sleep Country Canada has no obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. For additional information on these assumptions and risks, please consult the cautionary statement regarding forward-looking information contained in the company's MD&A dated May 7, 2018, available at sedar.com.I'd now like to turn the conference over to Mr. Friesema. Please go ahead.
Thank you, Virgil. Good morning, everyone, and thank you for being with us on our first quarter 2018 conference call. Joining me on today's call is Robert Masson, our CFO. This quarter represents the strong 3 months for Sleep Country. As most of you know, the first quarter is typically our slowest in terms of sales. In Q1 2018, the conditions driving this trend were amplified. Anecdotally, we have come to understand from suppliers that sales were slow across the industry during the quarter, possibly due to weather. Our results during this time demonstrates that we have built a resilient business that does not only withstand poor conditions but succeeds through them.In the quarter, we saw growth across all key financial metrics. Sales grew by 8.9% to $135.3 million from $124.2 million. This was supported by our 19th consecutive quarter of same store sales growth at 5.1% on top of 11.9% in the same period last year. Growth came from both the major categories we report, with mattresses growing 8.2% and accessories increasing 11.8%. We are also pleased to report an increase in gross profit of 10.7% year-over-year. This is a meaningful achievement as it demonstrates the significant impacts we are seeing from our strategically designed product portfolio. In addition to accessory products, new mattresses, including Bloom, are achieving better profit margins and driving this positive growth. We are extremely confident in our current product mix and pleased with its performance.Our strong financial results for the quarter were supported by the strategic investments we made in our business in 2017 and continue to make in 2018. Advertising expenditure for the quarter increased by approximately $1.5 million, roughly half of which went towards digital marketing and the onboarding of our new advertising agency. The remainder of this increased advertising spend was dedicated to driving our existing business and refreshing our accessory advertisings. This investment allowed for us to increase the frequency of our infomercials relative to last year. These advertising efforts have helped to fuel growth in our accessory category.Since May of last year, our increased investments in digital marketing have been fundamental to the successful ramp up or -- ramp up of our omnichannel business. In 2018, we are continuing to experience strong outcomes from this ongoing investment. Over this quarter, we saw increased traffic to our ecommerce platform. We carefully monitor online trends and, at this point in time, are still seeing a large majority of purchases taking place in stores.Looking at investments in our physical infrastructure, we are tracking well for 2018. In this quarter, we opened 3 new stores and completed 10 store renovations. Once again, in Q1, we saw that our renovated store locations continued to drive same store sales growth, outperforming our unrenovated locations by 360 basis points. The measurable success from enhancements to our existing stores and our standard presence across Canada are what continue to solidify our position as the leading mattress retailer in the country. Since last year, we've opened 13 new store locations, renovated 27 of our stores and relocated 4 of our largest distribution centers. These investments are already adding to our growth and will aid our ability to grow for years to come. Based on our meaningful growth and results, our Board of Directors made a decision to increase our quarterly dividend by 12% to $0.185 per share, effective with our main distribution. This marks our third dividend increase since going public in 2015.I will now turn the call over to Rob who will review our financial results more closely.
Thanks, Dave, and good morning, everyone. To begin, revenue grew by 8.9% for the first quarter and as a result, gross profit was up by 10.7%, or $3.5 million, to $36.2 million from $32.7 million in Q1 2017. Gross margin for Q1 2017 improved to 26.8% on 26.3% in the comparable quarter, primarily as a result of improvements in operating effectiveness. As a percentage of sales, this was reflected in a 40 basis point reduction in inventory and other directly related expenses net of all-in rebates. A 20 basis point reduction in sales and distribution expenses and a steady year-over-year store occupancy cost remaining at 9.9%.For the first quarter of 2018, total general and admin expenses increased by 17.8%, or $2.6 million, to $17.6 million. As a percentage of sales, G&A expenses increased from 12% in Q1 2017 to 13% in Q1 2018. Higher G&A expenses in Q1 are primarily attributed to a planned increase in our advertising expense of $1.5 million to support growth in digital marketing, onboarding our new advertising agency, and to drive accessory sales through traditional advertising. Credit card and finance charges, which are a variable cost, increased in accordance with sales. Salaries, wages and benefits also contributed to higher G&A expenses in Q1 2018. Other G&A expenses increased by $600,000, mainly due to the reversal of a onetime accrual in Q1 2017 related to a -- legal disputes and other miscellaneous provisions in Q1 2018. Operating EBITDA increased by 5.9% to $19.3 million in Q1 2018. Operating EBITDA margins decreased to 14.3% of sales from 14.7% of sales in Q1 2017. This increase in operating EBITDA was primarily due to strong sales growth and improved gross profit margins and was partially offset by a planned increase in advertising and other G&A expenses.Depreciation and amortize (sic) [ amortization ] expenses increased from $2.8 million in Q1 2017 to $3.5 million in Q1 2018. This $800,000 increase is primarily attributed to the higher capital expenditure incurred since March 31, 2017, mainly resulting from the 4 distribution center relocations, 27 renovations and the addition of 13 new stores. In Q1 2018, financial [ head ] expenses increased from $0.9 million to $1.1 million as a result of a higher effective interest rate of 3.4% in Q1 2018 compared to 2.7% in Q1 2017, partially offset by a lower average balance outstanding on the senior secured credit facility.During the first quarter of 2018, adjusted net income increased by 2.3% to $11 million or $0.30 per share compared to $10.8 million or $0.29 per share in Q1 2017. This year-over-year growth was the result of higher operating EBITDA, partially offset by increase in our depreciation and amortization expense and finance-related expenses.Net income before income taxes remained unchanged year-over-year at $14.1 million, resulting in no change to income tax expense, with an expense of $3.8 million in Q1 2018 and Q1 2017. Net cash flows used in operating activities amounted to $3 million in Q1 2018 compared with net cash flow generated in operating activities of $8.5 million in Q1 2017. This was a result of $19.2 million cash used, resulted from an increase in working capital mainly driven by the following factors: trade and other payables were lower due to the timing of payments at the end of Q1 2018 versus Q4 2017, and customer deposits were lower due to the seasonality of the business. The increase in working capital was offset by $16.2 million in cash generated from normal operating activities. As at March 31, 2018, the balance on our revolving credit facility was $110 million compared to $105 million as at December 31, 2017.As Dave noted at the start of our discussion today, our Board of Directors approved an increase in our quarterly dividend distribution to $0.185 on May 7. The increase marks our third dividend hike in 3 years since becoming a public company in 2015. With the latest increase of 12%, our dividend has grown by 42% since our IPO.That concludes my remarks. I'll now turn the call back to Dave.
Thanks, Rob. As demonstrated, we have made great progress in the first 3 months of 2018. I now look forward to telling you about some of the promising growth opportunities ahead of us.On our first quarter call of 2017, we announced the launch of our ecommerce business and along with it, introduced our mattress-in-a-box brand, Bloom. In only a year, this platform and product have experienced the growth necessary to warrant additional investments and expansion as announced at the end of 2017. We see the demand for additional online offerings and have decided to introduce 3 new Bloom mattresses. These products will expand our mattress-in-a-box line across more price points and strengthen our omnichannel position in Canada. We expect to release the 3 additional Blooms SKUs in the latter half of the second quarter and look forward to offering our customers this enhanced selection. Our omnichannel approach continues to be led by our physical presence across Canada. With 3 store openings in the quarter and a strong prospect identified for the remainder of the year, we will exceed our guidance for 2018, opening a minimum of 15 stores. We are confident that we will deliver this accelerated growth in 2018 and continue to be well-positioned to open 8 to 12 stores per year for the foreseeable future.We expect 4 of the store openings planned for 2018 to be mall locations. We began to test the mall store concept at the beginning of 2017 and have seen promising performance over the last year. These stores encourage impulse purchase and offer a unique opportunity to expose our brand to new customers. As of Q1 2018, we had 3 mall store locations in our network. Our intention is to end the year with 7 mall locations, more than double our current presence. We see this as a promising avenue for future growth.To support the continued growth of our business, our double-digit increase to advertising expenditure will continue through the end of 2018, with the highest growth concentrated in the first half of 2018. Increased mattress and accessory revenues and growth to online traffic and in-store sales all speak to the success of this investment. We are pleased with the early progress we have made in 2018 and look forward to executing on our objectives for the remainder of the year. This concludes our remarks. We'd now like to open the call for questions.
[Operator Instructions] Your first question comes from Martin Landry from GMP Securities.
My first question is with regards to whether you alluded that there was a bit of unfavorable weather during Q1, and I think we would all agree with that statement. Wondering, do you have an idea of what industry sales would have looked like in Q1?
No, I'm afraid we don't. As you all know from talking to us for the last few years, understanding what's going on to any great detail in the industry is frustratingly vague. We were pleased with Q1, as I think you understand from our comments, but even more importantly on that, as you know, we have several different ways to try and grow our business. For instance, one, is AUSP and the other one will be mattress units, and we'd like to also highlight that, while both being positive in Q1, we actually saw more growth in the first quarter of 2018 coming from unit increases than we did in 2017. And that actually makes us happy because it indicates market share.
Okay, okay, and you're accelerating the pace of new store openings in 2018. I'm wondering what's triggered that change because you gave us a guidance just a couple of months ago on that pace. So what's happened in the quarter that got you to change your strategy and accelerate your penetration?
So there -- first of all, there has been no change in strategy. We are still planning -- we still commit 8 to 12 stores per year, which is what we said we would do since 2015. But even within that, we've always said that in a year where more opportunities became available, we'd be happy to open more than 12. And what I can tell you, the big difference that happened this year than other years is normally we're not so sure how many will be prepared or ready to open by the end of the year due to construction schedules and so on. This really is just more we had a better window into what is actually going to be able to open this year than we normally do, and that's why we were able to expand it.
Okay, okay, and my last question. You and Robert, you gave us a bit of a breakdown on margin expansion, and I think 40 bps come from higher product margin. Wondering, is this a function of your new line up and your new pricing for 2018? And wondering if we could see -- if this margin expansion could be sustainable for the remainder of the year.
So Martin, I mean, we've had a very consistent increase in our gross margin for the last number of years, and every quarter, there's a different mix of products. Both mattresses and accessories showed solid performance. We did see a highest -- slightly higher growth on accessories, which as -- have a 10 percentage point higher margin profile compared to mattresses. So we're very comfortable with our position and our lineup of products. Every year, we refresh our mattress lineup and so that brings with it new sort of margin profiles. And so can't really comment on the future, but right now, we -- we're showing great performance in the results of those mattresses we've selected for this year.
Your next question comes from Meaghen Annett from TD Securities.
Just looking at the same store sales growth in the quarter. Were there any headwinds apart from the weather that you believe impacted the topline performance there?
Yes, we were -- we're very happy with the performance we had, and again, as I say, one of the things that made us even happier was that we saw a bigger percentage of our growth coming from unit increases this year than we did from AUSP in 2017. And so we really look at that as a real positive growth because we know that when anybody buys in it from Sleep Country due to our market research, that they are much more likely to buy from us again in the future. And so -- not only did we see a nice increase in our mattress units, but we saw increases in our accessory units as well. So we felt that we performed very well within the quarter on all categories.
And just going back to the gross margin. So we've seen leverage on occupancy costs fairly consistently. Can you just talk to the drivers of that line item remaining flat as a percent of sales this quarter and if you could just clarify what the offset was to the leverage on the inventory costs and the sales and distribution compensation expenses.
So I'll answer your question on the historic occupancy leverage first. So when we open up new stores, we, from an accounting straight line perspective, we typically take about 2 months from when we get occupation to when the store opens, and so we need to book a straight line accounting rent from that point. So typically there's a drag on the leverage when we open up new stores. And so that effect has come through on this quarter a little more than previous quarters and so that's offsetting some of the natural leverage we would get on our stores. On the rest of the other cost of sales items, if you can just clarify your question as to the offset you're talking about?
So from the MD&A, it seems that the margin was positively impacted by 60 basis points from the inventory-related costs in sales and distribution compensation, so there's a negative offset there to the 40 basis point improvement. So what would that have been?
I mean, there's a number of different items that go into that. On the sales and distribution compensation expenses, that's us just becoming more efficient on those line items. On the inventory and other expenses, that's made up of not only the raw product cost but also the volume rebate that we get from suppliers. And so that's driving those 2 categories there.
And just a question on why did the dividend increase this quarter. Just curious if you have a targeted payout ratio in mind at this point? Can you just remind us of your priorities reach this excess cash.
So our first priority is always to use growth CapEx to drive the business, and we're, obviously, making more use of that with our higher store openings and our continued renovation of 25 to 30 stores. Beyond that, we -- we're at a comfortable level with our outstanding debt at being $105 million -- sorry, $110 million at the moment. The dividend increases is consistent with what we've seen in the past. Our payout ratio is still very modest at sort of mid-50s on a go forward basis. And so that leaves our share buybacks as an opportunity for us to use up the excess cash that is not used up with the dividend. So we already just balanced those different possibilities on a quarterly basis. So we -- we'll use up that excess cash and return it to shareholders.
And just one last question if I might. Clarification on the potential notice of reassessment from the CRA. Can you just tell us what your comfort level is of not having a reserve for that event? And will there be any change in the tax rate that you anticipate going forward?
So that particular matter relates to our pre-IPO structure. And we feel comfortable that, that event, should it come, will be covered by our indemnity that's in place as a result of the purchase sale agreement that happened at the time of the IPO. At this point, we haven't received a formal notice of reassessment from the CRA and if that does come, we feel confident in our position of how those matters were treated from a tax perspective. Does that answer your question, Meaghen?
That's great.
Your next question comes from Kenric Tyghe from Raymond James.
Dave, question for you. Thanks for the color on the ecommerce strategy, but I'd like to ask you a 2 part question there. So the first one would be, you highlighted the sort of quantum of growth in terms of online mattress sales. Could you speak to whether you believe Bloom is sort of tracking or leading the market in terms of its growth, given the type of growth that we've heard bandied about by some of your competitors in the space? And the second part of the question would be as it relates to the new SKU introduction. Is that about a little bit of a mark-to-market in terms of what you've established is working? Is it about a better aligning with either way the market's at, the way competitors react in terms of new SKUs? How should we think about the new SKUs?
Sure, in regards to your first question. We're still relatively early in our ecommerce omnichannel approach. So it's a bit early to say we're -- that we're leading the market at this point in time. We're happy with our growth. The other side of that coin is that we are getting a lot of the people that see our product and other products online coming into our store and trying them and buying them in the store. So we feel that, that is working very well together. Lastly, there's really 2 reasons why we're adding those beds. First and foremost, we've always had beds in those price points in our store, but we think that by putting them under the Bloom brand, it will just be able to call more attention to them and also have a -- just a much more logical approach to that part of each store. And as we talked about in the past, we really are looking to help drive more traffic into our stores and part of that additional traffic is in the $750 and below category. So this is a -- an online approach that's mirrored very well in an in-store approach because we know that, while being strong in that category, it's not our strongest area, and we think we have a lot of opportunity to continue to drive that business. And just referring back to what I said about Q1, even though we did see an increase in average unit selling price, we had much more contribution from unit growth, and we think that is because of this initiative. So it's very exciting.
And then just switching gears to the market share discussion and the discussion around Sears. Was there any noticeable increase in terms of market activity on, sort of, the day that's called the Sears Mattress Grab? Or do you think both yourselves and competitors are keeping powder dry for the busier quarters of the year? And how should we think about sort of the evolution of spend around that should promotional intensity increase as that sort of share grab progresses through the year?
Well, we always do gauge our spend on marketing -- not gauge it, I'm sorry, we do -- our spend is somewhat correlated with cyclical times of the year, and that is the case. But we spent quite a bit in Q1, and we're really trying to get our share of that business. And I think other people are as well. So we certainly are not feeling like people are holding back in Q1.
Great, just a quick final one for me there. Just on these -- the mall stores. Is it fair to assume that, that would be not only a different size footprint but a materially different mix in terms of SKUs? Perhaps more accessory and/or bed-in-a-box, Bloom-type mix versus your sort of prototype store. How should we think about that store footprint? And perhaps even evolution of that store footprint based on your first couple of stores.
Generally speaking, to your point, the stores are going to be a little bit smaller and so that does change the footprint a bit. And it also means, generally, fewer mattresses in the store. But having said that, we still have it -- a large enough selection of mattresses that we would consider it a mattress store. And we do carry all the same accessories that we carry in all of our other stores as well. So we really -- it is a fully functioning location, albeit a little bit smaller.
Your next question comes from Matt Bank from CIBC.
Have the softer industry volumes and the weather impacts you saw in Q1 normalized in Q2?
I'm sorry, I didn't -- could you please repeat that question? Part of it was garbled.
Oh, sorry about that. I was just asking. So the softer industry volume you're hearing from suppliers and the weather impacts on same store sales. Has that normalized as you progress through Q2?
Well, I can't answer for the industry, just like I really couldn't answer other than anecdotally for Q1. And for our own business, we don't give out any statements until the quarter's over.
Okay, fair enough. And then just a follow-up on the Sears. Was there a noticeable amount of increased store traffic that you could attribute to Sears closing in Q1? And as the year progresses, has your view of this as a multiyear opportunity changed at all?
No, we still look at this as a very big opportunity for us, and to your point, it is a multiyear opportunity. It's not all going to happen immediately. We would -- and again, this is some speculation, but we would think that some of our growth in accessories was from our marketing, but we were marketing to people that would have maybe possibly shopped at Sears. So not only do we look at it as a multiyear opportunity for us and a good one at that, but we also look at it as an opportunity for mattresses but equally for accessories.
And I just want to follow up on the gross margin discussion. So was there any incremental drag from the TCs opened last year in Q1? And then also, should the increased store openings drag on occupancy levers through the rest of the year?
So the store -- the warehouse occupancy sits in our G&A section, and we did see an increase in warehouse costs. We had the onetime cost for last year because of the overlapping rent, but we do have higher -- so if you take that out of the discussion, we still have higher year-over-year increases in warehouses because our spaces are larger, and so the cost of those spaces has gone up. But it -- we will leverage that cost, which is now relatively fixed over the years to come as the volume expands in those facilities. And just to repeat your other question?
The other one was, you brought up earlier on the call that when you have higher store openings, that can drag on gross margins. So I'm just wondering, on an annual basis, since you're looking at more than 15 this year, if that's something that we should see through the year.
Yes, I mean, I think it's partly timing. The drag is highest in the immediate quarter when a store opens, but it tends to normalize over time as the volume of those new stores grow. And then, in subsequent years, become what we call wrap stores, and then they eventually fall into same store sales. So our new store openings are still very strong and so that is really just a temporary occurrence in a particular quarter.
Your next question comes from Stephen MacLeod from BMO Capital Markets.
Just want to follow up on Bloom and sort of where -- what you see now and what you see -- what do you expect to see with the 3 new SKUs that you're offering? Are you seeing sort of margins continuing to hold in on that product? You're not seeing any margin dilution from the ecommerce bed-in-a-box business are you?
No, we're very comfortable with the margins that we started with and we're continuing.
Yes, and lowering that -- taking on a lower price point. You're able to do that with -- by still keeping product margins flat?
Yes, we're not concerned about the product margins, and as a matter of fact, we are really looking at this as an opportunity to drive additional traffic from a consumer that may not be always thinking of us first for that particular purchase. And so to answer your question specifically, yes. Margin percentage should not be affected, and we're really just looking as a way to get more aggressive in that area.
Yes, okay, great. And when you think about the new store activities for 2018, how do you see the timing of that -- excuse me, evolve through the year? Is it typically weighted to Q2 and Q4? Or will you have it some more evenly spread?
No, I mean, frankly, a lot of these decisions -- I mean, these decisions are really made from a point of view of when the particular building is either built and ready for us to take it over or whether it's vacated by somebody else. So there is no -- and which is one of the reasons why we're able to say 15 for this year just because we have a better view of when they're going to be opening. But it is certainly not weighted to any particular quarter.
Okay, so we should expect a reasonably even distribution?
Yes.
Okay, and then I want to talk a little bit about the housing market. We've had some exogenous shocks over the last few quarters, and I just wanted to get a sense as to whether you saw any notable areas of strength or weakness as you think about the housing market impacts across the country in Q1?
It would be -- it's difficult for us to put the specific on that because, as you know, our -- we do have -- our traffic is positive to different degrees across the whole country. When we would look at that, there is possibly a weather effect in Q1, but nothing is specifically towards a region just in a real estate. So I would say that we are not seeing that as a huge red flag.
Right, right, okay, okay, that's great. And then just finally, you cited an increase in third party logistics through delivery expense in the quarter that weighed a little bit on the margins. Can you just explain a bit about what that was related to and whether it's an ongoing -- whether that is a Q1 specific phenomenon?
So that's really just the trade-off between distribution, compensation, which sits in a -- in the other category and we've -- that's been happening over the last number of years. And we will scale up and down on -- in our 3PL usage depending on what part of the country we're told where it's been affected by higher volumes. So that, really, should see that as a trade-off from distribution compensation to the other category, which has the 3PL expenses.
Your next question comes from Elizabeth Johnston from Laurentian Bank Securities.
I just want to return briefly to the discussion about your store openings for the year in terms of the outlook for 15 new openings this year. Is there -- 2 additional openings that you see coming through. Is there a particular region where you have had a higher opportunity for these openings? Or was it really across Canada that you see overall these openings contributing?
Yes, we are looking -- we always are looking for new locations across the country, and so we're much less focused on geography rather than good location. So we know where we want stores to be and when locations come up that meet all the criteria, we'll take it. And so it is -- we have a national search, and it just depends on when the right -- excuse me, when the right location becomes available.
Okay, great and in terms of the mall stores, looking out longer term, say 2019 or even farther, and maybe it's too early to say. But do you view the mall store as a proportion of your total store count to be changed -- to increase materially? Or how do you view that?
Well, based upon the fact that we only have 3 right now, it will -- they will increase, as long as they continue to perform, they have an opportunity to grow. But we're not really looking at the mall stores to ever be a huge, huge amount of locations. And even though we're very pleased with the early results we're seeing, every time we open a new mall store, we're going to continue to test and make sure that it's meeting the requirements that we have. So we would still consider this a test, but it's a -- so far a successful test.
Okay, great. And just turning over to the media and marketing spending again. Yes, there is definitely increase in spending year-over-year. I'm just wondering going forward, how are you -- what do you think is the best way for us to be looking at this? Is it really in absolute dollar terms? Or is it something that you think should be best viewed as a percentage of revenue?
I think you can look at it in a couple of different ways, but what we've been trying to let people understand is that our marketing spend is lumpy to begin with. And that's why, for instance Q2 and Q3 of last year, it was higher, and in Q4, it was lower, and we've already let everybody know that the first half of this year is going to be higher. And we continue to do tests and try new initiatives to see what drives traffic into our stores and what can move the needle on our business to grow it. But over the long run, our anticipation is that we're not really looking to leverage our marketing expense as a percentage of sales, but we're not looking to deleverage it, either, over the long run. And so we think we have a -- we're at a good -- we think we're at a fairly decent level right now, and we're going to continue to make the investments. But we hope to continue to grow the business and keep it fairly stable. Again, just as a last reminder, you can't look at it on a quarterly basis, though because it's lumpy.
Okay and do you have any -- in this particular quarter, do you feel like there was any marketing expense that got either delayed into Q2 or pulled back into Q4? Anything like that, as much as you can comment on it, I guess.
No, we spent what we thought we were going to spend, and so it was pretty much what we expected.
Okay, great. And just finally for me in terms of renovation activity. Is there a scenario where you would want to accelerate the pace of renovations? And also in regards to that, is there anything in particular that holds you back, be it lease term or something else, in terms of a renovation that would keep you from renovating a store as quickly as you would like?
It's mostly -- we're mostly constrained by the lease terms, and so our team is always looking at what the portfolio is, when the renewal terms are coming up and planning accordingly. But we've completed the 10 renovations in Q1, and we -- we've completed 4 since the end of Q1 and we're now hitting -- we just hit 50% of our network that is now in our new store format. And so we're very comfortable with the pace that we've set, and we're going as fast as we can because we're very happy with the results that we're seeing on the renovated portfolio stores that are sort of outpacing the legacy stores by 360 basis points.
And sorry, Elizabeth, just one little point to add to that. We also would prefer not to do any renovations in the second and third quarter or late second quarter, third quarter because that's our busiest time of year. So to Rob's point, 99% of what's holding us back is the lease term, but part of it also is that we can't do it 12 months a year, or we don't want to do it 12 months a year.
Your next question comes from Patricia Baker with Scotiabank.
I want to come back to the mall stores, and you called it a test, and I think that tests are particularly interesting. And what have you've been experiencing? I know it's only 3 stores, but have you been experience that the customer would come in -- I think you, at -- in the early opening remarks, you referenced impulse purchases. Are they coming in, maybe browsing, picking up accessories? And do you have any data on an accessories customer that discovers the store in the mall, are they coming back for mattresses?
So first of all, Patricia, just so you know, we had 3 stores in Q1, we now have 4. So the test is actually expanding, and we're gaining more data every single day. We really look at these as a regular store, and we were selling mattresses out of this store, we're selling accessories out of this store, a slightly higher percentage of accessories, yes, but we're selling mattresses as well. And it's just a great venue to have more people experience what we're doing, get to know our sales associates better, learn a bit about Sleep and so far, we're just seeing a great amount of revenue on both categories. And so we're not looking at these as accessory stores. We're looking at them as a regular Sleep Country store with some different characteristics.
No, I understand that. I was just curious about what the customer experience was like and if it was kind of a bit of a reversal so that they're on accessories first, and then they come back for the mattress... [indiscernible]
Yes, yes, sorry, I wasn't maybe as clear enough on that. Accessories do play a little bit bigger role, but I would say the customer experience is really seeming to be the same. Generally speaking, people come in, go through the full process. Some people are just coming in to buy accessories but it really -- the experience is very similar.
But Patricia, we have also adapted our sales process in our mall stores to have more of a team sale approach because we are seeing more browsers coming in, which is sort of natural to understand that from a mall perspective. And that's just making sure that our customers that do come in, in the malls experience -- I mean, have a really great experience, and the team sale approach will bring that to the table.
Okay, and 2 other questions on the mall-based stores. Are the economics similar in that you're still getting the payback, the typical payback that you get with the new store, on the mall stores?
Yes, we are very happy with the payback we're getting. Typically the mall stores have higher volume than our [ non-new ] mall stores that we've opened. I mean, again, it depends region-by-region, but we're very happy. We are paying close attention to the unit economics on the mall stores, but so far, we're very happy with the performance there.
Okay, and then lastly, again, sorry, on the mall stores. Are you finding that the mall landlords are more inclined to want to have Sleep Country stores in their malls now, given everything that's happening with malls and with other retailers? Are you becoming a more attractive tenant?
I would say 100% we're becoming a more attractive tenant and not only in the malls. I think we've been noticing over the last couple of years that we're becoming a more sought after tenant in power centers and getting the locations that we want more often than we used to. So at the power center, they see all different types of situations.
Your next question comes from Vishal Shreedhar of National Bank Financial.
This is Ryan Li for Vishal. I just had a quick question about tapering consumer confidence over the last couple of months. Was that an issue during the quarter? And if so, compared to weather, which one was the bigger impact?
Again, just to go back and say, understanding what motivates the mattress customer in Canada is frustratingly difficult to put your finger on completely, and we've talked about that since we went public, and it's something we continue to do a lot of discussion with a lot of different people, to get cross data, to get some information. But for us to come forward and have a answer on that, that would be acceptable is very difficult.
Okay, and then the last question actually goes back to the malls. With the 3 stores -- or the 4 stores that you have open and the remaining 3 planned for the rest of the year, is that -- are those in malls that had a Sears location? Or is that unrelated?
It's not unrelated, but it's also not a requirement. So some have and some haven't. Some of the -- 1 or 2 of the malls we're opening in had a Sears location, but it closed down not 4 months ago, it closed down a couple of years ago. So it's not a requirement. We're looking at the malls all kind of individually and deciding what the customer base is as well as -- and also very importantly, where we can get a location within that mall.
[Operator Instructions] Your next question comes from Sabahat Khan from RBC Capital Markets.
So I guess just talking about same store sales growth kind of on a broader scale. How do you, as a company, kind of manage quarter-to-quarter variability in that comps [indiscernible] metric? And in some of your weaker quarters, seasonally, you tend to have relatively large comps and even over the course of a year, it kind of varies. So I guess, how do you approach it as a company? Do you have some kind of visibility going into kind of the quarters, what is going to be kind of above your guidance range, within your guidance ranges? How do you manage marketing around that and as well as staffing and so forth?
So we have very little visibility in what to expect in a quarter ahead of us because, generally speaking, every week we have the sales that happened in that week. We have a very good amount of history behind us that gives us an idea of what's the stronger time of the year. So we advertise more during stronger times of year. We know our staffing levels very well. But it is difficult for us to have a point of view as to what same store sales will happen in the future. What I can say, though, is we're very confident in the initiatives that we have been using, which have produced 19 quarters in a row of good same store sales growth, and we're continue to focus on those and others going forward. So we want to drive traffic, we want to get our more than fair share of traffic in the industry, we have a very high conversion of -- shoppers to buyers, and we continue to see that increase. As I mentioned, in Q1, we were particularly pleased with our unit growth in mattresses when you compare it to 2017. And we also saw an additional increase in AUSP in mattresses, again, which is -- then a long string of quarters of same store sales. So what we're very happy about is we continue to see all the metrics that we measure and try and pull the lever to grow our business continue to grow. But to give much of a point of view of what's going to happen in the future, we think that with our initiative, we're going to get as much as we possibly can, but to say what that might be is very challenging.
And then you previously guided to some increased marketing spend in the first half of the year. For you, is Q1 as sort of a proxy? How do you think the marketing spend increase on a directional basis would be relative to Q1?
Well, Q2 will continue to be a little bit higher than -- as we had said, and then that will begin to mitigate again, partially because it gets to be a stronger period of time as well as far as revenue growing, I mean, not growing but stronger time of the year, excuse me.
And then one last one for me. On the margins on Bloom, you indicated that they are sort of favorable and in line with the company. I guess, how do you think about, as you develop volume for that platform, gaining some economies of scale and then also as you invest in adding some new SKUs there, how do you see the margin profile of the online business evolving? And when do you think you get to a point where some of the economies of scale can begin to benefit that platform?
So the -- we were already leveraging our economies of scale because the ecom business gets delivered through our existing logistics machine, whether it be using -- we have new partners with [indiscernible] in Canada [ powers ] but [ Jim's ] about distribution center network and our flow-through of product through our infrastructure, this is just adding onto that. There's no additional infrastructural costs as a result of the ecommerce platform other than just the cost of building the site itself. So we really view this as a pure omnichannel approach to it. And whether a customer buys it online or comes into the store and orders it through the store, the variable costs involved in getting it to the customer is very similar. And so we're seeing that happening and so it's -- we think we're well positioned for the future.
If I could just get one more in there. I guess in terms of how you are selling other Bloom mattresses or other Bloom products, in terms of the sales happening through your website or through in-store, how's that mix versus how you thought it might shake out when you launched the platform?
When we launched the platform, we believed fundamentally that, at least for the mattress, generally speaking, all things being equal, people would rather lay down on it and try it, generally speaking. And nothing at this point in time has changed that belief. We still find that the online as well as our stores are working well together.
We have no further questions at this time. I will turn the call back over to the presenters.
Well, thank you all for being on the call, and Rob and I would just like to end by thanking our talented teams across the country who've gotten us off to a strong start in 2018, and we look forward to talking to you next quarter.
This concludes today's call, and you may now disconnect.