© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, and welcome to Sleep Country Canada's Financial Results Conference Call for the Fourth quarter and Fiscal Year Ended December 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 fourth quarter and annual earnings release, 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 market close.Please note that the remarks on this conference 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 the information currently available to management and on the investments and assumptions based on factors that management 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 statement will materialize and you are cautioned not to place undue reliance on these forward-looking statements.Except as maybe 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 risk, please consult the cautionary statement regarding the forward-looking information contained in the Company's MD&A dated February 26, 2019 available on sedar.com.I would now like to turn the conference over to Mr. Friesema. Please go ahead.
Thank you, operator. Good morning everyone and thank you for joining us. With me this morning is Rob Masson and our CFO and Stewart Schaefer, our Chief Business Development Officer. We're pleased to share Sleep Country results.This year, Sleep Country took ownership of sleep and proved that it is more than just mattresses and the Canadian market responded. 2018 represents the highest revenue and profitability in Sleep Country history. Our revenue increased -- our revenue in Q4 increased by 4.2% to $160.1 million and on an annual basis, rose 6.1% to round out the year at $623 million.Mattresses revenue and accessory revenue similarly increased in Q4 by 3.1% and 8.7% respectively. On an annual basis, both categories increased 4.8%, and 11.7% respectively. From a strictly financial perspective, we also saw growth of 6.7% in gross profit and improved gross profit margin from 30.5% to 31.2% and a 0.6% increase in operating EBITDA to $25.9 million in Q4. Rob will discuss this in greater detail later in the call.In terms of other KPIs, we're very pleased to share that our system-wide traffic in-store and online, conversion rates of shoppers to buyers, mattress units, mattress average unit selling price, accessory unit and accessory average unit selling price all increased in Q4 and for the full year.2018 was a great year for our brick-and-mortar growth story in which we opened 17 new stores and renovated and relocated 32 for a total of 49 new concept locations. While disappointed with our same-store sales growth in Q4, particularly in markets with challenging consumer confidence environments total growth exceeded our expectations.Our new stores continued to perform well, exceeding our expectations as well and thus demonstrating that our real estate strategy is on mark and delivering results. Our mall stores have also exceeded expectations and have positioned us well to penetrate enclosed mall going market for many years to come, with an enviable return on investment of 2 to 3 years.Our store renovations continue to outperform nicely, post renovation and allow us display expanding array of products effectively. To-date 59% of our stores have been renovated and customers continue to respond well to the change. In fact, one of the unique features of our enhanced design stores is our Pillow Bars, which our customers love. Up to 25% of the comfort of a good night sleep comes from pillows and we've included the Pillow Bars so customers can come in and sample 1 of our 35 exclusive designs. And pillow are a big part of our accelerating accessory revenue.Our business is always evolving to the ever-changing needs of our customers. As such, our focus is to continue to provide Canadians with a great night sleep. Beginning with the mattress and growing and expanding on all core sleep essentials. Our expanded offerings feature lifestyle and platform beds, head and footboards, sheets, mattress covers, weighted blankets, throws, duvets, aromatherapy sprays and even pet beds to name a few.Our growing in-store mattress selection feature the most relevant brands from around the world giving our customers the ultimate choice in comfort. Familiar names like Sealy, Tempur-Pedic, Simmons, Serta, Kingsdown and Dormeo plus newly added highly reviewed bed-in-a-box options like Bloom and our recent partnership with the #1 reviewed mattress from Europe, Simba.Specifically, our expanded Bloom offering drove accelerating growth online in the second half of the year. Our Q4 growth was our best ever online, posting triple-digit growth. The periods between Black Friday and Cyber Monday and Christmas and New Year's was the most powerful weeks online for sales of Bloom and accessories in Sleep Country history.To improve on our overall customer experience, we also launched online a new and simpler use tool for customer reviews. We have collected thousands of fabulous verified reviews in a very short period of time.Of course, the most exciting event of the year was our acquisition of Endy. Endy, the #1 online profitable Canadian bed-in-a-box retailer will help round out our aggressive initiatives to grow our online business. This partnership will reinforce our positioning in Canada as the top mattress retailer for years to come.It is still very early days with the Endy team, but we continue to execute very well on our plan with brainstorming, sharing of ideas and best practices. We are very excited about what this partnership will bring to all our customers and investors for years to come.I believe Rajen, said on a conference call together that our 2 companies had become like brothers. I hope he and Mike are listening today because that couldn't be truer. Endy has very much become part of the family of Sleep Country, working together to better the sleep of all Canadians.I now turn the call over to Rob who can provide some color to our financials.
Thanks, Dave, and good morning everyone. It's been a rewarding year for all of us here at Sleep Country and I'd like to reiterate Dave's comments in saying we're proud of the results we've achieved. I'm very happy to be able to go through what are some historic financials for our business.In achievement, I'd like to call of right off the bat is the expansion of our gross profit margin. As you all know, this is very difficult to do in the retail vertical. We're extremely happy with the results. In our fourth quarter, we expanded our gross margin by 70 basis points from 30.5% to 31.2% compared to Q4, 2017. On an annual basis, our gross profit margin expanded by 50 basis points from 29.9% to 30.4%. This expansion was primarily the result of these factors in Q4.Inventory and other directory related expenses, net of volume rebates, decreased as a percentage of revenue by 90 basis points to 44.7% compared to 45.6% in Q4, 2017. Sales and distribution compensation expenses, as a percentage of revenue, decreased by 60 basis points to 14.5% compared to 15.1% last year, mainly as a result of improved efficiencies. And store occupancy costs increased, as a percentage of revenue, by 80 basis points to 9% compared to 8.2% of revenue in Q4, 2017.From a gross profit perspective, our Q4 results expanded by 6.7% to $49.9 million from $46.8 million. On an annual basis, gross profit increased by 8.1% to $189.5 million from $175.3 million.As Dave also mentioned, this year presented the highest revenue in Sleep Country's history. In the fourth quarter, revenue increased by 4.2% to $160.1 million. On an annual basis, this increased by 6.1% to $623 million when compared to last year. Our total sales growth over the year was aided by the addition of 17 new stores, the most in our Company's history and of which 4 were in enclosed malls and the completed renovation or relocation of 32 stores.Sleep Country has evolved into a one-stop shop for anything -- for everything our customers' needs to get their optimal sleep in person and online. Our mattress and accessories revenue are a direct response from the market to our strategy of bringing a more catered and varied selection of total sleep products to our customers, both consist larger part of our revenue in Q4 and year-over-year compared to 2017. Mattress sales increased by 3.1% to $126.7 million compared to $122.9 million in Q4 2017.On an annual basis, total mattress sales increased by 4.8% to $497 million. Accessories revenue saw very strong growth in Q4, increasing by 8.7% to $33.4 million from $30.7 million compared to last year. On an annual basis, accessories revenue saw a double-digit increase of 11.7% to $126 million. Our entry into new accessories categories dog beds, weighted blanket, throws has been exciting and we're very pleased with the early results.G&A expenses for this quarter increased by 16.1% to $25.6 million compared to $22.1 million in Q4, 2017. As a percentage of revenue, this expense represents 16%. The largest increase in expanding was attributable to media and advertising which grew by $2.6 million to $10.9 million from $8.3 million. While we saw partial offset in those expense category as we reduced traditional advertising, we strategically chose to invest more in this part of our business to support the ramp up and continued momentum of our "All for Sleep" campaign which includes refreshed marketing collaterals and infomercials.Increased digital advertising around our e-commerce platform which showed a triple-digit growth in the fourth quarter and continues to position us as the convenient choice for all our customers no matter how they choose to shop, and finally increased advertising spend to promote our newly acquired Endy brand.Form a customer standpoint, in Q4, credit card and finance charges increased as a percentage of sales by 30 basis points and by $600,000 to $4 million largely due to customer's changing preferences to longer-term financing plans Warehouse rent and other occupancy charges slightly increased our G&A expenses by $400,000 to $2.2 million. This is mainly attributable to the relocation of a distribution center in Moncton, which was required to support higher sales volume in that area.Moving on from G&A, our operating EBITDA for Q4 grew by 0.6% to $25.9 million. This increase was primarily driven by strong revenue growth and improved gross profit margins, partially offset by an increase in G&A expenses. Operating EBITDA margins decreased by 60 basis points to 16.2% as a percentage of revenue.Depreciation and amortization expenses grew by $0.8 million to $4.1 million in the quarter, mainly resulting from new store openings and renovations in the current year. The stores that we renovated in 2018 continued to show improved performance in their post renovation period relative to their pre-renovated period. Finance related expenses increased by $0.4 million to $1.3 million compared to $900,000 last year.As many of you are aware, this continues to be the impact of higher effective interest rates and a higher average balance outstanding on the senior secured credit facility mainly to fund the acquisition of Endy in December 2018. Our adjusted net income for Q4 decreased by 7.1% to $14.8 million or $0.40 per share compared to $15.9 million or $0.42 per share at this time last year. This decrease was primarily due to higher depreciation, amortization and finance related expenses offset by an increase in operating EBITA. Net cash flows generated by operating activities in our fiscal year comprise $68.1 million compared to $92.6 million last year.Our 2018 figure represents the positive impact of $85.8 million in cash generated from operating activities, offset by $17.1 million of cash used towards working capital. This compares to $82.2 million in cash generated in 2017 from operating activities, supplemented by $10.4 million of cash generated as a result of a decrease in non-cash items related to working capital.The combination of higher inventories, prepaid expenses and deposits, lower trade and other payables, all partially offset by higher customer deposits, lower trade and other receivables contributed to the year-over-year difference.Net cash flows used in investing activities was $93.2 million in 2018 compared to $28.1 million in 2017. This is of course largely attributable to our acquisition of Endy, but new store openings and renovations were also contributing factors. As at December 31, our cash position stood at $30 million compared to $23.6 million last year. As we've stated in previous quarters, our priorities when it comes to excess capital are as follows.Look for ways to grow our business and maintain some dry powder for future opportunities as we did during this quarter and with some of the other initiatives Dave mentioned. Number 2, pay down our debts. Number 3; be in a position to continue to raise our dividend. And finally, use the remaining cash to buy back shares. These will continue to be our chief priorities for the foreseeable future. As at the quarter's end, the balance on our revolving credit facility was $168.6 million compared to a $105 million as at December 31, 2017.Last night, we announced the renewal of our normal course issuer bid. We have been authorized to purchase up to 25% of the average daily trading volume to a maximum of 1.2 million shares. We believe that this along with our other growth initiatives will enhance shareholder value.Finally, our Board of Directors declared a dividend of $0.185 per share payable on February 26, 2019 to shareholders of record as at the close of business on February 15, 2019.With that, I conclude my remarks. I'll now turn the call back to Dave.
Thanks, Rob. From growing our selection of mattresses and accessories to internal improvements, our e-commerce platform is booming with Bloom. Our new relationship with Endy and new partnerships with well-regarded brands like Simba, we are confident that Sleep Country is poised to accelerate our competitive position in the sleep retail industry.We also plan to accelerate our total growth with continued penetration into the enclosed mall market. As a matter of fact, our market research indicates that our mattress market share grew more in 2018 than in previous years, driven by successful existing and new store locations. This coming year marks Sleep Country Canada's 25th anniversary. Over the past quarter century, our Company has evolved into the most recognized brand in our category.To continue our remarkable growth story, we will continue to invest and drive initiatives to better serve our customers and the Company broadly in 2019 and beyond. For instance, in November of 2018, we signed an agreement with Oracle guided by Deloitte to rollout a new cloud-based e-commerce platform and ERP in 2019. This ERP system will eventually be cascaded throughout our entire business in a conservatively phased approach over the next 18 months to 24 months.Not only will this upgraded ERP improve our customers' online shopping experience, it will also help us find efficiencies across all of Sleep Country, ultimately allowing us to grow more rapidly and with less friction. We will keep you updated on this development accordingly.We also plan to open between 8 stores and 12 stores and renovated a further 25 to 30. To support these goals, we are also committing to spend $30 million to $40 million in capital expenditures which will include CapEx related to the stores, the investment in the new cloud-based e-commerce platform and ERP system, maintenance as well as other general corporate initiatives.Our goal to become a true omnichannel retailer is well underway and the accomplishments made in 2018 and will make in 2019 are accelerating our progress. Lastly, I would like to thank the entire Sleep Country team for another year of growth and excellence. I would also like to welcome our new Endy team aboard. We are looking forward to the future together.That concludes our remarks. Now we will answer questions.
[Operator Instructions] And your first question comes from Kenric Tyghe from Raymond James.
Just I wondered you could provide some color for us. Same-store sales in the quarter in the context of last year's comp; and then perhaps more broadly, how to think about that performance in the context year-on-year relative to the market; and then also just sort of the market health and the tone exiting the year and the tone year-to-date. If you could sort of help us frame that up -- frame up where your share or where you believe your share exited and perhaps how the market has evolved fourth quarter and into quarter-to-date this year?
Sure. So, I'd just start obviously with your first comment was about same-store sales. Obviously, same-store sales is a number that we watch very carefully, but even more importantly, we track it back to every individual store. And the reason we do that is because we want to understand is it something that we're missing in a location? Is it something that is more economic? What are the cause of the changes? And as we look across in Q4 and as we mentioned in Q3 as well, it was very understandable to see why the sales were down. They were very much centered in areas where the economy was not strong, which was causing problems with consumer confidence. We also felt that, as I mentioned in the comments -- or not felt, with our studies our market share grew. We would say that as we sit here today, our market share is in the 30% or maybe a little higher category and as I say in 2018, all of our market research indicated it grew faster than in the previous years. I will point out a couple -- one of the markets that we had some same-store challenges, which I don't think would be a surprise would be the Alberta market. And I want to highlight that while the Alberta market is slightly challenged from a growth point of view and it has been, it still is one of our strongest markets from a same-store sales basis; not growth, but just a -- add revenue per store. And so, we look at that as a market that is currently having growth challenges, but it is still a wonderful market for us and we're supporting it heavily. We are seeing some changes in what the news is talking about with real estate which is obviously a trigger for purchases and we're looking forward to that, but it's certainly and what we're hearing in the market, it is not an easy market through all of Q4. Kenric, I kind of tried to answer all of your questions, is there an odd one out of that -- is there anything I missed?
No, just the final piece, Dave, just on the sort of the tone exiting fourth quarter versus kind of the market tone year-to-date, have you noticed any material changes in terms of how the market is either behaving all sort of the language coming through the market?
Well, we don't give comments about the quarter that we're in, but I think when you -- yeah, I'm sorry, you know I think you look at the overall economy and you have to kind of decide for yourself what's changed in that because we don't make comments, but there hasn't been a lot of change in the economy.
Sure. No, fair enough.
Stewart wants to add something. Kenric, just one second, Stewart is going to add a comment.
Kenric, I will say that all our KPIs and metrics indicate a shift in consumer confidence as Dave said. With the meltdown of the financial markets right at the end of December, we saw an acceleration in consumer confidence may be slowing down. Our metrics also indicated, as David said, that we gained market share in this off period. And one thing that I want to remind the markets which we haven't said in a long time, purchases get deferred not lost in our business, and in periods that we still believe that's a softer period, which we did feel in the fourth quarter, we actually believe we gained market share based on our communication with the -- our other vendors and view in other retailers.
That's great. And can I just switch gear quickly to Endy, got couple of months in here. Could you help us better understand or handicap the thinking or reasonable sort of growth expectations in the context of the markets for Endy this year or is it a little too early?
Well, it's a little too early I would say, and secondarily, we don't give forward-looking statements. But, I can tell you that we're very excited about the opportunity and we continue to get more excited as we spend more time together.
Just a quick final one. Rob, one for you, the step up in marketing cost, have we now cycled those in terms of the All for Sleep and early spend on Endy? Or should we expect those costs to remain elevated through 2019 just perhaps to better understand the evolution and the step-up/step-down on marketing?
So, I mean, I would characterize 2019 as a year where we will shift some traditional to digital. We don't see any reason for big increases, but we will -- from an Endy perspective in terms of having no history in our results for 2018 that will drive some increases, but for our -- kind of Sleep Country side of the house, it's mainly a shift towards just shifting dollars away from traditional to digital.
As we also said in the fourth quarter of 2017 that 2018 would be an investments in our infomercials as they were getting a little old. That investment has been made and previously, our infomercials lasted a 3 year period of time. So there was a big shift in terms of expanding on the All for Sleep campaigns as well as reinvesting in a bunch of our infomercial campaigns, which should last and continue into 2019. So there won't be a reinvestment in that space.
Your next question comes from the line of Matt Bank from CIBC.
So, I guess, on the same-store sales, I don't totally understand what part of it actually declined. You said traffic, conversion and AUSP were all up. So can you just explain that?
So, I was talking about our total business, our total business is, all of those metrics were up.
Okay. So then within same-store sales, could you help us a bit on those drivers?
Well our KPIs on same-store sales were very similar to what I said, for all of our stores. The -- obviously the traffic was not as strong in those categories. But our conversion was up, our AUSP was up, our accessories were up. So it's a very similar correlation to same store as the total sales, they were just -- what I was talking about was our entire system-wide business showed increases on all KPIs.
Okay. And then, in terms of the guidance, I guess first, so the way that you talk about growing same-store sales for next year is about optimizing advertising and investing in sales training. So is there anything specific in the sales training that you need to do. I know you touched on the advertising in terms of the shift, but just wondering if you can give any additional detail in terms of how you can actually grow same-store sales in what's looking to be a pretty tough economic environment.
So I -- as we mentioned before, I think we're more effective in our stores than we've ever been and that is because we continue to train all the time. And so this is not a new initiative for us. It's just a continuation of getting better. When we went public in 2015, we talked about how -- one of the areas that we will grow our same-store sales is by increasing our conversion rates. But we warned everybody that they're already very high and that we may not be able to increase them and yet they've increased every year since we went public. And so, this is just a continuation of that investment and that rigor to make sure we just continually improve.
Okay, great. And then, just kind of a high-level question on the way you guys think about G&A spending. I mean I know during the last recession when you cut advertising spending, you ended up coming out with a lesson that that's probably not something that's worth doing to preserve short term margin, but just wondering, since the call it was negative, like high level, how do you think about G&A spending versus same-store sales spending and how much flexibility you have there.
So G&A spending is always a focus for us, and so in times where we are experiencing negative same-store sales, we increased our focus on G&A spending and examine areas where we can cut. We -- from a marketing perspective, that probably would be the last area we would go towards because we think of it as the gas pedal for our business. So at this point, the focus on advertising is to shift to more -- to more digital avenues and we've got a lot of tests going on to see what works for us. But for now, our focus will be on non-advertising G&A expenses.
Your next question comes from the line of Martin Landry with GMP Securities.
Just, I was a little bit confused as well by the -- when you said Dave that your traffic was up and your average unit pricing was up when commenting on your same-store sales. So I gather that your traffic was up online very nicely and I -- does that mean that your traffic in your brick-and-mortar stores was down this quarter?
So, when you look at our same-store sale traffic, we did see a slight decline in that through our stores and I'm sorry, if I wasn't clear enough, I was referring to our system-wide business, when I was talking about every KPI being up. And then referring now to same-store sales, we saw a very similar increase in all KPIs, with the exception of same-store traffic. Second, and lastly on your question is, we have continued to see a nice increase in the traffic to our website and the growth of our e-commerce. And then lastly, we have also continued to see, Stewart mentioned a minute ago our infomercial investment, accessories continue to be a very -- are growing much faster as a part of our business and part of it is due to those marketing investments as well.
And how much was your traffic down in your stores during the quarter?
Obviously, it was very variable by the market, but it was a small decline and we've never talked about that in the past.
And then maybe a question for Rob. Wondering -- Rob, if you can quantify the impact of the IFRS 16 changes on your EBITDA line.
So, IFRS 16 only goes live in Q1 of 2019 so there is no impact in 2018 yet. So once we've completed Q1, it will be done in terms of the new IFRS 16 standard. We will be showing comparatives for 2018 in our MD&A and financial statements, so it will be clear what the impact will be but it is not a material impact from an earnings per share perspective. We don't expect it to be. It will cause some changes -- fairly significant changes to operating EBITDA based on how we measure it today. But there will be very clear disclosures so that people can do an apples-to-apples comparison when that change does come through.
No, I understand that the changes is not for the quarter, but I was wondering if you can give us an order of magnitude of what that is going to look like for 2019 for the full year?
So, in terms of the balance sheet, the -- our assets will go up by you know we're still giving ranges at this point, but they will go up by approximately $200 million. Our equity -- sorry our liability will go up by $210 million and -- sorry, $190 million and we'll have an equity impact of approximately $10 million. So that's on the balance sheet side. And on the P&L side, because we're still doing a lot of work in terms of where the various changes will impact whether it'd be cost of sales or G&A, we're not talking about that yet. That disclosure will come at the end of Q1.
Okay, so you've got no numbers to share in terms of the impact on the EBITDA?
No, because we're still going through that because some of that will hit cost of sales and will hit G&A and we might change some of the disclosure around where depreciation falls. But from an EBITDA perspective, there'll be plenty of disclosures people can work through that.
Your next question comes from the line of Sabahat Khan from RBC Capital Markets.
Just one on the inventory, it was up about $10 million quarter-over-quarter, I just want to understand the drivers of that and if Endy was any part of that?
So, on the quarter, yes. So there are number of different factors that drove the increase in revenue. Firstly, we expanded our Bloom line up from one SKU to additional 3 SKUs. So that drove our inventory up and we also launched Simba at the end of the quarter, which drove some additional inventory on hand for Simba. We also have increased our container purchases on the accessory side and in particular, we had a large buy of pillows towards the end of the quarter that drove our increased revenue. And then yes, Endy did drive an increase in our inventory of approximately $4 million, which you can see based on the opening balance sheet.
Got it. And then just on the ERP implementation that was mentioned, you said it's coming over the next, call it 18 months to 24 months. When does that -- when does the store implementation portion hit or when will it be kind of implemented across the POS system and so forth?
So, our plan is, the first phase of the total project is focused around e-commerce. So we'll be going live with a new Oracle based cloud system in the summer timeframe and we will have the appropriate ERP elements in live to support that. During that time, we will also be piloting the POS and warehouse management system and we will be doing it on a -- at a specific small region to make sure that it is sound and working well. Once that pilot is successful, we will then be doing it on a region-by-region basis, so that at no point in the project are we risking the entire business. We're doing a very sort of risk-averse approach here. And the first pilot will again be up and running in the summer timeframe and we will then roll it out to all the other regions, from that point onwards over the next 12 months.
And then, just kind of one on the broader trend that you've seen, maybe in some of your softer markets. In the ones where you are seeing some challenge topline, have you seen any trade down to some of your lower price point products? I know you mentioned AUSP is up across the system, but are you seeing a bit of a trade down?
So, when we look at our mattress band analysis we talked in Q3 and well it's a similar pattern as it is now, which is, below a 1000 is mixed; as far as that goes are above 1500 continues to be strong. So what we're really seeing is the very low price points we're still doing okay in. Then you have that middle price point, which seems a little softer and then the higher price points are going well. And a lot of the analysis that we've done indicates that that ties back in some ways to consumer confidence, as well because that middle consumer is the one that is -- one that is not as confident at the moment.
And then just one last one from me on just how Endy is flowing through the results, is it fair to assume that you're allocating it across mattress and accessories depending on what Endy is selling. And second part is on Endy mattress that's sold by Endy itself versus through one of it's -- I guess, call it brick-and-mortar partners; on those sales, are you recording kind of a wholesale margin or is still Endy collecting the sale and they get some sort of royalty? Just want to understand the economic arrangement there?
So, all the sales for Endy currently go through their e-commerce platform, even the ones that are on display in a particular retailer. We don't really disclose the economic deal that they have in place. But fair to say all the revenue goes through there -- it's all counted as e-commerce revenue in our consolidated business and we do report as one consolidated numbers from a revenue perspective, so their mattress revenue will go into our mattress revenue and their accessory revenue will go into our accessory revenue.
Your next question comes from the line of Meaghen Annett from TD Securities.
Can you just talk to the performance of your legacy store base relative to the new stores, and if there are any major differences in the performance in the quarter and in 2018 overall?
No. Again, going back to what I commented on earlier, we do look at every store on an individual basis to assess why it's either performing very well or having some challenges, and this is not and there is nothing that we can see that's based upon particular age or stage of a store. It has much more to do with what part of the country that store is located
And just looking at the e-commerce contribution in the quarter, are you able to give us any color as to how that contributed to the same-store sales growth or any color at all that you can provide around the size of that business currently would be helpful.
Yes. So, our intention at this point is not to disclose e-commerce as a percentage of revenue. It's just, again, we are an omnichannel retailer and we count it as one revenue bucket.
And then just -- I just wanted to clarify also whether the e-commerce sales have historically been included in that same-store sales growth number or was there a change in your definition this quarter?
No. So, we treated e-commerce as a new store. So when we launched it in May of 2017, for the first 11 months that it was live, it was not part of same-store sales and the moment it started lapping on itself, then it became part of same-store sales and that's the same treatment we apply for all our new stores. So it was viewed initially as a new store and now it's part of our same-store sale base.
And just lastly, can you maybe discuss the performance of Endy during 2018 and whether their annual revenue met expectations for the year?
So their annual revenue exceeded expectations for 2018. We've disclosed in our financials their contribution so their 2018 is shown as a pro forma number for the entire 2018, which was $47.3 million in net revenue and in the stub period from the acquisition dates to the end of December 31, was revenue of approximately $3.5 million. And again, those were -- those revenue numbers exceeded our expectations.
Your next question comes from the line of Patricia Baker from Scotiabank.
I just want to come back to the softness and I want to -- that we thought you saw in Q4 and of course we saw softness in Q3. And as Dave noted, it was -- seems to be in the mid-tier. Given that the comps turned negative in Q4 and they were just barely positive in Q3, would it be fair to say that the situation that you're monitoring there that it seems to have worsened in Q4 with respect to the consumer confidence and just weaker markets and can you speak at all to what you've seen so far in 2019 in the markets where you're concerned about the economy. Has the consumer confidence there continue to wane or is it stable?
So, I think, Patricia on Q4 is that felt consumer confidence was not getting better. We would say it was getting worse. We also were up against a particularly strong Q4 of 2017 with 9.3% comp store growth. Again, as we've said, all indications are that we gained market share in the quarter and unfortunately, we don't comment on the current quarter that we're in.
Okay, fair enough. And then, I just wanted to go back to in -- I think it was September you launched -- you did the major pivot on your advertising and launched the All for Sleep campaign, and as you've noted several times on the call today it's a big and important investment. So, can you just walk through for me how you measure the success of that campaign? What are the key metrics that you're looking at there?
Hi, Patricia its Stewart, so the same metrics that we use in all our campaign gets carried on to this new campaign. Obviously the messaging always been is, "why buy a mattress anywhere else,” and as we evolve to "why buy any sleep essentials anywhere else,” we want everyone to be thinking about All for Sleep campaign. So mattresses are always going to be a core of our business and a key indicator, but obviously the growth in our accessory category, especially as we invest in advertising and introduce new products into the categories, those are key metrics in terms of measuring. And we're getting better and better on that. Digital has definitely been a fabulous tool for us to be able to drive back our return on ad spend to see exactly what our ROI is.
So Patricia, one of the -- one of the KPIs that we recently sort of introduced as we've gotten better with our data is, we look at the amount of customers that come in and buy that there's a mattress on the order; and then those customers that only come in and there's no mattress on the order and we've seen an accelerated growth in orders without a mattress which shows that our accessory strategy is working and gaining strength.
And a big part of our accessory strategy has always been, right from the very beginning, to expose consumers to the Sleep Country brand, when -- in the past, when we only sold mattresses, you were visiting us very infrequently every 8 to 10 years. We've seen even in the fourth quarter, even though the same-store sales were down and even though there was a deferred purchase, again not lost, deferred purchase on mattresses, consumers were visiting us more than ever before for purchasing of Christmas gifts and Black Friday and accelerating that accessory category, which obviously we're excited about because those folks are now exposed to the brand. And when it is time to make the change in their mattress, hopefully that overall consumer experience was a good one and they'll come back for that.
Okay, that's very helpful Stewart, Just want to talk about Q4 conversions because you said they were up and I'm just curious whether or not you saw a differential in conversions in your mall-based stores versus the other legacy stores?
Well, we measure our mall-based stores in a separate category, because they obviously get more traffic that is just browsing traffic than our other stores do, and so -- but we've been measuring them since we opened them and we saw --we continue to see improvements and enhancements in those stores as well.
And then I'm just going to come back to the softness again and just ask a historical question perhaps this time. When you had weakness in Alberta in the 2008-2009 period, did you see whether competition or whether even yourselves, was there -- is there any point in lowering prices to try and drive demand?
No. So, again, as we've talked about the past, we made some changes in the recession of 2009, '10 '11 by dropping our advertising spend and we're not quick to do that this time. That's why we're measuring things even more carefully because that is what is continuing to help us gain share. There are some retailers out there that the first thing they do when times get tough is to drop their price. And we, as a company, have never believed to do things across the board. We talk about good value and then when the customer comes into our store, our sales associates take their great training and find the right product for them. And so, therefore, we really continue to focus on the individual consumer rather than just across the board dropping prices.
And Patricia, the other thing -- I mean we did launch the additional Bloom SKUs in June of last year. So we launched a 395, 595 and 795 SKU and we've been promoting those products over the year and so we've always had a wide selection of lower price points in our mattress selection and we've just reemphasized it with the bloom SKU. So in areas of the country where people perhaps a little tighter on money, they now see and recognize that we have a wide selection of mattresses for sale. So we don't -- we don't think that lowering prices is the right thing to do on a mattress by mattress basis, but we've just always maintained a wide selection of products.
Your next question comes from the line of Stephen MacLeod from BMO Capital Markets.
Lot of my questions have already been answered, so I just wanted to ask a couple of clarifying questions. The first one being, obviously you have elevated CapEx spend expected for 2019 around improving the e-commerce cloud functionality and ERP conversion, can you just talk a little bit about why that's a priority now? Is there anything that's changed in the business or is it just a function of supporting the future growth?
Well, to give you bit of a history lesson on that, we have the same system today that we started the business with, so we've gotten full usage out of it and obviously some parts of our business have felt that this has been slightly behind the times system for the last several years, but we never actually found it to be something that could be affecting our future growth. And now, as becoming more and more omnichannel every day we are -- we feel more -- no, actually we know that we need to move to this new system to continue our growth. And so that, it is really all about getting -- continue to prepare for the future. The nice thing about it is the system we currently have is a very stable system which is allowing us to do this in a staged fashion so that we can be very risk averse. We can get the benefits of the e-commerce cloud sooner and rollout to store later in whatever timeframe is required to make it smooth.
And then just -- just wanted to clarify on the G&A comments for 2019, I mean obviously my understanding, based on the commentary was that you've invested around infomercials in 2018. So did I understand correctly that you don't -- you'll maintain that level on investment, but you don't need to add incremental G&A spend on top of that? Is that the way to think about it for 2019?
So Stephen, just to go back in time, again just to make sure we're clear. Halfway through 2017 through halfway of 2018 we saw an increase in our marketing spend due to now being an e-commerce player. In 2018, we also saw an increase with our new All for Sleep branding as well as our investments in our infomercials. So, yes, to answer your question, I just wanted to give that as a background. But to answer your question fully, through 2019 we don't see that there is any new investments that you have to make like we've made over the last couple of years that have benefited us greatly and so yes, our expectation is that we don't have those investments, we're continuing now on a steady state.
And then finally, you gave some color around the Endy contribution in the quarter and for the full year. And I assume, consistent with what you did with e-commerce that will remain outside of same-store sales growth till you lap it, and I assume that's the case. And then secondly, do you expect to report -- will you report Endy revenues until it becomes part of same-store sales just so we can track how it's performing relative to our own expectations?
No. From an accounting perspective, it's one reportable segment and so while Endy will not be part of same-store sales until essentially January of 2020, it will show up as a difference between total sales growth and same-store sales growth.
Your next question comes from the line of Elizabeth Johnston from Laurentian Bank Securities.
So just maybe keeping on Endy just for a minute here; in terms of this business, can you give us a sense of whether there is a similar seasonality to Endy's sales compared to the Legacy Sleep Country, now that it's typically same?
Yeah, I mean, again they -- at the end of the day, we both sell mattresses and the consumers buy mattresses at similar timeframes no matter how they buy them whether it'd be online or in-store. So seasonality is very similar. We see peaks during Black Friday; they see peaks during Black Friday, during Boxing Week, the summer; so yeah, very similar seasonality.
I will add one thing that that in the midst of a few snowstorms, shopping online is a lot easier than driving to the stores. So we've seen from them spikes on bad days. Hopefully, we'll see that in Toronto today.
By the way, we see that in our business as well, on our online.
Correct, on our online, exactly.
Okay, understood. And I just wanted to also go back to the discussion on the IT focused CapEx that you already went through a little bit. In terms of the previous question about why now, like what was it about this year that you see this as being necessary. Maybe you can help us understand if you're able to quantify the benefits, so I understand it's investing to help support growth. So therefore, should we think about it as a topline driver or should we also expect gross margin improvement or other types of cost savings as well. Any additional color you could provide would be helpful?
So, I would say the primary reason why we're doing this is to continue to drive our revenue, right. We wouldn't do this solely just to cut costs, because it is a transformative project. So when it comes to becoming an omnichannel retailer buy online, pickup in store or ship from store or drop-ship opportunities or endless aisle opportunities, all of those represent future growth opportunities for us from a revenue perspective. So that really is the primary focus. You know I would say that in later years like 2020 onwards, we will start to see some benefits on a G&A perspective and possibly some improvements from a cost of sales perspective as we get better using this new system from a supply chain planning perspective, in particular, will positively impact on the cost of sales side.
And will this also include rolling out through Endy or should we really think about this as really an investment in the legacy Sleep Country Dormez-vous?
No. At this point, this discussion on ERP is not -- does not include Endy. Really there are -- they operate very well on the systems that they operate and in 2 years' time there is always the possibility that they might look at it. But at this point, that's not part of the conversation.
And in terms of gross margin, you called out in the MD&A on gross profit benefits from the increase in volume rebate income, just wondering if you can comment on why you saw that increase in this quarter, and if we should expect similar positive contribution going forward?
So, we look at our cost of sales in a number of different ways and we get benefits in a number of different ways. So we either negotiate better pricing from our suppliers for particular event which would then just hit straight to the raw cost of sales. Other cases, we negotiate tiered volume rebates that we get based on our annual purchases. And in the Q4, we did hit some of those tiers, which were a benefit to us. And in other cases, our vendors contribute towards our advertising and that mix changes in a very fluid manner. In Q4, in particular, we just had some better benefits on the volume rebate side.
Okay. I think in the past, you discussed how -- given the change in competitive environment within mattresses, there might have been an opportunity to capture more obviously, market share overall, but maybe as a result, more volume rebates. I don't know if you can comment on whether this is part of it or really it's not coming from that.
No, I think if you, if you take Rob's comments were about there has been a lot of different ways the vendors can work with us to help us grow our business. It's not just in a volume rebate way, it's in several ways and what we can tell you is that all of our vendors are more interested in having those relationships with us than they've done in the past. So we are getting the benefit of being the largest player in the market and the fastest growing and so on. So yes, we're getting those benefits, but it's not just a volume rebate conversation.
And your next question comes from the line of [ Edward Friedman ] from [indiscernible].
Hi, my question is around the same-store sales again. I just wanted to understand how the same-store sales dropped 2.7% yet all the other metrics that you discussed either increased or declined slightly. Wondering if you can just explain how this works?
So I think the one thing is our average unit selling price in mattresses was up, our average unit selling price in accessories was up, but we also saw a shift to accessory purchases. So what ends up happening is, our overall more -- a higher percentage of our orders came in were accessory orders, which meant that our overall basket size decreased. But that's not a negative because that's just showing that our mattresses grew but our accessory just grew faster due to the fact of our new infomercials, due to the fact that we're just growing faster in the accessory business and so that is a factor as well.
And just to repeat, so Dave's comments about traffic was all stores in other words, even the new stores that our same-store sale traffic was negative. So you know, conversion was up, but overall the result was a negative same-store sales.
But why was traffic down if -- from what I recall, the economy was not that bad and -- so if you can explain why was that down.
So as we said earlier on, the economy is very different across the whole country. We do the same marketing, the same products, the same training across the whole country and yet we're seeing different results based upon an economy. I think that it would be difficult to say that the Alberta economy was not challenged in 2018 and particularly in Q4. On the converse side of that, the Quebec market is not in a negative fashion. It is stronger and our business is quite strong there. So we are seeing the actual correlation across the country very, very perfect there. So I do believe that there are certain parts of this country that are at quite a challenged time at the moment.
And your next question comes from the line of Vishal Shreedhar from National Bank Financial.
This is actually a Ryan Lee for Vishal. Just -- it's tough to come up with some questions coming to -- a lot of them have been asked already, but I just have a few. In terms of new store openings, do you see any store cannibalization? Has that increased over the last couple of quarters and how do you guys measure that?
Well, again, just want to go back to talk about how we look at everything on every store basis. So this is, we don't look at it by region, we look at it on a store-by-store basis and we measure our new stores against any possible temporary dampening of sales in the area and we aren't seeing across the board a challenge in that at all. Our new stores are opening very strong and we are opening in -- and we're very pleased with the way they're working together with our other stores. Stewart, do you want to add to that?
Sure. That being said, we do budget, Ryan, for the possible cannibalization that is caused by any of our new store openings and we'll look at the radius and usually it will range between a 5 kilometers to 10 kilometer radius of stores that it may impact and our overall measure is the total gross sales minus the additional expenses to open those stores to make sure that it's still a positive in terms of the overall expansion on the real estate, including the investment on the CapEx and every one of those metrics are performing off the charts.
Okay, that's good to know. You guys reiterated that you're kind of using the same strategy across different regions and now that we're seeing like continued bifurcation in performance across different regions, is there any opportunity to kind of change a strategy, say for example, in Alberta in terms of marketing spend there?
Well, we always look at ways that we can tweak to address any market -- I'm sorry, I'm just getting some feedback from the telephone. We are always look at ways to tweak our market, but I want to reiterate again what we said earlier, which is Alberta may be temporarily challenge due to the economy, but it is still one of our strongest sales per store regions. And it is a -- it is a nice part of our business and we want to continue to focus there. And we talked about taking market share. Our indication is that our market share has been growing there for the last several years very nicely.
And in past history, whenever we've seen a little bit of a slowdown, economically, in any particular region, those have usually been very good opportunities, to Dave's point, to grow that market share. So backing off on advertising, as Rob said earlier, it's definitely one of the big levers that we have to take market share. The flip side of that is on certain markets that are performing really well and are not necessarily economically challenged as the same as others, we may slightly increase that spend to, again, take even more market share in those markets. But that's been pretty much the same practice that we've done for the last 25 years.
Okay. So, you do have some flexibility in terms of tweaking it for each individual region?
Oh, we sure do. And again, I just want to reiterate one thing, we didn't say on this call, we said in the past. Our market research indicates that if anybody buys something from us, they're 75% -- more than 75% more likely to buy from us again in the future because once they get into our system and once they see the service and the products, they become a customer of ours. And so getting market share today doesn't just pay today, it pays in the future, which is another one of the reasons we're so excited about our enclosed mall stores, because they are selling a higher percentage of accessories than other stores. So what's happening is we're being exposed to more and more people with those stores.
And then, just one last question in terms of the ERP and the e-commerce cloud rollout, should we be expecting any temporary inefficiencies as you ramp up across different regions? Will there be duplicate systems in place, that's going to cause any increased SG&A there?
No, not anything material, I mean we do operate each of our distribution centers, fairly separately from -- in terms of the product flow. So as we switch to one region, although that we'll be using 2 systems for a while, it won't cause a duplication of effort.
And your next question comes from the line of Patricia Baker with Scotiabank.
Dave I want to follow up on a comment you made a few minutes ago where you noted that the ramp up in accessory sales is having an impact, obviously on same-store sales because the AUSP on accessories is much lower than the AUSP on mattresses. I know you're not going to give us the AUSP for each of those, but can you provide an order of magnitude so that people can think about the real impact that that's having on same-store sales?
So, Patricia, I want to make sure that we always look at this as additive, because I believe that we are going to sell as many mattresses in Q4 as we can possibly sell and we're adding accessories on to that. It's not like customers are making the decision. Well I'm neither going to go there to buy a mattress, I'm going to go there to buy an accessory. So this to me is something that is adding to the entire pool, it's not a replacement of an accessory for a mattress. I will tell you that when you look at our, if you just look at what our average basket is, it's growing because the fact is our mattress AUSP is going -- average unit selling price is going up and our accessory AUSP is going up. But the nice thing is, we're attracting more customers to our store that will buy accessories that wouldn't have come here a year ago. So it's an additive effect; it's not a detraction.
But as a percentage, Patricia -- just to add to Dave. We don't talk about exactly what our AUSP is. You should probably consider that an accessory purchase on its own is approximately 10% of the dollar value of what it would have been for the average AUSP for our mattresses.
That's exactly what I was thinking. And Dave, yes, I do understand that it's -- what you're doing now is building up and getting to be known as an accessory store which you know your history, you were not an accessory stores. So I certainly understand that. But I think in terms of really understanding all the dynamics behind same-store sales. Stewart's [ ten to one ] point there I think is quite helpful.
Your next question comes from the line of Meaghen Annett from TD Securities.
You might have just answered my question a little bit there, but just wanted to be crystal clear on the drivers of the same-store sales growth in the quarter. So traffic was negative with lower traffic in stores, offset by higher online traffic, conversions did increase but the basket size decreased due to that shift that you just discussed with respect to the mattresses relative to accessories, is that correct?
It is an -- actually it is a correct statement, but I want to just clarify it, because if you look at what our average -- like if you take the average basket size, it includes a mattress, they went up. Because the fact is our average unit selling price for mattresses increased and our average unit selling price for accessories increased. So when you do the averages, it went up. But we are attracting more customers to our stores today than ever before looking for accessories. So when you look at the -- when you combine all that together, it does lower the basket size, but the problem is when someone says decrease, some people take it as a negative and it is absolutely not a negative. Having more customers come into our stores than in the past to buy accessory is only a positive. So, I just want to make sure I clarify that again.
Understood.
Again, I'm just going to -- and I said it to Patricia I know she understood, I'll say it one more time. There is no reason for anybody to believe that by us selling more accessories, we're selling less mattresses. We are still capitalizing 100% on the mattress market as much as possible in this current environment. We're just growing our accessory business even faster.
[Operator Instruction] Your next question comes from the line of Matt Bank from CIBC.
Hey, sorry guys, I wanted to jump in on the same-store sales with just one more clarification. So you talked a lot about Alberta but you also alluded to regions that was related to a weaker real estate market, you've talked about Toronto and Vancouver in the past. Just wondering if you could address those directly, and also if there are any other regions that we need to understand?
So, yeah, obviously Alberta would be a market that is the most pointing in that area. When you look at the Ontario market, for instance, if you -- you kind of break it into a couple of different areas, the Downtown core of Toronto is quite vibrant and we're feeling very good about that. When you get further away from there, particularly say Southwest Ontario we're feeling a little bit more weakness. But yes -- and when you look at the Lower Mainland of Vancouver, it is also not as buoyant as other areas, but it's still, again, a very solid market.And again, as I've said in the past as we've -- I'm sorry, as we've all said in the past real estate is a big trigger from what causes people to buy a bed and it's also a trigger for what makes people have confidence in their own ability to make bigger ticket purchases and that is the factor.
And the wealth of that is definitely a contributor to deferring purchase to a later date.
And your next question comes from the line of the [ Agam Sharma ] from -- who is an individual investor.
Could you briefly lay out your plan to tap into the digital mattress market and how do you plan to establish a brand using Endy.
I'm sorry that I didn't -- we couldn't really hear that question. Can you get closer to the phone?
Sure. So, can you hear me there?
A little better, yes.
Okay. So could you briefly layout your plan to tap into the digital mattress market and how do you plan to establish a brand using Endy?
Well, I mean, Endy is already an established brands and is the leading mattress-in-a-box retailer in Canada and is profitable. Most of the other mattress-in-a-box players both in the U.S. as well as in Europe and the U.K. are all losing money and Endy is profitable and has one of the highest reviews online for mattresses in Canada. And so we think, it's a brand that is strong and resonates with consumers and is well on its way as a company.
Okay. And would you give -- would you be able to give some color on the competitive environment of digital mattress brands and where do you see your digital business within the next 5 years.
So, our key focus is to be an omnichannel retailer. We've made investments online with our own Bloom brand. We also sell accessories online. We're investing in new e-commerce platform and we acquired Endy. So that demonstrates our strategy of growing online, but at the same time, we recognize that the vast majority of consumers still want to try out a mattress in a store. Our in-store experience is the best in the industry and so we think omnichannel is ultimately the winning recipe to survive and thrive long-term and that's why we've made these initiatives. That's why we're investing in our new ERP platform and e-commerce and that really is going to drive us for the next 5 to 10 years.
And your next question comes from the line of Elizabeth Johnston from Laurentian Bank Securities.
Just a quick follow-up here on the CapEx for 2019, can you give us any sense of when that will flow through on a quarterly basis and given your comments about it being rolled over 18 to 24 months, do you expect some of this spending to probably come in 2020?
Yes, so Elizabeth, when you look at our CapEx spend for 2018, that is mostly driven by the new stores and the renovations and so based on the level of activity of that, it'll drive similar spending in 2019 with respect to stores. From an e-commerce and ERP perspective, it is driving additional spend in 2019 of approximately $8 million to $12 million and there will be some spillover into 2020 as well. We are not really disclosing what the 2020 is numbers yet because it's still going through a lot of scoping exercises. But for now, the $8 million to $12 million, it will have impact 2019.
And it will be evenly spread out throughout the quarters from a cash flow perspective.
Okay. And just to be clear, when you say a spillover, of the $8 million to $12 million that's currently foreseen, some of that could be spent in 2020 potentially or will the 2020s spillover include additional spending? Just to clarify.
It will be some additional spend in addition to the $8 million to $12 million but...
And there are no further questions in queue at this time. I turn the call back over to our presenters.
Well, thank you very much. We appreciate the time to share our results and we look forward to doing it again in the next quarter. Have a good day everyone.
This concludes today's conference call. You may now disconnect.