Sleep Country Canada Holdings Inc
TSX:ZZZ
Sleep Country Canada Holdings Inc
TSX:ZZZ
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Good morning, and welcome to Sleep Country Canada's financial results conference call for the first quarter ended March 31, 2019. We will begin today's call with management's discussion, followed by a question-and-answer session open to investors and financial analysts. For your convenience, the first quarter 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're also available on SEDAR. The results were released yesterday after market close.Please note that the remarks on this conference call may contain forward-looking statements about Sleep Country Canada's current and future plans, expectations, intentions, results, level 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 the investments and assumptions based on factors that management believes are appropriate and reasonable in the circumstances.However, there can be no assurances that such estimates and assumptions will prove to be correct. Many factors could cause actual results, level 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 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 the forward-looking information contained in the company's MD&A dated May 6, 2019, available on sedar.com.I would now like to turn the conference over to Mr. David Friesema. Please go ahead.
Thank you, operator. Good morning, everyone, and thank you very much for joining us on our first quarter 2019 conference call. Joining me today is Stewart Schaefer, Chief Business Development Officer and President of Dormez-vous?; and Rob Masson, our CFO.I'm very excited about the significant investments we continue to make to increase our growth in multiple channels and grow our customer base. Ultimately, these investments strengthen our position as Canada's premier omnichannel sleep retailer, support our long-term profitable growth strategy, and enable us to grow our market share. We are proud of our record of success on this front.Over the previous several quarters, we made the following investments -- successfully acquired and celebrated our first full quarter with Endy, Canada's leading online mattress brand; partnered with Walmart, the world's largest retailer, to sell our popular Bloom mattress-in-a-box collection on walmart.ca and expose our brand to a new segment of customers; brought Europe's favorite mattress-in-a-box, the Simba Hybrid mattress, to Sleep Country customers online and in stores; continued to diversify our assortment of sleep accessories as part of our All for Sleep commitment; expanded and improved our e-commerce capabilities, including a forthcoming cloud-based e-commerce platform with Oracle, as well as a refreshed ERP system, also with Oracle; opened new stores and renovated existing locations to our enhanced store design; and invested in our brand by refreshing our creative and advertising.These investments are part of the aggressive and diverse strategy we've employed since our IPO and are a natural complement to the growth-focused plan that we've followed since day 1 25 years ago. The consumer is changing in what they buy, how they buy, and from whom they buy. We are confident that our investments are solidifying our position as the omnichannel destination for consumers looking for their best night's sleep.In Q1, we achieved 10.4% revenue growth, delivering CAD149.3 million from CAD135.3 million. I'm pleased that each of our 3 banners contributed to this growth. The gains were driven by a 9.6% increase in mattress sales and a 13.6% increase in accessory sales. In fact, Q1 2019 posted the strongest opening quarter for bedding accessories in Sleep Country history.The severe weather across the country in January and February, combined with soft consumer confidence, did not help us. While same-store sales were softer than expected in January and February, which resulted in our same-store sales declining 3.4% for the quarter, they improved in March.Our improved conversion rate and average unit selling price continue to highlight strong in-store service, and our overall growth of 10.4% reflects our strengthening market share position in both the mattress and accessory categories and the strength of our omnichannel platform.Looking at profit, it is important to note that we adopted IFRS 16 accounting standards as of January 1, 2019, which means that our first quarter results aren't directly comparable to 2018. On a pro forma basis, EBITDA increased 3.1% year-over-year, and adjusted earnings per share fell 16.7% to CAD0.23 per share. Rob will explain these results in a moment.I'll now turn my attention to our omnichannel strategy, a growth pillar that I'm very excited about. During the quarter, we expanded our store footprint, opening 1 new store in Ontario, bringing our total to 265 stores across Canada. We also upgraded 13 locations to our enhanced store design, bringing the total number of renovated stores to 64%.The performance of our new and renovated stores continues to exceed our expectations, demonstrating that our real estate strategy is effective at driving results. As such, we're maintaining our goal of opening 8 to 12 new stores in this year while renovating 25 to 30 locations.Our e-commerce business constitutes an increasingly significant portion of our overall revenue, driven by tremendous online growth in Q1. This online expansion is fueled by our Bloom collection, Simba Hybrid mattresses, an enhanced accessory assortment online, as well as immense growth from Endy.This quarter, we've also expanded our online footprint through our partnership with Walmart, which sees our Bloom collection available at walmart.ca and exposes our brand to 23 million new customers per month. Most of our Bloom collection was sold through our stores, which validates the omnichannel approach that we continue to execute with confidence.We are in an enviable position that many online and traditional brick-and-mortar retailers would love to be in. With 265 strategically-located stores, 16 distribution centers, established white-glove delivery service, and a rapidly-growing online presence, we are best-in-class to acquire, retain and service the omnichannel customer.I will now turn the call over to Rob, who will discuss our financial results in detail and explain the impact from the changes from our accounting standards.
Thanks, Dave, and good morning, everyone. I would like to start off by stating that this quarter's numbers aren't directly comparable to Q1 of 2018, mainly because of 2 reasons -- 1, the inclusion of Endy in our Q1 2019 results; and 2, our adoption of IFR 16 (sic) [ IFRS 16 ] accounting standard on leases, which came into effect on January 1 of this year. I will also note that, as standard in the industry, we will not be breaking out Endy's performance in our financial results at this time.I will be referring to IFR 16 many times as we discuss the Q1 2019 results. As a result, I would like to start off by briefing explaining the standard. IFR 16 is a new accounting standard on how to report, measure and present leases in the financial statements. This new standard became effective January 1, 2019, and requires companies to report operating leases on their balance sheet as a right-of-use asset.Sleep Country's operating leases, many comprise of store locations and distribution center leases. The corresponding lease liabilities, valued at the present value of future rent payments, is recorded as a liability. The right-of-use assets will be depreciated over the lease term on a straight-line basis, and interest expense, which is higher towards the start of the lease life cycle, will accrue on the lease liability.Rental expense, which was previously recorded in cost of sales for the store leases and in G&A for the warehouse leases, is no longer expensed in the P&L and is replaced by depreciation on right-of-use assets and interest expense on lease liability. This has an impact on our gross profits, gross profit margin, EBITDA, operating EBITDA, operating EBITDA margin, net income, adjusted net income, and earnings per share. There is no impact on the underlying business economics and how Sleep Country operates as a business, as well as its cash flow.IFR 16 impacts our Q1 2019 results. However, in the financial statements, 2018 comparative figures were not adjusted based on the adoption choices we made. In order to improve the comparability between the 2 quarters, we have included pro forma numbers for last year where possible. The pro forma numbers are compiled for Q1 2018 by adjusting the reported Q1 2018 results for the estimated impact of IFR 16 and are disclosed in the Q1 MD&A to provide the financial statement uses with more meaningful comparative figures.Upon adoption, an adjustment was made to the balance sheet as of January 1, 2019, as follows -- right-of-use assets of CAD253 million were recognized; lease liabilities of CAD289 million were recognized; deferred tax liability was reduced by CAD6.2 million to recognize the impact of timing differences; other liabilities were reduced by CAD13 million to reverse the balance sheet-related straight-line rents; and retained earnings were debited by CAD16.9 million.I would now also like to specifically disclose the impact on Q1 2019. In the cost of sales section, depreciation was increased by CAD7.6 million. Straight-line rent, which was previously recorded in this section, was reduced by CAD9.2 million. In the G&A section, depreciation was increased by CAD900,000 and straight-line rent was removed by CAD1.2 million with the warehouse leases. On the interest expense line, interest went up by CAD2.8 million, and so the bottom-line impact of net income after tax was an increase of CAD500,000, resulting in a CAD0.01 per share impact.In Q1 2018, the impact was as follows -- cost of sales section, the depreciation was increased by CAD6.7 million; straight-line rent was reduced by CAD8.2 million; in the G&A section, straight-line rent was reduced by CAD1.1 million; and depreciation increased by CAD800,000. In the interest expense section, interest was increased by CAD2.6 million, and so the bottom-line impact on net income after tax was an increase of CAD700,000, which rounded up to CAD0.02 per share.I'll now move on to talk about this quarter's highlights. Let's begin with revenue. In our first quarter, revenue increased by CAD0.104 per share to CAD149.3 million. This increase was aided mainly by the acquisition of Endy and the addition of 15 new stores since March 31, 2018.As Dave mentioned, same-store sales declined by CAD0.034 per share. Mattress revenue increased by CAD0.096 per share to CAD118.7 million compared to this time last year, and our accessories business continued to grow substantially, rising 13.6% to CAD30.7 million over the same period. These increases were driven by the combined impact of the addition of Endy, a more diverse total sleep solutions-focused product offering, increased customer awareness due to advertising campaigns, e-commerce growth, our enhanced store design, and new store openings.Gross profit for the quarter is not directly comparable to a year ago due to the adoption of IFR 16 on January 1, 2019. On a pro forma basis, gross profit increased 19.6%, from CAD35.4 million to CAD42.4 million. Again quoting pro forma, our gross margin expanded to 28.4% of revenue, from 26.2% last year.This improvement was primarily influenced by 3 factors. Firstly, our inventory and other directly-related expenses, net of volume rebates and expressed as a percentage of revenue, decreased by 40 basis points. Secondly, sales and distribution compensation expenses decreased by 140 basis points, largely due to a favorable impact of not incurring sales and distribution compensation expense for revenue generated through Endy's online platform. And third, the combined effect of store occupancy costs and depreciation as a percentage of revenue resulted in a decrease of 120 basis points due to the adoption of IFR 16.On a pro forma basis, store occupancy costs and depreciation expense on a combined basis resulted in a decrease of 20 basis points as a percentage of revenue in Q1 2019 compared to Q1 2018.G&A expenses for this quarter increased by 39.7%, or CAD7.5 million, to CAD26.4 million. As a percentage of revenue, this expense represents 17.7%. Again, this increase in expense is largely due to the inclusion of Endy in our results, along with changes to the way we account for rent expense under IFR 16. On a pro forma basis, G&A expenses for the quarter increased by CAD7.7 million to CAD26.4 million for this quarter, from CAD18.7 million in Q1 2018.A large portion of the increase in the G&A expense came from medium advertising expenditures, which rose by CAD4.9 million. The rising cost during the quarter was largely because of the inclusion of Endy, but also because of an ongoing greater spend in our support of our All for Sleep campaign, which was launched in September of last year, and for promoting the targeted brands and product offerings through traditional and digital mediums aimed at aggressively capturing more market share.Salaries, wages and benefit G&A expenses increased by CAD1.3 million. This is largely attributable to the inclusion of Endy and additional compensation due to merit increases and additional hires to support our growing business.The adoption of IFR 16 also had an impact on our G&A expenses, specifically around our G&A depreciation expense, which more than doubled to CAD3 million from CAD1.3 million because of depreciation on right-of-use assets, offset by a decrease in G&A occupancy charges, which fell by CAD1 million from a year ago, as distribution center rent is no longer expensed.Moving on from G&A, our operating EBITDA for the quarter was CAD29.4 million. On a pro forma basis, that was an increase of 3.1% after accounting for the adoption of IFR 16. Operating EBITDA margins decreased by 140 basis points from Q1 2018 to 19.7% as a percentage of revenue on a pro forma basis, primarily impacted by the inclusion of Endy.Finance-related expenses increased by CAD4.1 million compared to the first quarter of 2018, CAD5.2 million. This is largely due to additional interest expense incurred in Q1 2019 on lease liabilities upon adoption of IFR 16; increased interest expense on our senior secured credit facility related to the acquisition of Endy; and accretion on Endy's contingent consideration. On a pro forma basis, finance-related expenses increased by CAD1.5 million, or 41.9%, in Q1 2019 compared to Q1 2018.Our adjusted net income for the quarter decreased by 21.7% to CAD8.6 million, or CAD0.23 per share, compared to CAD11 million, or CAD0.30 per share, at this time last year. Again, this was largely due to the impact of Endy's numbers and the transition to IFR 16.Net cash flows generated by operating activities as of March 31, 2019, were CAD3.9 million, compared to net cash flows used in operating activities of CAD3 million as of Q1 2018. Net cash flows generated by operating activities in Q1 2019 comprised of the positive impact of cash generated from operating activities of CAD26.7 million, offset by CAD22.9 million of cash used as a result of an increase in non-cash items relating to operating activities.The increase in Q1 2019 was primarily driven by higher inventories, higher prepaid expenses and deposits, lower trade and other payables, and lower cash from deposits, partially offset by lower trade and other receivables.As of March 31, 2019, our cash position stood at CAD13.6 million, compared to CAD11.8 million as of March 31, 2018. As we've stated in previous quarters, our priorities when it comes to excess capital are 3-fold -- first, look for ways to invest in and grow our business, maintain some dry powder for future opportunities; secondly, pay down our debts; and thirdly, be a company that continually raises our dividends and, finally, uses any remaining cash to buy back shares under our NCIB program. These will continue to be our chief priorities for the foreseeable future.As of quarter's end, the balance on our rolling credit facility was CAD175.6 million, compared to CAD168.6 million as of December 31, 2018.Our board of directors declared a dividend of CAD0.195 per share, payable on May 31, 2019, to shareholders of record as of the close of business on May 21, 2019. This increase, the fourth since our IPO, is attributable to solid operational performance.Lastly, I'll provide an update on our NCIB program. In the first quarter of 2019, we received approval from the Toronto Stock Exchange to buy back approximately 4% of our outstanding shares on the open market beginning on February 28 of this year. Since the commencement of the NCIB, we have not currently repurchased any shares for cancellation, but are exploring the possibility of doing so in the future.With that, I conclude my remarks. I'll now turn the call back to Dave.
Thanks very much, Rob. As you've heard today, the past several quarters have been marked by strategic investment here at Sleep Country -- the acquisition of Endy; new partnerships with Walmart and Simba; reiterating our All for Sleep brand platform; an updated ERP system; our expansion in a more diversified product line; aggressive investment in e-commerce, including a new cloud-based platform; and an ongoing commitment to expanding and refreshing our bricks-in-mortar presence.These partnerships and investments are paying off, as evidenced by our 10.4% growth, and set us up for long-term profitable growth and success in the future.As I mentioned earlier, we're making great progress on the rollout of our upgraded ERP system, which we've undertaken in partnership with Oracle and Deloitte. This is a key enabler to our aggressive growth strategy and will support operational agility, analytics-based decision-making, and a best-in-class omnichannel customer journey.Finally, and on behalf of my whole team, I'd like to thank our Co-Founder and Co-Chair Steve Gunn for all his contributions to the success and growth of Sleep Country. While this decision was nearly a year in the making, it's always bittersweet to bid farewell to those who contribute as much to do with our business as Steve did.As we've previously disclosed, Steve will be retiring after our ADM. Steve co-founded the company with Christine Magee back in 1994, and together they built a legacy business on one of the most recognized and trusted brands in Canada. As we celebrate Sleep Country's 25th anniversary, I'd like to recognize the foundation of excellence that Steve and Christine have built, and I look forward to the next chapter in our continuing growth and exciting course we're charting with our investments in the future.This concludes our remarks. We now open the call for questions.
[Operator Instructions] Your first question comes from the line of Kenric Tyghe of Raymond James.
Dave, just a quick question on Endy. I appreciate why you're not breaking out the performance. Could you at least give us some context relative to expectations and how that performance perhaps impacts your thinking on 2019 and the spend required to drive that growth at Endy?
So when we look at the performance of Endy in Q1 of 2019, they did exceed our expectations in terms of top-line revenue. However, when you look at the bottom-line impact for the quarter, we did -- because of the purchase price accounting, we did need to recognize some amortization expense on their trademark of about CAD300,000, and there was additional interest on the accretion because of our earnouts of approximately CAD600,000.They did have an impact on the advertising spend for the quarter because, as with many online players, they do invest heavily in that area, but it did drive their revenue for the quarter, and we are very happy with the results. And so I just think -- Kenric, I'll just add that I think -- so outside of the accounting practice that you have to do, we were not only happy with their top line. We were also happy with their profitability.
So it really just reaffirms -- if I'm reading it correctly or characterizing it correctly, is it reaffirms your conviction not only around the opportunity, but sort of just more broadly around the space. Is that a fair characterization?
That's a very good characterization, yes.
And then if I could just switch gears quickly and then back in the queue here, a 3.4% decrease in same-store sales in the quarter. Could you add some indication of how that was trending through the end of February, given that you highlighted sort of a big step up in March? I mean, how bad was the market through February, I guess is the simply way I'd ask the question?
Yes, January and February were very difficult, and our understanding, from talking to the market, is it was across the board. There were some areas, for instance, that had worse consumer confidence in that period of time, so that may have affected it a bit, but we were much more pleased -- I'm sorry, let me back up. We were much happier with our performance in March, and so we're very pleased with that.
And our next question comes from the line of Matt Bank of CIBC.
Just to follow up on that last question, is there anything you can share in terms of the macro environment you're seeing? Was March positive, and is there anything you could say about April?
So on the macroeconomic environment, it really is a similar story to what we had talked about last quarter. There are certain areas where consumer confidence is lower, and those areas are not performing as well as other areas. On the other side of that spectrum, you have areas where consumer confidence continues to be strong, just using Quebec as an example, and our business is very strong there.To answer your question specifically about March, March exceeded our expectations. March actually exceeded our expectations that we had prior to going into the year, so we were very -- we felt that that was a nice improvement over what we had been seeing and also increased our feeling of the future after winter started to fade away.
And then last quarter, you touched on the KPIs underlying same-store sales, and you said they were all positive except for same-store volume in mattresses. Is that the same story as well?
Well, when you look at our overall business, our mattress business grew by 9.6% in the quarter, and our accessories grew by 13.6%, and so we obviously had same-store sales that were down in mattresses, but the nice thing about it was the work we've been doing with our new infomercials on our accessories, that really helped us continue to have stronger revenue, particularly in areas that may have been more affected by consumer confidence. So by diversifying our product mix, it's helping us stay stronger in both possibly a slightly down market in certain areas, but also in an up market.
And then I guess I want to just ask 1 sort of longer-term question. So I was wondering if you could update us on your view on long-term store counts. So you said over 300 om the past, and obviously you're investing not only in Endy but in 3 online brands now, and I'm just wondering what you see as sort of the longer-term right size for the physical store network.
So our bullish-ness on stores is still there, because they're a big component in the omnichannel world moving forward. We continually -- we still feel that we have a long runway to opening stores, and we test every store either actually before we open it as well as after we open it, and we're continuing to see strong results, especially in markets where consumer confidence is not playing a factor.So we're still very, very supportive of our store growth. We will continue to test it to make sure we have the right amount going forward, especially considering when you mentioned the 3 other brands. With Bloom and Simba, those are both in store and online. Those aren't just online brands. So we feel that that is a big component.
Matt, I just want to also add, and Dave said it in his comments, our 17 stores that we opened in 2018 far exceeded our expectations in terms of overall top-line revenue and profitability. And just as a further comment, we are very excited to see that that pendulum is swinging back with the dot-com players, who at one point very clearly pointed out that the online was the way to go, and now they view that their path to profitability is to build out brick-and-mortar, which we are way ahead of the game.So not only have our stores been achieving great growth of all the new markets that we go into and existing in-line stores, but clearly even our own experience with our online presence as we grow out that part of our digital exposure, we're driving customers every day online and into our stores. So we are way ahead of anyone within that space, and I think we've positioned ourselves and continue to position ourselves to outpace our competitors.
And our next question comes from the line of Vishal Shreedhar of National Bank.
Just on the stores, to follow up, and you've probably already made this clear, but I just want to make sure I understand it. So on the stores, where it is weaker consumer confidence -- and I appreciate in the past you've told us you like to continue to build out stores during periods of economic weakness to benefit when the market turns around, but when you're building and it's weak consumer confidence, how do you know that you're not building into a situation where it's over-stored and it's going to hit you 3 years down the road continuing? I guess that's my concern as you continue to build out these stores in some of these weaker areas.
So we do a lot of analysis prior to opening a store, whether it be population, shopping trends, things like that. And remember, we're only opening -- we're only committing to open between 8 and 12 stores per year, so there might come a time where we end up, in the future, in a certain area with an additional store that we shouldn't have, but that's what we're talking about. We're talking about just a couple of chances that that might happen. We are not talking about a wholesale just opening stores across the country. We're very targeted in where we open the stores, about the growth that they're experiencing now in population, and the trends in the future. So we do take it very cautiously.
In 2018, obviously a lot of investment, and that was in the SG&A line, a little bit of delevering there. I'm wondering if you can give us some color or thoughts on how we should think about SG&A in 2019, if that's going to be another big investment year. I know you have a lot of things on the go, but you'll be lapping a lot of elevated costs as well. I'm talking more so on the rate, rather than the dollar growth.
So I think with the inclusion of Endy in our results, you will see an impact on the G&A line specifically with advertising, but all the overheads associated with running the Endy business. If you exclude Endy from our results, certainly our advertising spend was planned to grow at sort of low-single digits, but with the inclusion of Endy, it will show higher growth than that. On the rest of the G&A stack, back-end finance charges will go in line with sales. It's a variable cost. And then, again, on all the other overhead expenses, excluding Endy, it was meant to be a modest single-digit growth.
And just wondering, on vendor rebates, how does that work associated with if there's a slowdown in sales? Do you have to hit certain thresholds to get vendor rebates, or how should we think about the vendor rebates flowing through your P&L when you have slowing same-store sales growth?
So, yes, we have a number of different vendors that we deal with, and we have different arrangements with all of them. We get it in terms of certainly price on the product itself, and that's negotiated heavily in the beginning of the year. Secondly, we get volume rebates based on purchase volume, and there are certain tiers we have to get to. Thirdly would be advertising co-op dollars that contribute towards our advertising. That sort of offsets our advertising line. And then we get sort of credits on an event-by-event basis when they bid out and are awarded certain advertising events during the year. So all of these factors are at play as we negotiate with our vendors.I would say our overall revenue growth is still supportive of us hitting a lot of the tiers that we've negotiated with our vendors, so we certainly -- you can see, based on our gross margin that we achieved specifically in the inventory-related section, that we achieved well in that line in Q1, so we don't have any concerns in that area.
And just to add to that point, the way we would look at it is we get a certain base of support from the vendors, and that can be upsided as we grow. So it's not like we're going to have to go backwards in any way. It just can continually be added to. And I just also want to point out that even in a very challenging environment in Q1, our mattress business grew by 9.6%, so we are -- our mattress business is not going backwards.
And just, lastly, I know in the past you commented that after periods of kind of a lull in purchases, there's a little bit of a catch-up pattern, or at least that's my interpretation of what was said in the past. So when you said March was better -- and I presume, if I'm reading between the lines, the implication was it was positive. Is management -- was there a little bit of catch-up from January, February in there, into March? And how would you know that that was the case?
So, firstly, we were -- yes, March was positive, and so we were very pleased with the way March turned out. There was possibly some that went from one particular month to the other, but we felt in general we were seeing -- we track our business across a lot of different fronts, and while we can't specifically what was pent-up demand versus not, we feel it's fairly solid across the board.And lastly, I just want to make sure I'm clear on something. March was benefited by the shift at Easter, and that's part of what happened, but I also want to say what we're really talking about is the -- we just kind of track individual day over individual day, so when we're saying March improved, we're not only saying it because of the Easter effect. We're also saying it because just day-to-day was better, so it was very -- it felt much more substantial than it might have seemed.
And I also just want to add there's no question that we were disappointed with January and February, whether it was consumer confidence, whether it was weather, but at the end of the day, we do not believe in any way that we lost market share. In fact, we believe we took market share.And as a reminder, in our industry, which we're very comfortable about, is that our business is very much sometimes a deferred purchase, so those mattresses maybe didn't pace as much or as fast as we wanted in January and February and recovered, as Dave said, in March, but was also quite significant to see for us was that our accessory business, all our bedding essentials, accelerated at the highest pace that we've ever seen in the first quarter of our business. That was one of our biggest quarters ever. So that deferred purchase potentially on the mattress was definitely met by many consumers gravitating to us for our accessory business.
And our next question comes from the line of Stephen MacLeod of BMO Capital.
I just wanted to circle around. I know in the past you've talked a little bit about, on the top line, some of the metrics and components in terms of bricks-and-mortar traffic, online traffic conversions, average basket. Can you just give a little bit of color around what you saw this quarter?
Well, we'll start with online. We continue to see nice, nice increases in our online traffic. We continue to see increases in traffic in total, and we continue to see stronger same-store sales traffic when it comes to markets that are not as affected by consumer confidence. But our same-store sales traffic for a part of Q1 was down, for sure.
And how about -- what did you see in terms of conversion rates and basket size?
So our conversion rates continue to rise, and our average unit selling price continues to rise for mattresses. Our average unit selling price continues to rise also for accessory items. And our basket size is down a little bit, but that's a good thing, because we're selling more accessory-only items because we have been trying to raise our awareness on people coming to us for accessories, and that's been successful.So all of those metrics are looking very strong, and one of the ways we really kind of look at our conversion [indiscernible] is we want to make sure that when the customers come into the store, they're getting great service, they're getting a full explanation of what we have and then make the decision themselves, and when you combine all those metrics together, it shows a very healthy experience within the store, and that makes us quite comfortable.
It's also important, Steve, and as you know, a few quarters ago, when we were talking about our accessory business, we've slowed a little bit and that we were reinvesting in some of our commercials that were a little bit older than we wanted, and that investment impacted our results at that particular quarter, but it's nice to see that those investments are paying off and generating at a higher rate of sales than ever before in terms of a category that we continue to grow and focus on.
And then I just wanted to circle around on the IFRS 16 impact. Rob, is it fair to say that the impact that you experienced in Q1 would be reflective of what you would expect in the future quarters through the balance of 2019?
Yes, I mean, it is affected by your new stores that you bring on, as well as your renewals that you do throughout the year. If, in theory, we didn't renew any of our leases and we didn't open up any new stores, it would have a positive impact on earnings per share on a go-forward basis because we took a hit to retained earnings on January 1, 2019, but whenever you're in expansion mode and you're opening up new stores and you're renewing a fair portion of your leases, it can have a rising and a negative impact on your earnings per share.So I just want to sort of clarify. I think on the call, I may have given the wrong bottom-line impact. So in Q1 2019, the net impact was a decline in net income of about CAD500,000, or about CAD0.01 per share, and in Q1 2018, it was a decline of CAD700,000 after tax, and that rounds up to about CAD0.02 per share. So very comparable impacts on earnings per share in Q1 2018 versus 2019. And then in terms of EBITDA, Q1 2019 was an increase in EBITDA of CAD10.4 million, using the old method of EBITDA, and in Q1 2018, it was an increase of CAD9.3 million in EBITDA. So I'd say for now, for the next -- for 2019, it's probably going to be a similar impact.
And our next question comes from the line of Meaghen Annett of TD Securities.
So I just wanted to go back to the Endy business for a second. So this quarter, it seemed that the business had a significant positive contribution to the gross margin, but maybe that G&A was a bit higher than some were anticipating, so maybe a bit of a longer-term question on that business. Is there any way you can give us color as to the potential synergies that you'd see within G&A if you do choose to integrate Endy and Sleep Country? And what would prompt you to make that decision to go ahead and integrate the 2?
So I'll talk about the synergy. So I think there are definitely some short- to medium-term potential synergies that we are already exploring with the Endy team, and #1 would be sort of in terms of the back-end logistics. That certainly presents an opportunity, whether from a reverse logistics perspective in terms of returns or anything along those lines, would definitely be things to be explored.The other area would just be in terms of our combined volumes of the business and using that as leverage to negotiate with vendors, so whether it be with 3PL carriers like FedEx or UPS, et cetera. We now have a combined volume that is pretty significant, and we're already using that leverage to negotiate with these vendors. So that would be just 2 quick and relatively achievable areas to look at. In terms of the longer-term decision on whether they go on our floor or not, that is still something that we're looking at, but no sort of decisions have been made in that area, and we will continue to evaluate that.
I will add that, again, it's still very early days, but we are more excited than ever with this partnership with Endy. Mike and [ Raj ] and the entire Endy team continue to demonstrate great leadership and entrepreneurship and demonstrate that entrepreneurship is alive and well, and they continue to demonstrate, unlike many other dot-coms in the space, that they can be very profitable. So our relationship continues to grow closer. We said right from the very beginning that we wanted them to have their independence to make sure that we encouraged their entrepreneurship and the way that they're thinking.That being said, the team and our teams are getting closer together than ever before, even on a personal level. We were all at Dave's house last night celebrating Steve's retirement. Mike was there with his wife, and so was [ Raj ]. But taking our relationship to that next level and expanding on ideas, whether it be on digital and marketing, whether there are some economies of scale that we can have. We are in very early days of the powerful impact that this partnership with Endy will have on the big machine, Sleep Country and Dormez-vous?
And I just wanted to go back to your comments related to maybe some of these online players that are going more omnichannel. Can you just talk a bit about the competitive environment that you're seeing separately for Endy and for the Sleep Country business? And are you seeing different challenges for the 2 businesses right now?
So, Meaghen, we're glad you asked the question. First of all, Endy, Mike and [ Raj ] have done a fabulous deal with Urban Barn, and we're very excited about that relationship that they are developing and growing. And for us, it actually opens up the door to an expanded customer segmentation that may not have shopped at the Sleep Country, Dormez-vous? stores before.So those channels we'll continue to explore and expand under the leadership of Mike and [ Raj ], but, as all of you know and as we take notice, the path to profitability, clearly, for a lot of these dot-com guys and the cost of acquisitions for most of them, excluding Endy, seems to be to open up and move into the brick-and-mortar world, which is an area where we shine and have an expertise.So we haven't felt the competitive intensity from these guys. Endy still is the #1 leader in the Canadian marketplace and continues to grow their share of business there, and we continue to focus on our own omnichannel capabilities, and it's very early days there. As Dave pointed out, we're very pleased, but clearly we all know -- the team from Endy and our team understand that an omnichannel component, that we need to create a business that allows consumers to shop any way that they want to, positions us in a way that nobody else in our space is today or can be for years to come.
And I just had a couple of maybe clarification questions. But, first, with respect to market share gains, you noted that you did gain market share in the quarter, but I just wanted to confirm that both the Endy business, as you mentioned, and the Sleep Country business continued to gain share.
Yes. We spend a lot of time analyzing the market by talking to our vendors, by using StatCan data. So we have a good finger on what's going on with the market, and we're very comfortable that we gain market share in all of our banners.
And, lastly, on the KPIs. So you mentioned improved average unit selling price for mattresses, I believe, but are you still seeing the trend of that weak middle price point?
I'm sorry, could you repeat that question again, Meaghen? It just got a little muffled.
Sure. So with respect to the average unit selling price, the improvement that you saw, is this still being driven by sort of the high-end and the lower-end price points with weakness in the middle price point?
That shifts around from quarter-to-quarter, and so I would say a more general overall statement would be that the higher price points, like you said, are doing very well, and the middle ones are doing okay, and the lower-end ones are -- well, I'm sorry. From the mid down to low, it depends on the quarter, but those are the ones that are a bit challenged, and we're doing a lot of work on there to make sure that we're understanding exactly what's driving those, whether it is the weather in a particular area, whether it is consumer confidence.But, generally speaking, the higher price points -- the mid to high price points are doing very well, and we're working on the other ones to get a better handle as to how we can continue to grow our share there. We're not necessarily saying we're losing share in those price points, but we're making sure that we're understanding how we can continue to capture more, which is one of the reasons why we started an initiative with walmart.ca. It's another reason why Endy is really capturing that market.And so when I talk about market share, not only in Q1 do we feel that we gained share in all of our banners, but I'd like to remind everybody that, using a full year of StatCan data, which is quite comprehensive, our market share grew 3 percentage points in 2018, which is the most we've grown our market share in the last 5 years. So we're very confident that our share is on the rise in mattresses. We also are -- and, also, our outsized performance in accessories would indicate the same type of share performance.
And our next question comes from the line of Sabahat Khan of RBC Capital Markets.
Just on the Endy, just a couple of questions there. I guess as you look out to the longer term, what do you see as a long-term potential EBITDA margin of that business? I think that acquisition is closer to 10%. Do you see it around, at or above your company average over the long run?
So, again, I think when you compare Endy to the other players that have got negative EBITDA margin, while I think Endy is -- when we acquired them, was around about that 10% margin, I think over time there's a possibility of that being improved, and we feel comfortable that that is the right spot to be at in their aggressive growth mode.
I will add that the Endy team have done a fabulous job at building a recognizable brand in a very short while. So these folks are in early days in terms of not only market share and growing out throughout Canada, but they're also early days in terms of growing out their assortment of product. As we expanded 5, 6 years ago into the accessory part of our business and it added a huge level of profitability to our overall business, the Endy team are already working with their product development in terms of introducing new products to their customers. So it is early days in terms of what we're going to see from our new partners.
And then just, I guess, if we just continue on that beam, if you look out 5 years or so, how big a part of your business do you expect your 3 bed-in-a-box offerings to be over the long run? Maybe not on any specifically, but I just wanted to get an idea of what proportion of your business they could represent over the medium to long term.
So when we look at the market from an omnichannel perspective, we view -- we just look at online as a percentage of sales, and so we think eventually the industry could get up to the 20% mark, and from a longer-term perspective, that's what we see, that the U.S. market is further ahead than Canada and the UK market is along those sort of 20% lines. So that's really where we see the market going, and we intend to capture more than our fair share of that online space. Whether it be with Endy or our own e-commerce offering, our objective is to capture that market share.
And I will add that our overall market share we believe is approximately 31% with our acquisition of Endy, so 69% of the market is still up for grabs. So building out our brick-and-mortar and building out our omnichannel e-commerce aggressive investments that we're playing there is not only to grow the online side of our business, but clearly just to continue to take share every single year in a space that still has plenty of room for us to grow.
And we never lose sight of -- and we also never lose sight of the reverse map. So in a decade from now, if the online part of the business is 20%, we're going to have our more than fair share of that, but that still means that 80% of the business is going to the stores, and we want to continue to have our more than fair share of that as well. And what we do realize, though, is it's not one or the other.In the omnichannel environment that we're building and that we're already -- the environment we're building right now really makes that more seamless, because some people want to start online and go to the store, some people want to start in the store, some people want to start online and end online, and we're not 100% of the way there combining all that, but with our new e-commerce cloud system we're rolling out, we're already doing a good job, but it's just going to get better.
And our overall plan of just growing out our distribution of mattresses and reaching more customers than ever before is why the partnerships -- the Simbas, the Walmarts, the Urban Barns -- all make sense on the longer-term initiative that our focus is on in terms of our overall strategic plans.
And then I guess just from a reporting perspective, is Endy going to be rolled into your same-store sales as sort of an online store, the way you report online, or how should we think about the same-store sales contribution from Endy?
So because we acquired Endy in December of 2018, for the entire year of 2019, they will not be part of our same-store sales, so it'll start from January of 2020. So during 2019, you will see their impact in our total sales growth, but not our same-store sales growth.
And then on the marketing spend that you commented on earlier, how should we think about it for the rest of the year, in terms of should we assume a similar dollar spend or should we think about it based on seasonality, the way we have for prior years, given this now includes Endy in your spend?
Again, we're not going to break out Endy versus Sleep Country, but in general, as I've said, the marketing spend for full year 2019 for Sleep Country is meant to be a low single-digit increase in spend, and Endy is -- because they're in high growth mode, we'll be making most of the investment on the marketing side.
And our next question comes from the line of Elizabeth Johnston from Laurentian Bank.
I want to talk a little bit about the renovation activity. You've mentioned in the past looking at different types of renovation, so maybe just give us an update on what your plans are going forward and just reiterate your expectation for the number of total renos for 2019.
So the plan is still the same, as we stated, between 25 and 30 stores. We've already done 13 in the first quarter, which we were very pleased with, and we plan to do the rest of the renovations in the back half of the year, at the tail end, which is normal course for us, because during busy, we don't like to do our renovations.We continue to see expanded gross margins as well as sales in the entire mattresses and accessories on our new stores, so we're still very pleased and happy with that. And in fact, we are going to be introducing new forms of millwork that will help support the growth in some of the bedding essentials that we are expanding on, which we're very excited about, which soon will be shared with you folks.
And I know you mentioned the gross margin, but, generally speaking, in terms of same-store sales growth, when these stores reopen, are they still comping in the range of 300 basis points higher than stores that have not been renovated?
Yes, so we still continue to see some improved performance in the post-renovation -- the 12-month post-renovation compared to pre-renovation. We're still seeing an improvement in the same-store sales relative to the rest of the store network.
And maybe just ask a couple more questions here on Endy. I'm sure I've asked this in the past, but seasonality of Endy -- I know you've disclosed in your MD&A, the seasonality of Sleep Country excluding them, but is there anything you can comment on in terms of any difference in seasonality, if Q1 is weaker for Endy than it is for the rest of the legacy business? Any further commentary there?
No. I think the seasonality of the Endy business is very similar to us. It's the same consumer that's buying a mattress during busier times, when they're moving in the summer, so they're very similar to us. From an e-commerce perspective, they obviously have a big Black Friday-Cyber Monday event and big during Boxing Week, but, again, we've also experienced similar gains in our business, even on the brick-and-mortar side, so very similar seasonality.
I will add a small flavor or color, which is really not that significant, but January and February, which was plagued with a lot of snowstorms and store closures across the country, a couple of times even in our Maritime stores -- some of them were closed for a day because of some big stores. On those snowy days, online, both in our Sleep Country Dormez-vous? site as well as our Endy business, we saw an uptick in business, so I guess people weren't driving out in the middle of the snowstorm and still buying mattresses from us online.
And in terms of your expectation for growth for Endy, I understand that it so far as exceeded your expectations, but going back to the level of growth and the expectation at the time of acquisition, would you say for this coming year there's been no change in terms of the kind of top-line growth you're expecting from Endy?
No, they're still -- our expectations for 2019 are in line with our original expectations when we acquired it.
And just 1 more for me on Endy, again. In terms of -- I'm trying to get a sense of the cadence of growth here. Obviously, quarter-to-quarter, organic growth varies for the legacy business. Would you say that you've seen a similar pattern of peaks and valleys within Endy, just at a higher rate? I'm trying to get a sense of what that cadence looks like, if they're moving together I guess is the question.
I mean, we really only have 1 quarter to really compare. And we did mention that we did see some indication of when the weather gets really bad, then they're not as impacted by that as we would be. But, really, we only have 1 quarter to compare at this point.
And our next question comes from the line of Patricia Baker of Scotiabank.
Dave, when you were talking about the mid to high end doing well, I just want to ask 1 question on that. In the markets where you saw weaker consumer confidence, did you see the higher end -- the mid to high end do well in those markets as well?
Yes. Generally speaking, we can -- that's a fairly consistent statement across the board. We also saw our accessory do well in those areas. So we felt that we were capturing the customers that were in the market, for sure.
And then, secondly, Stewart, you referenced the fact that you've done a number of things in 2018 and in Q1 to grow your distribution. I'm just curious, how do you think about that growing distribution? And do you have a view longer term about how the business will shape out wholesale versus retail? Because you are sort of getting into the wholesale business when you're broadening the distribution and doing partnerships with the likes of Walmart.
So I'm going to correct you, Patricia, if I may. We are definitely not wholesalers, nor do we have any interest in becoming wholesalers, because our relationship with our partners is very important, our vendors, so that's not the direction we're going. That being said -- because we don't manufacture any of our beds.So that being said, as we look at our partnerships, which is I think what you're referring to, it is more on a shared revenue model, where we believe that growing out our segmentations to new demographics, to new markets that may not -- who may not shop at our market and use them in a strong, powerful relationship to enter into their consumer base. There may be a shared revenue model in that type of a relationship, but definitely it's not a wholesale approach.
And then something else that you said earlier, and I'm just curious, about the pure online players, the path to profitability for them to get into bricks-and-mortar. Other than Endy, have you been in talks or have had other online players approach you to use your distribution?
Great question, and I can't answer that, Patricia. I apologize.
But what I can say, Patricia, is when you look at the partnerships we do have, the thing that -- I just want to be clear, the thing that we bring to the table is 2-fold. #1, even in this world where people are thinking online, it's our stores that are such a very big pull in this, as well as our market share, as well as our awareness. And so you look at both our unaided and our aided awareness in our brands, they're so strong. That's what makes us -- that's what really makes us so attractive to these opportunities.
And I'm going to add 1 more thing. I'm going to add 1 more thing to Dave's list, which I agree with everything he's saying, is our distribution logistics machine. We, in many ways, like to say internally that we are the Amazon of bedding. We could deliver same day, next day, anywhere we want, any way we want, with 17 -- 16 strategically located distribution centers, with a fleet of trucks. Our white-glove delivery service is almost the same cost as us shipping Purolator, FedEx or UPS.Nobody in this space on the dot-com can do what we're doing at the service levels that we're doing, and I think if you take what Dave said, combine it with the logistics machine of who we are, combine it with the brick-and-mortar, combine it with the omnichannel approach, combine it with the multi-channel relationship that we're developing, you're going to see exciting things for us in the future.
[Operator Instructions] Our next question comes from the line of Vishal Shreedhar of National Bank.
Just a quick follow-up here. So you mentioned in the modeling there was CAD300,000 of purchase price accounting, so we -- I just want to validate if we're going to push that forward in terms of modeling. And for the CAD600,000 on the earnout, how would -- what would be the best way to model that looking forward?
So both of them would be similar amounts on a quarter-to-quarter basis, both on the trademark and the accretion interest.
So the earnout, is there a finite period of time for that, or is it just --
Yes, it'll be for 2 years. So 2019 and 2020 will have similar accretion interest to the extent that the contingent consideration does not change, but assuming it stays the same where it is, it'll be approximately CAD600,000 per quarter of interest.
And there are no further questions in the queue at this time. I turn the call back to the presenters for their closing remarks.
Well, we just want to all thank you all for being on the call. We're looking forward to talking with you again in our Q2 call. And I'd like to just take this final opportunity to thank Rob. This will be his last call, because, I'm sure as you all know, he's leaving Sleep Country. He's been a very big part of our team, and we will miss him, but he is staying on as a cheerleader even though he's moving on. So thank you very much, Rob.
Thank you, Dave.
And that ends our comments. Thank you.
And this concludes today's conference call. You may now disconnect.