Sleep Country Canada

(TSX: ZZZ)
Ella Dong
January 30th, 2020
Recommendation: BUY
 Company Overview
Overview Locations Across Canada
• Largest specialty mattress and bedding Retail Banner Sale Breakdown
retailer in Canada 21%
• 264 stores, 17 distribution centers, and an
e-commerce platform
• Founded in 1994 and issued IPO in 2015
• Headquarter in Brampton Canada 79%
• 3 retail banners
ØSleep Country, Dormez-vous, and Endy Sleep Country Sales Dormez-Vous Sales

Revenue Breakdown Key Statistics

Revenue by Product
Metric Value Metric Value
Mattress Lines:
25%
-Bloom LTM Revenue 685.99M Dividend Yield 3.80%
-Simba
-Contour Collection LTM EBITDA 148.47M Number of Employees (2019) 1394
Price range: -Tempur Sealy
$149 - $6000 LTM Net Income 54.74M EBITDAR 155.2M
-Kingsdown
-Simmons EV/Sales 1.77x Same Store Sales 1.40%
-Serta
75% -Dormeo EV/EBIT 11.65x Avg. Retail Sq. Ft. (Net) $5,000

EV/EBITDA 8.2x EPS $1.59

Mattress Bedding Accessories
Trading History
Trading Summary and Recommendation
As of January 27th, 2020 52-Week High (C$) 22.7
Current Price (C$) 20.51 52-Week Low (C$) 16.01
F.D. Shares Outstanding (mm) 37.36M
F.D. Market Cap. (C$mm) 782.26M
Enterprise Value (C$mm) 1216.71M

Recommendation BUY Premium to Share Price 21.1%

Target Price $24.83
Historical Trading Performance
45 TSX:ZZZ - Share Pricing

40

35
Acquisition of Endy E-Commerce
Evolution
30

25

20 Entrance
Entranceinto
intoE-Commerce
E-Commerce
with
with BloomLine
Bloom Line
15

10
2015-07-16

2015-09-16

2015-11-16

2016-01-16

2016-03-16

2016-05-16

2016-07-16

2016-09-16

2016-11-16

2017-01-16

2017-03-16

2017-05-16

2017-07-16

2017-09-16

2017-11-16

2018-01-16

2018-03-16

2018-05-16

2018-07-16

2018-09-16

2018-11-16

2019-01-16

2019-03-16

2019-05-16

2019-07-16

2019-09-16

2019-11-16

2020-01-16
TSX:ZZZ - Share Pricing
 Industry Overview
Specialty Mattress Retail Industry
Attractive Trends Driving the Sleep Economy
The Frost & Sullivan Assessment forecasts the global Sleep Economy to be $432B in 2019, growing at 6.3% to $585B by 2024
1. Increasing expenditure on health/wellness to attain high sleep quality
• Consumer sleep sector grew 9.3%; health industry grew 6.4% since 2015; consumer mattress sector grew 12.8%
since 2014; consumer’s WTP for quality mattresses increased by 19% since 2008
2. Shortening and ongoing mattress replacement cycles creates resilience against economic downturn
• Canada mattress replacement cycle accelerated by 14% since 2017
3. Consumer demand for qualitied sleep drives mattress investment in commercial sectors such as hotels and planes
• Commercial sleep market expected to grow at 4.6% into 2024
Market Forces Market Share Breakdown
Industry Sleep Country Canada
Competition 44% 31%
100
80
60
Threat of 40 Potential of New
Substitutes 20 Entrants
0

12%
Power of
Power of Suppliers 8% 5%
Customers Sleep Country The Brick Leon's IKEA Others
Investment Theses
 I: Overreaction to Temporary Decline of SSSG
Stable performance metrics are shadowed by temporary SSSG decline, which is expected to ease in the long-run

Missing Market Expectation From Declining SSSG Moderating Housing Market Under Recovery
• Q3/19 SSSG were 0.5% vs. long-term expectation of 3-6% • Past 2 years of moderating housing market is expected to
• Declined from 8.8%à1.4%à0.5% while total sales went reignite in 2020
up by 14% in 2019/Q3 • Market stabilize
• Positive performance metrics remain • Regain consumer confidence à key driver of SSSG
• Overall traffic, conversion, mattress units, mattress fluctuations
AUSP indicated growth; gross profit margins • RE/MAX 2020 Housing Market Outlook Report
improved 23.10% from Q3 2018-2019 • Over 51% of Canadians consider home purchases, up
• Strategic execution to drive SSSG through ad spending, from 36% last year
renovations, accessories line expansion • Mortgage stress adjustments and millennials driving
Change in SSSG, Revenue, and Gross Margin From 2016- market
2019/Q3
25% Cannibalization Effect
20%

15%
• SSSG decline resulting from the cannibalization of new stores
on proximal stores may dissipate as total sales and profitability
10%
increase
5%

0% location saturation
2016 2017 2018 2019 Q3 275 stores currently
point of ~325 stores
SSSG Revenue Growth Gross Margin Growth
 II: Successful and Timely Business Evolvement
Sleep Country is well positioned to take advantage of secular trend towards bed-in-a-box mattress retail
Bed-In-A-Box Popularity
• Foam mattress compressed and vacuum-sealed in a box
provides affordable mattress alternative
• With traditional mattress delivery becoming increasingly
unprofitable, mattress retailers are expanding to
incorporate bed-in-a-box delivery
• Shipping expense savings as a result of reduced bulk of size
Competitive Landscape
Sleep Country Lines
Sleep Country’s Position
• Bed-in-a-box is capturing incremental market share from traditional brick-o-
mortar channel and SCC is well positioned in this segment through their
Bloom and Simba brands
• Strategic acquisition of Canada’s first mover and leading bed-in-a-box
retailer, Endy, puts the company in the forefront of the trend
• Expanded national covzerage with 3% gain on market share
• Launched Simba Hybrid mattress-in-a-box
2014 Mattress Market Breakdown: Direct-to- 2018 Mattress Market Breakdown: Direct-to-
Customer Vs. Traditional Retail
Customer Vs. Traditional Retail
6%à12%
Direct-to-Consumer Sales Traditional Sales Direct-to-Consumer Sales Traditional Sales
Leverageable Brand Recognition
• SCC remained a staple of Canadian retail landscape for >25
years
• New entrant competitors do not have extensive brand
recognition and trustworthiness as SCC
 III: Continued Omnichannel Dominance Drives Market Share Gain
SCC remains the top mattress retailer in Canada through their unique omnichannel positioning, with 31% market
share and long-term strategic initiatives to expand both online and physical presence

Brick-O-Mortar Expansion E-Commerce Presence

• Rolling out upgraded e-commerce platform featuring

traditional (non bed-in-a-box) mattresses delivery from
one of 17 Distribution centres
• Expand omnichannel platform and stay competitive
with online mattress entrants such as Casper
• All 8 brands of mattresses available online
• New cloud-based Oracle E-Commerce platform
• Introduced phase 1 of their new ERP platform
• 25-30 stores under renovation in 2019-2020 • Improved information system for effective
• 8-12 new stores underway operational management
• Expand physical presence to target more provinces

>85% 29%
and households
• Offer in-store experience and sales expertise on costly
and long-term investment products
In industry online
In store purchases
purchases in 2018
 Catalysts and Risks
Catalysts
ü Dominant omnichannel position in Canada
ü presents opportunities to capture larger customer
base and facilitate market share expansion
ü Awareness of store economy
ü Strong brand equity and diverse product selection
ü Positive economic and industry outlook supports
ongoing product demand
ü Recovering housing market
ü Investment in health and qualitied sleep
ü Accelerating replacement cycles
ü Acquisition of Endy brings SCC to the forefront of the
bed-in-a-box trend, Q3 2019 revenue and gross profit
margin remain positive
SCC’s catalysts are varied and attainable, balanced by risks which are relatively mitigated against a downside scenario
Risks
× Highly competitive and fragmented industry
ü SCC differentiates as Canada’s niche specialty mattress
retailer compared to general furniture retail competitors
× Threat of emerging entrants such as Casper and their cost
effective direct-to-consumer channel
ü Offers significantly wider product variety
ü Casper still in the process of expansion and incurred
operating losses and negative cash flow, uncertain
future margins
ü Casper first 3 quarters of 2019 unfavorable, direct to
consumer sale is slowing, expansion into physical retail
space dilutes core business
× Declining SSSG
ü Chance of recuperation balanced by positive profit
metric, but may be difficult to attain due to competition
Valuation Perspectives
DCF Overview
Observations
• DCF yields a target
price of $24.83,
representing a 21.1%
upside
• Assumes revenue
growth tapers to 2% in
perpetuity
• Revenue projected
based on moderate
SSSG assumptions
and store number
• 17% growth in SG&A
due to increased
ecommerce
marketing and growth
in Q3/19
• 6.8% WACC
Recommendation

Recommendation: BUY
Target Price: $24.83
Premium to Current Share Price: 21.1%

Omnichannel company undervalued by investor’s overreaction presents an attractive investment opportunity

Appendix
Income Statement Projection
Balance Sheet Projection
Cash Flow Statement Projection
Comparable Companies
All Figures in CAD Millions Shares Enterprise Enterprise
Company Shares Market Outstanding Enterprise Value/ Value/
Name Price Outstanding Value Diluted Value Sales EBIT EBITDA EBIT EBITDA
Sleep Country Canada 20.46 37.2 760.2 37.4 1,194.6 686.0 107.6 151.7 11.10x 7.88x

Low 10.39 10.5 354.8 34.2 372.2 508.2 -463.0 -5.0 9.57x 6.61x
Average 13.24 76.69 1,122.66 88.68 2,889.00 2,981.15 -62.44 80.65 31.56 22.81
Median 12.84 55.69 1,057.63 68.26 1,287.60 1,492.22 24.99 31.33 10.73 7.85
High 16.90 184.87 2,020.64 184.00 8,608.64 8,432.00 163.27 264.94 74.39 53.97

BMTC Group A 10.39 34.1 354.8 34.2 372.2 720.8 38.9 47.4 9.57x 7.85x
Purple Innovation 14.75 10.5 809.9 52.8 823.4 508.2 11.1 15.3 74.39x 53.97x
Leon's Furniture 16.90 77.2 1,305.4 83.7 1,751.8 2,263.6 163.3 264.9 10.73x 6.61x
Hudson's Bay 10.93 184.9 2,020.6 184.0 8,608.6 8,432.0 -463.0 -5.0 - -

• Sleep Country has no publicly listed Specialty Mattress Retail Competitors in Canada
• Comparable sets consists of companies in general furniture retail or home furnishing department stores
Online Mattress Retail vs. Brick-o-Mortar