Ian McGugan
Many investors look for stocks that will let them sleep well at night. That, however, is not quite the same as a stock that specializes in giving other people a good night's rest.
For proof of that, consider Sleep Country Canada Holdings Inc., which returned to the Toronto Stock Exchange on Thursday after a seven-year absence. Its cute ticker – ZZZ – wasn't enough to prevent its share price from sliding from an opening price of $17 to close at $16.15.
Those who are tempted to see the stock's first-day slip as a buying opportunity may want to, um, sleep on it. Selling mattresses can be a fine recession-resistant business, but it's not exactly a high-octane growth opportunity. How many people do you know who don't already own a mattress?
There are other aspects of Sleep Country's business that also deserve to be carefully mulled. The company's generous use of debt, for instance, suggests that the business could face challenges when interest rates rise or if sales disappoint.
There's also the prospect of increased competition. Sleep Country's prospectus touts its stature as Canada's leading specialty retailer of mattresses. It controls 23 per cent of the national market and has earned a reputation for outstanding customer service.
But the industry is changing. Casper Sleep Inc., a U.S. startup, has attracted attention with its elegantly simple business model: one type of mattress (in six sizes), sold online, with a 100-night trial period and free returns if you don't like the product. Other online retailers are also experimenting with simpler, cheaper ways to sell mattresses.
About time, many consumers would say.
Mattress manufacturing is an oligopoly dominated by a handful of companies such as Serta, Simmons and Tempur-Sealy, which produce products with slight variations under a multitude of names for different retailers.
"Consumers are the losers," Consumer Reports notes in its buying guide. "Because such mattresses are at least somewhat different, and the names vary, you can't comparison shop."
Of course, from the viewpoint of someone investing in an established mattress seller, the lack of transparency can be regarded as a positive. However, there's little evidence that Sleep Country has been able to generate huge profit margins from its prime position in slumber retailing.
In 2013, it produced net income of $1.8-million on sales of $353.9-million. In 2014, it lost $14.1-million on revenue of $396.1-million.
Despite those less than stirring results, Sleep Country says it intends to pay a dividend beginning later this year. It also vows to keep expanding the chain, which now stands at 215 stores. It says it can add another 50 outlets without oversaturating the market.
But it's worth noting that expansion prospects haven't always looked quite so strong. From 2008 to 2013, Sleep Country's revenue inched ahead, growing from $336-million to $354-million, or about a percentage point a year. It was only in the pre-IPO year of 2014 that revenue surged to $396-million.
Perhaps the recent jump in sales speaks to a new and sustained enthusiasm for mattress-buying. On the other hand, new investors may want to keep in mind the possibility that the chain will revert to its old slower-growth ways.
Sleep Country has been through more than a few changes over the past two decades. It was founded in 1994 and debuted on the Toronto Stock Exchange in 2003 following a $135.2-million initial public offering.
Birch Hill Equity Partners Management Inc., a private equity firm based in Toronto, led a buyout of the company in 2008 and took it private. Now it's reversing direction and returning Sleep Country to the public markets.
Its timing happens to coincide with a great appetite among the investing public for dividend-paying stocks. For now, though, the new and improved Sleep Country still has a lot to prove.
Ian McGugan