Via https://newsapi.org online business online marketing online business opportunities Edited Transcript of ZZZ.TO earnings conference call or presentation 1-Nov-19 12:00pm GMT

Via https://newsapi.org  online business  online marketing  online business opportunities Edited Transcript of ZZZ.TO earnings conference call or presentation 1-Nov-19 12:00pm GMT
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NORTH YORK Nov 7, 2019 (Thomson StreetEvents) — Edited Transcript of Sleep Country Canada Holdings Inc earnings conference call or presentation Friday, November 1, 2019 at 12:00:00pm GMT

Sleep Country Canada Holdings Inc. – CFO


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Sleep Country Canada Holdings Inc. – CEO & Director

Sleep Country Canada Holdings Inc. – Chief Business Development Officer & Corporate Secretary

* Patricia A. Baker

Good morning, and welcome to Sleep Country Canada’s Financial Results Conference Call for the Third Quarter ended September 30, 2019.


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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 third 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 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 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 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 October 31, 2019, available on sedar.com.

I’ll now like to turn the conference over to Mr. David Friesema. Please go ahead.

David Friesema, Sleep Country Canada Holdings Inc. – CEO & Director [2]

Thank you, operator. Good morning, everyone, and thank you very much for joining us on our third quarter 2019 conference call. Joining me today are Stewart Schaefer, Chief Business Development Officer and President of Dormez-vous; and Craig De Pratto, Chief Financial Officer.

As we celebrate our 25th year in business this week, I am pleased by our powerful track record of profitable growth and the results of our exciting omnichannel agenda. This quarter, our teams in all of our channels drove solid growth across our product categories confirming that our multichannel strategy is positioning us for today and for years to come, to take greater market share by serving our customers for all their sleep needs, any way and anywhere they want to shop.

We are pleased with the substantial 14.2% increase — revenue increase from the year before to $210 million. The gains were led by a 14% increase in mattress sales, a 14.9% increase in accessory sales, on top of a 12.8% increase in accessory sales during the segment in the previous year. We also posted a 0.5% increase in same-store sales.

We are also enthused with the continued acceleration of our Sleep Country eCommerce business, the inclusion of Endy now in our family brand has contributed to a tremendous increase in our online revenue, and as planned, is helping us to capture greater market share of a target customer segmentation that we want to grow.

Since going public in 2015, we have been significantly investing in strategic growth initiatives to reinforce our position as Canada’s #1 sleep retailer, and our third quarter results demonstrate the progress we’ve made in expanding our market share even further. The sustained and significant growth in our mattress and Accessories category, in-store and online, is indicative of our strategic investments paying off. Here, growth is driven by the successful execution of our All for Sleep brand platform, investment in the Endy brand, targeted digital advertising, expanded mix of products, strategic brand partnerships and investments in our store and eCommerce infrastructure.

As we have said on previous calls, the lucrative and fragmented $1.5 billion Canadian sleep accessories market is an exciting opportunity for us. And our investments in product innovation, partnerships and our in-store and digital platforms will continue to drive accelerated growth.

We are very excited about 2 of our key strategic initiatives. First, we successfully rolled out the first phase of our new enterprise resource planning, or ERP platform. Executing with excellence has always been a key pillar of our success, and our new ERP capabilities enable us to build upon this strength with enhanced analytics-based decision-making, operational agility and process automation.

Second, we are launching our new cloud-based Oracle eCommerce platform over the next few days. This new platform will deliver many additional benefit to our customers and now offers our entire house of well-known mattress brands, whether it is packaged in a box or not. We will provide a seamless experience to our customers to purchase any bed they want through our powerful network of 17 distribution centers strategically located across the country, we are uniquely positioned to offer our Bloom bed-in-a-box assortment by courier or any of our traditional line of mattresses through our White Glove delivery service. The new platform provides a best-in-class online shopping experience, which will continue to evolve, and offers an expanded assortment of the world’s most innovative sleep products for customers to research and purchase online.

We are confident that this new platform will accelerate our revenue growth by deepening relationships with existing customers, while establishing relationships with new ones. This launch is the first phase of our exciting online transformation, which we built upon in subsequent quarters, with the introduction of leading digital capabilities across our stores and website. The shopping habits of our customers are evolving, and we are evolving with them. For the last 25 years, our goal has always been to exceed our customer’s expectations and serving them for all their sleep needs, which is why we are so proud to offer them the only, truly national omnichannel destination for all things sleep. I commend the team for delivering both initiatives on time and on budget, and I am confident that these capabilities will position us for accelerated and profitable growth.

We are happy with Endy’s growth and the tremendous online expertise that they have brought to our overall business. Following the successful Sleep Country model, we have been investing in further building the Endy brand across the country, with new television and radio creative. Our online business continues to thrive, driven by the integration of Endy, the positive reception of our expanded Bloom collection, the growing popularity of the Simba Hybrid mattress, our newly formed partnership with Walmart, and an increased demand for our growing Accessories assortment. The online channel is driving an increasingly significant portion of our overall revenue, and we expect that to accelerate with the launch of our refreshed eCommerce platform.

Our stores remain a critical piece of our omnichannel infrastructure. During the quarter, we expanded our store footprint, opening 4 new stores bringing the total to 275 locations across channels. And those 4 new locations — of those 4 new locations, 2 are in enclosed malls. Subsequent to the end of the quarter, we opened our 276th location in Camrose, Alberta.

As we continue to expand our footprint, our new stores are consistently exceeding our budgeted expectations, demonstrating the effectiveness of our real estate strategy and the importance it plays in the overall omnichannel experience for this very tactile product. Our advantage over our competitors will continue to position us to drive strong results and take more market share. With the opening of our 276th store, our 12th new location for the year, we have achieved our new store goal for the year. We have also — we — while also renovating 24 existing locations.

Strategic partnerships further support our omnichannel strategy by expanding our customer reach. Through our partnership with Walmart, which offers our Bloom collection on Walmart.ca. Our Bloom lineup has exposed 23 million additional customers per month. This quarter, we advanced our relationship with Walmart by executing Bloom pop-up shops at 2 of their GTA stores, giving customers the opportunity to touch and feel the entire collection. These pop-ups are an example of our commitment to next-generation retailing and serving our customers any way they want to shop, and we’re pleased with the positive customer response to the collaboration.

In sum, I believe we are uniquely positioned to serve today’s customer. Our new best-in-class online platform will compliment our robust store network and strategic retail partnerships like Walmart and Urban Barn. This powerful infrastructure differentiates us from both traditional brick-and-mortar retailers and online-only retailers and serves as a strong foundation, upon which to serve the sleep needs of all Canadians and continue to grow our market share.

Finally, I mentioned Craig De Pratto earlier in the call, and I would now like to officially welcome him. Craig joined Sleep Country as Chief Financial Officer on September 9 this year. He has a proven and established track record of financial and strategic leadership in a rapid growth and entrepreneurial environment, and we are very excited to have him on our team.

I will now turn the call over to him to discuss our financial details — financial results in detail.

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Craig De Pratto, Sleep Country Canada Holdings Inc. – CFO [3]

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Thank you, Dave, for the warm welcome, and good morning, everyone. Before we get to the quarterly results, I just wanted to say that I am honored to join as CFO of Canada’s — one of Canada’s most iconic companies. I’m excited to contribute to the strategic vision laid out by Dave and the senior leadership team here at Sleep Country and help to build upon the success they have achieved over the past 25 years.

Turning to the results. It is important to note that like the previous 2 quarters of fiscal 2019, this quarter’s numbers aren’t directly comparable to Q3 of fiscal 2018, mainly because of 2 reasons: One, the inclusion of Endy in the Q3 results of fiscal 2019. As a reminder, Sleep Country acquired Endy in December 2018. And two, our adoption of IFRS 16 accounting standard, which came into effect on January 1 of this year. I’ll explain the impact of these 2 items on the results as we work through the numbers, and we’ll use pro forma numbers for the last year where possible.

The pro forma numbers are compiled for Q3 and year-to-date fiscal 2018 to improve the year-over-year comparability by adjusting the reporting — the reported 2018 results and their respective periods for the estimated impact of IFRS 16. The reconciliation of pro forma Q3 and year-to-date 2018 results are disclosed in Q3 in the 2019 MD&A, and are available on SEDAR and the Investor Relations section of the Sleep Country website. As with previous calls, we’ll not be breaking out Endy’s performance on our financial results at this time.

As a reminder, upon the adoption of IFRS 16, rental expense, which is previously recorded a cost of sales for store leases and G&A for warehouse leases, is no longer expensed in the P&L and is replaced by depreciation of a right-of-use asset and interest expense on our lease liability. While IFRS 16 has an impact on gross profit, gross profit margin, EBITDA, operating EBITDA, net income, adjusted net income and earnings per share, there is no impact on the underlying business economics on how Sleep Country operates as a business and no impact on our cash flow.

I would now like to specifically disclose the impact of IFRS 16 on Q3 fiscal 2019. In the cost of sales section, depreciation related to IFRS 16 increased by approximately $7.9 million. Straight-line rent, which is previously recorded in this section, was reduced by $9.5 million.

In the G&A section, depreciation related to IFRS 16 increased by $0.8 million, and straight-line rent of $1.2 million was removed. On the interest expense line, the interest on lease liability increased by $2.9 million. The bottom line impact on net income after tax was decreased by $0.6 million, resulting in $0.02 per share impact tied directly to this accounting standard change.

In Q3 fiscal 2018, the impact was as follows: Cost of sales section, the depreciation increased by $7.3 million, straight-line rent reduced by $8.8 million; and in the G&A section, straight-line rent was lower by $1.1 million, and depreciation increased by $0.9 million.

The interest expense section, interest increased by $2.7 million, and the bottom line impact on net income after-tax was a decrease of $0.7 million, which rounded up to $0.02 per share impact.

To give you some insight into this quarter’s highlights, let’s begin with revenue. In the third quarter, revenue increased by 14.2% to $210 million. This increase was driven mainly by the acquisition of Endy and aided by the opening of 15 new stores in September 30, 2018, and same-store sales growth of 25%. The significant growth in our mattress and Accessories segments also continue to be key drivers to our business.

Mattress revenue increased by 14% to $166.7 million compared to this time last year, and our Accessories business continue to grow substantially, with revenue rising 14.9% to $43.3 million over the same period in the prior year. The 14.9% Accessories revenue growth is building upon growth of 12.8% in the third quarter of 2018, resulting in a 2-year stack growth that bring together the 27%. These gains are attributable to the continued increase in our brick-and-mortar store network, eCommerce growth, including the addition of Endy, and our focus on All for Sleep brand evolution to include more diverse, total-sleep-solutions-focused product offering, the deepening relationships of our strategic partners, increased customer awareness due to advertising campaigns and our enhanced store design.

As we explained in our first 2 conference calls of this fiscal year, gross profit for the quarter is not directly comparable to that of the year ago due to the adoption of IFRS 16 accounting standard, effective on January 1, 2019.

Gross profit increased 19.5% to $71.6 million from $59.9 million. On a pro forma basis, our gross margin increased by 0.7% to 34.1% from 33.4% at third quarter of 2018. This improvement was primarily influenced by 3 factors. First, our inventory and other directly related expenses, net of volume and rebates, and expressed as a percentage of revenue decreased by 20 basis points. Second, sales and distribution expenses decreased by 60 basis points. This is largely due to improved efficiencies brought on by Endy.

And finally, store occupancy costs, together with depreciation, decreased by 70 basis points, mainly due to the adoption of IFRS 16, which changed the way we account for rent expenses by reclassifying lease stores from operating leases to right-of-use assets and depreciating these assets accordingly.

G&A expenses for this quarter increased by 36.6%, or $9.8 million, to $36.6 million. As a percentage of revenue, this expense represents 17.4%, up from 14.6% last year. Taking a closer look at G&A expense, media and advertising expenditures rose by $6.4 million. The rise in this cost during the quarter was largely because of the inclusion of Endy, in addition to planned marketing spends for Sleep Country and Dormez-vous shifting between quarter 2 to quarter 3 in fiscal 2019.

Building on that, I’d like to touch upon the quarterly marketing spend briefly. As Dave mentioned, one of the key components of our long-term profitable growth strategy is brand building. Targeted marketing is an important part of brand building process, and we’re excited to see the entire family of brands continue to accelerate under this framework. Salaries, wages and benefit in the G&A expenses increased by $1.3 million, which is largely attributable to the inclusion of Endy in fiscal ‘019.

From a customer standpoint, credit card finance charges grew as a percentage of revenue by 0.5%, again, mostly due to the inclusion of Endy and providing our customers with longer-term financing options. The new financing programs have allowed our sales teams to drive additional items into the customer’s basket and grow average unit selling price, which translated into an increase in total average unit selling price in Q3 of 2019 for the entire company. We will continue to measure and iterate on these new financing plans to ensure the net benefits of the company outperforms this increased cost and this — and expense line item.

The adoption of IFRS 16 has also had an impact on our G&A expenses, specifically around our occupancy and depreciation figures. Occupancy charges, which include property taxes, maintenance costs, further distribution centers and office space fell by $1 million from a year ago. However, our depreciation expense almost doubled to $2.7 million from $1.4 million. This increase relates to the changes to the treatment of leased warehouses and operating leases to depreciating right-of-use assets.

Moving on from our G&A. Our operating EBITDA for the quarter was $49.6 million. On a pro forma basis, that was an increase of 4% after accounting for the adoption of IFRS 16. Operating EBITDA margins decreased by 230 basis points from Q3 of fiscal 2018 to 23.6% as a percentage of revenue on a pro forma basis. Again, these numbers are affected by the changes to the way we recognize our leased warehouse and other impacts from IFRS 16.

On to financial-related expenses. Financial-related expenses increased in the third quarter to $5.3 million, up from $1.1 million in Q3 of fiscal 2018. This was largely due to the adoption of IFRS 16 and the increase interest expenses related to the acquisition of Endy. Our adjusted net income for the quarter decreased 9.3% to $22.4 million from the same period last year. That works out to an adjusted earnings per share of $0.60 on a diluted basis, down from $0.66 a year ago. Again, this is largely due to the impact of Endy’s result that have a lower profitability profile from our core omnichannel operations at Sleep Country and Dormez-vous and in addition to the adoption of IFRS 16.

On to our cash flow. Net cash flow is generated by operating activities for year-to-date fiscal 2019, were $98.2 million, compared to $52.3 million in fiscal 2018 for the same period. Net cash flows generated by operating activities year-to-date 2019 comprised of a positive impact of cash generated from operating activities of $98.2 million. On September 30, our cash position currently stands at $48 million compared to $32.9 million as of September 30, 2018.

As we stated in previous quarters, our priorities when it comes to excess capital are as follows: One, we look for ways to grow our business and maintain some dry powder for future opportunities; two, pay down our debt; three, be a company that continually raises our dividend; and four, use 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 the end of the quarter, the balance in our revolving credit facility was $175.8 million compared to $168.6 million as at December 31, 2018. Our Board of Directors declared a dividend of $0.195 per share payable on November 29, 2019, to shareholders on record after the close of business on November 19, 2019. The dividend was increased for the fourth time since our IPO after the first quarter of this year.

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 commencement of the NCIB program, we have not currently repurchased any shares for cancellation but are exploring the possibilities of doing so in the future.

With that, I will conclude my remarks, and I’ll turn the call back to Dave.

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David Friesema, Sleep Country Canada Holdings Inc. – CEO & Director [4]

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Thanks very much, Craig. As you’ve heard today, in Q3, our teams drove solid financial performance across all of our categories, channels and brands, while investing in further future growth and delivering significant process against our strategic initiatives. Our goal remains to be Canada’s preeminent omnichannel sleep solutions retailer. The strategic investments I have outlined today are bringing existing and new customers into our stores and online, and deepening relationships through increased frequency and expanded basket size. We believe our track record of matching customers with their best nights sleep and our commitment to serving them how and where they want to shop will keep them coming back.

Before wrapping up, I’m delighted to congratulate our colleagues at Endy for winning the Proudly Canadian award in the 2019 Canada Post E-commerce Innovation Awards. Like Sleep Country, Endy was proudly founded in Canada, and that remains a large part of our shared identity today.

Finally, as I mentioned at the beginning of the call, this month, we’re celebrating Sleep Country’s 25th year in business. Looking to the past, we’re extremely proud of the business we’ve built and are truly honored to be Canada’s leading sleep solutions provider. Shifting the focus towards the next 25 years, I am more excited than ever by the opportunity that lies ahead of us, and look forward to continuing to work alongside the team to execute our strategic agenda and service of an extraordinary customer experience at long-term profitable growth. As we celebrate this milestone, I’d like to offer my sincere thanks to our best-in-the-business team, our valued suppliers, vendors and investors and our loyal customers, who we will be thanking with some celebratory promotions in the fourth quarter.

That concludes our remarks. We now open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question here comes from the line of Matt Bank with CIBC.

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Matt Bank, CIBC Capital Markets, Research Division – Associate [2]

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I guess, just to start on same-store sales. I mean, it was a little bit softer than Q2 and the comparable period you were lapping was a little bit easier. So did you see anything by month or by channel worth noting?

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David Friesema, Sleep Country Canada Holdings Inc. – CEO & Director [3]

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Yes. So I mean, first of all, let’s just start of, we would always like to do more revenues than we did, no matter what the number is. But we are happy with 0.5% growth. I mean it is a big quarter and having growth over that is great. But we always want more. The quarter unfolded — so July and September were both strong months, and August was a little weaker. And that’s how the — that’s how it unfolded.

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Matt Bank, CIBC Capital Markets, Research Division – Associate [4]

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Okay. And then on margins, down a little bit more in Q3 than in Q1 and Q2. Can you talk about the drivers in Q3 versus the first half of the year?

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David Friesema, Sleep Country Canada Holdings Inc. – CEO & Director [5]

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So I think — Well, Craig might be able to add some more color to this, but I think the one thing that we — over the year — I’ll cover the first part of it because over the years, we’ve talked about it quite a bit. Our marketing expenses are not always leveled quarter-over-quarter. It depends on what’s going on in the quarter. And sometimes you make investments in the quarter that you don’t see until future quarters, and then you make it up somewhere in the future, which we’ve shown a few times in the past. And Q3 was a great quarter of investments for us. And so both for Sleep Country, Dormez-vous and Endy, we did a lot of brand building investments for the future, and we were — we did that on purpose and are excited about it.

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Craig De Pratto, Sleep Country Canada Holdings Inc. – CFO [6]

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Yes. And, well, just to add to what Dave indicated, we did also see a pickup in our gross margin in the — and part of that is the efficiencies of the Endy business. We add that line item as well as the continued acceleration of the Accessories business, which as a reminder, does have a higher gross margin profile. So that would be an additional direction impact, which was a big pick up on the gross margin line.

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Matt Bank, CIBC Capital Markets, Research Division – Associate [7]

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Okay. And then on the gross margin, could you just comment on the higher delivery expenses and also the higher compensation expenses at Sleep Country that were in selling and distribution?

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Craig De Pratto, Sleep Country Canada Holdings Inc. – CFO [8]

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Yes. That’s — a little bit of that is also with the inclusion of Endy, so there was a few increases there, but it wasn’t anything significant. But we didn’t see any sort of large anomalies on that line item.

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David Friesema, Sleep Country Canada Holdings Inc. – CEO & Director [9]

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I think another thing is — sorry. We just look at some of the — we had some — there was some timing on some sales bonus numbers that were in Q3. They will be under for the year. And there was — the other item had to do with overall benefits, which were analyzed. Payroll tax deduction and benefits were a bit off, and we’re looking into that. But that’s coming back in the line for the year, too.

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Matt Bank, CIBC Capital Markets, Research Division – Associate [10]

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Okay. And last one for me. When you acquired Endy, you said it would be immediately accretive to EPS. Has that happened year-to-date and in Q3?

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David Friesema, Sleep Country Canada Holdings Inc. – CEO & Director [11]

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So as far as our premise when we bought Endy, we bought a company that we wanted to continue to grow, just like Sleep Country and Dormez-vous, and add to our long-term profitability. The — when we make investments in building a brand, sometimes that investment doesn’t happen in a particular quarter. But it is something that we are very cognizant of. For 25 years, we’ve always wanted to grow and grow profitably, and that continues to be our focus.

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Operator [12]

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Your next question comes from the line of Sabahat Khan with RBC Capital Markets.

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Sabahat Khan, RBC Capital Markets, Research Division – Analyst [13]

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Just starting of maybe with the top line. I guess, can you maybe talk about was — in the — during the quarter, was it more maybe a sequential slowdown in the macro environment? Was it traffic-related? Just trying to understand the drivers of maybe the sequential slowdown and if there’s anything you can share on what you’re seeing in the market right now.

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David Friesema, Sleep Country Canada Holdings Inc. – CEO & Director [14]

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So as I said on the last question, it was, of the quarter, we had July and September were stronger, where August wasn’t. And interestingly enough, what we’ve been talking about for quite a while, has been the correlation between our business and consumer confidence. And if you’ll notice, that tracked quite nicely with the way consumer confidence was unfolding.

We also do see anomalies region over region, and there was nothing new there. So that continues to be very strong. And areas where consumer confidence is lower, where it’s not quite as strong. But nothing unfolded that would make us believe that we weren’t winning in those regions and taking share.

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Sabahat Khan, RBC Capital Markets, Research Division – Analyst [15]

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Okay. And then just looking at the gross margin line. Obviously, there is some variation there caused by IFRS 16. But if we think about 2019 as sort of a run rate number, how should gross margin evolve over the next, call it, 12, 24 months as eCommerce becomes a bigger part of your business and as you invest a little bit in online, do you — what do you expect will be the drivers of gross margin? Which direction do you expect it to trend in?

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David Friesema, Sleep Country Canada Holdings Inc. – CEO & Director [16]

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So Sabahat, I just — I want a little clarifying there. When you say gross margin, are you talking about, say, an EBITDA margin?

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Sabahat Khan, RBC Capital Markets, Research Division – Analyst [17]

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Well, basically, probably like more of gross margin but also yes, I guess, overall, if taking into account SG&A, how do you think your overall marginal trend also, I guess, taking Endy into account.

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Craig De Pratto, Sleep Country Canada Holdings Inc. – CFO [18]

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Yes. So as we noted on the call earlier, we do see some efficiencies with the Endy business and as well with the Accessories business, we do see — we do feel there will be continued efficiencies there at a higher margin. As a reminder, the Accessories business is about a 10% higher margin than what we see in the mattress business. So I’d say directionally, on those 2 pieces, as they continue to evolve through the model, will be accretive to the gross margin.

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Sabahat Khan, RBC Capital Markets, Research Division – Analyst [19]

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Okay. So you expect, I guess, as Accessories grows, it can maybe offset some of the lower margin Endy business? And overall, you think EBITDA margins, I guess, sort of, gross margin should trend higher overall?

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Craig De Pratto, Sleep Country Canada Holdings Inc. – CFO [20]

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Yes. No. I’d also point out that the Endy business is a good margin business for us, so it is slightly accretive to the overall margin profile compared to the core mattress business. But we also will see additional efficiencies and pickups in that line, as it relates to the continued expansion of Accessories itself. So we would — we do expect to see that have opportunity in that line item.

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Sabahat Khan, RBC Capital Markets, Research Division – Analyst [21]

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Okay. And then just on the eCommerce side, can you maybe talk where you’re adding some capabilities to your eCommerce website? How should we think about the evolution of that business? How much are you looking to invest behind it? Do you eventually see yourself getting to a point where you may offer even mattresses online for sale that are sort of non bed-in-a-box brand? Like what are your plans over the next few years for developing your e-commerce platform?

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David Friesema, Sleep Country Canada Holdings Inc. – CEO & Director [22]

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That’s a great question. So as — if you go on our website today, you can buy 5 mattress-in-a-box and 5 models-in-a-box, and you can buy our Accessories. And when we roll out our new eCommerce platform and when I say a few days, I mean, literally a few days. You will immediately be able to buy — any bed that you see online will be for sale, whether it’s in a box or whether it’s not in a box, whether it’s delivered by a courier or whether it’s delivered on our truck, plus all our accessories, and that’s just the beginning. That starts on day 1. And as we continue to evolve that, it will just get more and more.

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Sabahat Khan, RBC Capital Markets, Research Division – Analyst [23]

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And then just one last one for me. I guess, how are you noticing, I guess, the competitive intensity in the market? How does it change over the course of the last year? Is it competition in the market from larger players, smaller players? Just trying to understand the competitive intensity amidst the current macro environment?

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David Friesema, Sleep Country Canada Holdings Inc. – CEO & Director [24]

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So I think — and I’m trying not to say it too many times, but in our 25 years of being in business, we — and this has been a competitive business since day 1. And that’s not changing. And the competition shifts from region to region, from channel to channel over time, but I would say it’s equally as competitive, and I would say we’re equally as dominant and as strong today as ever. And frankly, when our new eCommerce platform rolls out over the next couple of days, few days, and we continue to build Endy’s brand and so on, we will just continue to get stronger.

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Operator [25]

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Your next question comes from the line of Patricia Baker with Scotiabank.

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Patricia A. Baker, Scotiabank Global Banking and Markets, Research Division – Analyst [26]

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I have 2 questions for you guys. Number one, Dave, typically, on these calls, you do share with us the quarterly KPIs. So can you talk about AUSP conversion, et cetera, et cetera, in the quarter?

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David Friesema, Sleep Country Canada Holdings Inc. – CEO & Director [27]

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Sure. So we — again, you look at our KPIs and they — if you look at total traffic, we were up. If you look at conversion, we were very flat, which is — it’s the first time we’ve ever said that, but our conversion is so high, it’s hard to always have an increase. And we were up a very high percentage last year and we held it. So we’re happy with that. AUSP is up, units are up, everything else is up. I’m just trying to — I’m trying to — I could go through the list completely. I’m just — I don’t want to miss anything. Our gross product margin is strong. Yes, I mean, we really feel that it was a very solid quarter on those KPIs.

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Patricia A. Baker, Scotiabank Global Banking and Markets, Research Division – Analyst [28]

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Okay. Excellent. Good to hear that. And then I just want to come back to the new eCommerce platform and talk about that strategically, because you’ve made the big decision here to put the rest of your mattress assortment online. And to be fair, you don’t know how that is going to play out. But given that you’ve made that decision, you must have some thoughts about how the business is going to evolve, and I wonder how much of that you would share with us. What are you — what do you anticipate the consumer will do? And are you anticipating a small migration for the other — the standard mattresses online or something larger? What are the implications for your SG&A? Should part of that business shift online? And are there any other longer-term implications that you’re thinking about, about your store-based related to shifting this business online?

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Business Development Officer & Corporate Secretary [29]” data-reactid=”223″ type=”text”>Stewart Schaefer, Sleep Country Canada Holdings Inc. – Chief Business Development Officer & Corporate Secretary [29]

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Patricia, it’s Stewart. I’m going to give you a little bit of color. So I think — I mean we’re very excited about this move, and it’s taken a few years for us to get there. And it’s more about making sure that it’s a seamless experience for the customer. And Canada knows us for our wide selection of mattresses, all our major brands, the Sealy, Simmons, Serta, Tempur-Pedic, Kingsdown. And just to clarify a little bit, Dave’s comment about the 5 mattresses that we sell, he was including the sizes. So currently, today, of our vast selection of product that we offer to the Canadian consumer, we only sell online Bloom, which has been wildly successful and created as of 2017 and expanded in 2018 with, with various different models in terms of the pricing, but only the Bloom collection, and Simba, the relationship that we created with Europe’s #1 bed-in-a-box.

We are in a uniquely competitive market as with the bed-in-a-box business, but because that has really been the only broad offering online. What’s about happen is the entire collection of Sleep Country, all our brands, which is probably about 45 different types of models in all various sizes, obviously, will be offered either through an overnight courier bed-in-a-box component, or through our White Glove delivery service. So the customer now will have a seamless experience to be able to shop any way they want. But more importantly, for us, our advertising has always been our strongest lever in our business, and it will unify everything that we do, so that we drive a seamless message to our customers for driving the business online or in-store. We all know how important the omnichannel component is, and some of the bed-in-a-box realized that their path to profitability requires a brick-and-mortar component. We now are offering the entire line up through the online, through the brick-and-mortar, seamless experience through a overnight courier system or our White Glove delivery, giving our Canadian consumer more options than anyone else out there in this domain.

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David Friesema, Sleep Country Canada Holdings Inc. – CEO & Director [30]

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And then Patricia, we’ve done quite a bit of market research while we’ve been going through this whole process, and we understand — Yes, and we understand that there are customers who want to shop in the store, which is — because it’s a very tactile purchase and that’s most customers. And there are some people, whether it’d be the way they shop or just what they need the mattress for, they’re not as concerned about going to the store. And for us, we just want to be in the right place at the right time for anybody, and that’s what this is going to open up.

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Patricia A. Baker, Scotiabank Global Banking and Markets, Research Division – Analyst [31]

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Okay. Just let me ask a follow-up on that. It’s just thinking about your website. So let’s say I’m a customer and I’ve ordered one of your traditional mattresses from a store, and I’ve set up a delivery time et cetera, et cetera but something changed. Would you be able to go online and make a change to your delivery? Will it be that seamless?

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David Friesema, Sleep Country Canada Holdings Inc. – CEO & Director [32]

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So that is why we say this is going to continue to evolve over the next year because our new online system is rolling out very, very soon. We’ll be — it’s just going to be vastly better than the one that we currently have, and it’s going to be leading edge from a competitive point of view. But it won’t completely connect all the stores until we roll out the next phase over the next year. So we will have good capabilities, but it’s only going to get better as we move forward. So to answer your question specifically, we will be able to do that but not as it rolls out. That will come later.

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Patricia A. Baker, Scotiabank Global Banking and Markets, Research Division – Analyst [33]

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Okay. Fair enough. And then back to my original question, and I know you won’t give much color here, but I just wanted — tell me whether I’m directionally thinking about this properly. But I am thinking that over the long term, that this shift could result in lower — some lower SG&A.

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David Friesema, Sleep Country Canada Holdings Inc. – CEO & Director [34]

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So it’s hard for us to answer that question, not trying to be evasive on it. Our plan is, and it always has been, to grow our business and grow it profitably. And we are going to continue to evolve, and we’re going to continue to make sure we’re doing things that are smart for the business, both from a revenue point of view and profit. How that actually unfolds, whether it be in the gross margin line or SG&A, we’ll continue to be prudent. But we don’t have those answers at this point.

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Craig De Pratto, Sleep Country Canada Holdings Inc. – CFO [35]

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And specifically, Patricia, what are you referring to in the lower SG&A? Is there something specific that you’re thinking?

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Patricia A. Baker, Scotiabank Global Banking and Markets, Research Division – Analyst [36]

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Well I just think that you would have less store-related expenses when mattresses shift to being the traditional mattresses, convert to being sold online, so you would have less selling expenses?

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David Friesema, Sleep Country Canada Holdings Inc. – CEO & Director [37]

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Well, most of our — well, our — just to be clear, we — that’s why we don’t call it SG&A. We call it G&A. So in the gross margin line — Yes, so the G&A doesn’t include those costs. So — but in our whole profit stack, you have to remember that selling online saves in some buckets and then there’s more cost in others. So…

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Patricia A. Baker, Scotiabank Global Banking and Markets, Research Division – Analyst [38]

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Okay. Fair enough. I really look forward to having more in-depth conversations on this later.

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David Friesema, Sleep Country Canada Holdings Inc. – CEO & Director [39]

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So do we. We’re very, very excited about this and look forward to talking more.

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Operator [40]

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Your next question comes from the line of Vishal Shreedhar with National Bank.

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Vishal Shreedhar, National Bank Financial, Inc., Research Division – Analyst [41]

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As you launch the new eCommerce platform, should we consider that you would have to accelerate marketing in advance in order to prime the customers of the new offer?

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Business Development Officer & Corporate Secretary [42]” data-reactid=”276″ type=”text”>Stewart Schaefer, Sleep Country Canada Holdings Inc. – Chief Business Development Officer & Corporate Secretary [42]

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Actually, we are going to do a soft launch to make sure that everything is running smoothly. As we get closer to Black Friday and Cyber Monday, that will be an opportunity for us. But this is not a short race. This is a long marathon, and we are going to experiment and carefully drive different categories. In fact, over the next year, hopefully, you will see us expand our endless aisle component of our business and be adding new items to it. I expect, as time goes on, and we see that acceleration in our revenue online are profitable — revenue online, we will act accordingly with our advertising budgets to drive all the different categories.

But let’s be clear in our thinking that we do believe there’s a — this is a powerful omnichannel tool. And for us, whether they drive the business to store or online, it works well for our teams anyway. So there will be a balance in terms of the overall media mix that will drive revenue in all our channels.

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David Friesema, Sleep Country Canada Holdings Inc. – CEO & Director [43]

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And Vishal just as a — to add to that, just as a reminder to everybody that’s on the call. We’ve been talking in the past about how it’s very difficult to look at our marketing expense on any individual quarter, and we’ve seen that over the last couple of years, and I think that’s been proven out. Over the long run, our marketing will shift from different mediums and different messaging, but we do believe that over the long run, we will be able to leverage our marketing expense. And if we want to invest more, it’s going to have to deliver the revenue and to make that worthwhile. And so that’s been our approach for the last 25 years, and it’s going to be continuing going forward.

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Vishal Shreedhar, National Bank Financial, Inc., Research Division – Analyst [44]

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Okay. On the — on that point that you just made, what tools or metrics does management use to evaluate if the marketing investment was productive?

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David Friesema, Sleep Country Canada Holdings Inc. – CEO & Director [45]

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Well, there’s different categories for each level. So if it’s more tactical, you can measure traffic, and you can measure revenue over the short period of time. When you’re investing in branding, as we always have and continue to do so, for instance, with our All for Sleep campaign, and this year, Tell Us Everything as well as Endy going on TV and radio to expand their brand, that is a longer-term game. And you don’t sometimes always know exactly how well it’s paying dividend because there isn’t an exact marketing for that. But we’ve been doing it for a long time, and we feel very confident that we’re sending the right messages in the right mediums to build the brand.

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Vishal Shreedhar, National Bank Financial, Inc., Research Division – Analyst [46]

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Okay. The new eCommerce sales from the new platform, will that be in the comp right away? Or will you take a year and lap in?

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David Friesema, Sleep Country Canada Holdings Inc. – CEO & Director [47]

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No. That will be in the comp because it’s just part of — our eCommerce business is already in comp, so that will just stay there.

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Vishal Shreedhar, National Bank Financial, Inc., Research Division – Analyst [48]

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Okay. When a non-bed-in-a-box mattress is purchased online, and I know we’re looking out at least a couple of quarters until you get this fully running, should we expect that to be higher margin as you avoid some of the sales compensation — incentive compensation?

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David Friesema, Sleep Country Canada Holdings Inc. – CEO & Director [49]

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I think it’s — again, as we were talking into the previous question, when you sell something online, there’s different costs. There’s different savings and there’s different costs. And so we will save some money in some areas, and we will spend it in others. So we really are looking at this as additive to our business and not to drive our margins down but also not to wildly increase that. It’s a way for us to capture more market share in an effective way.

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Vishal Shreedhar, National Bank Financial, Inc., Research Division – Analyst [50]

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Okay. I appreciate that. And just last one for me here. Obviously, the investment in Endy and marketing, as you indicated, off the top, you’ve been implementing that. And — have you seen Endy’s performance get accelerated associated with that marketing investment?

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David Friesema, Sleep Country Canada Holdings Inc. – CEO & Director [51]

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Well, it’s interesting you mentioned that because obviously, Endy is still a fast-growing company, and they continue to be that. But we also can measure other KPIs that would indicate people understanding their brand better and searching it more, and we are seeing positive results there as well.

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Operator [52]

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Your next question comes from the line of Stephen MacLeod with BMO Capital Markets.

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Stephen MacLeod, BMO Capital Markets Equity Research – Analyst [53]

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I just wanted to follow up very briefly on the KPIs that you talked about, Dave, earlier in the question period. Can you just talk a little about like how those KPIs might have differed between online and bricks-and-mortar?

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David Friesema, Sleep Country Canada Holdings Inc. – CEO & Director [54]

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I’m sorry, Stephen, I don’t understand that question. I’m — how they — we saw increases in our KPIs. So far, we saw increased traffic into our stores. We saw increased traffic to our website. So they were increasing on both fronts.

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Stephen MacLeod, BMO Capital Markets Equity Research – Analyst [55]

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Okay. Yes, that’s what I was wondering.

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David Friesema, Sleep Country Canada Holdings Inc. – CEO & Director [56]

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Okay. There we go.

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Stephen MacLeod, BMO Capital Markets Equity Research – Analyst [57]

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Yes. That’s what I was wondering, just if you saw — because they have different KPIs versus online — to your online properties versus your bricks-and-mortar properties. And it sounded like if you saw total traffic up, you also saw total traffic up in both the stores as well as online.

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David Friesema, Sleep Country Canada Holdings Inc. – CEO & Director [58]

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That is accurate.

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Craig De Pratto, Sleep Country Canada Holdings Inc. – CFO [59]

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I will add though, Stephen, because one of the — so yes to exactly what you just said. But in the past, we have advertised differently online as we have done in-store because we were not able to sell everything online. So if there is an event that was a Sealy posturepedic bed that we were selling, it is possible that the positioning through our traditional advertising was driving aggressively one message. And it was possible that our messaging online was driving another message to drive revenue. So that added a layer of complexity to our business even though it’s been quite successful and growing incrementally. Now going forward, the message will be very clear. It will be very seamless. The drivers will be exactly the same thing. The KPIs will be exactly the same thing. And it will have a seamless experience for us throughout all the advertising channels. So we do expect to see a nice lift because of that less fragmented advertising campaigns.

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Stephen MacLeod, BMO Capital Markets Equity Research – Analyst [60]

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Okay. I see that makes sense. Okay. Just turning to Endy, I just wanted to clarify just on liquidity. Was Endy not margin-additive in the quarter? I know Craig mentioned that it is additive to gross margin, but was it not margin-additive for the, say, operating EBITDA?

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Craig De Pratto, Sleep Country Canada Holdings Inc. – CFO [61]

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Yes. So we don’t break out Endy specifically, but I believe as we described previously, there is different margin profiles for Endy and where it is in its growth stage versus the more established Sleep Country Dormez-vous business. But we don’t break out the results. So I’d rather would say that I can’t confirm that it was margin accretive throughout the entire P&L.

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Business Development Officer & Corporate Secretary [62]” data-reactid=”357″ type=”text”>Stewart Schaefer, Sleep Country Canada Holdings Inc. – Chief Business Development Officer & Corporate Secretary [62]

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I will say though that we are adding investments in brand awareness in the Endy brand. Dave mentioned it at the beginning of the call. We, for 25 years, have done a great job of having the highest brand awareness in this category. Endy, which is still relatively a very new company, which is hugely successful, and we don’t break it out provincially, but it’s definitely has dominated in the Ontario market. And one of the exciting opportunities for us is be able to create a greater brand awareness countrywide, the same way we did Sleep Country. So the investments of that may not pay off immediately, but we have a proven track record showing that creating strong brand awareness resonates with the consumer for years to come.

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Stephen MacLeod, BMO Capital Markets Equity Research – Analyst [63]

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Okay. Okay, that’s great. And then I just want — Oh, sorry.

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David Friesema, Sleep Country Canada Holdings Inc. – CEO & Director [64]

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Just to underscore what Stewart said, all these people that are calling right now are generally are living in Toronto. And so you see Endy as this big, big brand. It’s not exactly the same across the country, but it will be someday, hopefully. And that’s what we’re working on. So…

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Stephen MacLeod, BMO Capital Markets Equity Research – Analyst [65]

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Yes. And along those lines, would you say that there’s another — that there are other brands that resonate better in, say, Western Canada and Eastern Canada? Or do you just think that the model of bed-in-a-box hasn’t quite caught on outside of the much more urban areas?

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David Friesema, Sleep Country Canada Holdings Inc. – CEO & Director [66]

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We would say that Endy has done an excellent job of building the brand that they have in the time they’ve been there. And this is not that anybody’s winning elsewhere and they have to catch up. This is just the process of going through the whole country.

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Stephen MacLeod, BMO Capital Markets Equity Research – Analyst [67]

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Okay. Okay, that’s helpful. And then one of the other initiatives that we haven’t talked about yet that you cited is your new ERP platform, which has launched. Can you just talk a little bit about how the launch has gone and maybe just remind us as to what benefits you expect to see from that over time?

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Craig De Pratto, Sleep Country Canada Holdings Inc. – CFO [68]

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Sure. So first of all, we’re very happy with the launch. By the way, we have a lot of tired people that work for the company right now, and it’s a good thing we’re a mattress company because everybody got a good night sleep. But we’re really happy with the launch. And so basically, that is our complete financial backbone that is now up and running. And we’re still in what they call hyper care, but we’re doing very well. And we’re starting to really — keep it starting to — and because that’s now been launched for about 3 weeks, and so that one has gotten off to a great start. The eCommerce one is that — they’re going to launch very soon. But back to the ERP that you mentioned, it is just right now, it’s our financial’s backbone as well as our merchandising. And then over the next period of time, we’ll be adding the POS in the stores because that’s currently not out there. The eCommerce platform will be running through the new ERP when it launches very soon and so on. So it is — right now, it’s the backbone, and we’ll just keep adding things to it as we move forward, warehouse management, all those sorts of things.

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Operator [69]

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Your next question comes from the line of Brian Morrison with TD Securities.

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Brian Morrison, TD Securities Equity Research – Research Analyst [70]

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First question is for Craig, I think. When I take a look at your — I’m not sure if I fully understand the gross profit margins. So when I take a look at it for the first half of the year and then on an apples-to-apples pre-IFRS 16 basis, your gross profit margin is up about 200 basis points. And in this quarter, if I did the math correct, I think you only have about 75 basis points. There’s been a few questions on that. So I’m kind of curious as to why is the performance in Q3 not as good as it was in the first half of the year, specifically for gross profit? Is that competition? Is it your new partner relationships, one-time items? What’s going on there?

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Craig De Pratto, Sleep Country Canada Holdings Inc. – CFO [71]

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Yes. Sorry. This is Craig. Yes. So one thing we did have was we did have some different promotional activities that did fall into Q3. And to break those out a little bit more specifically, one, we ran a gift card program where the redemptions crossed over the period, so it crossed over the quarter end. And so we accrued for those and expensed those in Q3 where the redemption rate is not fully baked through. So there will likely be some tick up in Q4 to offset what was hit in Q3 for those gift card programs, for items that are not redeemed. So the cards that are redeemed are obviously margin accretive.

Second off, we did run some promotional — bedding promotions where we had some tick up in those items, above the line, in our gross profit margin because they were discounts from vendors to sell those through, through promotional activities, where we compensated our sales associates in an accretive matter to the sales associates on the discounted beds. So there’s a little bit of pass-through between each bucket, a little bit higher margin up top as we discussed previously, and a little bit of reduction down to contribution margins for those initiatives.

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David Friesema, Sleep Country Canada Holdings Inc. – CEO & Director [72]

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And I think another — Craig, another portion of it is store occupancy. Correct?

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Craig De Pratto, Sleep Country Canada Holdings Inc. – CFO [73]

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Correct. Yes.

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David Friesema, Sleep Country Canada Holdings Inc. – CEO & Director [74]

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We’ve been good at opening stores.

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Craig De Pratto, Sleep Country Canada Holdings Inc. – CFO [75]

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Yes. That’s another — another big bucket there was the store occupancy for the openings, which we’re at 11 to date versus — yes, 11 to date versus the 12 a year forecast.

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Brian Morrison, TD Securities Equity Research – Research Analyst [76]

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Okay. So on those new stores, it sounds like you’re getting good returns. Are they having any impact upon your existing same-store sales — the existing store-base, same-store sales growth?

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David Friesema, Sleep Country Canada Holdings Inc. – CEO & Director [77]

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So that’s a great question. The fact is, I mean, I have to say it again. For the past 25 years, every time you open a store that’s not too far from another store, you see some cannibalization. And that is absolutely understood, and we measure that, and we’re happy to do that because in the long run, the market gets stronger. And so yes, we do see some cannibalization when we open new stores, and we’re seeing a little bit more of that plan with some old stores. So it is — some of that is affected, but it is nothing new, and it is something that we plan for, and it helps us grow our market share over the long run because that’s only a 1-year phenomenon, and then it gets back on track as a bigger market.

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Business Development Officer & Corporate Secretary [78]” data-reactid=”422″ type=”text”>Stewart Schaefer, Sleep Country Canada Holdings Inc. – Chief Business Development Officer & Corporate Secretary [78]

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And I’ll just add to that, that one of the trackers is the overall revenue by stores. So as we look and expand our markets, the shift between stores is less relevant to us, but it does eat into a little bit to the same stores, especially with the last 15 to 17 stores have opened and exceeded our expectations. They’ve done a fabulous job. But at the same time, the most important metric that we measure is the overall gross revenue of the stores as time goes on. If you look a little bit back in the time panel, in 2015, when we went public, we were around, on average, of about $1.8 million a store. We’ve grown from approximately 217 stores in 2015 to 276 stores currently, and our gross revenue in the stores have also gone from $1.8 million on average to $2.4 million. But that metric for us is the biggest thing that as we grow, shifting around between stores may have some type of impact and cloudiness on the numbers, but the overall growth and market share that we continue to take has been far exceeding our expectations.

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Brian Morrison, TD Securities Equity Research – Research Analyst [79]

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Okay. And then the last question I have is, as you successfully grow your eCommerce platform, and the outlook is obviously quite positive, and you expand new partnerships, I’m wondering if that’s all incremental or whether that will impact the rate of new store growth as you go forward?

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David Friesema, Sleep Country Canada Holdings Inc. – CEO & Director [80]

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Sorry. So we sit here, as Stewart just mentioned, with 276 stores, and we still see a strong future for adding stores for the foreseeable future. But we do measure each one, and we make sure it’s adding to the overall value, and we continue to watch the customer to make sure that they want to still buy in the stores. I must say, we’ve seen very little information that would indicate that the stores are not going to continue to be a big part of the future, and that’s one of our big strengths. And one of the things we’re happy about is that 5 years ago, this is a bricks-and-mortar industry. 2 years ago, people are wondering if everybody in the world was going to start buying online. And now everybody seems to coming back to a better understanding that it’s an omnichannel business, and we’re — we have all the ingredients for an omnichannel business. If you look at some of our online competitors, they’re raising money to open stores. We already have great stores. We already have 17 distribution centers to handle the final mile. And coming in the next very few days, we’re going to go from an okay web presence to a much better and industry-leading web presence that we’re going to continue to add to over the coming quarters.

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Business Development Officer & Corporate Secretary [81]” data-reactid=”434″ type=”text”>Stewart Schaefer, Sleep Country Canada Holdings Inc. – Chief Business Development Officer & Corporate Secretary [81]

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And I’d like to say internally, we look at our business as layering. So sometimes, the Street doesn’t necessarily see all the layering that’s going on, and some of the moves that we’re not making isn’t because something isn’t going well. Every single thing that we put into place over the last 25 years continues to compound and grow and accelerate. I mean 4 years ago we went public, and the double-digit CAGR that we’ve been seeing has not slowed. I mean maybe choppy on a quarterly basis, but look at the path and look at all these things that we’ve added that we said that we were going to add, that we continue to add, including the multi-channels, the partnerships, the accessory part of our business, now layered on with the eCommerce. Like, we’re really excited, and Dave mentioned in the first part of the comments that we’re more excited about our business for the next few years than we have been for probably the last 5 years, and the last 5 years had been exceptional, mainly because of all the layering that we’re doing onto our business so that we could continue to take more market share within this — more market share at a profitable way than over the next few years. And we’re positioned really — like there’s exciting things to come still.

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Operator [82]

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Your next question comes from the line of Elizabeth Johnston with Laurentian Bank Securities.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division – Analyst [83]

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I just wanted to go back to something you mentioned in the prepared remarks about credit card and financing charges. So I do see the commentary about the higher cost of that as a percentage of sales coming from Endy, but I just wanted to go through some of it again, because when I look at this quarter specifically, the first half of the year, even though that would have include Endy, we didn’t see the differential year-over-year. So wondering if you can just go through that in a little more detail?

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David Friesema, Sleep Country Canada Holdings Inc. – CEO & Director [84]

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Sure. So yes, Endy did play a part, like we said. And there was another initiative that we put in place there, which is a third-party financing to our customers. And we’ve always done that for the past years, and we’ve continued over the years to try different tests to see how we can use that better to maximize our business. And so this particular quarter, we’re running tests around how we can use it in a longer-term plan to raise our average unit selling price in the store and, which did drive higher financing charges, but it also did drive higher AUSP.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division – Analyst [85]

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Okay. And so when we look forward, do you think that based on the tests that you’ve done this quarter, this is more like the level of cost that we’d see going forward? You’re happy, in other words, with the test that you did?

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David Friesema, Sleep Country Canada Holdings Inc. – CEO & Director [86]

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I would say that it’s somewhere in the middle. We’re happy with the tests, and we’ve got a lot of learnings on it. We’re in the right direction, but we’re going to tweak it to make it even more efficient. So I would say that it’s going to be a part of what we do going forward. And we’re just going to continue to try and maximize it as we go.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division – Analyst [87]

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And when it comes to the test, are you seeing — the customer pickup that you’re seeing, are you able to tease that out, whether it’s a customer that might not have purchased or one that’s purchasing more items, so a larger basket size? Do you have any other data on who these customers that are using this offer — these offerings?

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David Friesema, Sleep Country Canada Holdings Inc. – CEO & Director [88]

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Yes. So we’re still continuing to do the evaluations of it. But this is — it would be more about adding to the customers’ purchase rather than getting more customers. And we’re going to continue to try and get more customers with it. But in our system, that has never been as easy to read. What we can see very clearly is that people are using it to buy more.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division – Analyst [89]

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Okay. And apart from that, so I understand how that’s driving AUSP, but apart from that, would you have still said that you’re seeing higher AUSP, excluding this impact?

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David Friesema, Sleep Country Canada Holdings Inc. – CEO & Director [90]

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Yes. Yes. For sure.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division – Analyst [91]

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Okay. Great. Just moving on going over to Accessories. Maybe you can talk about some of the drivers of the sales. I mean you’ve highlighted on the 2-year stack the 27% growth. Is it transactions or average basket size? Or maybe you can talk a bit about any new products that you launched in the period?

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David Friesema, Sleep Country Canada Holdings Inc. – CEO & Director [92]

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Sure. Stewart can answer this much better than me, but I will just make the first comment. It is both, average unit selling price and units. So it’s nice because it’s both.

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Business Development Officer & Corporate Secretary [93]” data-reactid=”482″ type=”text”>Stewart Schaefer, Sleep Country Canada Holdings Inc. – Chief Business Development Officer & Corporate Secretary [93]

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And I think also our partnerships, and you’ll — over the next few quarters, you’ll probably see new products being introduced that are slowly being trinkled in that we’ve not dealt with in the past that are delivering exceptional results for us. I also believe that our marketing campaigns, someone asked before in terms of our measurement on our rollouts or a return on our investment. We do measure our business by category, and we invest by category. So whether it’s our pillows or lifestyle basis, the accelerated growth is partially new products that we’re going to — that we’ve introduced and we’ll continue to introduce that are very relevant to our consumers. But it is also the metrics around driving our advertising awareness around certain products, which seems to be having a terrific compounding effect in our stores and online. And that’s going to continue into the new year.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division – Analyst [94]

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And do you continue to measure the number of sales that are Accessories only? And if that’s — and if so, have you seen that continue to tick up?

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Business Development Officer & Corporate Secretary [95]” data-reactid=”490″ type=”text”>Stewart Schaefer, Sleep Country Canada Holdings Inc. – Chief Business Development Officer & Corporate Secretary [95]

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Yes. And interestingly enough, Dave mentioned in the early part of the call that the Q3 saw July strong, September strong and August, a little softer. But our traffic in our stores for the month of August, we still saw an acceleration of our Accessories. So there might have been a deferred purchase from customers maybe, because of consumer confidence on the mattress side, but what’s interesting to us, which is exciting to us, too, is that on the Accessories side of the business, that didn’t seem to slow down. So they came in. They crossed the lease line. They had the Sleep Country experience. They bought a pillow or something, and we believe those customers also come back after having a good experience when they’re ready for the mattress, which is possible we saw in September.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division – Analyst [96]

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Okay. Great. And just my final question just on the CapEx. Can you just give us an update on what spending you anticipate incurring for the balance of this year and any update in terms of 2020? I know in the past you discussed the potential for some of this ERP cost to come through in 2020.

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Craig De Pratto, Sleep Country Canada Holdings Inc. – CFO [97]

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Yes. So consistent with our outlook that we do indicate in the MD&A is we do plan to come in line in the range of approximately $30 million to $40 million on the CapEx. There will be some spillover of the ERP, as you mentioned into 2020, and — but we expect about 70% or so about to be behind us at the end of this year. But there will be some fall over. And we don’t — we’re not breaking out what we plan to do in 2020, but I’m just confirming that we will see some spend related to the ERP release 2 or phase 2 in 2020.

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Operator [98]

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Your next question comes from Edward Friedman with CWB McLean & Partners.

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Edward Friedman;CWB McLean & Partners;Senior Research Analyst, [99]

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So I understand that the market was always competitive as you mentioned. But I was a little surprised, higher marketing spend and margin impact, it seems like the competition from the likes of Casper and others is intensifying. And as such, you see a pressure — more pressure on margin and have a higher marketing spend for a while. Just wondering if this seems like a fair observation?

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David Friesema, Sleep Country Canada Holdings Inc. – CEO & Director [100]

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Well first of all, we can break — when we have our gross margin that you see, that is including all the things we discussed that were additional cost in Q3. When you look at our actual gross product margin, we’re very happy with that, and so — which is more what you would be talking about with intensified competition. And so yes, we’re not disappointed at all with our gross product margin. And then our increase in marketing came for 2 reasons. One, where Endy is now in our business when it wasn’t last year. And secondarily, for Sleep Country, Dormez-vous and Endy, we’ve added brand building in the quarter. So, I would say, your comment is less about competitive intensity and it’s — in our business, and it’s more about winning today but building for the future.

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Edward Friedman;CWB McLean & Partners;Senior Research Analyst, [101]

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Okay. Fair enough. There’s also another — there’s usually some correlation between housing sales and bed purchases. And those housing market was suddenly weakened, especially in Toronto for the last couple of quarters but lately, growth there resumed and — but your [total price] actually, decelerated over the last quarter. So I was wondering why is that? I understand that July was strong, September was strong and August was weak. But usually, there is a correlation between that, and this quarter, it was not. So I was wondering if you can make a comment on that?

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David Friesema, Sleep Country Canada Holdings Inc. – CEO & Director [102]

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Sure. I’ll make a more overall comment, and this is something we’ve been saying for years. While a strong housing market is good for our business because when people move, it’s a trigger for buying a mattress. But having said that, there’s other triggers to buy a mattress other than housing. So the best correlation that we found over the years is consumer confidence. And so housing affects our business more in relationships to how it affects consumer confidence than the actual transactional side of it. And so if you’re really looking for a directional measure, I would suggest consumer confidence is a better correlation.

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Operator [103]

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(Operator Instructions) Your next question comes from Sabahat Khan with RBC Capital Markets.

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Sabahat Khan, RBC Capital Markets, Research Division – Analyst [104]

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Just a couple of quick ones here. There’s some commentary about the store network and your views on it. Can you maybe give us an update on your thoughts on maybe what you think is a good size for the store network over the long run or just directionally speaking if you think you’ll be opening up similar number of stores over the foreseeable future over the next few years? Just your thoughts on what the network could look in a few years.

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David Friesema, Sleep Country Canada Holdings Inc. – CEO & Director [105]

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Sure. As we said when we went public, which may or not have been as clear as it could, that we could open between 8 and 12 stores a year. I think the better way to put that is we’ll — we think we can open up a minimum of 8 stores per year and that we don’t see anything different looking forward for the foreseeable future. To say exactly how many stores we think we might have, I think it’s a bit premature to do that because we study every single store. But as we sit here today, we’re opening our stores and they’re very strong, both rural, both infill stores within our — the more urban market, plus mall stores. So we don’t see a break to the ability to open stores for the next many years.

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Stewart Schaefer, Sleep Country Canada Holdings Inc. – Chief business Development Officer & Corporate Secretary [106]

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Sabahat, I’ll add one other metric, but not a predictor. It’s more of a metric that we use. We do believe that we could have one store for every 100,000 in terms of population up to 100,000 and 120,000. So just quick calculation on the back of a napkin, there’s 36 million people in Canada. So that will give you a little bit of an idea of the runway of our business. And that model has always been our model for the last 25 years, and it’s worked very successfully.

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Sabahat Khan, RBC Capital Markets, Research Division – Analyst [107]

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Great. And then there is some a bit — you guys had some commentary earlier on AUSP trending higher. Can you maybe give a little bit of color on what you’re seeing at the different price points? Is it the market is shifting a little bit more to the higher price points? Did you just see maybe a quarter of less sales at the lower price point? Just trying to understand directionally how you see the market shifting?

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David Friesema, Sleep Country Canada Holdings Inc. – CEO & Director [108]

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So first of all, our average unit selling price for mattresses has gone up every year that we’ve been in business, except for one, and that was more than a decade ago. So this is nothing new. And frankly, we saw increases in every single price band across our whole company in the quarter, which we’ve seen all year, and so it is — one of the things that really is good about our company is that every single one of our sales is an assisted sale on our stores. And so we do a lot of work to make sure we understand what the customer’s needs are. We ask them to tell us everything, and we then find the right product for them. And generally speaking, when people do that and they talk to our — they generally buy — they might invest a little bit more because they realize how important sleep is. We’ve always been a company that doesn’t want to commodify — make sleep a commodity, and we’re going to continue to focus on that.

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Sabahat Khan, RBC Capital Markets, Research Division – Analyst [109]

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And just on the comment, I guess, is it fair to assume then that the bed-in-a-box brands are not included in that metric? And do you plan on including them once Endy annualizes at some point?

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David Friesema, Sleep Country Canada Holdings Inc. – CEO & Director [110]

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So, no. We include them in our overall business already.

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Operator [111]

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And presenters, I am showing no further questions in the queue at this time. I will now turn the call back over to David Friesema for closing remarks.

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David Friesema, Sleep Country Canada Holdings Inc. – CEO & Director [112]

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Well thank you all for the great questions. We look forward to sharing our Q4 results with you on the next call. And just the last little thing, keep your eyes open for our new eCommerce platform, which is rolling out very soon. Thanks. Take care.

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Operator [113]

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And ladies and gentlemen, that does conclude today’s conference call. You may now disconnect.

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