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Summary:

Sleep Country is Canada’s largest specialty mattress retailer with an estimated market share of 37% as of 2022. The company has a coast-to-coast retail network of 289 stores supported by 20 warehouses.

In addition to being the leading brick-and-mortar retailer in Canada, Sleep Country also owns e-commerce mattress and accessories brands such as Endy (bed-in-a-box), Hush (weighted blankets), and Silk & Snow (bed-in-a-box). Most recently, Sleep Country acquired the Canadian operations of the U.S. DTC mattress brand, Casper.

In 2022, Sleep Country had revenue of $929 million, out of which 80% came from retail stores and 20% from e-commerce. In terms of product revenue, 76% of Sleep Country’s revenue comes from mattresses and the remainder from the sale of accessories such as pillows, duvets, etc.

While the mattress industry has been in turmoil, Sleep Country has delivered strong financial performance along with an increasing market share in Canada from 23% in 2015 to 37% in 2022. This was a result of consistent investment in the brand, the fall of Sears, which was a major competitor, and taking share from smaller independent mattress retailers.

Mattress firms performed exceptionally well during 2020-2022. This was primarily driven by pandemic stimulus spending and the increased focus of households on home-related expenses as people spent more time at home. As interest rates started increasing in 2022, Sleep Country’s same-store sales quickly turned negative.

I believe that the market is currently pricing a severe recession for Sleep Country. It currently trades at an EV / EBITDA multiple of 5x, which is the lowest since its IPO in 2015. In addition to acquiring companies at lower multiples, the management has been smart to use the current valuation levels to buy back over $50 million worth of stock in 2022.

Using a discounted cash flow model and very conservative assumptions, I estimate that Sleep Country’s intrinsic value per share is $30, representing a 30% upside from the current levels.