Well Rested
Well Invested
2019 Annual Report
Message from the Chair
Dear Fellow Shareholders,
I am proud to say that Sleep Country Canada had another successful year in 2019, reporting strong financial results and
achieving new heights of customer experience and service. We continued to grow our national footprint of stores and
expanded our omnichannel platform across each of our three banners – Sleep Country, Dormez-vous? and Endy. These
results reflect the efforts of our outstanding Associates and Leadership Team.
Given the ongoing and uncertain impact of the global COVID-19 pandemic at the time of issuing this Annual Report, we
would like to recognize the devastating human toll that the virus has taken. Our thoughts are with the individuals, families
and frontline workers who confront the realities of this crisis each day. We would also like to acknowledge the pandemic’s
serious economic consequences. Canadian retailers, like other industries and sectors across the country, are facing
unprecedented economic challenges.
At Sleep Country Canada, we are focused on facing these challenges head-on. We are prioritizing the health and safety
of our Associates and our customers, while continuing to plan for the future of our business. Over the past 25 years as
Canada’s leading specialty sleep retailer, we have successfully navigated the challenges and opportunities that economic
downturns and transformations have brought to our industry, and each time we have emerged stronger than before.
Our company is built on a solid foundation and executes against a strategic plan that serves our customers, Shareholders
and Associates alike. Under the leadership of our capable, strong and dedicated Management Team, we achieved strong
operating results over the past year. Although, disappointingly, these results have not been reflected in our share price and
total shareholder return over the last year, we are confident that our strategic plan, decisions and actions are on the right
trajectory. Our proven business model consistently produces market-leading growth, profits and dividend growth, and
our strong free cash flow enables us to manage through times of market volatility and stability. This model, combined with
our organic and acquisition-driven growth strategy, will continue to differentiate us from competitors and yield attractive
returns in the future.
Looking ahead to the coming year, we are well-positioned to serve customers online by leveraging our omnichannel
foundation, combined with the strategic initiatives and investments executed in 2019. Our customers’ digital touchpoints
include the enriched Sleep Country and Dormez-vous? platforms, Endy – our market-leading online mattress-in-a-box
retailer – and the Walmart online marketplace. We know that the pandemic has resulted in many Canadians adding to or
making changes to their sleep arrangements, and we remain committed to assisting with these sleep needs in every way
we can.
I would personally like to thank my fellow Board members for their commitment, contribution and constructive challenging.
The Board supports Management’s current efforts, both in response to the COVID-19 crisis and in the strategic vision set
in place prior to the onset of this pandemic. We continue to oversee and support Management in their implementation
of the business plans and initiatives that serve our customers, support our Associates and ensure long-term value to our
Shareholders.
Thank you to our Shareholders for your continued support. We recognize and appreciate the trust you have placed in us.
Sincerely,
Christine Magee
Sleep Country Canada | Annual Report 2019
2
Message from the CEO
To the Sleep Country Canada community,
Across the globe, we are facing an unprecedented healthcare emergency as the COVID-19 virus continues its spread. We
at Sleep Country Canada offer our sincere gratitude to frontline workers helping to control COVID-19’s proliferation, and our
thoughts are with all those who have been impacted.
With the current reality’s new economic challenges, Canadian retailers are adapting to doing business in a COVID-19
landscape. Sleep Country Canada remains committed to providing a safe and healthy environment for our Associates and
customers. Through this uncertain time, we continue to work diligently to serve the sleep needs of Canadians and have
recently temporarily shifted all of our business online. No matter the channel, our goal remains to provide the excellent
customer experience for which we have been known from coast-to-coast for a quarter century.
This past year was particularly strong for Sleep Country Canada and, while our initial capital investment outlook for
this year has changed due to the COVID-19 crisis, we are well-positioned to weather the uncertainty of 2020 financially,
strategically and operationally. Our revised outlook can be found on SEDAR.
In 2019, the company recognized the highest revenue in our history, increasing by 14.3 percent (to $712.4M), in addition to
a 7.5 percent increase in operating EBITDA (to $155.9M, when compared to pro-forma 2018). Both our core foundation of
mattresses and innovative accessories assortments continued to build on previous successful years, growing by 13.7 percent
(to $564.7M) and 16.9 percent (to $147.7M), respectively. These results demonstrate our ability to serve the dynamic sleep
needs of Canadians.
Additional highlights of the year included:
•
Expanding our mattress and adjustable base market share to an estimated 33 percent, from an estimated 28 percent
in 2018;
Increasing our customer community through our omnichannel network by growing from 264 to 276 stores, while also
enhancing and optimizing our best-in-class digital sites;
•
• Completing our first full year of operation with Endy in our family of brands, which contributed to our goals of
diversifying our customer reach, expanding our product offering and accelerating our online growth;
Announcing strategic partnerships with Walmart’s online marketplace and Urban Barn to diversify revenue channels
and reach new customer segments; and
Launching our new Oracle cloud-based eCommerce platform and executing Release 1 of our new ERP system.
•
•
These notable achievements, among others, moved us forward in achieving our goal to consistently deliver a best-in-class
omnichannel retail experience for our customers, while also allowing us the flexibility to offer a range of purchase channels.
This strategy has proved prudent in today’s unforeseen circumstances.
Finally, I would like to recognize and celebrate our Associates for their dedication. Across the country, our Associates have
rallied together to support the communities in which we operate and assist our customers in this challenging time. From
making new sleeping arrangements in their homes to house elderly relatives, to creating self-isolation areas for family
members and friends, to supplying essential Canadian organizations with beds and bedding for team members who can’t
go home, our Associates have gone above and beyond to help create safe, comfortable sleeping environments for all. We
could not continue to serve our customers with the high level of service that they have come to expect without our capable
and devoted team. And for this, we sincerely thank them.
Stay well and sleep well,
Dave Friesema
Sleep Country Canada | Annual Report 2019
3
Quality ZZZ for 25 Years
2019 marked our 25th year in business, and we’ve never been more pleased with our position as Canada’s premier sleep retailer. Our strong
performance this year across our family of three brands, Sleep Country, Dormez-vous? and Endy, resulted in 14.3% total revenue growth
and market share expansion, demonstrating that our strategy and evolving business model continue to best serve the sleep needs of
Canadians.
Looking ahead, we’re excited to build upon our track record of profitable growth. We have a clear strategic agenda for the future including
the continued progress of our leading digital and physical footprints, advancing our retail partnerships, offering Canadians the most
innovative sleep products from around the world and expanding our reach through targeted and compelling marketing. Here at Sleep
Country, we’ve been dedicated to enhancing the Canadian sleep experience through our unrivaled service and leading assortment for 25
years. We look forward to continuing to fulfill our promise, while also investing in future growth for many years to come.
2019 Highlights
Expanded market
share to an
estimated 33%
(mattress and
adjustables)
Accelerated sleep
accessories – revenue
increased by 16.9%
to $147.7M
Delivered tremendous
eCommerce growth
across each of our Endy,
Sleep Country and
Dormez-vous? brands
Opened 12 new
stores (four in malls)
and completed 26
renovations
Launched exclusive
Canadian distribution
deals with Simba and
Blanquil
Achieved highest
revenue in
the history of
the company,
increasing by
14.3% to $712.4M
Strengthened our
core – mattress
revenue increased
by 13.7% to
$564.7M
Celebrated our first full
year with Endy in our
family of brands
Launched Oracle cloud-
based eCommerce
platform and executed
Release 1 of our new
ERP platform
Launched Bloom lineup
on the Walmart.ca
marketplace
712.4
20.7%
Revenue
(C$ MILLI ONS)
ACCESSORY REVENUE
MATTRESS REVENUE
623.0
586.9
20.2%
19.2%
523.8
19.7%
456.2
17.6%
82.4%
80.3%
80.8%
79.8%
79.3%
21.9%
1
155.9
1
Operating EBITDA
(C$ MILLI ONS)
Operating
EBITDA Margin
(% PERCENT)
17.0%
105.8
17.0%
100.0
16.2%
85.0
15.2%
69.1
2015
2016
2017
2018
2019
2015
2016
2017
2018
2019
1 On January 1, 2019, the Company adopted the new accounting standard IFRS 16 - Leases and comparative figures have not been restated. The impact of the adoption of this standard is
discussed in Note 3 in the Summary of Significant Accounting Policies section in the 2019 Annual Consolidated Financial Statements.
Sleep Country Canada | Annual Report 2019
4
Gross Profit
(C$ MILLIONS)
151.4
126.8
189.5
175.3
223.3
1
Gross Margin
(% PERCENT)
30.4
31.3
1
29.8
29.9
27.8
2015
2016
2017
2018
2019
2015
2016
2017
2018
2019
Total Sales Growth & Same Store Sales Growth
(% PERCENT)
TOTAL SALES GROWTH
SAME STORE SALES GROWTH
15.8%
13.4%
15.9%
14.2%
16.5%
10.7%
10.1%
10.4%
8.9%
8.1%
4.4%
4.2%
11.9%
7.5%
7.3%
9.3%
5.1%
4.4%
0.2%
Q1’17
Q2’17
Q3’17
Q4’17
Q1’18
Q2’18
Q3’18
1.9%
0.5%
1.9%
Q2’19
Q3’19
Q4’19
(2.7%)
Q4’18
(3.4%)
Q1’19
Sleep Country Canada | Annual Report 2019
5
Uniquely Positioned to Win
Sleep Country’s distinctive combination of store footprint and growth, dynamic digital platform including Endy, and powerful logistics
and delivery infrastructure differentiates us from our competitors, uniquely positioning us to win. Our expansive omnichannel network,
combined with our proven business model, strong gross margin expansion and innovative mattress and accessories collections,
enable us to successfully and profitably evolve with our customers and yield attractive returns for our shareholders.
Offering
Canadians
eCommerce
coast-to-coast
44
BC
37
AB
7
SK
7
MB
110
ON
61
QC
10
NS,PEI,
NB
#1
276
Matress
stores
retailer
31%
of National
Market Share
Ability to
offer
264
white glove
Stores
delivery
service
from coast-to-coast
16
Distribution
centres
2
strategic
partnerships with
Walmart and
Urban Barn
9
17
Provinces
distribution
centres
16.2%
CAGR in
accesories
revenue
since 2014
69
New stores
since 2012
Triple-digit
eCommerce
3
growth
Leading digital platforms
including Endy, Canada’s
leading online mattress in
a box retailer, and enriched
2018
Sleep Country and
Dormez-vous? websites
sleepcountry.ca | dormezvous.com | endy.com
Endy Acquisition in
Simba mattresses in stores
Canada’s
#1 specialty
mattress
and bedding
retailer
Sleep Country Canada | Annual Report 2019
6
33% market
share
(mattress
and
adjustables)
Recognized as
one of Canada’s
Best Workplaces
for Mental
Wellness, for
Giving Back and
in Retail and
Hospitality
Diverted 138,000+
mattresses from local
landfills through
donation or recycling
Accessories
revenue
increased by
16.9%
Mattress
revenue
increased by
13.7%
Gross profit
margins
improved
by 1.4%2
2 On January 1, 2019, the Company adopted the new accounting standard, IFRS 16. The impact of the adoption of this standard is discussed in Note 3 in the
Summary of Significant Accounting Policies section in the 2019 Annual Consolidated Financial Statements. For comparison purposes for this measure, the
Company recalculated 2018 figures to include the IFRS 16 impact assuming the standard had been adopted on January 1, 2018. This estimated impact
on 2018 has been calculated based on the lease information available as of January 1, 2019, and using similar accounting policies and assumptions
as in place upon adoption of the standard on January 1, 2019. Additionally, in Fiscal 2019, depreciation and amortization expense related to stores and
delivery property and equipment assets is classified in cost of sales and the depreciation and amortization expense related to distribution centres, offices,
intangibles and other is classified in general and administrative expense. The results for 2018 have been revised to conform to this presentation.
Sleep Country Canada | Annual Report 2019
7
Management’s
Discussion and
Analysis
Sleep Country Canada | Annual Report 2019
8
Management’s Discussion and Analysis of Financial Condition
and Results of Operations of Sleep Country Canada Holdings Inc.
The following Management’s Discussion and Analysis (“MD&A”) is prepared as of March 4, 2020 and is intended to assist
readers in understanding the financial performance and financial condition of Sleep Country Canada Holdings Inc. (“SCC”
or “Sleep Country” or the “Company”) for the year ended December 31, 2019 and should be read in conjunction with the
audited annual consolidated financial statements of SCC and the accompanying notes for the year ended December 31, 2019
and the audited annual consolidated financial statements of SCC and accompanying notes for the year ended December 31,
2018 and the related MD&A.
1. Basis of Presentation
All references in this MD&A to “Q4 2019” are to SCC’s fiscal quarter ended December 31, 2019, “Q4 2018” are to SCC’s fiscal
quarter ended December 31, 2018 and “Q4 2017” are to SCC’s fiscal quarter ended December 31, 2017. All references in this
MD&A to “2019” are to SCC’s fiscal year ended December 31, 2019, to “2018” are to SCC’s fiscal year ended December 31,
2018 and to “2017” are to SCC’s fiscal year ended December 31, 2017.
The Company’s audited annual consolidated financial statements and accompanying notes have been prepared in accordance
with the International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”) using
the accounting policies described therein. All amounts are presented in thousands of Canadian dollars, except number of
stores, per share amounts or unless otherwise indicated.
The audited annual consolidated financial statements of SCC and the accompanying notes for the year ended December 31,
2019 and this MD&A were reviewed by the Company’s Audit Committee and were approved by its Board of Directors on March
3, 2020.
2. Forward-looking Information
This MD&A, including, in particular, the sections below entitled “Factors Affecting The Results of Operations”, “Outlook”,
“Liquidity and Capital Resources” and “Risk Factors” contains forward-looking information and forward-looking statements
which reflect the current view of management with respect to the Company’s objectives, plans, goals, strategies, outlook,
results of operations, financial and operating performance, prospects and opportunities. Wherever used, the words “may”,
“will”, “anticipate”, “intend”, “estimate”, “expect”, “plan”, “believe” and similar expressions identify forward-looking information
and forward-looking statements. Forward-looking information and forward-looking statements should not be read as
guarantees of future events, performance or results, and will not necessarily be accurate indications of whether, or the times
at which, such events, performance or results will be achieved. All of the information in this MD&A containing forward-looking
information or forward-looking statements is qualified by these cautionary statements.
Forward-looking information and forward-looking statements are based on information available to management at the time
they are made, underlying estimates, opinions and assumptions made by management and management’s current good
faith belief with respect to future strategies, prospects, events, performance and results, and are subject to inherent risks
and uncertainties surrounding future expectations generally. Such risks and uncertainties include, but are not limited to,
those described below under the heading “Risk Factors” and in the Company’s 2019 annual information form (the “AIF”) filed
on March 4, 2020. A copy of the AIF can be accessed under the Company’s profile on the System for Electronic Document
Analysis and Retrieval (“SEDAR”) at www.sedar.com. Additional risks and uncertainties not presently known to the Company
or that the Company currently believes to be less significant may also adversely affect the Company.
SCC cautions that the list of risk factors and uncertainties described in this MD&A and the AIF is not exhaustive and that
should certain risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual strategies,
prospects, events, performance and results may vary significantly from those expected. There can be no assurance that the
actual strategies, prospects, results, performance, events or activities anticipated by the Company will be realized or, even if
Sleep Country Canada | Annual Report 2019
9
substantially realized, that they will have the expected consequences to, or effects on, the Company. Readers are urged to
consider the risks, uncertainties and assumptions carefully in evaluating the forward-looking information and forward-looking
statements and are cautioned not to place undue reliance on such information and statements. SCC does not undertake to
update any such forward-looking information or forward-looking statements, whether as a result of new information, future
events or otherwise, except as required by applicable laws.
3. Overview
Sleep Country is Canada’s leading omnichannel specialty sleep retailer with a national-brick-and-mortar footprint and online
presence. Sleep Country operates under three retail banners (the “Banners”):
z
z
z
“Sleep Country Canada™”, with omnichannel operations in Canada excluding Québec;
“Dormez-vous?™”, with omnichannel operations in Québec;
“Endy™”, Canada’s leading online mattress-in-a-box retailer.
Sleep Country’s new, existing and renovated stores along with its expanding online presence continue to grow its customer
base and market share across Canada. On December 31, 2019, Sleep Country had 276 stores (2018 - 264 stores) and 17
distribution centres (2018 - 16 distribution centres) across Canada. Sleep Country’s stores are on average approximately
5,000 square feet and offer customers Canada’s largest selection of mattresses, both made in Canada and imported from
countries around the world, along with bases, metal frames and lifestyle bases. Sleep Country also sells a wide assortment
of complementary sleep related products (“Accessories”) which include pillows, pillowcases, sheets, blankets, throws, duvets,
duvet covers, mattress toppers, mattress protectors, pet beds, sleep essentials, weighted blankets, headboards, footboards
and platforms. Each store is staffed by the Company’s Sleep Experts who are dedicated to matching customers to their best
night’s sleep. All Sleep Country’s stores are corporate-owned thereby enabling the Company to develop and maintain a strong
culture resulting in a consistent and superior in-store and home delivery customer experience.
On December 6, 2018, Sleep Country acquired Endy, further strengthening the Company’s omnichannel positioning and
expanding the Company’s brand portfolio to meet the needs of different customer segments.
Sleep Country Canada
Sleep Country Canada launched its concept in the Vancouver market with four stores in 1994 and has since expanded across
Canada with 215 corporately owned stores and 14 distribution centres as at December 31, 2019 in British Columbia, Alberta,
Manitoba, Saskatchewan, Ontario, Nova Scotia, New Brunswick and Prince Edward Island. SCC’s regional footprint includes
the following distribution centres: Victoria, BC; Richmond, BC; Kelowna, BC; Calgary, AB; Edmonton, AB; Winnipeg, MB;
Regina, SK; Brampton, ON; London, ON; Ancaster, ON; Cobourg, ON; Ottawa, ON; Moncton, NB and Halifax, NS.
Dormez-vous?
In Quebec, Sleep Country operates under the “Dormez-vous?” banner. “Dormez-vous?” launched its first store in April 1994
and has continued to expand over the last 25 years. As of December 31, 2019, the Dormez-vous? Banner has 61 stores with
three distribution centres in Montréal and Québec City.
Endy
Launched in 2015, Endy is Canada’s leading mattress-in-a-box eCommerce retailer. The brand’s award-winning Endy
mattress-in-a-box is engineered to offer the perfect balance of comfort and support. Endy’s product assortment includes The
Endy Pillow, The Endy Sheets, The Endy Mattress Protector, The Endy Duvet, The Endy Duvet Cover, The Endy Bed Frame
and The Endy Weighted Blanket. On December 6, 2018, Sleep Country acquired substantially all the operating assets of Endy.
Sleep Country Canada | Annual Report 2019
10
Management’s Discussion and Analysis of Financial Condition and Results of Operations of Sleep Country Canada Holdings Inc. 4. Dividends and Share Purchases
Dividends
The Board of Directors of the Company has periodically declared dividends on the Company’s common shares as follows:
Date of declaration
Record date
Payment date
Dividend declared (per share)
January 29, 2016
February 16, 2016
February 26, 2016
May 10, 2016
July 28, 2016
May 20, 2016
May 30, 2016
August 16, 2016
August 26, 2016
November 1, 2016
November 18, 2016
November 28, 2016
January 26, 2017
February 17, 2017
February 27, 2017
May 9, 2017
August 2, 2017
May 19, 2017
May 29, 2017
August 18, 2017
August 28, 2017
November 1, 2017
November 17, 2017
November 27, 2017
January 26, 2018
February 16, 2018
February 26, 2018
May 7, 2018
August 2, 2018
May 22, 2018
May 31, 2018
August 20, 2018
August 30, 2018
November 1, 2018
November 19, 2018
November, 29, 2018
February 5, 2019
February 15, 2019
February 26, 2019
May 6, 2019
August 8, 2019
October 31, 2019
February 4, 2020
May 21, 2019
May 31, 2019
August 20, 2019
August 29, 2019
November 19, 2019
November 29, 2019
February 14, 2020
February 25, 2020
$ 0.130
$ 0.130
$ 0.150
$ 0.150
$ 0.150
$ 0.165
$ 0.165
$ 0.165
$ 0.165
$ 0.185
$ 0.185
$ 0.185
$ 0.185
$ 0.195
$ 0.195
$ 0.195
$ 0.195
All dividends are designated as “eligible dividends” for Canadian tax purposes.
Sleep Country Canada | Annual Report 2019
11
Management’s Discussion and Analysis of Financial Condition and Results of Operations of Sleep Country Canada Holdings Inc. Share Purchases
In the first quarter of 2019, the Company received approval from the Toronto Stock Exchange (the “TSX”) to commence,
effective February 28, 2019, a Normal Course Issuer Bid (“NCIB”) and purchase through the facilities of the TSX of up to
1,200,000 of the Company’s common shares, representing approximately 4.0% of the public float as of February 26, 2019.
In accordance with the rules and by-laws of the TSX, the Company has been permitted to purchase up to a daily maximum
of 35,204 Shares (representing 25% of the average daily trading volume of the Shares on the TSX for the six months prior
to commencement of the NCIB), except where such purchases are made in accordance with the “block purchase” exception
under the applicable TSX rules and policies. Sleep Country’s NCIB expired on February 27, 2020.
As of December 31, 2019, the Company had purchased 510,829 Common Shares, for cancellation, at an average price of
$19.59 per share, for a total consideration of $10.0 million.
Subsequent to year end, the Company received acceptance by the TSX on March 4, 2020 of the Company’s Notice of
Intention to make a NCIB. Pursuant to the NCIB, the Company proposes to purchase through the facilities of the TSX, from
time to time over the next 12 months, if considered advisable, up to a maximum of 1,368,363 common shares of the Company,
being approximately 4.8% of its public float as of February 29, 2020. Purchases may commence through the TSX on March 9,
2020 and will conclude on the earlier of the date on which purchases under the bid have been completed and March 8, 2021.
The Company may purchase up to a daily maximum of 28,010 Shares (representing 25% of the average daily trading volume
of the Shares on the TSX for the six months prior to commencement of the NCIB), except where such purchases are made in
accordance with the “block purchase” exception under applicable TSX rules and policies.
5. Factors Affecting The Results of Operations
Revenues
Revenues are derived primarily from the retail sales of mattresses, lifestyle bases and Accessories and are recognized when
the performance obligation is fulfilled. The performance obligation is deemed fulfilled when the control of the products has
transferred to the customer and there is no unfulfilled obligation that could affect the customer’s acceptance of the products.
Provisions for returns relating to the Company’s various customer satisfaction programs are accrued based on historical
experience. Revenue from sale of third party warranties is recognized based on the net amount of consideration the Company
retains after paying the third party the consideration received in exchange for the services to be provided by the third party.
SCC’s goal is to build on the market position of its Banners and to grow its revenue by growing Same Store Sales (or
“SSS”(1)), continuing to add stores in both new and existing markets, increasing online revenue through its eCommerce
platforms, expanding its product offerings and growing revenue through retail partnerships. SCC’s revenue is impacted by
competition from other retailers that sell similar products and by seasonal patterns.
SSS is primarily driven by:
z
z
z
z
changes in customer traffic through marketing;
changes in the conversion rate of converting shoppers into buyers;
changes in the average transaction size; and
changes in economic conditions and consumer confidence.
Online Expansion Opportunities
Sleep Country launched its first eCommerce platform in 2017 to address the growing trend of consumers who research and
shop online. Since its launch in 2017, the Company has continually evolved and improved its eCommerce platform. In Q4
2019, the Company launched its new cloud based Oracle eCommerce platform, providing customers a best in class online
(1) See “Non-IFRS Measures”.
Sleep Country Canada | Annual Report 2019
12
Management’s Discussion and Analysis of Financial Condition and Results of Operations of Sleep Country Canada Holdings Inc. experience. The new website provides customers an enhanced omnichannel experience by offering them a larger selection
of mattresses, lifestyle bases and Accessories. These recent enhancements to the Company’s online experience allow
customers to interact with the Company’s three banners when they want, how they want and where they want.
In December 2018, Sleep Country acquired Endy with a goal of diversifying the product offering, accelerating the growth of
the Company’s online business and reaching a new customer segment. The acquisition of Endy, along with Sleep Country’s
new eCommerce website, complements Sleep Country’s national store footprint and diverse selection of sleep products.
The Company believes that this acquisition strengthens its omnichannel footprint, customer experience and positions Sleep
Country strongly to compete against local and potential U.S. and international entrants to the Canadian market.
In March 2019, Sleep Country announced its partnership with Walmart to offer consumers its Bloom mattress-in-a-box
collection on a dedicated Bloom storefront on Walmart.ca, thereby accessing Walmart’s expansive online customer base.
Walmart receives millions of visits to its Canadian website every month and over 80 per cent of Canadian households shop
at Walmart. This partnership positions both retailers well to meet consumer demand and further bolsters Sleep Country’s
omnichannel offering.
Product Expansion Opportunities
SCC’s goal is to build on the market position of its Banners and to grow its revenue by continuing to expand its product offering
in both the mattresses and Accessories categories. This is achieved by securing exclusive partnerships with international
sleep brands and continued in-house innovation.
The original Bloom mattress-in-a-box was launched in 2017 in order to cater to consumers that are looking for affordability,
convenience and trust when buying a new mattress-in-a-box. In 2018, SCC added to the original Bloom mattress-in-a-box
by introducing three new Bloom mattress-in-a-box products at various price points, thereby extending the mattress-in-a-box
offering for every budget and every room.
Sleep Country and Simba, a leading mattress-in-a-box retailer based in the UK, announced their strategic partnership to
launch the Simba Hybrid mattress-in-a-box in Canada. This premium mattress-in-a-box was introduced to the Canadian
market exclusively by Sleep Country through its eCommerce platform and network of stores, and complements the Bloom
mattress-in-a-box offerings. The Simba Hybrid mattress-in-a-box was launched in Q1 2019.
In 2018 and 2019, SCC launched a number of new Accessories such as weighted blankets, silk pillowcases, eye masks, Hotel
Collection sheets, throws in a variety of materials from faux cashmere to faux fur, LuxeSilk™ Duvets, baby mattresses and pet
beds. SCC intends to continue to expand its product offerings by entering into business partnerships with other mattresses
and Accessories players that will be featured in its network of stores and on its eCommerce platforms, branded websites and
in-house product innovations.
Store Expansion Opportunities
SCC has the ability to add new stores in existing markets (in-fill stores), in satellite markets and in new markets. An existing
market or in-fill opportunity is a pre-existing built out region in which SCC already has an established store presence serviced
by one or more existing distribution centres. A satellite market is a new region that is adjacent or close to a pre-existing built-out
region, which benefits from advertising spill and is serviced logistically from the nearby distribution centre. A new market is a
brand new territory in which the Company did not previously operate, requiring incremental advertising and distribution logistics.
Sleep Country has successfully expanded every year since its founding in 1994. This capability to expand its store presence
depends on SCC’s ability to choose new locations and new markets, to hire and train new employees for its stores and
distribution centres and, in the case of expansion into new markets, create top-of-mind brand awareness of its Banners.
In 2015, Sleep Country opened its first mall store. Since 2017, Sleep Country has opened 10 additional stores within enclosed
malls, bringing the overall store count to 11. Stores within enclosed malls represent an additional growth opportunity to
Sleep Country Canada | Annual Report 2019
13
Management’s Discussion and Analysis of Financial Condition and Results of Operations of Sleep Country Canada Holdings Inc. service the captive audience that is shopping in these malls and further allows the Company to capitalize on the decline of
departmental stores.
SCC’s site selection strategy is focused on maximizing sales per store and per region throughout its store network. Prior to
identifying and ultimately selecting locations for new stores, management conducts extensive analysis utilizing the following
factors: (i) demographics such as population density, household income and population growth rates; (ii) store visibility and
accessibility; (iii) lease and advertising economics; (iv) competitive dynamics; (v) overlap with existing stores and distribution
footprint; and (vi) potential cannibalization of existing stores. In terms of regional expansion, once a target area has been
determined, management focuses on ensuring SCC can successfully incorporate its culture, vision and mission into the new
region. To help accomplish this, SCC has traditionally started by ensuring the core of its new regional team is comprised of
existing employees in leadership roles who are willing to relocate. The team is then supplemented with local hires, who have
received extensive training including in classroom, in store, and throughout the organization (i.e. distribution centres, thereby
learning SCC’s service model and culture).
The following table summarizes SCC’s store count for each of the three-month periods and fiscal years ended December 31,
2019 and December 31, 2018.
Number of stores, beginning of period
Stores newly opened
Number of stores, end of period
Number of stores in new store design, end of period
Stores relocated
Stores renovated
2019
275
1
276
–
5
Q4
2018
260
4
264
2
10
2019
264
12
276
193
–
26
Annual
2018
247
17
264
155
3
29
Of the 12 new stores opened in 2019, nine are in-fill stores and three are satellite stores. The nine new in-fill stores include
four stores located in enclosed malls.
Enhanced Store Design
An enhanced store design was first introduced in certain existing stores in 2014. As at December 31, 2019, there are 193
stores or 70% of the store network that featured the new store design, of which 66 are new stores, 119 are renovated stores
and eight are relocations of existing stores. Over time, SCC intends to select additional stores to renovate to this new design.
The Company will continue to feature the new design in all new stores it opens.
Competition
The retail mattresses industry is highly competitive and includes national and regional full-line furniture retailers, departmental
retailers, small regional specialty mattresses retailers and online mattress-in-a-box retailers. Of the leading retailers in the
mattresses industry, Sleep Country is the only national specialty mattresses retailer. Management believes it can maintain a
leading position through its highly differentiated service model that has been unrivalled in execution over the last 25 years and
serves as a significant barrier to entry.
Supply Chain
The Company relies on third party manufacturers to obtain its merchandise. Merchandise is sourced domestically in Canada
as well as from countries around the world (U.S., China, Italy and Spain) and can be adversely impacted by political,
regulatory, economic, legal factors including duties, tariffs, sanctions, pandemics, currency exchange rates along with other
Sleep Country Canada | Annual Report 2019
14
Management’s Discussion and Analysis of Financial Condition and Results of Operations of Sleep Country Canada Holdings Inc.
factors relating to foreign trade.
Seasonality
The retail mattresses industry is affected by seasonal conditions. SCC typically experiences higher sales and a greater
proportion of income during the third and fourth quarters due to a concentration of summer season holidays in the third quarter
and other seasonal factors. Sales have historically trended lower in the first quarter as consumers tighten their budgets after
the holiday season. The cold winter weather in many parts of the country during the first quarter also tends to lower customers’
desire to shop. SCC expects these trends to continue for the foreseeable future. The average quarterly share of annual sales
over the last three fiscal years, excluding Endy, is as follows:
First quarter
Second quarter
Third quarter
Fourth quarter
Yearly total
21%
24%
30%
25%
100%
Cost of Sales and Gross Profit
Cost of sales includes product related costs and the costs of SCC’s sales and distribution and operations (excluding
distribution centre occupancy costs), net of volume rebates received from suppliers. Cost of sales is impacted by the number
of stores, fluctuations in the volume of inventories sold, average unit selling prices (“AUSP”) and SCC’s ability to manage store
level occupancy costs.
Product gross margin is affected by changes in sales product mix, suppliers’ term discounts, volume rebates, freight and
inventory management.
The largest component of SCC’s sales operational costs are the sales associates’ compensation and store occupancy costs.
The largest component of SCC’s distribution operations are labour costs and delivery expenses. The sales and distribution
operation costs include the depreciation and amortization related to the sales and distribution assets.
Volume rebates are driven by the purchase volume of inventory from suppliers. Some suppliers also offer step-ups on higher
volume achieved as additional incentives. Rebates on products sold are recorded as a reduction to cost of sales, while
rebates on products held in inventory are recorded as a reduction to the carrying value of inventory.
Sleep Country Canada | Annual Report 2019
15
Management’s Discussion and Analysis of Financial Condition and Results of Operations of Sleep Country Canada Holdings Inc. 6. Fourth Quarter and Full Year Operational Highlights
(C$ thousands unless otherwise stated;
except store count and
earnings per share)
2019(2)
2018
Change
2019(2)
2018 Change
Q4
Annual
Revenues
SSS(1)
Stores opened
Stores renovated/relocated
$
186,490 $
160,104
16.5% $
712,372 $
622,977
14.3%
1.9%
(2.7%)
0.3%
1.4%
1
5
4
12
12
26
17
32
Gross profit margin(3)
32.0%
29.6%
31.3%
29.0%
Operating EBITDA(1)
Operating EBITDA margin %(1)
$
41,310
$
25,896
59.5% $ 155,932 $ 105,775
47.4%
22.2%
16.2%
21.9%
17.0%
Net income
Earnings per share – Basic
Earnings per share – Diluted
Adjusted Net Income(1)
Adjusted earnings per share – Basic(1)
Adjusted earnings per share – Diluted(1)
Notes:
$
$
$
$
$
$
14,027
0.38
0.38
15,744
0.43
0.42
$
$
$
$
$
$
13,313
5.4% $
55,460 $
59,641
(7.0%)
0.36
0.36
5.6% $
5.6% $
1.50 $
1.49 $
1.61
1.59
(6.8%)
(6.3%)
14,776
6.6% $
59,251 $
63,861
(7.2%)
0.40
0.40
7.5% $
5.0% $
1.60 $
1.59 $
1.72
1.71
(7.0%)
(7.0%)
1. See the section below titled “Non-IFRS Measures” for further details concerning how the Company calculates SSS, Operating EBITDA,
Adjusted Net Income and Basic and Diluted Adjusted Earnings per Share (“EPS”) and for a reconciliation to the most comparable IFRS
measure. The SSS measure does not include Endy.
2. On January 1, 2019, the Company adopted the new accounting standard IFRS 16 - Leases (“IFRS 16”) and comparative figures have
not been restated. The impact of the adoption of this standard is discussed under the heading Current and Future Accounting Stan-
dards. As a result, the financial results and the non-IFRS measures for Q4 2019 and 2019 have been impacted compared to Q4 2018
and 2018.
3. Depreciation and amortization expense related to stores and delivery property and equipment assets is classified in cost of sales and
the depreciation and amortization expense related to distribution centres, offices, intangibles and other is classified in general and ad-
ministrative expense. The comparative results for Q4 2018 and 2018 have been revised to conform to this presentation.
Highlights of Results in Q4 2019
Q4 2019 compared to Q4 2018 - See “Non-IFRS Measures”.
z Revenues increased by $26.4 million (16.5%), driven by 1.9% SSS growth (excluding Endy), opening of 12 new
stores during the year, wrap stores and the inclusion of Endy’s sales for the full quarter in 2019;
z Gross profit margins improved by 2.4% from 29.6% in Q4 2018 to 32.0% in Q4 2019;
z Operating EBITDA margins improved by 6.0% from 16.2% in Q4 2018 to 22.2% in Q4 2019 mainly due to the adop-
tion of IFRS 16, whereby the rent for stores, distribution centres, and office leases are no longer being expensed
through rent expense, and are instead being expensed through depreciation and interest charges in Q4 2019;
z Net income increased by $0.7 million to $14.0 million in Q4 2019;
Sleep Country Canada | Annual Report 2019
16
Management’s Discussion and Analysis of Financial Condition and Results of Operations of Sleep Country Canada Holdings Inc.
z
Basic EPS increased by $0.02 to $0.38 in Q4 2019, up from $0.36 in Q4 2018. This increase was impacted by the
following additional items in 2019 that were not included in the Company’s 2018 results:
Negative impact from the adoption of IFRS 16 of ($0.02) per share;
Negative impact from interest on the additional debt from the acquisition of Endy of ($0.01) per share;
Negative impact from accretion expense on the earn out from the acquisition of Endy of ($0.02);
z
z
Adjusted Net Income increased by $0.9 million;
Basic Adjusted EPS increased by $0.03 from $0.40 in Q4 2018 to $0.43 in Q4 2019, which was negatively impacted
by items noted above as well as adjustments due to share-based compensation and Enterprise Resource Planning
(“ERP”) implementation costs that were not included in the Company’s 2018 results.
Highlights of Results in 2019
2019 compared to 2018 - See “Non-IFRS Measures”.
z Revenues increased by $89.4 million (14.3%), driven by 0.3% SSS growth (excluding Endy), the opening of 12 new
stores during the year and the inclusion of wrap stores and Endy for the full year in 2019;
z Gross profit margins improved by 2.3% from 29.0% in 2018 to 31.3% in 2019;
z Operating EBITDA margins improved by 4.9% from 17.0% in 2018 to 21.9% in 2019 mainly due to the adoption of
IFRS 16, whereby the rent for store, distribution centres, and office leases are no longer being expensed through rent
expense, and are instead being expensed through depreciation and interest charges in 2019;
z Net income decreased by $4.2 million to $55.5 million;
z
Basic EPS decreased by $0.11 to $1.50 in 2019 down from $1.61 in 2018. The decrease was impacted by the follow-
ing additional items in 2019 that were not included in the Company’s 2018 results:
Negative impact from the adoption of IFRS 16 of ($0.08) per share;
Negative impact from interest on the additional debt from the Acquisition of Endy of ($0.06) per share;
Negative impact from accretion expense on the earn out from the Acquisition of Endy of ($0.07);
z
z
Adjusted Net Income decreased by $4.6 million;
Basic Adjusted EPS decreased by $0.12 from $1.72 in 2018 to $1.60 in 2019, which was negatively impacted by
items noted above as well as adjustments due to share-based compensation and ERP implementation costs that
were not included in the Company’s 2018 results.
Sleep Country Canada | Annual Report 2019
17
Management’s Discussion and Analysis of Financial Condition and Results of Operations of Sleep Country Canada Holdings Inc. The comparability of the results of Q4 2019 versus Q4 2018 was impacted by the adoption of IFRS 16. The table below
summarizes the impact of adoption of IFRS 16 as described on the previous page:
Q4
2019
As
presented
in quarterly
interim
statements
Q4
2018
As
presented
in quarterly
interim
statements (3)
Q4
2018
Change
IFRS 16
pro-forma
Adjustments(2)
Pro-
forma(2)
Q4 2019 versus
Q4 2018
pro-forma(1)
$
186,490 $
160,104 $
– $
160,104 $
26,386
16.5%
112,669
(1,508)
111,161
15,678
14.1%
126,839
59,651
34,762
24,889
5,306
(102)
19,685
5,658
47,435
27,199
20,236
1,287
–
18,949
5,636
1,508
(394)
1,902
2,686
–
(784)
(233)
48,943
26,805
10,708
21.9%
7,957
29.7%
22,138
3,973
2,751
12.4%
1,333
33.6%
–
(102)
–
18,165
5,403
1,520
255
8.4%
4.7%
9.9%
14,027 $
13,313 $
(551) $
12,762 $
1,265
39,366 $
24,300 $
10,328 $
34,628 $
4,738
13.7%
41,310 $
22.2%
25,896 $
16.2%
10,328 $
36,224 $
5,086
14.0%
22.6%
15,744 $
14,776 $
(551) $
14,225 $
1,519
10.7%
0.38 $
0.38 $
0.43 $
0.42 $
0.36
0.36
0.40
0.40
$
$
$
$
0.34 $
0.34 $
0.38 $
0.04
0.04
0.04
10.3%
10.5%
11.1%
0.38 $
0.04
11.2%
(C$ thousands unless otherwise
stated; other than earnings per share)
Consolidated Income Statement
Revenues
Cost of sales
Gross profit
General and administrative expenses
Income before finance related
expenses, interest income and other
expenses (income) and income taxes
Finance related expenses
Interest and other expenses (income) - net
Net Income before provision for income
taxes
Provision for income taxes
Net income
EBITDA(1)
Operating EBITDA(1)
Operating EBITDA Margin(1)
Adjusted Net Income(1)
Earnings per share – Basic
Earnings per share – Diluted
Adjusted earnings per share - Basic(1)
Adjusted earnings per share -
Diluted(1)
Notes:
$
$
$
$
$
$
$
$
1. See the section below entitled “Non-IFRS Measures” for further details concerning how the Company calculates EBITDA, Operating EBITDA, Ad-
justed Net Income and Basic and Diluted Adjusted EPS, Pro-forma Q4 2018 and for a reconciliation to the most comparable IFRS measure.
2. On January 1, 2019, the Company adopted the new accounting standard, IFRS 16, and comparative figures have not been restated.
The impact of adoption of this standard is discussed under the heading “Current and Future Accounting Standards”. As a result, the
financial results and the non-IFRS measures for Q4 2019 have been impacted compared to Q4 2018. The IFRS 16 pro-forma ad-
justments relate to the impact of IFRS 16 on Q4 2018, assuming the standard had been adopted on January 1, 2018. This estimated
impact on Q4 2018 has been calculated based on the lease information available as of January 1, 2019, and using similar accounting
policies and assumptions as in place upon adoption of the standard on January 1, 2019.
3. On January 1, 2019, the Company reclassified depreciation and amortization expense to Cost of Sales and General and Administrative
expenses respectively. These figures have been have been updated for comparative purposes.
Sleep Country Canada | Annual Report 2019
18
Management’s Discussion and Analysis of Financial Condition and Results of Operations of Sleep Country Canada Holdings Inc.
The comparability of the results of 2019 versus 2018 was impacted by the adoption of IFRS 16. The table below summarizes
the impact of adoption of IFRS 16 as described on the previous page:
(C$ thousands unless otherwise
stated; other than earnings per share)
Consolidated Income Statement
Revenues
Cost of sales
Gross profit
2019
As
presented
in annual
statements
2018
As
presented
in annual
statements(3)
2018
Change
IFRS 16
pro-forma
Adjustments(2)
Pro-
forma(2)
2019 versus 2018
pro-forma(1)
$
712,372 $
622,977 $
– $
622,977 $
89,395
14.3%
489,082
442,615
223,290
180,362
(5,953)
5,953
(1,149)
436,662
186,315
92,611
52,420
12.0%
36,975
19.8%
33,215
35.9%
General and administrative expenses
125,826
93,760
Income before finance related
expenses, interest income and other
expenses (income) and income taxes
Finance related expenses
Interest and other expenses (income)
97,464
21,149
86,602
4,475
7,102
10,581
93,704
15,056
3,760
4.0%
6,093
40.5%
- net
(788)
(89)
–
(89)
(699) 785.4%
Net Income before provision for
income taxes
Provision for income taxes
Net income
EBITDA(1)
Operating EBITDA(1)
Operating EBITDA Margin(1)
Adjusted Net Income(1)
Earnings per share – Basic
Earnings per share – Diluted
Adjusted earnings per share -
Basic(1)
Adjusted earnings per share -
Diluted(1)
Notes:
77,103
21,643
82,216
22,575
(3,479)
(955)
78,737
21,620
(1,634)
(2.1%)
23
0.1%
55,460 $
59,641 $
(2,524) $
57,117 $
(1,657)
(2.9%)
151,914 $
101,422 $
39,238 $
140,660 $
11,254
8.0%
155,932 $
105,775 $
39,238 $
145,013 $
10,919
7.5%
21.9%
17.0%
23.3%
59,251 $
63,861 $
(2,524) $
61,337 $
(2,086)
(3.4%)
1.50 $
1.49 $
1.61
1.59
1.60 $
1.72
1.59 $
1.71
$
$
$
$
1.54 $
1.53 $
(0.05)
(3.0%)
(0.04)
(2.7%)
1.66 $
(0.06)
(3.5%)
1.64 $
(0.05)
(3.2%)
$
$
$
$
$
$
$
$
1. See the section below entitled “Non-IFRS Measures” for further details concerning how the Company calculates EBITDA, Operating EBITDA, Ad-
justed Net Income and Basic and Diluted Adjusted EPS, Pro-forma 2018 and for reconciliation to the most comparable IFRS measure.
2. On January 1, 2019, the Company adopted the new accounting standard, IFRS 16, and comparative figures have not been restated.
The impact of adoption of this standard is discussed under the heading “Current and Future Accounting Standards”. As a result, the
financial results and the non-IFRS measures for 2019 have been impacted compared to 2018. The IFRS 16 pro-forma adjustments
relate to the impact of IFRS 16 on 2018, assuming the standard had been adopted on January 1, 2018. This estimated impact on 2018
has been calculated based on the lease information available as of January 1, 2019, and using similar accounting policies and assump-
tions as in place upon adoption of the standard on January 1, 2019.
3. On January 1, 2019, the Company reclassified depreciation and amortization expense to Cost of Sales and General and Administrative
expenses respectively. These figures have been have been updated for comparative purposes.
Sleep Country Canada | Annual Report 2019
19
Management’s Discussion and Analysis of Financial Condition and Results of Operations of Sleep Country Canada Holdings Inc.
Outlook
Management continues to make significant investments to strengthen the Company’s omnichannel capabilities, grow its
customer base and increase its market share. These investments support the Company’s long-term, profitable growth
strategy and reinforce its position as Canada’s premier omnichannel sleep retailer. Key initiatives planned for 2020 include the
following:
z
z
z
opening a minimum of eight new stores;
renovating 25 to 30 stores to feature the enhanced store design;
growing SSS (See “Non-IFRS Measures”) by optimizing the omnichannel experience through the following initiatives:
the revitalized eCommerce website, offering the full lineup of mattresses and a wider assortment of Accessories
to enhance the customer experience;
investing in sales training and in-store customer experience; and
continuing to expand merchandising opportunities in mattresses and sleep Accessories.
z
continuing to focus on brand messaging “All for Sleep” and implementing specific tactics including targeted advertis-
z
z
ing aimed at aggressively capturing more market share;
continuing to grow Endy’s online sales;
increasing digital marketing spend to drive engagement across the marketing funnel and traffic to the Company’s
website and stores;
z
continuing to invest in advertising the Endy brand using digital advertising channels enhanced with additional tradi-
tional media channels to broaden awareness in all Canadian markets; and
z
capital expenditures will be driven mainly by investments in a new in-store Point of Sale system, a new warehouse
management system, new ERP system, new stores, store renovations and maintenance capital expenditures.
Sleep Country Canada | Annual Report 2019
20
Management’s Discussion and Analysis of Financial Condition and Results of Operations of Sleep Country Canada Holdings Inc. Selected Financial Information
The following table sets out selected IFRS and certain non-IFRS financial measures of SCC and should be read in conjunction
with the audited annual consolidated financial statements of SCC for 2019 and 2018.
(C$ thousands unless otherwise stated;
except earnings per share)
2019(2)
2018
Change
2019(2)
2018
Change
Q4
Annual
Consolidated Income Statement
Revenues
Cost of sales
Gross profit
General and administrative expenses
Income before finance related expenses,
interest income and other expenses
(income) and income taxes
Finance related expenses
Interest income and other expenses
$
186,490 $
160,104
16.5% $
712,372 $
622,977
126,839
112,669
12.6%
489,082
442,615
59,651
34,762
47,435
27,199
25.8%
223,290
180,362
27.8%
125,826
93,760
14.3%
10.5%
23.8%
34.2%
24,889
20,236
23.0%
5,306
1,287
312.3%
97,464
21,149
86,602
12.5%
4,475
372.6%
(income) - net
(102)
–-
(788)
(89)
785.4%
Net Income before provision for income
taxes
Provision for income taxes
Net income
EBITDA(1)
Operating EBITDA(1)
Operating EBITDA Margin(1)
Adjusted Net Income(1)
Earnings per share – Basic
Earnings per share – Diluted
Adjusted earnings per share - Basic(1)
Adjusted earnings per share - Diluted(1)
Dividends declared per share
Total assets
Lease Liabilities and Long-term debt(3)
Notes:
$
$
$
$
$
$
$
$
$
$
$
19,685
5,658
18,949
5,636
3.9%
0.4%
77,103
21,643
14,027 $
13,313
5.4% $
55,460 $
82,216
22,575
59,641
39,366 $
41,310 $
22.2%
24,300
25,896
16.2%
62.0% $
151,914 $
101,422
59.5% $
155,932 $
105,775
15,744 $
14,776
6.6% $
59,251 $
0.38 $
0.38 $
0.43 $
0.42 $
0.36
0.36
0.40
0.40
0.195 $
0.185
31-Dec-19
917,052
446,196
5.6% $
5.6% $
7.5% $
5.0% $
5.4% $
$
$
21.9%
1.50 $
1.49 $
1.60 $
1.59 $
17.0%
63,861
1.61
1.59
1.72
1.71
0.770 $
0.720
31-Dec-18
602,106
170,036
(6.2%)
(4.1%)
(7.0%)
49.8%
47.4%
(7.2%)
(6.8%)
(6.3%)
(7.0%)
(7.0%)
6.9%
1. See the section below entitled “Non-IFRS Measures” for further details concerning how the Company calculates EBITDA, Operating
EBITDA, Adjusted Net Income and Basic and Diluted Adjusted EPS and for a reconciliation to the most comparable IFRS measure.
2. On January 1, 2019, the Company adopted the new accounting standard, IFRS 16, and comparative figures have not been restated.
The impact of the adoption of this standard is discussed under the heading “Current and Future Accounting Standards”. As a result, the
financial results and the non-IFRS measures for Q4 2019 and 2019 have been impacted compared to Q4 2018 and 2018.
3. On January 1, 2019, the Company adopted the new accounting standard, IFRS 16. Due to this adoption, as at December 31, 2019, the
Company’s total lease liabilities and long-term debt balance increased by $271,112 for lease liabilities with a corresponding increase by
$263,777 for right-of-use assets.
Sleep Country Canada | Annual Report 2019
21
Management’s Discussion and Analysis of Financial Condition and Results of Operations of Sleep Country Canada Holdings Inc.
The following table sets out selected IFRS and certain non-IFRS financial measures of SCC and should be read in conjunction
with the audited annual consolidated financial statements of SCC for 2018 and 2017.
(C$ thousands unless otherwise stated;
except earnings per share)
2018
2017(2) Change(3)
2018
2017(2) Change(3)
Q4
Annual
Consolidated Income Statement
Revenues
Cost of sales
Gross profit
General and administrative expenses
Income before finance related expenses,
interest income and other expenses
(income) and income taxes
Finance related expenses
Interest income and other expenses
(income) - net
Net Income before provision for income
taxes
Provision for income taxes
Net income
EBITDA(1)
Operating EBITDA(1)
Operating EBITDA Margin(1)
Adjusted Net Income(1)
Earnings per share – Basic
Earnings per share – Diluted
Adjusted earnings per share - Basic(1)
Adjusted earnings per share - Diluted(1)
Dividends declared per share
Total assets
Lease Liabilities and Long-term debt
Notes:
$
160,104
$
153,620
4.2% $
622,977
$
586,948
112,669
109,027
3.3%
442,615
419,834
167,114
6.1%
5.4%
7.9%
47,435
27,199
44,593
23,200
6.4%
180,362
17.2%
93,760
82,397
13.8%
20,236
1,287
21,393
(5.4%)
922
39.6%
86,602
4,475
84,717
3,687
2.2%
21.4%
–
71
(100.0%)
(89)
(17)
423.5%
18,949
5,636
13,313
24,300
25,896
16.2%
14,776
0.36
0.36
0.40
0.40
0.185
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
20,400
(7.1%)
5,551
1.5%
14,849
(10.3%)
$
$
(1.6%)
82,216
22,575
59,641
101,422
24,699
25,750
16.8%
15,900
0.40
0.39
0.42
0.42
0.6% $
105,775
(7.1%)
(10.0%)
(7.7%)
(4.8%)
(4.8%)
$
$
$
$
$
17.0%
63,861
1.61
1.59
1.72
1.71
81,047
21,801
59,246
97,101
100,022
17.0%
62,167
1.58
1.56
1.65
1.64
1.4%
3.6%
0.7%
4.5%
5.8%
2.7%
1.9%
1.9%
4.2%
4.3%
0.645
10.8%
$
$
$
$
$
$
$
$
$
0.165
12.1% $
0.720
31-Dec-18
602,106
170,036
$
$
31-Dec-17(2)
482,499
107,147
1. See the section below entitled “Non-IFRS Measures” for further details concerning how the Company calculates EBITDA, Operating
EBITDA, Adjusted Net Income and Basic and Diluted Adjusted EPS and for reconciliation to the most comparable IFRS measure.
2. On January 1, 2018, the Company adopted IFRS 15 and as a result the financial results and the non-IFRS measures for 2017 have
been restated. The adoption has no material impact on the financial results of the Company and has no impact on the EPS.
3. See the Management Discussion and Analysis for year ended December 31, 2018 for discussion related to performance analysis.
Sleep Country Canada | Annual Report 2019
22
Management’s Discussion and Analysis of Financial Condition and Results of Operations of Sleep Country Canada Holdings Inc.
7. Fourth Quarter 2019 versus Fourth Quarter 2018
Revenues
Revenues increased by 16.5% from $160.1 million in Q4 2018 to $186.5 million in Q4 2019 mainly due to the addition of 12
new stores in 2019, wrap stores, the inclusion of revenue from Endy since its acquisition in December 2018 and growth in SSS
(excluding Endy) of 1.9%. See “Non-IFRS Measures”.
The increase in total revenue was comprised of an increase in both mattresses sales and Accessories sales.
(C$ millions unless otherwise stated)
Mattresses
Accessories
Total
Gross profit
2019
$ 146.2
40.3
$ 186.5
2018
$ 126.7
33.4
$ 160.1
Change
Change (%)
Q4
$ 19.5
6.9
$ 26.4
15.4%
20.6%
16.5%
Gross profit was $59.7 million in Q4 2019 compared to $47.4 million in Q4 2018, representing an increase of $12.3 million.
Gross profit margin increased by 2.4% to 32.0% for Q4 2019 from 29.6% for Q4 2018 primarily as a result of the following
factors on a net basis:
z
inventory and other directly related expenses, net of volume rebates, increased as a percentage of revenue to 45.4%
from 44.7%, mainly as a result of lower volume rebates; partially offset by lower direct product costs;
z
sales and distribution compensation expenses were 12.9% of revenue in Q4 2019 compared to 14.5% of revenue in
Q4 2018 mainly due to the favorable impact of no sales and distribution compensation expense incurred for revenue
generated through Endy’s online platform, in addition to lower sales compensation expenses incurred for SCC as a
percentage of sales in Q4 2019 over Q4 2018;
z
store occupancy costs decreased as a percentage of revenue to 3.3% compared to 9.0% of revenue in Q4 2018 or
$8.1 million. This was mainly driven by the adoption of IFRS 16 which, effective January 1, 2019, eliminated the base
rent charges for leased stores previously included as part of store occupancy costs; and
z
depreciation increased to 5.8% of revenue in Q4 2019 from 1.6% of revenue in Q4 2018 or $8.4 million. The majority
of this increase relates to the adoption of IFRS 16 on January 1, 2019, subsequent to which, the Company’s leased
stores are reclassified from operating leases to Right-of-use (“ROU”) assets and depreciated. In addition, incremental
depreciation resulting from new store openings, the new ERP system, and store renovations also contributed to the
increase.
Sleep Country Canada | Annual Report 2019
23
Management’s Discussion and Analysis of Financial Condition and Results of Operations of Sleep Country Canada Holdings Inc. General and administrative (“G&A”) expenses
Total G&A expenses increased by $7.6 million, or 27.8%, from $27.2 million in Q4 2018 to $34.8 million in Q4 2019; and,
as a percentage of revenue, G&A increased from 17.0% of revenue in Q4 2018 to 18.6% of revenue in Q4 2019. The G&A
expenses for Q4 2019 compared to Q4 2018 were mainly impacted by the inclusion of the results of Endy in Q4 2019 and the
adoption of IFRS 16 effective January 1, 2019.
(C$ millions unless otherwise stated)
Media and advertising expenses(1)
2019
13.5
$
% of revenue
7.2% $
2018
10.9
Salaries, wages and benefits(2)
Credit card and finance charges(3)
Occupancy charges(4)
Professional fees(5)
Telecommunication and information
technology
Mattress recycling and Donations
Depreciation and amortization(6)
Other
7.0
5.0
1.2
1.1
1.8
0.5
3.6
1.1
3.8%
2.7%
0.6%
0.6%
0.9%
0.3%
1.9%
0.6%
5.1
4.0
2.2
0.8
1.0
0.8
1.5
0.9
% of revenue
Change
Q4
6.8% $
3.2%
2.5%
1.4%
0.5%
0.6%
0.5%
1.0%
0.6%
2.6
1.9
1.0
(1.0)
0.3
0.8
(0.3)
2.1
0.2
7.6
Total G&A expenses
$
34.8
18.6% $
27.2
17.0% $
Notes:
1. Media and advertising expenses increased by $2.6 million mainly due to the inclusion of advertising expense related to Endy in Q4
2019 and an increase in TV advertising; partially offset by a decrease in internet and newspaper advertising spend during the quarter.
2. Salaries, wages and benefits increased by $1.9 million mainly as a result of the inclusion of compensation expense related to Endy in
Q4 2019.
3. Credit card and finance charges are variable costs. These costs increased as a percentage of revenue over Q4 2018 by 0.2% mainly
due to the impact of inclusion of expenses related to Endy and providing customers with longer term financing options.
4. Occupancy charges in Q4 2019 include common area maintenance costs, property taxes and other maintenance costs for the distribu-
tion centres and office space. Occupancy charges decreased by $1.0 million in Q4 2019 compared to Q4 2018 mainly due the adoption
of IFRS 16, which, effective January 1, 2019, eliminated the base rent charges for leased distribution centres previously included as
part of occupancy costs now recorded in depreciation expense; partially offset by an increase in occupancy costs related to Endy.
5. Professional fees increased by $0.3 million due to non-recurring professional fees incurred in relation to the ERP project in Q4 2019.
6. The G&A depreciation expense increased by $2.1 million mainly due to an increase in intangible depreciation tied to the revamped
eCommerce platform and Finance and Merchandising module of the ERP implementation which was completed in Q4 2019.
EBITDA
EBITDA was $39.4 million for Q4 2019 compared to $24.3 million for Q4 2018, representing an increase of $15.1 million (or
62.0%). See “Non-IFRS Measures”.
The Q4 2019 EBITDA was positively impacted by the adoption of IFRS 16 effective January 1, 2019. Starting January 1,
2019, the base rent expense related to all leases, which are mainly comprised of store leases and distribution centres and
office leases, are no longer recognized as rental expense, thereby positively impacting EBITDA. The Highlights of Results in
Q4 2019 includes a table that computes the pro-forma results of Q4 2018, adjusted for the impact of IFRS 16. After adjusting
for the impact of IFRS 16, the Pro-forma EBITDA was $34.6 million for Q4 2018 compared to $39.4 million for Q4 2019,
representing an increase of $4.7 million (or 13.7%).
Sleep Country Canada | Annual Report 2019
24
Management’s Discussion and Analysis of Financial Condition and Results of Operations of Sleep Country Canada Holdings Inc. Operating EBITDA
Operating EBITDA was $41.3 million for Q4 2019 or 22.2% of revenue, compared to $25.9 million for Q4 2018, or 16.2% of
revenue, representing an increase of $15.4 million (or 59.5%). See “Non-IFRS Measures”.
The Q4 2019 Operating EBITDA was positively impacted mainly by the adoption of IFRS 16 as noted above. The Highlights of
Results in Q4 2019 includes a table that computes the pro-forma results of Q4 2018, adjusted for the impact of IFRS 16. After
adjusting for the impact of IFRS 16, the Pro-forma Operating EBITDA for Q4 2018 was $36.2 million or 22.6% of revenue.
When compared to pro-forma Q4 2018, the Q4 2019 Operating EBITDA increased by $5.1 million (or 14.0%).
Finance related expenses
Finance related expenses increased by $4.0 million from $1.3 million in Q4 2018 to $5.3 million in Q4 2019 due to the following
reasons:
z
z
the adoption of IFRS 16 effective January 1, 2019 increased interest expense on lease liabilities by $2.8 million;
interest expense of $0.6 million due to the accretion of the contingent consideration related to the Endy acquisition in
December 2018; and
z
an increase of $0.6 million in interest expense on the senior secured credit facility. The Company’s average debt
balance increased mainly due to the additional debt taken to finance the acquisition of Endy in December 2018.
Income taxes
The Net income before income taxes in Q4 2019 increased by $0.8 million from $18.9 million in Q4 2018 to $19.7 million in Q4
2019. This resulted in an increase in income tax expense by $0.1 million to $5.7 million in Q4 2019.
Net income
The Net income for Q4 2019 increased by $0.7 million to $14.0 million compared to $13.3 million in Q4 2018 (Q4 2019 -
$0.38 per share; Q4 2018 - $0.36 per share). This increase was mainly driven by a favourable impact to gross profit in Q4
2019. This improvement was offset partly by an increase in G&A expenses and finance related expenses relating to IFRS 16
accounting for leases in 2019 that are not reflected in the 2018 results.
Adjusted Net Income
Adjusted Net Income for Q4 2019 increased by $0.9 million (or 6.6%) from $14.8 million ($0.40 per share) in Q4 2018 to $15.7
million ($0.43 per share) in Q4 2019.
Sleep Country Canada | Annual Report 2019
25
Management’s Discussion and Analysis of Financial Condition and Results of Operations of Sleep Country Canada Holdings Inc. 8. Annual Financial Results 2019 versus 2018
Revenues
Revenues increased by 14.3% from $623.0 million in 2018 to $712.4 million in 2019 due to the addition of 12 new stores since
December 31, 2018, wrap stores, the inclusion of revenue from Endy since its acquisition in December 2018 and growth in
SSS (excluding Endy) of 0.3%. See “Non-IFRS Measures”.
The increase in total revenue was comprised of an increase in both mattresses sales and Accessories sales.
(C$ millions unless otherwise stated)
Mattresses
Accessories
Total
Gross profit
2019
$ 564.7
147.7
$ 712.4
2018
$ 496.6
126.4
$ 623.0
Annual
Change
Change (%)
$ 68.1
21.3
$ 89.4
13.7%
16.9%
14.3%
Gross profit was $223.3 million in 2019 compared to $180.4 million in 2018, representing an increase of $42.9 million. Gross
profit margin increased by 2.3% to 31.3% for 2019 from 29.0% in 2018 primarily as a result of the following factors on a net basis:
z
inventory and other directly related expenses, net of volume rebates, decreased as a percentage of revenue to 45.1%
from 45.3% mainly as a result of achieving higher raw product margins, net of volume rebates; partially offset by high-
er delivery expenses related to sales made by Endy;
z
sales and distribution compensation expenses were 13.8% of revenue in 2019 compared to 14.8% of revenue in
2018 mainly due to the favorable impact of no sales and distribution compensation expense incurred for revenue
generated through Endy’s online platform. This was partially offset slightly by higher sales compensation expenses
incurred for SCC;
z
store occupancy costs decreased as a percentage of revenue to 3.3% from 8.9% or $31.7 million. This was main-
ly driven by the adoption of IFRS 16 which, effective January 1, 2019, eliminated the base rent charges for leased
stores previously included as part of store occupancy costs; and
z
depreciation increased to 6.0% of revenue in 2019 from 1.5% of revenue in 2018 or $33.5 million. The majority of this
increase relates to the adoption of IFRS 16 on January 1, 2019, subsequent to which, the Company’s leased stores
are reclassified from operating leases to ROU assets and depreciated. In addition, incremental depreciation resulting
from new store openings and store renovations also contributed to the increase.
Sleep Country Canada | Annual Report 2019
26
Management’s Discussion and Analysis of Financial Condition and Results of Operations of Sleep Country Canada Holdings Inc. General and administrative (“G&A”) expenses
Total G&A expenses increased by $32.0 million, or 34.2%, from $93.8 million in 2018 to $125.8 million in 2019 and, as a
percentage of revenue, G&A increased from 15.1% in 2018 to 17.7% in 2019. The G&A expenses for 2019 compared to 2018
were mainly impacted by the inclusion of the results of Endy in 2019 since its acquisition in December 2018 and the adoption
of IFRS 16 effective January 1, 2019.
(C$ millions unless otherwise stated)
2019 % of revenue
2018
% of revenue
Change
Q4
Media and advertising expenses(1)
$
Salaries, wages and benefits(2)
Credit card and finance charges(3)
Occupancy charges(4)
Professional fees
Telecommunication and information
technology(5)
Mattress recycling and Donations
Depreciation and amortization(6)
Other(7)
52.7
24.8
18.6
4.3
2.4
5.4
2.3
11.8
3.5
7.4% $
3.5%
2.6%
0.6%
0.3%
0.8%
0.3%
1.7%
0.5%
33.8
19.9
14.8
8.1
2.2
3.9
2.3
5.6
3.2
5.4% $
3.2%
2.4%
1.3%
0.4%
0.6%
0.4%
0.9%
0.5%
18.9
4.9
3.8
(3.8)
0.2
1.5
–
6.2
0.3
Total G&A expenses
$
125.8
17.7% $
93.8
15.1% $
32.0
Notes:
1. Media and advertising expenses increased by $18.9 million mainly due to the inclusion of advertising expenses related to Endy since its
acquisition in December 2018.
2. Salaries, wages and benefits increased by $4.9 million mainly as a result of the inclusion of compensation expense related to Endy in
2019 since its acquisition in December 2018; partially offset by a decrease to the share-based compensation expense.
3. Credit card and finance charges are variable costs. These costs increased as a percentage of revenue over 2018 by 0.2% mainly due
to the impact of inclusion of expenses related to Endy and providing customers with longer term financing options.
4. Occupancy charges in 2019 include common area maintenance costs, property taxes and other maintenance costs for the distribution
centres and office space. Occupancy charges decreased by $3.8 million in 2019 compared to 2018 mainly due the adoption of IFRS 16,
which, effective January 1, 2019, eliminated the base rent charges for leased distribution centres previously included as part of occu-
pancy costs now recorded in depreciation expense; partially offset by an increase in occupancy cost related to Endy.
5. Telecommunication and information technology costs increased by $1.5 million mainly due to additional software support expenses
incurred as part of the new ERP system as well as the inclusion of Endy.
6. The G&A depreciation expense increased by $6.2 million mainly due to the adoption of IFRS 16, as a result of which, effective January
1, 2019, the Company’s leased distribution centres and offices are reclassified from operating leases to ROU assets and depreciated.
There was additional depreciation and amortization expense related to Endy since its acquisition in December 2018 and additional
depreciation on new leasehold improvements made to the distribution centres for offices.
7. Other expenses increased by $0.3 million mainly due to the inclusion of the results of Endy in 2019 since its acquisition in December
2018.
EBITDA
EBITDA was $151.9 million for 2019 compared to 101.4 million for 2018, representing an increase of $50.5 million (or 49.8%).
See “Non-IFRS Measures”.
The 2019 EBITDA was positively impacted by the adoption of IFRS 16 effective January 1, 2019. Starting January 1, 2019, the
base rent expense related to all leases, which are mainly comprised of store leases and distribution centres and office leases,
is not expensed, thereby positively impacting EBITDA. The Highlights of Results in 2019 includes a table that computes the
pro-forma results of 2018, adjusted for the impact of IFRS 16. After adjusting for the impact of IFRS 16, the Pro-forma EBITDA
was $140.7 million for 2018 compared to $151.9 million for 2019, representing an increase of $11.2 million (or 8.0%).
Sleep Country Canada | Annual Report 2019
27
Management’s Discussion and Analysis of Financial Condition and Results of Operations of Sleep Country Canada Holdings Inc. Operating EBITDA
Operating EBITDA was $155.9 million for 2019, or 21.9% of revenue, compared to $105.8 million for 2018, or 17.0% of
revenue, representing an increase of $50.1 million (or 47.4%). See “Non-IFRS Measures”.
The 2019, Operating EBITDA was positively impacted by the adoption of IFRS 16 as noted above. The Highlights of Results
in 2019 includes a table that computes the pro-forma results of 2018, adjusted for the impact of IFRS 16. After adjusting for
the impact of IFRS 16, the Pro-forma Operating EBITDA for 2018 was $145.0 million, or 23.3% of revenue. When compared to
pro-forma 2018, the 2019 Operating EBITDA increased by $10.9 million (or 7.5%).
Finance related expenses
Finance related expenses increased by $16.6 million from $4.5 million in 2018 to $21.1 million in 2019 due to the following
reasons:
z
the adoption of IFRS 16 effective January 1, 2019, which increased interest expense on lease liabilities by $11.6 mil-
lion;
z
interest expense of $2.4 million due to the accretion of the contingent consideration related to the Endy’s acquisition
in December 2018; and
z
an increase of $2.9 million in interest expense on the senior secured credit facility. The Company’s incurred a higher
effective interest rate of 4.07% in 2019 compared to 3.70% in 2018. Additionally, the Company’s average debt bal-
ance mainly increased due to the additional debt taken to finance the acquisition of Endy in December 2018.
Income taxes
2019 had an income tax expense of $21.6 million versus $22.6 million for 2018 representing a decrease of 4.1%. The
effective tax rate for 2019 was at 28.07% compared to 27.46% for 2018. The main reason for the increase in the effective tax
rate was due to a decrease in non-deductible stock compensation expenses in 2019 compared to 2018.
Net income
The net income for 2019 was $55.5 million ($1.50 per share) compared to $59.6 million ($1.61 per share) in 2018 representing
a decrease of $4.1 million (or 7.0%). The decrease was mainly as a result of higher G&A expenses and finance related
expenses in 2019 compared to 2018, partially offset by the favorable impact of increase in gross profit, decrease in income tax
expense and an increase in other income as a result of insurance compensation received.
Adjusted net income
Adjusted Net Income for 2019 was $59.3 million ($1.60 per share) compared to $63.9 million ($1.72 per share) for 2018. A
decrease of $4.6 million (or 7.2%), mainly as a result of lower net income and lower stock compensation expense incurred in
2019 compared to 2018. Lower stock compensation expense was due to the forfeiture of options and performance share units
upon departure of employment of eligible associates.
Sleep Country Canada | Annual Report 2019
28
Management’s Discussion and Analysis of Financial Condition and Results of Operations of Sleep Country Canada Holdings Inc. 8
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Sleep Country Canada | Annual Report 2019
29
10. Segment Performance
As at December 31, 2019, the Company manages its business on the basis of two operating segments, SCC and Endy,
which is consistent with the internal reporting provided to the chief operating decision-maker, the Chief Executive Officer. The
Company has only one reportable segment as the operating segments meet the aggregation criteria of IFRS 8. The Company
aggregates these reporting segments because the nature of products, services, methods of distribution and economic
characteristics are similar. The Company operates in Canada, which is its country of domicile.
11. Liquidity and Capital Resources
Liquidity
SCC’s primary sources of cash consist of existing cash balances, operating activities and available credit facilities. SCC’s
primary uses of cash are to fund operating expenses, capital expenditures, finance costs, taxation expenses, debt principal
payments, dividends, business acquisitions and share repurchases. Historically, SCC has experienced higher sales and
EBITDA in the second half of the year. Management believes cash generated from operations, together with cash on hand and
amounts available under SCC’s credit facilities will be sufficient to meet its future cash requirements. However, SCC’s ability to
fund future cash requirements will depend on its future operating performance, which could be affected by general economic,
financial and other factors including factors beyond its control despite the risk management strategies that management puts
in place. See the section entitled “Risk Factors” in the AIF for a discussion of the various risks and uncertainties that may affect
the Company’s ability to fund its future cash requirements.
Management reviews new store opening, acquisition and investment opportunities in the normal course of its business and
may, if suitable opportunities arise, realize these opportunities to meet SCC’s business strategy. Historically, the funding for
any such acquisitions or investments has come from cash flow generated from operating activities and/or additional debt.
A summary of net cash flows by activities is presented below for 2019 and 2018:
(C$ thousands unless otherwise stated)
Cash flows from operating activities
Cash flows used in investing activities
Cash flows (used in)/provided by financing activities
Net increase in cash
Cash at beginning of the year
Cash at end of the period
Net cash flows from operating activities
2019
2018
$ 132,060
$ 68,100
(35,449)
(82,559)
14,052
29,988
(93,157)
31,425
6,368
23,620
$ 44,040
$ 29,988
Net cash flows generated from operating activities in 2019 were $132.1 million comprised of the positive impact of cash
generated from operating activities of $136.9 million offset by $4.8 million of cash used as a result of an increase in non-cash
items relating to operating activities (“working capital”). The increase in working capital in 2019 was primarily driven by higher
trade and other receivables, inventories and prepaid expenses and deposits, partially offset by higher trade and other payables
and customer deposits.
Net cash flows generated by operating activities in 2018 were $68.1 million in 2018 comprised of the positive impact of cash
generated from operating activities of $85.8 million offset by $17.7 million of cash used as a result of an increase in non-cash
items relating to working capital. The increase in working capital in 2018 was primarily driven by higher inventories, higher
prepaid expenses and deposits, lower trade and other payables, partially offset by higher customer deposits and lower trade
and other receivables.
Sleep Country Canada | Annual Report 2019
30
Management’s Discussion and Analysis of Financial Condition and Results of Operations of Sleep Country Canada Holdings Inc.
Net cash flows used in investing activities
Net cash flows used in investing activities in 2019 consist mainly of investments in capital expenditure mainly due to new store
openings, store renovations, initial spend on the investment in the new ERP system and eCommerce platform and on store
hardware refresh.
Net cash flows used in investing activities were 93.2 million for 2018, consisting primarily of $66.0 million used in the
acquisition of Endy. The remaining change in 2018 mainly related to investments in capital expenditure mainly due to new
store openings and store renovations.
Net cash flows used in/provided by financing activities
Net cash flows used in financing activities were $82.6 million for 2019, consisting primarily of dividends on the common shares
of $29.2 million, repurchase of its common shares $10.0 million, repayment of lease obligation of $32.0 million and interest
payments of $18.5 million on lease liabilities and the senior secured credit facility; partially offset by net additional loan of $7.2
million taken in 2019 through the senior secured credit facility.
Net cash flows from financing activities were $31.4 million for 2018, consisting primarily of additional loans taken on the senior
secured credit facility $63.6 million, partly offset by dividends on the common shares of $26.7 million, interest payments of $5.0
million on the senior secured credit facility and finance leases.
Contractual obligations
The following table summarizes the Company’s significant contractual obligations as at December 31, 2019 based on
undiscounted cash flow including the estimated interest payable as per the terms of the long-term debt:
Trade and other payables
Lease liabilities
Long-term debt
Between 1
Within 1 year
and 5 years Over 5 years
$ 68,156
$ —
$ —
45,220
7,155
133,190
196,618
63,333
—
$ 120,531
$ 329,808
$ 63,333
The existing credit facility represents a senior secured credit facility with a balance outstanding as at December 31, 2019 of
$175.1 million (December 31, 2018 - $168.6 million).
Executive employment agreements allow for total additional payments of approximately $6,124 if a liquidity event occurs,
$3,946 if all are terminated without cause, $nil if all are terminated with cause and $2,606 if all are terminated as a result of
death.
All directors and/or officers of the Company, and each of its various subsidiary entities, are indemnified by the Company for
various items including, but not limited to, all costs to settle lawsuits or actions due to their association with the Company,
subject to certain restrictions. The Company has purchased directors’ and officers’ liability insurance with maximum
coverage of $30,000 to mitigate the cost of any potential future lawsuits or actions to the directors and officers. The term of
the indemnification is not explicitly defined, but is limited to events for the period during which the indemnified party served
as a director or officer of the Company. The maximum amount of any potential future payment required to be made by the
Company cannot be reasonably estimated but could have a material adverse effect on the Company.
In the normal course of business, the Company has entered into agreements that include indemnities in favour of third parties,
such as purchase and sale agreements, confidentiality agreements, engagement letters with advisers and consultants,
leasing contracts, licence agreements, information technology agreements, and various product and service agreements.
These indemnification arrangements may require the Company to compensate counterparties for losses incurred by the
counterparties as a result of breaches in representations, covenants and warranties provided by the Company or as a result
Sleep Country Canada | Annual Report 2019
31
Management’s Discussion and Analysis of Financial Condition and Results of Operations of Sleep Country Canada Holdings Inc. of litigation or other third party claims or statutory sanctions that may be suffered by the counterparties as a consequence of
the relevant transaction. In some instances, the terms of these indemnities are not explicitly defined. The Company, whenever
possible, tries to limit this potential liability within the particular agreement or contract; however, due to the unpredictability of
future events, the maximum amount of any potential reimbursement required to be made by the Company or its subsidiary
entities cannot be reasonably estimated, but could have a material adverse effect on the Company.
Capital Resources
Senior secured credit facility
On January 1, 2018, SCC held a senior secured credit facility of $150,000, which was scheduled to mature on August 30,
2022. On November 29, 2018, in connection with the purchase of Endy, the senior secured credit agreement was amended.
Pursuant to this amendment, the facility was increased from $150,000 to $210,000 and the maturity date was extended to
November 29, 2023.
The senior secured credit facility is secured by all of the present and after acquired personal property of the Company. As
at December 31, 2019, the balance outstanding on the senior secured credit facility was $175,800 (2018 – $168,600). The
long-term debt liability balance in the consolidated statements of financial position is net of transaction costs of $716 (2018 –
$1,027).
The senior secured credit facility allows for the debt to be held in Canadian or US dollars. During the year, the Company held
the majority of the debt in US dollars for 337 days as the debt held in US dollars had a lower interest rate. To mitigate the
foreign exchange risk, the Company entered into forward foreign exchange contracts to sell US dollars in the equal amount
of the debt with an overall impact of $nil recorded in general and administrative expenses in the consolidated statements
of income and comprehensive income. As at December 31, 2019, the debt is held in Canadian dollars and no forward
foreign exchange contracts were outstanding. Interest on the senior secured credit facility is based on the prime or bankers’
acceptance rates plus applicable margins based on the achievement of certain targets, as defined by the amended and
restated senior secured credit agreement. As at December 31, 2019, the applicable margin for bankers’ acceptances was 200
basis points and the applicable margin for prime rate loans was 100 basis points.
Under the terms of the senior secured credit facility, certain financial and non-financial covenants must be complied with. As at
December 31, 2019, SCC was in compliance with all covenants under the senior secured credit facility.
Off-balance sheet arrangements
SCC did not have any material off-balance sheet arrangements as at December 31, 2019 and December 31, 2018, nor did it
have any subsequent to December 31, 2019.
Related party transactions
As at December 31, 2019 and December 31, 2018, there were no balances due from or payable to a related party.
Sleep Country Canada | Annual Report 2019
32
Management’s Discussion and Analysis of Financial Condition and Results of Operations of Sleep Country Canada Holdings Inc. 12. Transactions with Key Management Personnel
Key management personnel are those individuals having authority and responsibility for planning, directing and controlling the
activities of the Company, including members of the Company’s Board of Directors. The Company considers key management
to be the Board of Directors and its executive team. SCC incurred the following compensation expenses in relation to key
management personnel:
(C$ thousands unless otherwise stated)
Salaries and short-term employee benefits
Share-based compensation
Directors fees
2019
$ 2,868
2,542
578
$ 5,988
2018
$ 2,785
3,655
669
$ 7,109
13. Risk Factors
SCC’s activities expose it to a variety of financial risks: market risk (including foreign exchange risk and cash flow and fair
value interest risks), credit risk, liquidity risk, capital risk and technology risk. SCC’s overall risk management program and
business practices seek to minimize any potential adverse effects on SCC’s financial performance.
Risk management is carried out by the senior management team and is reviewed by SCC’s Board of Directors.
For an understanding of other potential risks, including non-financial risks, see the section entitled “Risk Factors” in the AIF.
Market Risk
Market risk is the loss that may arise from changes in factors such as interest rates, foreign exchange rates and the impact
these factors may have on other counter-parties.
Foreign Exchange Risk
SCC’s operating results are reported in Canadian dollars. A portion of the Company’s merchandise purchases are
denominated in US dollars which results in foreign currency exposure related to fluctuations between the Canadian and US
dollars. The Company does not currently use foreign exchange options or forward contracts to hedge its foreign currency risk
relating to merchandise purchases. A sudden increase in the US dollar relative to the Canadian dollar could result in higher
costs to the Company, which could in turn result in increased prices and reduced sales, decreased profit margins and could
negatively impact the Company’s business and financial results.
The Company’s senior secured credit facility allows the Company to borrow in Canadian and US dollars. To mitigate any
foreign exchange risk related to its US dollar denominated debt, the Company enters into forward foreign exchange contracts
to sell US dollars in an amount equal to the principal amount of its US dollar denominated borrowings.
Cash Flow and Fair Value Interest Risk
SCC has no significant interest-bearing assets. SCC’s income and operating cash flows are substantially independent of
changes in market interest rates.
SCC’s primary interest rate risk arises from long-term debt. SCC manages its exposure to changes in interest rates by using a
combination of fixed and variable rate debt and varying lengths of terms to achieve the desired proportion of variable and fixed
rate debt. An increase (or decrease) in interest rates by 1% would result in a $1.8 million increase (or decrease) on annual
interest expense on the credit facility. SCC has leases that carry interest at variable rates.
Sleep Country Canada | Annual Report 2019
33
Management’s Discussion and Analysis of Financial Condition and Results of Operations of Sleep Country Canada Holdings Inc.
Credit Risk
Credit risk refers to the risk of losses due to failure of the Company’s customers or other counter-parties to meet their payment
obligations. Credit risk arises from deposits with banks, as well as credit exposures from mattress vendors for the payment
of volume and co-operative advertising rebate amounts and balances owed from third-party financing companies under the
various financing plans the Company offers its customers. In accordance with SCC’s investment practice, all deposits are
held at banks possessing a credit rating of AA- or better. Sales to retail customers are settled in cash, financed by third-party
financing companies or by using major credit cards. The Company transfers the credit risk for financing plans to third-party
financing companies. The third-party financing company that SCC deals with carries a minimum rating of BBB or better.
There are no significant impaired receivables that have not been provided for in the allowance. There are no amounts
considered past due or impaired.
Liquidity Risk
Liquidity risk is the risk SCC will not be able to meet a demand for cash or fund its obligations as they come due. Liquidity risk
also includes the risk of not being able to liquidate assets in a timely manner at a reasonable price. Prudent liquidity management
implies maintaining sufficient cash and the availability of funding through an adequate amount of committed credit facilities.
Capital Risk
SCC’s objectives when managing capital are to safeguard its ability to continue as a going concern in order to provide returns
for its common shareholders in the form of cash dividends, benefits to other stakeholders and to maintain an optimal capital
structure to minimize the cost of capital.
In order to maintain or adjust the capital structure, SCC may issue new shares, purchase its own shares or sell assets to
reduce long-term debt.
Technology Risk
The company continues to undertake investments in new IT systems to improve the operating effectiveness of the
organization. Beginning 2019, this includes implementation of a new cloud based eCommerce platform, a new in-store Point
of Sale system, a new warehouse management system and new ERP system. Failure to successfully migrate from legacy
systems to the new IT system or a significant disruption in the company’s current IT systems during the implementation of the
new systems could result in a lack of accurate data to enable management to effectively manage day to day operations of the
business or achieve its operational objectives, causing significant disruptions to the business and potential financial losses.
14. Critical Accounting Estimates
A summary of significant accounting policies is included in Note 3 of SCC’s 2019 audited annual consolidated financial
statements. The Company’s critical accounting estimates are included in Note 4 of SCC’s 2019 audited annual consolidated
financial statements and are described below. Critical accounting estimates requires management to make certain judgements
and estimates, which may differ from actual results. Accounting estimates are based on historical experience and other factors
that management believes to be reasonable under the time frame and circumstances. Changes in management’s accounting
estimates can have a material impact on the financial results of the Company.
Impairment of goodwill and brands
Management is required to use judgment in determining the grouping of assets to identify the Company’s cash generating
units (“CGUs”) for the purposes of testing fixed assets for impairment. Judgment is further required to determine appropriate
groupings of CGUs in order to determine the level at which goodwill and intangible assets are tested for impairment. In
Sleep Country Canada | Annual Report 2019
34
Management’s Discussion and Analysis of Financial Condition and Results of Operations of Sleep Country Canada Holdings Inc. addition, judgment is used to determine whether a triggering event has occurred requiring an impairment test to be completed.
In determining the recoverable amount of a CGU, various estimates are employed. The Company determines fair value less
costs of disposal using estimates such as projected future sales, earnings, capital investments and discount rates. Projected
future sales and earnings are consistent with strategic plans provided to the Company’s Board of Directors. Discount rates
are based on an estimate of the Company’s weighted average cost of capital taking into account external industry information
reflecting the risk associated with the specific cash flows. As at December 31, 2019 and December 31, 2018, impairment
reviews were performed by comparing the CGU’s carrying value with the recoverable amount of the CGU to which goodwill and
brands have been allocated. Management has determined there had been no impairment as at December 31, 2019 and 2018.
15. Financial Instruments
At December 31, 2019, the financial instruments consisted of cash, trade and other receivables, trade and other payables,
customer deposits, senior secured credit facilities, contingent consideration liability and leases.
The carrying values of cash, trade and other receivables, trade and other payables and customer deposits approximate their
fair values due to the relatively short periods to maturity of these financial instruments. The carrying values of the revolving
and term facilities approximate their fair values as the terms and conditions of the borrowing arrangements are comparable
to market terms and conditions as at December 31, 2019 and December 31, 2018. The Company’s financial instruments are
exposed to certain financial risks, including currency risk, interest rate risk, credit risk and liquidity risk, which are discussed
above under the heading “Risk Factors”.
Fair values of contingent consideration liability
The fair value of the contingent consideration liability recorded on the consolidated statements of financial position as
at December 31, 2019 was $17,538. The estimated range of outcomes (undiscounted) for the contingent consideration
arrangement is determined based on the formula price and the likelihood of achieving specified earnings levels over the
contingency period, and ranges from $nil to a maximum of $25,000. The consideration is contingent on the acquired business
achieving certain specified earnings levels during the period commencing on January 1, 2020 and ending on December 31,
2020. During the year ended December 31, 2019, $nil was paid with reference to such contingent consideration (2018 – $nil).
The inputs to the measurement of the fair value of contingent consideration related to acquisitions are Level 3 inputs. The fair
value measurements were made using a discounted cash flow model; significant model inputs were expected future operating
cash flows (determined with reference to each specific acquired business) and a discount rate of 15.0%. The discount rates
is attributable to level of risk related to economic growth factors combined with the length of the contingent payment periods;
and the dispersion was driven by unique characteristics of the businesses acquired and the respective terms for these contingent
payments. A 1% increase in the weighted average discount rate would reduce the fair value of contingent consideration by $260.
16. Disclosure Controls and Procedures
Disclosure controls and procedures are designed to provide reasonable assurance that material information relating to the
Company is made known to the Chief Executive Officer and the Chief Financial Officer (the “Certifying Officers”) by others
on a timely basis so that appropriate decisions can be made regarding public disclosure within the time periods required by
applicable securities laws. The Certifying Officers are responsible for establishing and maintaining the Company’s disclosure
controls and procedures.
The Company’s system of disclosure controls and procedures includes, but is not limited to, the Company’s Disclosure Policy,
the Company’s Code of Business Conduct, the effective functioning of the Company’s Disclosure Committee, procedures
in place to systematically identify matters warranting consideration of disclosure by the Disclosure Committee, verification
processes for individual financial and non-financial metrics and information contained in annual and interim filings, including
Sleep Country Canada | Annual Report 2019
35
Management’s Discussion and Analysis of Financial Condition and Results of Operations of Sleep Country Canada Holdings Inc. the consolidated financial statements, MD&As, AIF, Management Information Circular and other documents and external
communications.
Based on an evaluation of the Company’s disclosure control and procedures, the Certifying Officers have concluded that
these controls are appropriately designed and were operating effectively as of December 31, 2019. Although the Company’s
disclosure controls and procedures were operating effectively as of December 31, 2019, there can be no assurance that the
Company’s disclosure controls and procedures will detect or uncover all failures of persons within the Company to disclose
material information otherwise required to be set forth in the Company’s regulatory filings.
17. Internal Control Over Financial Reporting
Management is also responsible for establishing and maintaining appropriate internal controls over financial reporting
(“ICFR”). The Company’s ICFR include, but are not limited to, Entity Level Controls, Information Technology General Controls,
Information Technology Application and Development Controls, detailed policies and procedures related to financial accounting
and reporting and controls over systems that process and summarize transactions. The Company’s procedures for financial
reporting also include the active involvement of qualified financial professionals, senior management, executive management
and the Audit Committee.
ICFR is designed to provide reasonable assurance regarding the reliability of the Company’s financial reporting and the
preparation of financial statements in accordance with IFRS. The Certifying Officers are responsible for establishing and
maintaining adequate ICFR for the Company. In designing ICFR, it should be recognized that due to inherent limitations, any
controls, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control
objectives and cannot provide absolute assurance with respect to the prevention or detection of misstatements. Projections
of any evaluations of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Additionally,
management is required to use judgment in evaluating ICFR.
The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of
the Company, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with IFRS, and that receipts and expenditures of the Company are being made only in accordance
with authorizations of management and directors of the Company, and (iii) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on
the financial statements.
A “material weakness” in internal control over financial reporting is a deficiency, or a combination of deficiencies, in internal
controls over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual
or interim financial statements will not be prevented or detected in a timely basis by the company’s internal controls. The
Certifying Officers have evaluated the effectiveness of the Company’s ICFR as at December 31, 2019 using the framework
established in ‘Internal Control - Integrated Framework (COSO Framework)’ published by The Committee of Sponsoring
Organizations of the Treadway Commission (COSO), 2013. Based on that evaluation, the Certifying Officers concluded
that the ICFR, as defined by National Instrument 52-109 – Certification of Disclosure on Issuers’ Annual and Interim Filings,
are appropriately designed and were operating effectively as at December 31, 2019 and that no material weaknesses were
identified through their evaluation.
Sleep Country Canada | Annual Report 2019
36
Management’s Discussion and Analysis of Financial Condition and Results of Operations of Sleep Country Canada Holdings Inc. 18. Current and Future Accounting Standards
IFRIC 23 – Uncertainty over Income Tax Treatments
On January 1, 2019, the Company adopted IFRIC 23, uncertainty over Income Tax Treatment, which clarified how to apply
the recognition and measurement requirement in IAS 12, Income Tax, when there is uncertainty over income tax treatments.
There are no significant adjustments to the amounts recognized in the consolidated financial statements. .
IFRS 16 - Leases
On January 1, 2019, the Company adopted the new accounting standard IFRS 16 – Leases (IFRS 16), using the modified
retrospective approach, and comparative figures have not been restated. A lease is a contract in which the right-of-use of an
asset is granted for an agreed upon time in return for compensation. Lease liabilities are recorded on the present value of the
non-cancellable lease payments over the lease term and discounted at the Company’s incremental borrowing rate. Lease
payments include fixed payments and variable payments. The right-of-use assets are measured at cost, which comprises the
lease liability, lease payments made prior to delivery, initial direct costs and restoration obligations less lease incentives. The
right-of-use assets are subsequently measured at amortized cost. The assets are depreciated over the term of the lease using
the straight-line method. The Company has elected to use the relief practical expedient provided for low-value assets and
short-term leases (shorter than 12 months), which are expensed in the consolidated statements of income and comprehensive
income according to the straight-line method. Extension and termination options exist for a number of leases, particularly
for properties. The Company assesses all facts and circumstances available in determining the probability of exercising
available extension and termination options. The Company includes the extension option in calculating the lease term when
it determines that it is reasonably certain that the Company will exercise the available extension option. The Company
reassesses whether an extension option is included in the lease term when there is a change in events and circumstances that
affects that decision, and re-measures the lease liability upon change in the assessment.
On adoption, a cumulative adjustment was recognized directly to equity as deficit on January 1, 2019 as illustrated in the note
below. For leases previously classified as finance leases, the Company recognized the carrying amount of the lease asset and
lease liability immediately before transition as the carrying value of the right-of-use asset and the lease liability at the date of
initial application. The Company chose the practical expedient to grandfather any contracts that were previously considered to
be leases. As part of the initial application of IFRS 16, the Company chose, on a lease-by-lease basis, to measure that right-
of-use asset at its carrying amount as if the standard had been applied since the lease’s commencement date, discounted
using the Company’s incremental borrowing rate at the date of initial application. In addition, upon adoption, the Company
applied a single discount rate to a portfolio of leases with reasonably similar characteristics. The Company chose the practical
expedient to not separate the lease component and its associated non-lease components for its trucks. The Company decided
not to apply the new standard for leases with remaining lease terms less than 12 months. Additionally, the Company chose
the practical expedients to exclude initial direct costs for the measurement of the right-of-use asset and to use hindsight in
determining the lease term where the contract includes extension options. The lease payments associated with short-term
leases will be recognized as a straight-line expense in the consolidated statements of income and comprehensive income.
Sleep Country Canada | Annual Report 2019
37
Management’s Discussion and Analysis of Financial Condition and Results of Operations of Sleep Country Canada Holdings Inc. The following reconciliation to the opening balance for the leases liabilities as at January 1, 2019 is based upon operating lease obligations as
at December 31, 2018:
(C$ thousands unless otherwise stated)
January 1, 2019
Operating lease obligations as at December 31, 2018
Adjustments as a result of a different treatment of renewal options
Undiscounted minimum lease payments on finance lease liabilities as at
December 31, 2018
Gross leases liabilities as at January 1, 2019
Discounting
Leases Liabilities as at January 1, 2019
$
$
224,342
130,772
3,685
358,799
(66,829)
291,970
The lease liabilities were discounted at the borrowing rate as at January 1, 2019. The weighted average discount rate was
3.86%.
Leases are shown as follows in the audited consolidated statements of financial position and the consolidated statements of
income and comprehensive income for year December 31, 2019.
(C$ thousands unless otherwise stated)
Lease in the audited consolidated statements of income and comprehensive income:
Cost of Sales:
Depreciation - ROU
General and administrative expenses:
Depreciation - ROU
Interest and other expenses:
Interest expense on lease liabilities
2019
31,976
3,748
11,562
$
$
$
The ROU assets include assets that were recognized as finance assets with IAS 17 until December 31, 2018. The ROU assets
transactions during the period were as follows:
(C$ thousands unless otherwise stated)
ROU Assets
As at January 1, 2019
Properties
Trucks
Total
$ 252,613
$ 3,403
$ 256,016
Add: Additions during the year with a corresponding increase to the
lease liability
Add: Cash additions due to initial direct cost incurred during the year
Less: Tenant inducements received
Less: Depreciation – right-of-use assets
43,434
46
35
(1,030)
(34,804)
–
(920)
44,480
35
(1,030)
(35,724)
As at December 31, 2019
$ 261,248
$ 2,529
$ 263,777
Sleep Country Canada | Annual Report 2019
38
Management’s Discussion and Analysis of Financial Condition and Results of Operations of Sleep Country Canada Holdings Inc.
(C$ thousands unless otherwise stated)
Lease Liabilities:
As at January 1, 2019
Add: Additions during the period with corresponding increase to the ROU Asset
Less: Repayment of principal lease liabilities
As at December 31 2019
Adjustment of opening balances as at January 1, 2019
2019
291,970
44,480
(32,029)
304,421
$
$
The adjustments to the opening balances below resulted from the initial application of IFRS 16 as at January 1, 2019. The
prior period amounts were not adjusted. The effects on the transition were recognized directly in equity as deficit.
(C$ thousands unless otherwise stated)
reported
Adjustments
As adjusted
December 31, 2018
January 1, 2019
As previously
Assets:
Property and equipment
ROU asset
Liabilities and Shareholder’s Equity:
Long-term debt - Current portion
Lease liabilities - Current Liabilities
Other liabilities
Deferred tax liabilities
Lease liabilities
Long-term debt
Deficit
$
$
$
$
$
$
$
65,710 $
(3,311) $
– $
256,016 $
62,399
256,016
686 $
–
28,988 $
24,789 $
(686) $
7,143
(13,003) $
(6,200) $
–
284,827
170,036 $
(2,463) $
(49,444) $
(16,913) $
–
7,143
15,985
18,589
284,827
167,573
(66,357)
19. Outstanding Share Data
As of the date hereof, 36,642,185 common shares and no Class A common shares of the Company are issued and
outstanding. As of the date hereof, 976,080 options to purchase an equivalent number of common shares, 178,864
performance share units and 34,430 deferred share units are issued and outstanding. For further details concerning the rights,
privileges and restrictions attached to the common shares and the Class A common shares, please refer to the section entitled
“Description of Share Capital” in the AIF.
20. Non-IFRS Measures
The Company prepares its financial statements in accordance with IFRS. In order to provide additional insight into the
business, to provide investors with supplemental measures of its operating performance and to highlight trends in its business
that may not otherwise be apparent when relying solely on IFRS financial measures, the Company has also provided in
this MD&A certain non-IFRS measures, including “Same Store Sales” or “SSS”, “EBITDA”, “Operating EBITDA”, “Operating
EBITDA Margin”, “Adjusted Net Income” and “Basic and Diluted Adjusted EPS” each as defined below. These measures are
provided as additional information to complement IFRS measures by providing further understanding of the Company’s results
of operations from management’s perspective. Management also uses non-IFRS measures in order to facilitate operating
performance comparisons from period to period, to prepare annual operating budgets and forecasts and to determine
Sleep Country Canada | Annual Report 2019
39
Management’s Discussion and Analysis of Financial Condition and Results of Operations of Sleep Country Canada Holdings Inc.
components of management compensation. The Company also believes that securities analysts, investors and other
interested parties frequently use non-IFRS measures in the evaluation of issuers.
Readers are cautioned that these non-IFRS measures are not recognized under IFRS and do not have a standardized
meaning prescribed by IFRS. They are therefore unlikely to be comparable to similarly titled measures presented by other
publicly traded companies. Accordingly, they should not be considered in isolation nor as a substitute for analysis of the
Company’s financial information reported under IFRS. See below for further details concerning how the Company calculates
these non-IFRS measures and for reconciliations to the most comparable IFRS measures.
Same Store Sales (SSS)
SSS is a non-IFRS measure used in the retail industry to compare sales derived from established stores over a certain period
compared to the same period in the prior year. The Company has embarked on an omnichannel approach to engaging with
customers. This approach allows customers to shop online for home delivery or purchase in any store locations. Due to the
customer cross-channel behavior, the Company reports a single comparable sales metrics, inclusive of store and eCommerce
channels. SSS calculation excludes sales of excess inventory to third parties. SSS helps to explain what portion of revenue
growth can be attributed to growth in established stores and what portion can be attributed to the opening of new stores. SCC
calculates SSS as the percentage increase or decrease in sales of stores opened for at least 12 complete months relative to
the same period in the prior year. Endy was acquired in December 2018, and the revenue of Endy is not included in SSS.
The revenue of Endy will be included in the SSS calculation starting January 2020.
EBITDA and Operating EBITDA
EBITDA and Operating EBITDA are used by SCC to assess its operating performance.
EBITDA is defined as income (loss) adjusted for:
z
z
z
z
finance related expenses;
income taxes;
depreciation and amortization; and
interest and other expenses (income) - net.
Operating EBITDA is defined as EBITDA adjusted for:
z
z
z
share-based compensation;
ERP implementation costs; and
acquisition costs
Adjusted Net Income
Adjusted Net Income is used by SCC to assess its operating performance. Adjusted Net Income is defined as net income
(loss) adjusted for:
z
z
z
share-based compensation;
ERP implementation costs; and
acquisition costs.
Adjusted EPS – Basic
Adjusted EPS - Basic is defined as Adjusted Net Income attributable to the common shareholders of the Company divided by
weighted average number of shares issued and outstanding during the period.
Sleep Country Canada | Annual Report 2019
40
Management’s Discussion and Analysis of Financial Condition and Results of Operations of Sleep Country Canada Holdings Inc. Adjusted EPS – Diluted
Adjusted EPS - Diluted is defined as Adjusted Net Income attributable to the common shareholders of the Company divided by
weighted average number of shares issued and outstanding during the period adjusted for the effects of dilutive stock options,
Performance share units and Deferred share units.
Pro-forma – Q4 2018 and Pro-forma - 2018
Pro-forma – Q4 2018 and Pro-forma - 2018 is defined as the results of the respective 2018 periods as presented in condensed
interim consolidated statement of income and comprehensive Income, adjusted for the estimated impact of IFRS 16 as follows:
z
z
z
z
base rent expense, which mainly related to stores and distributions center occupancy leases;
estimated depreciation on the ROU assets;
estimated interest on lease liabilities; and
income tax impact of the above adjustments.
The estimated impact of IFRS 16 has been calculated based on the lease information available as of January 1, 2019, and
using similar accounting policy on leases, assumptions and practical expedients as in place upon the formal adoption of the
standard on January 1, 2019.
Sleep Country Canada | Annual Report 2019
41
Management’s Discussion and Analysis of Financial Condition and Results of Operations of Sleep Country Canada Holdings Inc. Calculation of Non-IFRS Measures
(C$ thousands unless otherwise
stated, except earnings per share)
2019(5)
2018(5)
Reconciliation of net income to EBITDA and Operating EBITDA:
Q4
Pro-
forma
2018(6)
Annual
Pro-
forma
2018(6)
2019(5)
2018(5)
Net income
$ 14,027 $ 13,313
$
12,762
$
55,460 $
59,641 $
57,117
Interest income and other expenses
(income) - net
Finance related expenses
Income taxes
Depreciation and amortization
EBITDA
Adjustments to EBITDA:
ERP Implementation costs(3)
Acquisition costs(2)
Share-based compensation(1)
(102)
5,306
5,658
14,477
39,366
809
–
1,135
Total adjustments
$
1,944 $
–
1,287
5,636
4,064
24,300
–
502
1,094
1,596
Operating EBITDA
$ 41,310 $ 25,896
–
3,973
5,403
12,490
34,628
–
502
1,094
1,596
(788)
21,149
21,643
54,450
(89)
4,475
22,575
14,820
(89)
15,056
21,620
46,956
151,914
101,422
140,660
809
– $
–
502
3,209 $
3,851
$
4,018 $
4,353 $
–
502
3,851
4,353
36,224
$ 155,932 $
105,775 $
145,013
$
$
Operating EBITDA margin
22.2%
16.2%
22.6%
21.9%
17.0%
23.3%
Reconciliation of net income to Adjusted Net Income:
Net income
$ 14,027 $ 13,313
$
12,762
$
55,460 $
59,641 $
57,117
Adjustments:
ERP Implementation costs(3)
Acquisition costs(2)
Share-based compensation(1)
Total adjustments
Tax impact of all adjustments
809
–
1,135
1,944 $
(227) $
–
502
1,094
1,596
(133)
$
$
Adjusted Net Income
$ 15,744 $ 14,776
Weighted average number of
shares – Basic
Earnings per share – Basic
Adjusted earnings per share –
Basic
Adjusted earnings per share –
Diluted(4)
Notes:
36,919
37,058
0.38 $
0.36
0.43 $
0.40
0.42 $
0.40
$
$
$
–
502
1,094
1,596
(133)
14,225
37,058
0.34
0.38
0.38
$
$
$
$
$
$
809
– $
–
502
3,209 $
3,851
4,018 $
4,353 $
(227)
(133) $
–
502
3,851
4,353
(133)
59,251 $
63,861 $
61,337
37,076
37,029
37,029
1.50 $
1.61 $
1.54
1.60 $
1.72 $
1.66
1.59 $
1.71 $
1.64
$
$
$
$
$
$
1. Adjustment for share-based compensation, a non-cash item, and the related payroll tax expense, a cash expense.
2. Adjustment for one-time professional fees incurred in relation to acquisition of business operations of Endy in December 2018.
3. The Company incurred charges related to its ERP implementation project which commenced in 2019.
4. The weighted average number of diluted shares for Q4 2019 is 37,159; for Q4 2018 is 37,346; 2019 is 37,323 and 2018 is 37,409.
Sleep Country Canada | Annual Report 2019
42
Management’s Discussion and Analysis of Financial Condition and Results of Operations of Sleep Country Canada Holdings Inc.
5. On January 1, 2019, the Company adopted the new accounting standard, IFRS 16, and comparative figures have not been restated.
The impact of adoption of this standard is discussed under the heading “Current and Future Accounting Standards”. As a result, the
financial results and the non-IFRS measures for Q4 2019 and 2019 have been impacted compared to Q4 2018 and 2018.
6. The adjustment for pro-forma relates to estimated calculated impact of IFRS 16 on Q4 2018 and 2018. This estimated impact on Q4
2018 and 2018 has been calculated based on the lease information available as of January 1, 2019, and using similar accounting policy
on leases, assumptions and practical expedient as in place upon adoption of the standard on January 1, 2019.
21. Additional Information
Additional information relating to the Company, including the Company’s annual information form, quarterly and annual reports
and supplementary information is available on SEDAR at www.sedar.com. Press releases and other information are also
available in the Investor Relations section of the Company’s website at www.sleepcountryir.ca.
Sleep Country Canada | Annual Report 2019
43
Management’s Discussion and Analysis of Financial Condition and Results of Operations of Sleep Country Canada Holdings Inc. Financial
Statements
Sleep Country Canada | Annual Report 2019
44
Sleep Country
Canada Holdings Inc.
Consolidated Financial Statements
December 31, 2019 and December 31, 2018
(in thousands of Canadian dollars)
Sleep Country Canada | Annual Report 2019
45
“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.
Sleep Country Canada | Annual Report 2019
46
Independent auditor’s reportto the shareholders of Sleep Country Canada Holdings Inc. Sleep Country Canada | Annual Report 2019
47
Independent auditor’s reportto the shareholders of Sleep Country Canada Holdings Inc. Sleep Country Canada | Annual Report 2019
48
Independent auditor’s reportto the shareholders of Sleep Country Canada Holdings Inc. Sleep Country Canada | Annual Report 2019
49
Independent auditor’s reportto the shareholders of Sleep Country Canada Holdings Inc. Assets
Current assets
Cash
Trade and other receivables (note 5)
Inventories (note 6)
Prepaid expenses and deposits (note 12)
Property and equipment (note 7)
Right-of-use assets (note 3)
Deferred tax assets (note 12)
Intangible assets (note 8)
Goodwill (note 8)
Liabilities
Current liabilities
Trade and other payables (note 9)
Customer deposits
Lease liabilities (note 3)
Other liabilities (note 10)
Deferred tax liabilities (note 12)
Lease liabilities (note 3)
Long-term debt (note 3 and 11)
Shareholders’ Equity
Share capital and other (note 14)
Deficit
2019
$
2018
$
44,040
20,899
65,361
6,008
136,308
71,486
263,777
3,029
141,568
300,884
917,052
68,156
24,415
33,309
125,880
18,406
21,060
271,112
175,084
611,542
350,858
(45,348)
305,510
917,052
29,988
13,120
54,729
5,545
103,382
65,710
–
3,908
128,222
300,884
602,106
51,411
22,452
686
74,549
28,988
24,789
–
170,036
298,362
353,188
(49,444)
303,744
602,106
Contingent liabilities and unrecognized contractual commitments (note 16)
Approved by the Board of Directors
(Signed) Douglas Bradley
Director
(Signed) David Shaw
Director
The accompanying notes are integral part of these consolidated financial statements.
Sleep Country Canada | Annual Report 2019
50
Sleep Country Canada Holdings Inc.Consolidated Statements of Financial PositionAs at December 31, 2019 and December 31, 2018 (in thousands of Canadian dollars, except per share amounts)
Revenues
Cost of sales (notes 6 and 13)
2019
$
712,372
489,082
2018
$
622,977
442,615
Gross profit
223,290
180,362
General and administrative expenses (notes 13)
125,826
93,760
Income before finance related expenses, interest income and other
expenses (income) and income taxes
Finance related expenses (note 11)
Interest and other expenses (income) – net
Income before provision for income taxes
Provision for income taxes (note 12)
Current
Deferred
Net income and comprehensive income for the year
Earnings per share attributed to common shareholders (notes 15)
Basic earnings per share (in dollars)
Diluted earnings per share (in dollars)
97,464
21,149
(788)
20,361
77,103
18,294
3,349
21,643
55,460
1.50
1.49
86,602
4,475
(89)
4,386
82,216
21,728
847
22,575
59,641
1.61
1.59
The accompanying notes are integral part of these consolidated financial statements.
Sleep Country Canada | Annual Report 2019
51
Sleep Country Canada Holdings Inc.Consolidated Statements of Income and Comprehensive IncomeAs at December 31, 2019 and December 31, 2018 (in thousands of Canadian dollars, except per share amounts)
Share capital and other
Number of
Common
Contributed
shares
shares
surplus
Deficit
Total equity
$
$
$
$
Balance – January 1, 2018
37,008,306
345,670
4,287
(82,790)
267,167
Net income for the year
Dividend declared and paid
Shares issued on exercise of share-based
compensation option/unit
Share-based compensation (note 18)
–
–
51,124
–
–
–
536
–
–
–
(867)
3,562
59,641
59,641
(26,665)
(26,665)
370
–
39
3,562
Balance – December 31, 2018
37,059,430
346,206
6,982
(49,444)
303,744
Balance – January 1, 2019
37,059,430
346,206
6,982
(49,444)
303,744
Adjustments as a result of IFRS 16 (note 3)
–
–
–
(16,913)
(16,913)
Adjusted balance – January 1, 2019
37,059,430
346,206
6,982
(66,357)
286,831
Net income for the year
Dividend declared and paid
–
–
–
–
–
–
55,460
55,460
(29,208)
(29,208)
Shares issued on exercise of share-based
compensation option/unit
93,584
1,707
(1,707)
Share-based compensation (note 18)
–
–
2,432
Share repurchase (note 14)
(510,829)
(10,005)
Excess of purchase price over average
cost
–
5,243
–
–
–
–
–
–
2,432
(10,005)
(5,243)
–
Balance – December 31, 2019
36,642,185
343,151
7,707
(45,348)
305,510
The accompanying notes are integral part of these consolidated financial statements.
Sleep Country Canada | Annual Report 2019
52
Sleep Country Canada Holdings Inc.Consolidated Statements of Changes in Shareholders’ EquityAs at December 31, 2019 and December 31, 2018 (in thousands of Canadian dollars, except per share amounts)
Cash provided by (used in)
Operating activities
Net income for the year
Items not affecting cash
Depreciation of property and equipment and right-of-use assets
(notes 3 and 7)
Amortization of intangible assets (note 8)
Share-based compensation (note 18)
Finance related expenses (note 11)
Warranty liability
Loss on disposal of property and equipment
Deferred lease inducements and escalated rent
Decommissioning liabilities
Deferred income taxes (note 12)
Changes in non-cash items relating to operating activities
Trade and other receivables
Inventories
Prepaid expenses and deposits
Trade and other payables
Customer deposits
Investing activities
Purchase of property and equipment and right-of-use assets
Purchase of intangible assets
Acquisition of Endy (note 20)
2019
$
2018
$
55,460
59,641
49,976
4,473
2,432
21,149
(26)
45
—
28
3,349
136,886
(6,749)
(10,632)
(464)
11,055
1,964
(4,826)
12,707
2,113
3,562
4,475
—
336
2,048
57
847
85,786
1,065
(12,255)
(3,356)
(6,232)
3,092
(17,686)
132,060
68,100
(17,630)
(17,819)
—
(35,449)
(24,591)
(2,583)
(65,983)
(93,157)
The accompanying notes are integral part of these consolidated financial statements.
Sleep Country Canada | Annual Report 2019
53
Sleep Country Canada Holdings Inc.Consolidated Statements of Cash FlowsAs at December 31, 2019 and December 31, 2018 (in thousands of Canadian dollars, except per share amounts)
Financing activities
Shares issued
Shares repurchased (note 14)
Increase in senior secured credit facility (note 11)
Repayment of senior secured credit facility (note 11)
Financing costs on senior secured credit facility
Dividends paid
Interest paid
Repayment of principal portion of lease liabilities (note 3)
Increase in cash during the year
Cash – Beginning of year
Cash – End of year
Supplementary information
Additions to property and equipment and intangibles included in trade and
other payables
Additions to property and equipment included in decommissioning liabilities
Additions to property and equipment included in acquisition of Endy
Additions to intangible assets included in acquisition of Endy
2019
$
—
(10,005)
26,700
(19,500)
(28)
(29,208)
(18,489)
(32,029)
(82,559)
14,052
29,988
44,040
5,789
5
—
—
2018
$
39
—
106,600
(43,000)
(575)
(26,665)
(4,250)
(724)
31,425
6,368
23,620
29,988
918
30
54
22,119
The accompanying notes are integral part of these consolidated financial statements.
Sleep Country Canada | Annual Report 2019
54
Sleep Country Canada Holdings Inc.Consolidated Statements of Cash Flows...ContinuedAs at December 31, 2019 and December 31, 2018 (in thousands of Canadian dollars, except per share amounts) 1. Organization
Sleep Country Canada Holdings Inc. (the Company or SCC) was incorporated by articles of incorporation under the Canada
Business Corporations Act on May 27, 2015. The Company is authorized to issue an unlimited number of common shares and
Class A common shares without par value. The common shares are voting and are entitled to dividends if and when declared
by the Board of Directors.
As at January 1, 2018, the sole subsidiary of the Company was Sleep Country Canada Inc. (SCCI). On December 6, 2018,
the Company acquired the business of Overwater Limited (note 20), operating under the brand name Endy, an online mattress
retailer operating in the Canadian market. This acquisition was made by Endy Canada (Endy), a newly formed subsidiary of
the Company, by purchasing a majority of the assets of Overwater Limited, net of designated liabilities assumed.
The Company and its subsidiaries operate as an omnichannel specialty mattress and bedding retailer under three retail
banners, Sleep Country, Dormez-vous? and Endy. The Company operates through its network of 276 stores and its
eCommerce platforms. As at December 31, 2019, the Company has two subsidiaries, SCCI and Endy.
The address of its registered office is 7920 Airport Road, Brampton, Ontario.
2. Basis of presentation
The consolidated financial statements of the Company are prepared in accordance with International Financial Reporting
Standards, as issued by the International Accounting Standards Board (IFRS) and using the accounting policies described
herein.
The consolidated financial statements of the Company include the financial results of SCC and its two subsidiaries, SCCI and
Endy.
The Company’s operations can be affected by seasonal fluctuations due to changes in customer buying habits throughout the
year.
The consolidated financial statements were reviewed by the Company’s Audit Committee and approved and authorized for
issuance by the Board of Directors on March 3, 2020.
3. Summary of significant accounting policies
The significant accounting policies set out below have been applied consistently to all periods presented in these consolidated
financial statements.
Financial assets and liabilities
Financial assets and liabilities are recognized when the Company becomes a party to the contractual provisions of the
financial instrument.
Financial assets are derecognized when the contractual rights to receive cash flows from the financial asset expire and
financial liabilities are derecognized when obligations under the contract expire, are discharged or are cancelled. Financial
assets upon initial recognition are classified in one of two categories: (1) those to be measured subsequently at fair value
(either through OCI or through profit or loss); and (2) those to be measured at amortized cost. The classification depends
on the entity’s business model for managing the financial assets and the contractual terms of the cash flows. The following
classifications have been applied:
Sleep Country Canada | Annual Report 2019
55
Sleep Country Canada Holdings Inc.Notes to Consolidated Financial StatementsAs at December 31, 2019 and December 31, 2018 (in thousands of Canadian dollars, except per share amounts) z
cash and trade and other receivables are classified as financial assets measured at amortized cost;
z
trade and other payables, customer deposits, and long-term debt have been classified as other financial liabilities
measured at amortized costs.
Long-term debt is recognized initially at fair value, net of recognized transaction costs, and is subsequently measured at
amortized cost, which is the carrying value. Any difference between the carrying value and the redemption value is recognized
in the consolidated statements of income and comprehensive income using the effective interest rate method. For debt
modifications, a gain or loss is calculated as the difference between the original contractual cash flows and the modified cash
flows discounted at the original effective interest rate.
Fees paid on the establishment of senior credit facilities are capitalized and amortized over the period of the facility to which it
relates and are presented net of long-term debt in the consolidated statements of financial position.
The Company assesses on a forward-looking basis the expected credit losses associated with its financial assets. The
impairment methodology applied depends on whether there has been a significant increase in credit risk. For trade and other
receivables, the Company applies the simplified approach permitted by IFRS 9, Financial Instruments (IFRS 9) which requires
expected lifetime losses to be recognized at the time of initial recognition of the receivables. There was no impact due to this
change in accounting policy.
Derivative financial instruments
Forward foreign exchange contracts are periodically used to limit foreign currency risks relating to the Company’s senior
secured credit facility (note 11) when denominated in US dollars. These contracts are treated as derivative instruments, are not
designated as hedges for accounting purposes and are marked-to-market in the period, with changes in fair value recorded in
the consolidated statements of income and comprehensive income.
Offsetting financial instruments
Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statements of financial
position when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net
basis or to realize the asset and settle the liability simultaneously.
Foreign currency translation
z
Functional and presentation currency
Items included in the consolidated financial statements of each of the Company’s entities are measured using the
currency of the primary economic environment in which the entity operates (the functional currency). The functional
currency of the subsidiaries is Canadian dollars. The consolidated financial statements are presented in Canadian
dollars, which is the Company’s functional currency.
z
Transactions and balances
Transactions denominated in a foreign currency are translated into the functional currency at the rate in effect at the
date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into the func-
tional currency at the exchange rates in effect as at the year-end date and revenues and expenses are translated at
the average rate during the year. Foreign exchange gains and losses are included in the consolidated statements of
income and comprehensive income.
Sleep Country Canada | Annual Report 2019
56
Sleep Country Canada Holdings Inc.Notes to Consolidated Financial StatementsAs at December 31, 2019 and December 31, 2018 (in thousands of Canadian dollars, except per share amounts) Segment information
As at December 31, 2019, the Company manages its business on the basis of two operating segments, SCC and Endy,
which is consistent with the internal reporting provided to the chief operating decision-maker, the Chief Executive Officer. The
Company has only one reportable segment as the operating segments meet the aggregation criteria of IFRS 8. The Company
aggregates these reporting segments because the nature of products, services, methods of distribution and economic
characteristics are similar. The Company operates in Canada, which is its country of domicile.
Inventories
Inventories are stated at the lower of their carrying value determined on a specific item on an actual cost basis and net
realizable value. Net realizable value is the estimated selling price less applicable selling expenses. Trade discounts and
volume rebates earned are deducted in determining the carrying value of inventory purchases.
Property and equipment
Property and equipment are recorded at cost less accumulated depreciation, net of any impairment loss. Depreciation is
computed on a straight-line basis at annual rates based on the estimated useful lives of the related assets as follows:
Computer hardware
Furniture, fixtures and other
Leasehold improvements
36 months
48 to 60 months
lesser of the lease term or 120 months
Included in furniture, fixtures and other are office equipment depreciated over 60 months and certain vehicles depreciated over
48 months.
The Company recognizes in the carrying amount of property and equipment the full purchase price of assets acquired/
constructed as well as the costs incurred that are directly incremental as a result of the construction of a specific asset, when
they relate to bringing the asset into working condition.
Estimates of useful lives, residual values and methods of depreciation are reviewed annually. Any changes are accounted for
prospectively as a change in accounting estimate.
Goodwill and intangible assets
Intangible assets are acquired assets that lack physical substance and that meet the specified criteria for separate recognition
from goodwill.
z Computer software
Computer software is recorded at cost less accumulated amortization, net of any impairment loss. Amortization is com-
puted on a straight-line basis at annual rates based on the estimated useful life of 36 to 90 months.
z Non-compete contracts
Non-compete contracts are amortized over an estimated life of four to ten years.
Sleep Country Canada | Annual Report 2019
57
Sleep Country Canada Holdings Inc.Notes to Consolidated Financial StatementsAs at December 31, 2019 and December 31, 2018 (in thousands of Canadian dollars, except per share amounts) z
Brands
Sleep Country and Dormez-vous? corporate brands are recorded at cost and are not subject to amortization, as they
have an indefinite life. The Company has determined the brands have an indefinite life because the Company has the
ability and intention to renew the brand names indefinitely and an analysis of product life cycle studies and market
and competitive trends provides evidence that the brands will generate net cash inflows for the group for an indefinite
period. They are tested for impairment annually, as at the consolidated statements of financial position dates, or more
frequently if events or circumstances indicate they may be impaired.
The Endy brand was recorded at its fair value at the time of acquisition and is subject to amortization over an estimat-
ed life of 20 years.
z Goodwill
Goodwill is the residual amount that results when the purchase price of an acquired business exceeds the sum of the
amounts allocated to the assets acquired, less liabilities assumed. Goodwill is not amortized and management tests
goodwill for impairment annually or more frequently if events or changes in circumstances indicate the asset might be
impaired.
Impairment of non-financial assets
z
Impairment of goodwill and indefinite life intangible assets
Management tests goodwill and brands related to the Sleep Country and Dormez-Vous?, corporate brands and
goodwill related to Endy for impairment annually on December 31st or more frequently if events or changes in cir-
cumstances indicate the asset might be impaired. The asset will be written down if the carrying amount of the asset
exceeds the higher of its fair value less costs of disposal and its value in use. Value in use is the present value of the
future cash flows expected to be derived from the asset.
For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately iden-
tifiable cash flows. Goodwill is allocated to cash generating units (CGUs) or groups of CGUs for the purpose of im-
pairment testing. The allocation is made to those CGUs or groups of CGUs that are expected to benefit from the syn-
ergies of the business combination from which the goodwill arose. The impairment tests are performed by comparing
the carrying value of the assets (or asset groups) of these CGUs with their recoverable amount, which is the higher
of their fair value less costs of disposal and their value in use (which is the present value of the expected future cash
flows of the relevant asset or CGU), as determined by management.
z
Impairment of definite life intangible assets, right-of-use assets and property and equipment
Assets that are subject to amortization are periodically reviewed for indicators of impairment. Whenever events or
changes in circumstances indicate the carrying amount may not be recoverable, the asset or CGU is tested for im-
pairment. To the extent the asset or CGU’s carrying amount exceeds its recoverable amount, an impairment loss is
recognized in the consolidated statements of income and comprehensive income. The recoverable amount of an
asset or a CGU is the higher of its fair value less costs of disposal and its value in use. Value in use is the present
value of the future cash flows expected to be derived from an asset or CGU. The fair value is the price that could be
received for an asset or CGU in an orderly transaction between market participants at the measurement date, less
costs of disposal. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there
are separately identifiable cash flows.
Sleep Country Canada | Annual Report 2019
58
Sleep Country Canada Holdings Inc.Notes to Consolidated Financial StatementsAs at December 31, 2019 and December 31, 2018 (in thousands of Canadian dollars, except per share amounts) z
Impairment reversals
If, in a subsequent period, the amount of recognized impairment loss decreases and the decrease can be related
objectively to an event occurring after the impairment was recognized, a reversal of the previously recognized impair-
ment, except for goodwill, is recognized in the consolidated statements of income and comprehensive income.
Trade and other payables
Trade and other payables are obligations to pay for goods or services that have been acquired or rendered in the ordinary
course of business from suppliers and employees. Trade and other payables are classified as current liabilities if payment is
due or expected within one year or less. Otherwise, they are presented as non-current liabilities. Trade and other payables are
recognized initially at fair value and subsequently are measured at amortized cost.
Customer deposits
Customer deposits represent amounts paid by customers in advance of delivery of product (e.g., mattresses). These deposits
can be for all or a portion of the total purchase price of the product. The amounts received representing the customer deposit are
unencumbered and can be used for general operating purposes. Once the product is delivered to the customer, therefore fulfilling
the performance obligation, the liability is relieved and is recorded in revenue. Over time, some portion of the customer deposits
is not redeemed (breakage). The expected breakage amount based on historical actuals are recognized as revenue in proportion
to the redemption pattern exercised by the customers.
Decommissioning provisions
These provisions represent the cost of the Company’s obligation to rehabilitate its leased premises and is estimated based
on the present value of expected future rehabilitation costs and is recognized in the period in which the obligation is incurred.
The present value of these costs is added to the cost of the associated asset and is amortized over its useful life, while the
corresponding liability will accrete to its future value over the same period.
Share-based compensation
The Company has a share-based compensation plan (the stock option plan), a performance share unit (PSU) plan and a
deferred share unit (DSU) plan, all of which are equity settled share-based arrangements.
Equity settled share-based payments to employees are measured at the fair value of the equity instrument granted. An option
valuation model (Black-Scholes) is used to fair value stock options issued to employees on the date of grant. The market value
of the Company’s common shares at the date of the grant is used to determine the fair value of the equity based share units
issued to participants.
The Company grants stock options and PSUs to certain employees and key management of the Company, while DSUs are
granted only to directors. In general, stock options cliff vest after four years, PSUs cliff vest after three years and DSUs vest
in equal instalments on the last day of each month of the fiscal year immediately following the grant date. The initial fair value
of equity settled share-based arrangements is recognized as a compensation expense with a corresponding increase in
equity reserves over the related service period provided to the Company. The compensation expense is recognized over the
applicable vesting period by increasing contributed surplus based on the number of awards expected to vest. This number is
reviewed at least annually, with any change in estimate recognized immediately in compensation expense.
Sleep Country Canada | Annual Report 2019
59
Sleep Country Canada Holdings Inc.Notes to Consolidated Financial StatementsAs at December 31, 2019 and December 31, 2018 (in thousands of Canadian dollars, except per share amounts) Revenue recognition
Revenue is recognized based on the five-step model outlined in IFRS 15. Revenue is derived from the sale of goods and
services and is recognized at a point in time when the performance obligation is fulfilled. The performance obligation is
deemed fulfilled when the control of the products has transferred to the customer and there is no unfulfilled obligation that
could affect the customer’s acceptance of the products. Provisions for returns relating to the Company’s various customer
satisfaction programs are accrued based on historical experience. Revenue from sale of third party warranties is recognized
based on the net amount of consideration the Company retains after paying the third party the consideration received in
exchange for the services to be provided by the third party.
Income taxes
Income taxes comprise current and deferred income taxes. Income taxes are recognized in the consolidated statements of
income and comprehensive income, except to the extent that they relate to items recognized directly in other comprehensive
income or directly in equity, in which case the income tax is recognized directly in other comprehensive income or equity,
respectively.
Current income tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively
enacted at the end of the reporting period, and any adjustment to tax payable in respect of previous years.
Income taxes provided for by the Company and its subsidiaries are accounted for using the liability method. Deferred income
taxes arise due to the temporary differences in the financial reporting and tax bases of assets and liabilities. Changes in these
temporary differences are reflected in the provision for deferred income taxes using substantively enacted income tax rates
and regulations. Deferred income taxes are recognized for all temporary differences except where they arise on goodwill
that is not tax deductible, on the initial recognition of an asset or liability that is not a business combination and at the time
of the transaction affects neither accounting nor taxable income, and in respect of differences associated with investments
in subsidiaries where the group is able to control the timing of their reversal and it is probable that the temporary differences
will not reverse in the foreseeable future. Deferred income tax assets are recognized to the extent that the recoverability of
deferred income tax assets is considered more likely than not.
Business combinations
Business combinations are accounted for using the acquisition method. The consideration transferred by the Company is
measured as the fair value of assets transferred and equity instruments issued at the date of completion of the acquisition.
Identifiable assets acquired and liabilities assumed in a business combination are measured initially at fair value at the
acquisition date. The excess of the consideration transferred over the fair value of the net assets acquired is recorded as
goodwill. If the consideration transferred is less than the net assets acquired, the difference is recognized directly in the
consolidated statements of income and comprehensive income as a gain on acquisition. Results of operations of a business
acquired are included in the Company’s consolidated financial statements from the date of the business acquisition.
Acquisition costs incurred are expensed and included in general and administrative expenses.
The fair value of the contingent consideration is classified as a financial liability and is recorded on the consolidated statements
of financial position at the acquisition date and is remeasured at fair value at the end of each period until the end of the
contingency period, with fair value adjustments recognized in earnings.
Sleep Country Canada | Annual Report 2019
60
Sleep Country Canada Holdings Inc.Notes to Consolidated Financial StatementsAs at December 31, 2019 and December 31, 2018 (in thousands of Canadian dollars, except per share amounts) Change in accounting policy
z
IFRIC 23 – Uncertainty over Income Tax Treatments
On January 1, 2019, the Company adopted IFRIC 23, uncertainty over Income Tax Treatment, which clarified how to
apply the recognition and measurement requirement in IAS 12, Income Tax, when there is uncertainty over income
tax treatments. There are no significant adjustments to the amounts recognized in the consolidated financial state-
ments.
z
IFRS 16 - Leases
On January 1, 2019, the Company adopted the new accounting standard IFRS 16 – Leases (IFRS 16), using the
modified retrospective approach, and comparative figures have not been restated. A lease is a contract in which the
right-of-use of an asset is granted for an agreed upon time in return for compensation. Lease liabilities are recorded
on the present value of the non-cancellable lease payments over the lease term and discounted at the Company’s
incremental borrowing rate. Lease payments include fixed payments and variable payments. The right-of-use assets
are measured at cost, which comprises the lease liability, lease payments made prior to delivery, initial direct costs
and restoration obligations less lease incentives. The right-of-use assets are subsequently measured at amortized
cost. The assets are depreciated over the term of the lease using the straight-line method. The Company has elected
to use the relief practical expedient provided for low-value assets and short-term leases (shorter than 12 months),
which are expensed in the consolidated statements of income and comprehensive income according to the straight-
line method. Extension and termination options exist for a number of leases, particularly for properties. The Company
assesses all facts and circumstances available in determining the probability of exercising available extension and
termination options. The Company includes the extension option in calculating the lease term when it determines
that it is reasonably certain that the Company will exercise the available extension option. The Company reassesses
whether an extension option is included in the lease term when there is a change in events and circumstances that
affects that decision, and re-measures the lease liability upon change in the assessment.
On adoption, a cumulative adjustment was recognized directly to equity as deficit on January 1, 2019 as illustrated
below in this note. For leases previously classified as finance leases, the Company recognized the carrying amount
of the lease asset and lease liability immediately before transition as the carrying value of the right-of-use asset and
the lease liability at the date of initial application. The Company chose the practical expedient to grandfather any con-
tracts that were previously considered to be leases. As part of the initial application of IFRS 16, the Company chose,
on a lease-by-lease basis, to measure that right-of-use asset at its carrying amount as if the standard had been ap-
plied since the lease’s commencement date, discounted using the Company’s incremental borrowing rate at the date
of initial application. In addition, upon adoption, the Company applied a single discount rate to a portfolio of leases
with reasonably similar characteristics. The Company chose the practical expedient to not separate the lease com-
ponent and its associated non-lease components for its trucks. The Company decided not to apply the new standard
for leases with remaining lease terms less than 12 months. Additionally, the Company chose the practical expedients
to exclude initial direct costs for the measurement of the right-of-use asset and to use hindsight in determining the
lease term where the contract includes extension options. The lease payments associated with short-term leases will
be recognized as a straight-line expense in the consolidated statements of income and comprehensive income. The
following reconciliation to the opening balance for the lease liabilities as at January 1, 2019 is based on operating
lease obligations as at December 31, 2018.
Sleep Country Canada | Annual Report 2019
61
Sleep Country Canada Holdings Inc.Notes to Consolidated Financial StatementsAs at December 31, 2019 and December 31, 2018 (in thousands of Canadian dollars, except per share amounts) Operating lease obligations as at December 31, 2018
Adjustments as a result of a different treatment of renewal options
Undiscounted minimum lease payments on finance lease liabilities as at December 31, 2018
Gross lease liabilities as at January 1, 2019
Discounting
Lease liabilities as at January 1, 2019
January 1,
2019
$
224,342
130,772
3,685
358,799
(66,829)
291,970
Lease liabilities were discounted at the incremental borrowing rate as at January 1, 2019. The weighted average discount rate
was 3.86%.
The right-of-use assets include assets that were recognized as finance assets with IAS 17, Leases, and asset retirement cost
until December 31, 2018. The right-of-use assets transactions during the year were as follows:
Right-of-use assets
Properties
$
Trucks
$
Total
$
As at January 1, 2019
252,613
3,403
256,016
Add: Additions during the year with a corresponding increase to
the lease liability
Add: Cash additions due to initial direct cost incurred during the
year
Less: Tenant inducements received
Less: Depreciation – right-of-use assets
44,434
35
(1,030)
(34,804)
46
–
–
(920)
44,480
35
(1,030)
(35,724)
As at December 31, 2019
261,248
2,529
263,777
Sleep Country Canada | Annual Report 2019
62
Sleep Country Canada Holdings Inc.Notes to Consolidated Financial StatementsAs at December 31, 2019 and December 31, 2018 (in thousands of Canadian dollars, except per share amounts) The lease liabilities transactions during the year were as follows:
Lease liabilities – Current and long-term
As at January 1, 2019
Add: Additions during the year with a corresponding increase to the right-of-use asset
Less: Repayment of principal portion of lease liabilities in cash
As at December 31, 2019
Lease in the consolidated statements of income and comprehensive income
Cost of sales
Depreciation – right-of-use assets
General and administrative expenses
Depreciation – right-of-use assets
Interest and other expenses
Interest expense on lease liabilities (paid in cash) (note 11)
Total
$
291,970
44,480
(32,029)
304,421
2019
$
31,976
3,748
11,562
Sleep Country Canada | Annual Report 2019
63
Sleep Country Canada Holdings Inc.Notes to Consolidated Financial StatementsAs at December 31, 2019 and December 31, 2018 (in thousands of Canadian dollars, except per share amounts)
Adjustment of opening balances as at January 1, 2019
The adjustments to the opening balances below resulted from the initial application of IFRS 16 as at January 1, 2019. The
prior period amounts were not adjusted. The effects on the transition were recognized directly in equity as deficit.
Assets
Property and equipment
Right-of-use asset
Liabilities and shareholders’ equity
Long-term debt – current portion
Lease liabilities – current liabilities
Other liabilities
Deferred tax liabilities
Lease liabilities
Long-term debt
Deficit
As previously
reported
Adjustments
As adjusted
$
$
$
65,710
—
686
—
28,988
24,789
—
170,036
(49,444)
(3,311)
256,016
(686)
7,143
(13,003)
(6,200)
284,827
(2,463)
(16,913)
62,399
256,016
—
7,143
15,985
18,589
284,827
167,573
(66,357)
4. Critical accounting estimates and judgments
The preparation of consolidated financial statements requires management to make estimates and assumptions using
judgments that affect the application of accounting policies and the reported amounts of assets and liabilities, income
and expenses during the reporting period. Estimates and other judgments are continually evaluated and are based on
management’s experience and other factors, including expectations about future events that are believed to be reasonable
under the circumstances. Actual results may differ from those estimates.
The following discusses the most significant accounting judgments and estimates the Company has made in the preparation of
the consolidated financial statements.
Impairment of goodwill and brands
Management is required to use judgment in determining the grouping of assets to identify their CGUs for the purposes
of testing fixed assets for impairment. Judgment is further required to determine appropriate groupings of CGUs in order
to determine the level at which goodwill and intangible assets are tested for impairment. In addition, judgment is used to
determine whether a triggering event has occurred requiring an impairment test to be completed.
In determining the recoverable amount of a CGU, various estimates are employed. The Company determines fair value less
costs of disposal using estimates such as projected future sales, earnings, capital investments and discount rates. Projected
future sales and earnings are consistent with strategic plans provided to the Company’s Board of Directors. Discount rates
are based on an estimate of the Company’s weighted average cost of capital taking into account external industry information
reflecting the risk associated with the specific cash flows. As at December 31, 2019 and December 31, 2018, impairment
Sleep Country Canada | Annual Report 2019
64
Sleep Country Canada Holdings Inc.Notes to Consolidated Financial StatementsAs at December 31, 2019 and December 31, 2018 (in thousands of Canadian dollars, except per share amounts)
reviews were performed by comparing the carrying value with the recoverable amount of the CGU to which goodwill and
brands have been allocated. Management has determined there had been no impairment as at both of those dates (note 8).
5. Trade and other receivables
Trade and other receivables
Income tax receivable
Provision for doubtful debts
2019
$
15,770
5,264
(135)
2018
$
13,194
—
(74)
20,899
13,120
The Company’s trade and other receivables consist of balances due from vendors related to volume and co-operative
advertising rebates and balances due from the third party financing companies. The carrying amounts of the Company’s trade
and other receivables, which approximate their fair values, are denominated in Canadian dollars.
The maximum exposure to credit risk at the reporting date is the carrying value of the trade and other receivables.
6. Inventories
Merchandise
Provision for obsolescence
Included in cost of sales
Writedowns (reversals) of inventory due to net realizable value lower
than cost
Writeoffs due to damage or shrinkage
2019
$
68,285
(2,924)
2018
$
57,101
(2,372)
65,361
54,729
489
1,023
(489)
1,976
There were no reversals of previously taken writedowns in 2019 (2018 – $991). All inventory is recorded in cost of sales once
sold.
Sleep Country Canada | Annual Report 2019
65
Sleep Country Canada Holdings Inc.Notes to Consolidated Financial StatementsAs at December 31, 2019 and December 31, 2018 (in thousands of Canadian dollars, except per share amounts)
7. Property and equipment
Year ended December 31, 2018
At January 1, 2018
Additions
Depreciation
Disposal
At December 31, 2018
At December 31, 2018
Cost
Accumulated depreciation
Net book value
Furniture,
Computer
fixtures
Leasehold
Assets under
hardware
and other
improvements
finance lease
$
$
$
$
Total
$
1,560
1,844
5,897
2,250
(1,054)
(1,786)
—
2,350
(17)
6,344
41,831
21,532
(9,144)
(352)
53,867
3,485
387
52,773
26,013
(723)
(12,707)
—
(369)
3,149
65,710
5,166
(2,816)
2,350
12,083
(5,739)
6,344
87,293
(33,426)
53,867
5,284
109,826
(2,135)
(44,116)
3,149
65,710
Year ended December 31, 2019
At January 1, 2019
2,350
6,344
Adjustments as a result of IFRS 16 (note 3)
Adjusted balance- January 1, 2019
Additions
Depreciation
Disposal
At December 31, 2019
At December 31, 2019
Cost
Accumulated depreciation
Net book value
—
2,350
1,493
—
6,344
1,640
53,867
(162)
53,705
20,300
(1,417)
(2,054)
(10,781)
—
2,426
(20)
5,910
(74)
63,150
3,149
(3,149)
—
—
65,710
(3,311)
62,399
23,433
— (14,252)
—
—
(94)
71,486
6,167
(3,741)
2,426
12,973
(7,063)
5,910
98,891
(35,741)
63,150
— 118,031
— (46,545)
—
71,486
During the year ended December 31, 2019, the Company disposed of assets with an original cost value of $9,569 (2018 –
$9,933) and accumulated depreciation of $9,476 (2018 – $9,564).
Sleep Country Canada | Annual Report 2019
66
Sleep Country Canada Holdings Inc.Notes to Consolidated Financial StatementsAs at December 31, 2019 and December 31, 2018 (in thousands of Canadian dollars, except per share amounts)
8. Goodwill and intangible assets
Brands –
Intangible assets
Non-
indefinite
Brands –
compete
Computer
Year ended December 31, 2018
At January 1, 2018
Additions
Additions - acquisition of Endy (note 20)
Amortization for the year
Disposal
life
$
101,540
—
—
—
—
definite life
contracts
software
Total
Goodwill
$
—
—
21,960
(77)
—
$
$
$
$
435
—
145
3,658
105,633
242,146
2,583
2,583
—
14
22,119
58,738
(169)
(1,867)
(2,113)
—
—
—
—
—
411
At December 31, 2018
101,540
21,883
4,388
128,222
300,884
At December 31, 2018
Cost
101,540
21,960
2,949
9,140
135,589
300,884
Accumulated amortization
—
(77)
(2,538)
(4,752)
(7,367)
—
Net book value
101,540
21,883
411
4,388
128,222
300,884
Year ended December 31, 2019
At January 1, 2019
Additions
Amortization for the year
At December 31, 2019
At December 31, 2019
Cost
Accumulated amortization
Net book value
101,540
21,883
—
—
101,540
101,540
—
101,540
—
(1,097)
20,786
21,961
(1,175)
20,786
411
—
(204)
207
4,388
128,222
300,884
17,819
17,819
(3,172)
(4,473)
—
—
19,035
141,568
300,884
2,949
26,053
152,503
300,884
(2,742)
(7,018)
(10,935)
—
207
19,035
141,568
300,884
During the year ended December 31, 2019, the Company disposed of assets with an original cost value of $905 (2018 –
$905) and accumulated depreciation of $905 (2018 – $905).
Goodwill of $300,884 (2018 – $300,884) has been allocated to the two CGU’s Sleep Country and Endy.
The Sleep Country and Dormez-vous corporate brands of $101,540 (2018 – $101,540) have been allocated to the Sleep
Country operating segment.
Management has determined, using appropriate valuation methodologies, that there was no impairment of its goodwill or
brands as at December 31, 2019 or December 31, 2018.
Sleep Country Canada | Annual Report 2019
67
Sleep Country Canada Holdings Inc.Notes to Consolidated Financial StatementsAs at December 31, 2019 and December 31, 2018 (in thousands of Canadian dollars, except per share amounts)
In assessing goodwill and brands for impairment as at December 31, 2019, the Company compared the aggregate
recoverable amount of the assets included in the CGUs to their respective carrying amounts as follows:
Sleep Country
Endy (note 20)
2019
$
242,146
58,738
2018
$
242,146
58,738
300,884
300,884
For the Sleep Country CGU, the recoverable amount has been determined based on the value in use (discounted cash
flows) of the CGU using the 2020 budget approved by the Board of Directors that made maximum use of observable markets
for inputs and outputs. The fair value less cost of disposal is categorized as Level 3 in the fair value hierarchy. For periods
beyond the budget period, cash flows were extrapolated using revenue growth rates of 5.1% - 5.9% (2018 – 5.0% - 5.7%)
and a terminal growth rate of 2.5% (2018 - 2.5%) that approximate the long-term average for the mattress retailer segment.
A discount rate of 8.2% (2018 – 8.2%) was used in the model. As at December 31, 2019 and December 31, 2018, any
reasonable changes to the model assumptions would not result in an impairment.
For the Endy CGU, the recoverable amount has been determined based on the value in use (discounted cash flows) of the
CGU using the 2020 budget approved by management that made maximum use of observable markets for inputs and outputs.
The fair value less cost of disposal is categorized as Level 3 in the fair value hierarchy. For periods beyond the budget period,
cash flows were extrapolated using revenue growth rates of 5.0% - 23.5% (2018 – 5.5% – 45.6%) and a terminal growth rate
of 3.0% (2018 – 3.0%) that approximate the long-term average for the online mattress retailer segment. A discount rate of
15.2% (2018 – 15.2%) was used in the model. As at December 31, 2019 and December 31, 2018, any reasonable changes to
the model assumptions would not result in an impairment.
Sleep Country Canada | Annual Report 2019
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Sleep Country Canada Holdings Inc.Notes to Consolidated Financial StatementsAs at December 31, 2019 and December 31, 2018 (in thousands of Canadian dollars, except per share amounts) 9. Trade and other payables
Trade payables
Income taxes payable
Accrued expenses
10. Other liabilities
Deferred lease inducements and rent escalation (note 3)
Decommissioning provisions
Contingent consideration (note 19)
Other
11. Long-term debt
Senior secured credit facility
2019
$
44,303
53
23,800
2018
$
28,534
883
21,994
68,156
51,411
2019
$
—
797
17,538
71
2018
$
13,003
765
15,123
97
18,406
28,988
On January 1, 2018, SCC held a senior secured credit facility of $150,000, which was scheduled to mature on August 30,
2022. On November 29, 2018, in connection with the purchase of Endy, the senior secured credit agreement was amended.
Pursuant to this amendment, the facility was increased from $150,000 to $210,000 and the maturity date was extended to
November 29, 2023.
The senior secured credit facility is secured by all of the present and after acquired personal property of SCC, SCCI and Endy. As
at December 31, 2019, the balance outstanding on the senior secured credit facility was $175,800 (2018 – $168,600). The long-
term debt liability balance in the consolidated statements of financial position is net of transaction costs of $716 (2018 – $1,027).
The senior secured credit facility allows for the debt to be held in Canadian or US dollars. During the year, the Company held
the majority of the debt in US dollars for 337 days as the debt held in US dollars had a lower interest rate. To mitigate the
foreign exchange risk, the Company entered into forward foreign exchange contracts to sell US dollars in the equal amount
of the debt with an overall impact of $nil recorded in general and administrative expenses in the consolidated statements
of income and comprehensive income. As at December 31, 2019, the debt is held in Canadian dollars and no forward
foreign exchange contracts were outstanding. Interest on the senior secured credit facility is based on the prime or bankers’
acceptance rates plus applicable margins based on the achievement of certain targets, as defined by the amended and
restated senior secured credit agreement. As at December 31, 2019, the applicable margin for bankers’ acceptances was 200
basis points and the applicable margin for prime rate loans was 100 basis points.
Sleep Country Canada | Annual Report 2019
69
Sleep Country Canada Holdings Inc.Notes to Consolidated Financial StatementsAs at December 31, 2019 and December 31, 2018 (in thousands of Canadian dollars, except per share amounts)
Under the terms of the senior secured credit facility, certain financial and non-financial covenants must be complied with. As at
December 31, 2019, SCC was in compliance with all covenants under the senior secured credit facility.
Finance related expenses included in the consolidated statements of income and comprehensive income include the following:
Interest on lease obligations
Accretion on contingent consideration
Revolver commitment fees
Interest expense on senior secured credit facility
12. Income tax
Significant components of the income tax provision are as follows:
Current income tax expense
Deferred income tax expense relating to;
Temporary differences
Deferred income tax rate changes
2019
$
11,562
2,414
134
7,039
21,149
2019
$
18,294
3,723
(374)
3,349
2018
$
270
—
144
4,061
4,475
2018
$
21,728
836
11
847
Provision for income taxes
21,643
22,575
Sleep Country Canada | Annual Report 2019
70
Sleep Country Canada Holdings Inc.Notes to Consolidated Financial StatementsAs at December 31, 2019 and December 31, 2018 (in thousands of Canadian dollars, except per share amounts)
Reconciliation to effective tax rate
The overall income tax provision differs from the amount that would be obtained by applying the combined statutory income
tax rate to income due to the following:
Income of continuing operations before income taxes
Weighted average Canadian income tax rate
Income tax expense based on statutory income tax rate
Difference between rates applicable to Company and rates applicable to
subsidiaries
Effect of non-deductible expenses and other items
Deferred tax rate changes
2019
$
77,104
26.50%
20,433
186
1,398
(374)
21,643
2018
$
82,216
26.50%
21,785
266
513
11
22,575
Effective income tax rate
28.07%
27.46%
Deferred income tax liability
Significant components of the net deferred income tax liability are as follows:
Excess of carrying value of intangible assets over tax values
(27,279)
(27,188)
2019
$
2018
$
Benefit of share issuance costs and financing fees deductible in future years
Loss carry-forwards – net of unrecognized deferred income tax assets
Other temporary differences
340
2,669
6,239
1,334
2,195
2,800
(18,031)
(20,859)
SCC has recognized a deferred tax asset of $3,029 (2018 – $3,908), which is dependent on future taxable income. The
Company expects that it will be able to utilize the deferred tax asset in the future. On January 1, 2019, SCC adopted IFRS 16
– Leases thereby recognizing an adjustment of $6,200 to deferred tax liabilities at the beginning of the year (note 3).
As at December 31, 2019, the Company has unused capital losses of $19,702 (2018 – $19,702) with no expiry date.
Capital losses may only be used to offset capital gains. No deferred income tax benefit has been set up for these losses as the
Company does not expect to realize capital gains in the foreseeable future.
On February 1, 2018, the Canada Revenue Agency (CRA) issued a notice of proposed adjustments for the 2014 taxation year,
which also results in consequential income adjustments for the 2015 and 2016 taxation years. The proposed adjustments
relate to restructuring transactions in the Company’s pre-initial public offering (IPO) structure and certain related transactions.
Notices of Reassessment were issued by the CRA related to certain of these issues in June 2018 with an exposure of $3,480,
which includes tax and interest. In order to contest the matter, the Company has filed Notices of Objection with the Chief
Sleep Country Canada | Annual Report 2019
71
Sleep Country Canada Holdings Inc.Notes to Consolidated Financial StatementsAs at December 31, 2019 and December 31, 2018 (in thousands of Canadian dollars, except per share amounts)
of Appeals, CRA on September 5, 2018. The Company has received an acknowledgement of the receipt of the Notices of
Objection by the CRA and is currently awaiting a response to these Notices.
The Company was required to pay a minimum of 50% of the amount issued in the Notices of Reassessment within 30 days
of the date of these Notices. Accordingly, payments of $2,988 have been made and are included in prepaid expenses and
deposits.
The Company expects to receive a Notice of Reassessment under Part III Tax, pursuant to subsection 184(2) of the Income
Tax Act (Canada) on the basis that it paid an excess capital dividend on July 15, 2015. The maximum exposure, including
tax, penalty and interest, in this matter is approximately $5,818. In the event the Notice of Reassessment under Part III Tax is
received, the Company, with the concurrence of Birch Hill Equity Partners Management Inc. (Birch Hill) and its co-investors,
has the ability to file an election under subsection 184(3) to treat the excess amount as a taxable dividend, which is expected
to resolve this exposure.
Pursuant to the indemnification provisions of the pre-IPO share purchase agreement dated July 10, 2015, the Company
expects to be indemnified for all of the above matters by Birch Hill and its co-investors, which include some current members
of the Company’s Board of Directors and the Company’s management. The Company believes it will be able to sustain its tax
positions, and consequently no reserve has been made.
Sleep Country Canada | Annual Report 2019
72
Sleep Country Canada Holdings Inc.Notes to Consolidated Financial StatementsAs at December 31, 2019 and December 31, 2018 (in thousands of Canadian dollars, except per share amounts) 13. Expenses by nature
Inventory and directly related costs recognized as an expense, including
writedowns, writeoffs and reversals
Salaries, wages and benefits
Occupancy costs – stores
Depreciation and amortization
Other
Cost of sales
2019
$
321,335
98,138
23,371
42,682
3,556
2018
$
(restated –
note 3)
282,165
92,387
55,134
9,183
3,746
489,082
442,615
The depreciation included in cost of sales relates to depreciation on store and delivery property and equipment.
Media and advertising expenses
Salaries, wages and benefits
Credit card and finance charges
Occupancy costs – distribution centres and other
Professional fees
Telecommunication and information technology
Mattress recycling costs and donations
Depreciation and amortization
Other
General and administrative
2019
$
52,709
24,778
18,606
4,253
2,441
5,323
2,292
11,767
3,657
2018
$
33,711
19,885
14,805
8,134
2,239
3,948
2,315
5,637
3,086
125,826
93,760
The depreciation included in general and administrative expenses relates to distribution centres, offices and other property and
equipment and intangibles.
Sleep Country Canada | Annual Report 2019
73
Sleep Country Canada Holdings Inc.Notes to Consolidated Financial StatementsAs at December 31, 2019 and December 31, 2018 (in thousands of Canadian dollars, except per share amounts)
14. Share capital and other
Authorized share capital
Unlimited common shares
Unlimited Class A common shares
Issued and outstanding, no par value
36,642,185 common shares (2018 – 37,059,430)
Reorganization adjustment and other
Contributed surplus
2019
$
619,310
(276,159)
7,707
2018
$
622,365
(276,159)
6,982
350,858
353,188
Common shares and Class A common shares
The holders of common shares are entitled to receive notice of any meetings of shareholders, to attend and to cast one vote
per common share at all such meetings. Holders of common shares do not have cumulative voting rights with respect to the
election of directors and, accordingly, holders of a majority of the common shares entitled to vote in any election of directors
may elect all directors standing for election. Holders of common shares are entitled to receive on a pro rata basis such
dividends, if any, as and when declared by the Board of Directors at its discretion from funds legally available therefore and on
liquidation, dissolution or winding up of the Company are entitled to receive on a pro rata basis the net assets of the Company
after payment of debts and other liabilities, in each case subject to the rights, privileges, restrictions and conditions attaching
to any other series or class of shares ranking senior in priority to or on a pro rata basis with the common shares with respect to
dividends or liquidation. The common shares do not carry any pre-emptive, subscription, redemption or conversion rights, nor
do they contain any sinking or purchase fund provisions.
Holders of Class A common shares will be entitled to the same rights and privileges as holders of common shares described
above and will rank equally with the holders of common shares on liquidation, dissolution, or winding up of the Company. The
Class A common shares will not carry any pre-emptive or subscription rights, nor will they contain any sinking or purchase fund
provisions. Class A common shares are redeemable at the option of the Company on written notice to the holders of the Class
A common shares, with the redemption price being equal to the price per common share in the IPO. As at December 31, 2019,
there were no outstanding Class A common shares (2018 – nil).
In the first quarter of 2019, the Company received approval from the Toronto Stock Exchange (the TSX) effective February 28
2019, to commence, within one year of the approval date, a Normal Course Issuer Bid (NCIB) and purchase on the TSX or
through alternative trading systems up to 1,200,000 of the Company’s common shares, representing approximately 4% of the
public float of the Company’s common shares issued and outstanding as at February 26, 2019. In accordance with the rules and
by-laws of the TSX, the Company was permitted to purchase up to a daily maximum of 35,204 shares (representing 25% of the
average daily trading volume of the shares on the TSX for the six months prior to commencement of the NCIB), except where
such purchases were made in accordance with the block purchase exception under the applicable TSX rules and policies.
During 2019, the Company purchased 510,829 common shares for cancellation (2018 – nil), at an average price of $19.59, for
a total consideration of $10,005. Sleep Country’s NCIB expired on February 27, 2020 and was renewed on March 4, 2020.
Sleep Country Canada | Annual Report 2019
74
Sleep Country Canada Holdings Inc.Notes to Consolidated Financial StatementsAs at December 31, 2019 and December 31, 2018 (in thousands of Canadian dollars, except per share amounts)
15. Earnings per share (EPS)
Basic EPS amounts are calculated by dividing the net earnings attributable to common shareholders of the Company by the
weighted average number of shares outstanding during the year.
Diluted EPS amounts are calculated by dividing the net earnings attributable to common shareholders of the Company by the
weighted average number of shares outstanding during the year adjusted for the effects of potentially dilutive stock options.
PSU and DSU are dilutive in nature. The table below summarizes the dilution impact of stock options:
Dilutive
Anti-dilutive
2019
$
407,625
568,455
2018
$
459,037
386,789
976,080
845,826
The following table sets forth the calculation of basic and diluted EPS:
Attributable to common shareholders
Net earnings
$
55,460
55,460
Weighted
average number
of shares
(in thousands
of shares)
37,076
37,323
Attributable to common shareholders
Net earnings
$
59,641
59,641
Weighted
average number
of shares
(in thousands
of shares)
37,029
37,409
2019
EPS
$
1.50
1.49
2018
EPS
$
1.61
1.59
Basic
Diluted
Basic
Diluted
Sleep Country Canada | Annual Report 2019
75
Sleep Country Canada Holdings Inc.Notes to Consolidated Financial StatementsAs at December 31, 2019 and December 31, 2018 (in thousands of Canadian dollars, except per share amounts)
16. Contingent liabilities and unrecognized contractual
commitments
Executive employment agreements allow for total additional payments of approximately $6,124 if a liquidity event occurs,
$3,946 if all are terminated without cause, $nil if all are terminated with cause and $2,606 if all are terminated as a result of
death.
All directors and/or officers of the Company, and each of its various subsidiary entities, are indemnified by the Company for
various items including, but not limited to, all costs to settle lawsuits or actions due to their association with the Company,
subject to certain restrictions. The Company has purchased directors’ and officers’ liability insurance with maximum
coverage of $30,000 to mitigate the cost of any potential future lawsuits or actions to the directors and officers. The term of
the indemnification is not explicitly defined, but is limited to events for the period during which the indemnified party served
as a director or officer of the Company. The maximum amount of any potential future payment required to be made by the
Company cannot be reasonably estimated but could have a material adverse effect on the Company.
In the normal course of business, the Company has entered into agreements that include indemnities in favour of third parties,
such as purchase and sale agreements, confidentiality agreements, engagement letters with advisers and consultants,
leasing contracts, licence agreements, information technology agreements, and various product and service agreements.
These indemnification arrangements may require the Company to compensate counterparties for losses incurred by the
counterparties as a result of breaches in representations, covenants and warranties provided by the Company or as a result
of litigation or other third party claims or statutory sanctions that may be suffered by the counterparties as a consequence of
the relevant transaction. In some instances, the terms of these indemnities are not explicitly defined. The Company, whenever
possible, tries to limit this potential liability within the particular agreement or contract; however, due to the unpredictability of
future events, the maximum amount of any potential reimbursement required to be made by the Company or its subsidiary
entities cannot be reasonably estimated, but could have a material adverse effect on the Company.
17. Related party transactions and balances
Key management personnel are those individuals who have the authority and responsibility for planning, directing and
controlling the activities of the Company, including members of the Company’s Board of Directors. The Company considers
key management to be the Board of Directors and its executive team.
As at December 31, 2019 and December 31, 2018, there were no balances due from or payable to a related party.
SCC incurred the following compensation expenses in relation to key management personnel:
Salaries and short-term employee benefits
Share-based compensation
Directors’ fees
2019
$
2,868
2,542
578
5,988
2018
$
2,785
3,655
669
7,109
Sleep Country Canada | Annual Report 2019
76
Sleep Country Canada Holdings Inc.Notes to Consolidated Financial StatementsAs at December 31, 2019 and December 31, 2018 (in thousands of Canadian dollars, except per share amounts)
18. Share-based compensation
The Company has stock option plan and a PSU plan for certain employees and key management of the Company. The
Company has a DSU plan for its Directors.
The stock options, PSUs and DSUs are equity settled and, as such, the expense associated with these instruments is
recorded as share-based compensation expense through the consolidated statements of income and comprehensive income
with a corresponding entry made to contributed surplus in share capital and other on the consolidated statements of financial
position. During the year, the Company recorded $776 (2018 – $289) in payroll taxes related to share-based compensation.
Share-based compensation expense is summarized as follows:
976,080 stock options (2018 – 845,826) (a)
178,864 PSUs (2018 – 167,152) (b)
34,430 DSUs (2018 – 22,901) (c)
2019
$
1,068
1,028
336
2,432
2018
$
1,402
1,820
340
3,562
The maximum number of common shares that may be issued under all security-based compensation arrangements
implemented by the Company, including the stock option plan, the PSU plan and the DSU plan, may not exceed 10% of the
total number of common shares issued and outstanding from time to time. The maximum number of common shares that
may be issued under the PSU plan is 4% and under the DSU plan is 1% of the total number of common shares issued and
outstanding from time to time.
a)
Stock options
The Company has a stock option plan under which options to purchase common shares may be granted to officers
and employees of the Company. Options granted under the plan have an exercise price of not less than the weighted
average trading price of the common shares where they are listed for the five trading days prior to the date of the
grant. Options granted vest on the fourth anniversary of the grant date. All issued options expire after ten years from
the date granted.
Sleep Country Canada | Annual Report 2019
77
Sleep Country Canada Holdings Inc.Notes to Consolidated Financial StatementsAs at December 31, 2019 and December 31, 2018 (in thousands of Canadian dollars, except per share amounts) The Company’s stock option transactions during the year were as follows:
Balance – January 1, 2018
Granted – March 13, 2018
Forfeited – August 31, 2018
Forfeited – November 14, 2018
Exercised – November 14, 2018
Balance – December 31, 2018
Balance – January 1, 2019
Granted – March 8, 2019
Forfeited – May 8, 2019
Granted – May 28, 2019
Forfeited – June 12, 2019
Forfeited – August 6, 2019
Granted – September 10, 2019
Granted – November 4, 2019
Balance – December 31, 2019
Number
of options
692,966
161,212
(5,028)
(1,298)
(2,026)
845,826
845,826
250,585
(111,232)
5,220
(26,605)
(9,107)
17,471
3,922
976,080
Weighted average
exercise price per share
$
23.21
36.60
26.94
32.39
19.31
25.73
25.73
21.23
25.25
19.45
24.82
17.00
20.80
19.40
24.59
The vested number of options outstanding as at December 31, 2019 is 110,193 (2018 – nil).
The Black-Scholes model was used to estimate the fair value of stock options. The grant date fair value of the options
is the same as the weighted average exercise price. In determining the fair value of these employee stock options,
the following assumptions were used:
Risk-free interest rate
Expected volatility
Estimated dividend yield
Expected life of the options
(in years)
Forfeiture rate
March 8, 2019
May 28, 2019 September 9, 2019 November 4, 2019
Date of grant
1.98%
30.8%
3.67%
7
0.37%
1.98%
29.98%
3.99%
7
3.66%
1.19%
29.89%
3.71%
7
3.66%
1.41%
29.33%
4.04%
7
3.66%
The risk-free interest rate is based on a Government of Canada five to ten-year benchmark bond yield at the date of
grant.
Sleep Country Canada | Annual Report 2019
78
Sleep Country Canada Holdings Inc.Notes to Consolidated Financial StatementsAs at December 31, 2019 and December 31, 2018 (in thousands of Canadian dollars, except per share amounts)
b)
PSU plan
The Company has established a PSU plan for employees and officers of the Company. A PSU represents the right to re-
ceive a common share settled by the issuance of treasury shares or purchased on the open market. PSUs vest 100% at the
end of the third year after the grant date. The number of units which will vest is determined based on the achievement of cer-
tain earnings before interest, taxes, depreciation, and amortization (EBITDA) targets established by the Board of Directors.
The number of units that vest is determined by multiplying the number of units granted to the participant by the adjustment
factor, which ranges from 0.5 to 1.5, depending on the achievement of such targets. Therefore, the number of units that will
vest and are paid out may be higher or lower than the number of units originally granted to a participant.
The Company’s PSU plan transactions during the year were as follows:
Number of
units (vested and
Grant date fair
unvested)
value per unit
Balance – January 1, 2018
Issued as accelerated performance units – January 10, 2018
Exercised – January 15, 2018
Issued as dividend equivalents – February 28, 2018
Granted – March 13, 2018
Granted – May 31, 2018
Issued as accelerated performance units – August 8, 2018
Exercised – August 8, 2018
Cancelled – August 31, 2018
Balance – December 31, 2018
Balance – January 1, 2019
Exercised – March 7, 2019
Granted – March 7, 2019
Granted – March 8, 2019
Forfeited – May 8, 2019
Granted – May 28, 2019
Forfeited – June 12, 2019
Granted - September 10, 2019
Granted - November 4, 2019
Balance – December 31, 2019
149,977
180
(873)
156
50,835
187
16,075
(48,225)
(1,160)
167,152
167,152
(87,640)
29,214
87,329
(20,707)
1,858
(5,857)
6,118
1,397
178,864
$
24.06
19.31
24.30
33.48
36.60
31.78
17.00
17.00
28.71
29.21
29.21
19.31
19.31
21.23
28.88
19.45
26.64
20.80
19.40
28.21
The vested number of units outstanding as at December 31, 2019 is nil (2018 – nil).
Sleep Country Canada | Annual Report 2019
79
Sleep Country Canada Holdings Inc.Notes to Consolidated Financial StatementsAs at December 31, 2019 and December 31, 2018 (in thousands of Canadian dollars, except per share amounts)
c)
DSU plan
The Company has established a DSU plan for Directors of the Company. A DSU represents the right to receive a
common share settled by the issuance of treasury shares or purchased on the open market. DSUs granted vest in
equal instalments on the last day of each month of the fiscal year immediately following the grant date, and relate to
the applicable portion of the Directors’ annual retainer.
Balance – January 1, 2018
Granted – May 17, 2018
Granted – August 15, 2018
Balance – December 31, 2018
Balance – January 1, 2019
Granted – May 16, 2019
Exercised – May 31, 2019
Exercised – July 6, 2019
Granted - August 8, 2019
Balance – December 31, 2019
Number of units
(vested and
unvested)
Grant date
fair value
per unit
12,506
9,162
1,233
22,901
22,901
15,684
(1,028)
(4,916)
1,789
34,430
34.65
32.74
31.55
33.72
33.72
19.13
31.55
33.91
20.82
26.44
The vested number of units outstanding as at December 31, 2019 is 28,160 (2018 – 19,128).
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Sleep Country Canada Holdings Inc.Notes to Consolidated Financial StatementsAs at December 31, 2019 and December 31, 2018 (in thousands of Canadian dollars, except per share amounts)
19. Financial instruments and risk management
The Company’s activities expose it to a variety of financial risks: market risk (including foreign exchange risk and cash flow
and fair value interest risks), credit risk and liquidity risk. The Company’s overall risk management program and business
practices seek to minimize any potential adverse effects on the Company’s consolidated financial performance.
Risk management is carried out by the senior management team and is overseen by the Board of Directors.
Market risk
Market risk is the loss that may arise from changes in factors such as interest rates, foreign exchange and the impact these
factors may have on other counterparties.
z
Foreign exchange risk
The Company operates in Canada. The exposure related to foreign exchange is limited to US dollar payments to
suppliers, which is not significant.
z Cash flow and fair value interest risk
The Company has no significant interest bearing assets. The Company’s income and operating cash flows are sub-
stantially independent of changes in market interest rates.
The Company’s primary interest rate risk arises from long-term debt. The Company manages its exposure to changes
in interest rates by using a combination of fixed and variable rate debt and utilizing interest rate swaps as necessary
to achieve the desired proportion of variable and fixed rate debt. An increase or decrease in interest rates by 1%
would result in an increase or a decrease of $1,758 (2018 – $1,686) on interest expense on the credit facilities.
Credit risk
Credit risk refers to the risk of losses due to failure of the Company’s customers or other counterparties to meet their payment
obligations. Credit risk arises from deposits with banks, as well as credit exposures from mattress vendors for the payment
of volume and co-operative advertising rebate amounts and balances owed from third party financing companies under the
various financing plans the Company offers its customers. In accordance with SCC’s investment practice, all deposits are
held at banks possessing a credit rating of AA- or better. Sales to retail customers are settled in cash, financed by third party
financing companies or by using major credit cards. The Company transfers the credit risk for financing plans to third party
financing companies. The third party financing companies that SCC deals with carry a minimum rating of BBB or better.
Trade receivables are written off when there is no reasonable expectation of recovery. Indicators that there is no reasonable
expectation of recovery include, amongst others, the failure of a debtor to engage in a repayment plan with the group, and a
failure to make contractual payments for a period of greater than 120 days past due.
Impairment losses on trade receivables and contract assets are presented as net impairment losses within operating profit.
Subsequent recoveries of amounts previously written off are credited against the same line item.
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Sleep Country Canada Holdings Inc.Notes to Consolidated Financial StatementsAs at December 31, 2019 and December 31, 2018 (in thousands of Canadian dollars, except per share amounts) Liquidity risk
Liquidity risk is the risk the Company will not be able to meet a demand for cash or to fund its obligations as they come due.
Liquidity risk also includes the risk of not being able to liquidate assets in a timely manner at a reasonable price. Prudent
liquidity management implies maintaining sufficient cash and the availability of funding through an adequate amount of
committed credit facilities.
The table below analyzes the Company’s financial liabilities into relevant maturity groupings based on the remaining period
from the consolidated statements of financial position dates to the contractual maturity date. The amounts discussed in the
table are contractual undiscounted cash flows.
At December 31, 2018
Trade and other payables
Lease liabilities
Long-term debt
At December 31, 2019
Trade and other payables
Lease liabilities
Long-term debt
Within
1 year
$
51,411
686
6,464
Between 1
and 5 years
$
—
2,363
193,385
58,561
195,748
68,156
45,220
7,155
—
133,190
196,618
Over
5 years
$
—
100
—
100
—
63,333
—
120,531
329,808
63,333
Fair value of financial instruments
The different levels used to determine fair values have been defined as follows:
z
Level 1 – inputs use quoted prices (unadjusted) in active markets for identical financial assets or financial liabilities
that the Company has the ability to access.
z
Level 2 – inputs other than quoted prices included in Level 1 that are observable for the financial asset or financial lia-
bility, either directly or indirectly. Level 2 inputs include quoted prices for similar financial assets and financial liabilities
in active markets, and inputs other than quoted prices that are observable for the financial liabilities.
z
Level 3 – inputs are unobservable inputs for the financial asset or financial liability and include situations where there
is little, if any, market activity for the financial asset or financial liabilities.
The following describes the fair value determinations of financial instruments:
The carrying values of cash, trade and other receivables, trade and other payables and customer deposits
approximate their fair values due to the relatively short periods to maturity of these financial instruments. The carrying
value of the senior secured credit facility approximates its fair value as the terms and conditions of the borrowing
arrangements are comparable to market terms and conditions as at December 31, 2019 and December 31, 2018.
z
Fair values of contingent consideration liability
Sleep Country Canada | Annual Report 2019
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Sleep Country Canada Holdings Inc.Notes to Consolidated Financial StatementsAs at December 31, 2019 and December 31, 2018 (in thousands of Canadian dollars, except per share amounts)
The fair value of the contingent consideration liability recorded on the consolidated statements of financial position
as at December 31, 2019 was $17,538 (2018 - $15,123). The estimated range of outcomes (undiscounted) for the
contingent consideration arrangement is determined based on the formula price and the likelihood of achieving spec-
ified earnings levels over the contingency period, and ranges from $nil to a maximum of $25,000. The consideration
is contingent on the acquired business achieving certain specified earnings levels during the period commencing on
January 1, 2020 and ending on December 31, 2020. During the year ended December 31, 2019, $nil was paid with
reference to such contingent consideration (2018 – $nil).
The inputs to the measurement of the fair value of contingent consideration related to acquisitions are Level 3 inputs.
The fair value measurements were made using a discounted cash flow model. Significant model inputs were; expect-
ed future operating cash flows (determined with reference to each specific acquired business) and a discount rate of
15%. The discount rate is attributable to the level of risk related to economic growth factors combined with the length
of the contingent payment periods; and the dispersion was driven by unique characteristics of the businesses ac-
quired and the respective terms for these contingent payments. A 1% increase in the weighted average discount rate
would reduce the fair value of contingent consideration by $260.
Balance – January 1, 2019
Fair value adjustments - Accretion on contingent consideration
Balance – December 31, 2019
Less: Current portion
Non-current portion
Capital risk management
$
-
15,123
2,415
17,538
—
17,538
The Company’s objectives when managing capital are to safeguard its ability to continue as a going concern in order to
provide returns for its common shareholders in the form of cash dividends, benefits to other stakeholders and to maintain an
optimal capital structure to minimize the cost of capital.
In order to maintain or adjust the capital structure, the Company may issue new shares or sell assets to reduce long-term debt.
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Sleep Country Canada Holdings Inc.Notes to Consolidated Financial StatementsAs at December 31, 2019 and December 31, 2018 (in thousands of Canadian dollars, except per share amounts) 20. Business combinations
There were no business combinations in 2019.
On December 6, 2018, the Company acquired substantially all of the operating assets of Overwater Limited, a leading online
mattress retailer operating under the brand name Endy.
This acquisition has been accounted for as a business combination.
The following table summarizes the purchase consideration that is paid or payable at the date of the acquisition and the
allocation of the purchase consideration to the identifiable assets acquired and liabilities assumed based on management’s
estimate of the fair values:
Purchase consideration
Cash purchase price, including working capital adjustment
Other liabilities – Contingent consideration
Total purchase consideration
Allocation of purchase consideration to net assets acquired
Current assets
Trade and other receivables
Inventories
Prepaid expenses and deposits
Current liabilities
Trade and other payables
Customer deposits
Net working capital
Property and equipment
Intangible assets
Goodwill
Total net assets acquired
$
66,080
15,123
81,203
184
4,147
356
4,687
4,299
96
4,395
292
54
22,119
58,738
81,203
Acquisition related costs of $502, incurred in 2018, are included in general and administrative expenses in profit or loss and in
operating cash flows in the consolidated statements of cash flows.
Recognized goodwill reflects the value assigned to expected future synergies and an assembled workforce within the
companies.
The vendor, at the time of acquisition, is entitled to receive a contingent consideration payment if the acquired business
achieves specified earnings levels. The ultimate amount of payment is determined based on a formula, the key inputs to which
are (i) a contractually agreed maximum payment; (ii) a contractually specified earnings level and (iii) the actual earnings for the
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Sleep Country Canada Holdings Inc.Notes to Consolidated Financial StatementsAs at December 31, 2019 and December 31, 2018 (in thousands of Canadian dollars, except per share amounts)
contingency period. If the acquired business does not achieve the specified earnings level, the maximum payment is reduced
for any shortfall, potentially to nil.
21. Comparative figures
Certain comparative figures have been reclassified to conform to the current year’s presentation. This includes the
reclassification of depreciation expense between cost of sales and general and administrative expenses (note 13).
22. Subsequent event
The Company’s dividend policy is at the discretion of the Board of Directors. On February 4, 2020, the Company declared a
dividend of $0.195 per common share that was paid on February 25, 2020 to holders of the common shares of record as at the
close of business on February 14, 2020.
Subsequent to year end, the Company received approval from the TSX on March 4, 2020, to commence trading effective
March 9, 2020, and will expire within one year of the effective date. A NCIB and purchase on the TSX or through alternative
trading systems up to 1,368,363 of the Company’s common shares, representing approximately 4.8% of the public float of
the Company’s common shares issued and outstanding as at February 29, 2020. In accordance with the rules and by-laws of
the TSX, the Company was permitted to purchase up to a daily maximum of 28,010 shares (representing 25% of the average
daily trading volume of the shares on the TSX for the six months prior to commencement of the NCIB), except where such
purchases were made in accordance with the block purchase exception under the applicable TSX rules and policies.
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Sleep Country Canada Holdings Inc.Notes to Consolidated Financial StatementsAs at December 31, 2019 and December 31, 2018 (in thousands of Canadian dollars, except per share amounts) Shareholder information
Exchange Listing
The Toronto Stock Exchange
Common Shares
Ticker Symbol: ZZZ
Auditor
PricewaterhouseCoopers LLP
PWC Tower
18 York Street, Suite 2600
Toronto, ON M5J 0B2
Banker
TD Securities
TD West Tower, 30th Floor
100 Wellington Street West
Toronto, ON M5K 1A2
Registrar and Transfer Agent
Computershare
100 University, 8th Floor
Toronto, ON M5J 2Y1
computershare.com
Shareholder Contact
Craig De Pratto
Chief Financial Officer
Sleep Country Canada
craig.depratto@sleepcountry.ca
Annual Meeting of Shareholders
Date: May 5, 2020
Time: 10:00am (EST)
Scotiabank Centre
Scotia Plaza, 2nd Floor
40 King Street West
Toronto, ON M5H 1H1
Board of Directors
Christine Magee
Chair
Douglas Bradley
John Cassaday
David Friesema
Zabeen Hirji
Andrew Moor
Stacey Mowbray
David Shaw
Officers
David Friesema
Chief Executive Officer
Craig De Pratto
Chief Financial Officer
Stewart Schaefer
Chief Business Development Officer & President,
Dormez-vous?
Dave Howcroft
Chief Sales Officer
Capital Stock
As at December 31, 2019, there were 36,642,185 common
shares outstanding.
Sleep Country Canada | Annual Report 2019
86
Sleep Country Canada
7920 Airport Road
Brampton, ON, L6T 4N8
T: 289-748-0206
sleepcountry.ca | dormezvous.com | endy.com