Sleep Country Canada Holdings Inc. (OTCPK: <a href="https://www.otcmarkets.com/stock/SCCAF/overview" target="_blank">SCCAF</a>), the ubiquitous name in Canadian mattress retail, just released a seemingly "boring" Q1 2024 earnings transcript. Revenue inched up 1.6%, while same-store sales dipped 1.6%. The dividend, after two consecutive 10% jumps, remains unchanged.

Analysts, predictably, honed in on the "miss" in adjusted EPS and the dividend pause, painting a picture of a company struggling in a challenging retail environment. But hidden within the dry language of the transcript, seasoned investors might spot a tell: Sleep Country is quietly preparing for a major acquisition, and this seemingly conservative stance is actually a strategic power play.

Why a Major Acquisition is on the Horizon

Here's why:

<ul>

<li><b>Emphasis on "Opportunity"</b>: Sleep Country's management repeatedly emphasized "opportunity" in their capital allocation decisions. The dividend pause, they argued, wasn't due to financial strain, but rather a desire to maintain "flexibility" and build "gunpowder" for future opportunities. This echoes their actions after the COVID-19 pause, where they aggressively ramped up dividends only after securing a strong financial position. [<a href="https://investors.sleepcountry.ca/English/news-releases/news-release-details/2023/Sleep-Country-Canada-Holdings-Inc.-Announces-Fourth-Quarter-and-Fiscal-2023-Financial-Results/default.aspx">Reference: Q1 2024 Earnings Call Transcript</a>]</li>

<li><b>Robust CapEx Plan</b>: Despite acknowledging a "soft" operating environment, Sleep Country remains committed to a robust CapEx plan of CAD 40 million in 2024. This includes opening a minimum of six new stores, piloting innovative store formats, and potentially resuming renovations in the back half of the year. This aggressive expansion strategy, even amidst economic uncertainty, suggests confidence in their core business and a desire to solidify their market dominance. [<a href="https://investors.sleepcountry.ca/English/news-releases/news-release-details/2023/Sleep-Country-Canada-Holdings-Inc.-Announces-Fourth-Quarter-and-Fiscal-2023-Financial-Results/default.aspx">Reference: Q1 2024 Earnings Call Transcript</a>]</li>

<li><b>Unsatiated M&A Appetite</b>: Sleep Country explicitly stated their intention to pursue "high-growth, profitable, and EPS-accretive companies" within the sleep ecosystem, potentially funded through a combination of cash and debt. This, coupled with their conservative dividend stance, points towards a potential large-scale acquisition on the horizon. [<a href="https://investors.sleepcountry.ca/English/news-releases/news-release-details/2023/Sleep-Country-Canada-Holdings-Inc.-Announces-Fourth-Quarter-and-Fiscal-2023-Financial-Results/default.aspx">Reference: Q1 2024 Earnings Call Transcript</a>]</li>

</ul>

Crunching the Numbers

Let's look at the numbers:

<table>

<thead>

<tr>

<th>Item</th>

<th>Value (CAD Million)</th>

</tr>

</thead>

<tbody>

<tr>

<td>Cash on hand</td>

<td>31.1</td>

</tr>

<tr>

<td>Available credit facility</td>

<td>83.3</td>

</tr>

<tr>

<td>Accordion feature</td>

<td>100</td>

</tr>

<tr>

<td><b>Total Potential War Chest</b></td>

<td><b>214.4</b></td>

</tr>

</tbody>

</table>

Considering their stated intention to use a debt-cash mix for acquisitions, Sleep Country could realistically target a company valued between CAD 200 million to CAD 300 million. [<a href="https://investors.sleepcountry.ca/English/news-releases/news-release-details/2023/Sleep-Country-Canada-Holdings-Inc.-Announces-Fourth-Quarter-and-Fiscal-2023-Financial-Results/default.aspx">Reference: Q1 2024 Earnings Call Transcript</a>]

This hypothesis is further strengthened by their recent, accelerated full acquisition of Hush Blankets Inc. Originally planned to be completed in two stages (2024 and 2025), Sleep Country swiftly bought the remaining 32% stake for an estimated CAD 6 million to CAD 7 million. This decisiveness, particularly in a "soft" market, indicates a clear strategy: consolidate their hold on the Canadian sleep market and emerge stronger when the economy rebounds. [<a href="https://investors.sleepcountry.ca/English/news-releases/news-release-details/2023/Sleep-Country-Canada-Holdings-Inc.-Announces-Fourth-Quarter-and-Fiscal-2023-Financial-Results/default.aspx">Reference: Q1 2024 Earnings Call Transcript</a>]

Potential Acquisition Targets

So, who could be their next target?

Potential candidates include prominent players in the sleep accessory market, innovative technology companies offering sleep solutions, or even regional mattress retailers with a strong customer base. Sleep Country, known for their channel-agnostic approach and robust sleep ecosystem, could seamlessly integrate these acquisitions, maximizing synergies and driving future growth.

Revenue Growth & Same-Store Sales

The following chart illustrates Sleep Country's revenue growth and same-store sales performance over the past five quarters. While same-store sales have dipped, the overall revenue growth suggests the impact of new stores and acquisitions.

From Mattress Retailer to Sleep Ecosystem

Fun Fact: Sleep Country's journey began in 1994 with a simple mission: "To help Canadians get a better night's sleep." 30 years later, they've expanded from a mattress retailer to a comprehensive sleep ecosystem, encompassing digital brands, accessories, and even a luxury sleep brand, "The Rest."

Their ambition is evident. This "boring" dividend pause might just be the calm before the storm. When the dust settles, Sleep Country could very well wake up as a vastly larger, more formidable force in the North American sleep market.

"Fun Fact: Sleep Country's Green Glove Delivery service not only offers a premium delivery experience but also incorporates sustainability. They donate collected mattresses to those in need or recycle them entirely."