Roots Reports Second Quarter Fiscal 2018 Results

Total sales growth of 3.6% with 200 basis point improvement in Direct-to-Consumer gross margins

TORONTO, Sept. 12, 2018 /CNW/ - Roots ("Roots," "Roots Canada" or the "Company") (TSX:ROOT) today announced its financial results for the second fiscal quarter ended August 4, 2018 ("Q2 2018"). All financial results are reported in Canadian dollars unless otherwise stated. Certain metrics, including those expressed on an adjusted or comparable basis, are non-IFRS measures. See "Non-IFRS Measures and Industry Metrics" below.

Roots Corporation (CNW Group/Roots Corporation)

Second Quarter Fiscal 2018 Highlights

  • Total sales increased 3.6% to $60.2 million compared to second quarter Fiscal 2017 ("Q2 2017")
    • Direct to Consumer ("DTC") sales increased 3.5% to $48.3 million compared to Q2 2017
  • Comparable Sales Growth(1) of 1.1%
  • Gross margin expanded to 55.1% from 53.3% in Q2 2017
    • DTC Gross Margin increased 200 basis points to 60.7% from 58.7% in Q2 2017
  • Selling, general and administrative expenses increased 10.3% to $37.2 million compared to
    Q2 2017
  • Adjusted EBITDA was $32,000 compared to $1.3 million in Q2 2017
  • Basic Loss Per Share was $0.10 per share compared to $0.08 per share in Q2 2017, and Adjusted Net Loss Per Share was $0.06 compared to $0.03 per share in Q2 2017
  • Opened two new corporate retail stores in Canada and two new corporate retail stores in the United States, ending the quarter with 122 stores in North America
    • Renovated one store in Canada, and relocated and expanded two stores in Canada
  • Opened two partner-operated stores in Taiwan and one partner-operated store in China, ending the quarter with 112 stores in Taiwan and 27 in China

"For the quarter, sales were up year-over-year and our Direct-to-Consumer gross margins expanded substantially," said Jim Gabel, President and Chief Executive Officer of Roots. "The consumers' positive response to certain new products, improved conversion and our continued success as an omni-channel retailer drove positive Comparable Sales Growth, offsetting softer year-over-year store traffic, as Q2 2017 benefitted from a louder brand voice in Canada and one-time traffic and sales related to Canada 150. In the quarter, we also continued to expand our retail footprint. Most notably, we opened two new U.S. stores and a brand activation centre in Boston where consumer excitement was reflected in our stores as well as through increased online traffic in the region."

Mr. Gabel continued: "Through the remainder of fiscal 2018, while negative store traffic trends are a concern in Q3, we will continue with our foundation-building work to best position Roots for long-term success. Looking to fiscal 2019, we expect our financial results to be within our target range, particularly as we pick-up momentum with our renovations and relocations, and e-Commerce continues to be the fastest growing part of our business. We remain confident in the strength of our iconic brand and the Company's long-term growth potential."

Summary of Second Quarter Fiscal 2018 Financial Results

Sales
Total Q2 2018 sales increased 3.6% to $60.2 million from $58.1 million in Q2 2017. Sales in the DTC segment (corporate retail store and e-Commerce sales) increased 3.5% to $48.3 million compared to $46.6 million in Q2 2017. The year-over-year improvement in DTC sales reflects comparable sales growth, as well as the addition of two net-new corporate retail stores since Q2 2017. Comparable Sales Growth for Q2 2018 was 1.1%, which the Company achieved against strong Canada 150 sales in the prior year. While Roots faced store traffic headwinds in Q2 2018, the Company believes that consumers are increasingly embracing the Company's omni-channel capabilities.

Sales in the Partners and Other segment (wholesale Roots-branded products, royalties on partner retail sales, licensing to select manufacturing partners and the sale of certain custom Roots-branded products) for Q2 2018 were $11.9 million, representing a 3.8% increase compared to $11.5 million in Q2 2017. The year-over-year increase reflects sales growth in Asia as well as the shift in sales to the Company's partner in Asia from Q1 2018 to Q2 2018 (as discussed in Q1 2018), all of which were partially offset by certain Canada 150-related wholesale arrangements in Q2 2017 that did not reoccur in Q2 2018.

Gross Profit
Total gross profit for Q2 2018 increased 6.9% to $33.1 million from $31.0 million in Q2 2017.

Q2 2018 gross profit in the DTC segment increased 7.0% to $29.3 million, from $27.4 million in Q2 2017. Q2 2018 DTC Gross Margin was 60.7%, up 200 basis points from a Q2 2017 DTC Gross Margin of 58.7%. Year-over-year gross margin improvements reflect the benefits of the Company's merchandising initiatives, including the two-year implementation of the United Brand Range, that are driving lower costs, as well as favourable foreign exchange rates on goods purchased in U.S. dollars.

Gross profit in the Partners and Other segment increased 6.3% to $3.8 million, from $3.6 million in Q2 2017.

Selling, general and administrative expenses
Selling, general and administrative expenses for Q2 2018 were $37.2 million, up 10.3% compared to $33.8 million in Q2 2017. The year-over-year increase was primarily driven by incremental costs to support higher sales and strategic investments to drive the growth of the business. Year-over-year, marketing expense increased $1.1 million, the majority of which was attributable to new U.S. location openings, the minimum wage increase in Ontario and Alberta accounted for an additional $0.5 million and public company costs were an incremental $0.6 million.

Adjusted EBITDA, Net Income & Adjusted Net Income
Reflecting the Company's sales growth and margin improvements, offset by increased strategic investments in the business, Adjusted EBITDA was $32,000 compared to $1.3 million in Q2 2017.

Net loss was $4.1 million, or $0.10 per share, compared to $3.2 million, or $0.08 per share, in Q2 2017. Adjusted Net Loss was $2.4 million, or $0.06 per share, compared to $1.4 million, or $0.03 per share, in Q2 2017. In the quarter, the Company recorded an income tax recovery of $1.2 million, up from $1.1 million in Q2 2017 and realized an effective tax recovery rate of 22.9%, down from 26.1% in Q2 2017 as a result of greater non-deductible expenses.

Outlook

Management expects to achieve results within the range of its previously stated fiscal 2019 financial targets:

  • Sales of $410.0 million to $450.0 million
  • Adjusted EBITDA of $61.0 million to $68.0 million
  • Adjusted Net Income of $35.0 million to $40.0 million

Conference Call and Webcast Information

Roots will hold a conference call to discuss the Company's second quarter fiscal 2018 financial results on September 12, 2018 at 8:00 a.m. ET. All interested parties can join the call by dialing 647-427-7450 or 1-888-231-8191 and using conference ID: 4883578. Please dial-in 15 minutes prior to the call to secure a line. The conference call will be archived for replay until September 19, 2018, at midnight and can be accessed by dialing 416-849-0833 or 1-855-859-2056 and entering replay passcode 4883578.

A live audio webcast of the conference call will be available on the Events and Presentations section of the Company's investor website at http://investors.roots.com or by following the link here. Please connect at least 15 minutes prior to the conference call to ensure adequate time for any software download that may be required to join the webcast. An archived replay of the webcast will be available on the Company's website for one-year.

(1) To be consistent with other retailers, and as a result of the Company's U.S. expansion strategy, starting as of Q2 2018, the Company has changed its calculation methodology for Comparable Sales Growth by applying the prior year's average monthly U.S. dollar to Canadian dollar exchange rates to both current year and prior year comparable sales to achieve a consistent basis for comparison. Prior to Q2 2018, comparable sales growth was calculated and presented using a U.S. dollar to Canadian dollar exchange rate of 1:1.

See Roots Interim Condensed Consolidated Financial Statements and the Company's Management's Discussion and Analysis of Financial Condition and Results of Operations for the Second Quarter Ended August 4, 2018 on the Company's investor website at http://investors.roots.com and on SEDAR at www.SEDAR.com

About Roots
Established in 1973, Roots is an iconic Canadian lifestyle brand with a rich heritage and portfolio of premium apparel, leather goods, accessories and footwear. Roots delivers products to customers through its store network, online platform and international partnerships. As of August 4, 2018, Roots integrated omni-channel footprint included 117 company retail stores in Canada, five company retail stores in the United States, 112 partner-operated stores in Taiwan, 27 partner-operated stores in China and a global e-commerce platform. Roots Corporation is a Canadian corporation doing business as "Roots" and "Roots Canada".

Non-IFRS Measures and Industry Metrics
This press release makes reference to certain non-IFRS measures including certain metrics specific to the industry in which we operate. These measures are not recognized measures under IFRS, do not have a standardized meaning prescribed by IFRS and, therefore, may not be comparable to similar measures presented by other companies. Rather, these measures are provided as additional information to complement those IFRS measures by providing further understanding of our results of operations from management's perspective. Accordingly, these measures are not intended to represent, and should not be considered as alternatives to net income or other performance measures derived in accordance with IFRS as measures of operating performance or operating cash flows or as a measure of liquidity. In addition to our results determined in accordance with IFRS, we use non-IFRS measures including EBITDA, Adjusted EBITDA, Adjusted Net Income (Loss), and Adjusted Net Income (Loss) per Share. This press release also refers to Comparable Sales Growth, a commonly used metric in our industry but that may be calculated differently compared to other companies. We believe these non-IFRS measures and industry metrics provide useful information to both management and investors in measuring our financial performance and condition and highlight trends in our core business that may not otherwise be apparent when relying solely on IFRS measures. Definitions and reconciliations of non-IFRS measures to the relevant reported measures can be found in our MD&A under "Cautionary Note Regarding Non-IFRS Measures and Industry Metrics", which is available on SEDAR at www.sedar.com or the Company's Investor Relations website at https://investors.roots.com.

Forward-Looking Information
Certain information in this press release contains forward-looking information. This information is based on management's reasonable assumptions and beliefs in light of the information currently available to us and are made as of the date of this press release. Actual results and the timing of events may differ materially from those anticipated in the forward-looking information as a result of various factors. Information regarding our expectations of future results, performance, achievements, prospects or opportunities or the markets in which we operate is forward-looking information. Statements containing forward-looking information are not facts but instead represent management's expectations, estimates and projections regarding future events or circumstances. Many factors could cause our actual results, level of activity, performance or achievements or future events or developments to differ materially from those expressed or implied by the forward-looking statements.

See "Forward-Looking Information" and "Risk Factors" in the Company's Annual Information Form for the fiscal year ended February 3, 2018 for a discussion of the uncertainties, risks and assumptions associated with these statements. Readers are urged to consider the uncertainties, risks and assumptions carefully in evaluating the forward-looking information and are cautioned not to place undue reliance on such information. We have no intention and undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable securities law. 

ROOTS CORPORATION
Interim Condensed Consolidated Statement of Financial Position
(In thousands of Canadian dollars, except per share amounts)
(Unaudited)












As at August 4,


As at February 3,



2018


2018

Assets





Current assets:






Cash  

$

382

$

1,809


Accounts receivable


9,461


6,420


Inventories 


50,267


35,407


Prepaid expenses


5,820


5,580


Derivative assets 


1,676



Total current assets


67,606


49,216






Non-current assets: 






Loan receivable  


541


541


Fixed assets 


51,096


36,981


Intangible assets


201,061


203,408


Goodwill 


52,705


52,705


Total non-current assets


305,403


293,635






Total assets                                                                                                                

$

373,009

$

342,851






Liabilities and Shareholders' Equity










Current liabilities:






Bank indebtedness    

$

9,637

$


Accounts payable and accrued liabilities  


19,867


18,306


Deferred revenue    


4,164


4,647


Income taxes payable


1,393


6,589


Current portion of long-term debt 


4,984


4,984


Derivative obligations  



1,233


Total current liabilities  


40,045


35,759






Non-current liabilities:






Deferred tax liabilities


22,821


21,166


Deferred lease costs      


7,157


4,815


Finance lease obligation  


712


894


Long-term debt       


107,284


79,481


Other non-current liabilities  


1,586


1,763


Total non-current liabilities    


139,560


108,119

Total liabilities                                                                                                                


179,605


143,878






Shareholders' equity:






Share capital 


196,691


195,994


Contributed surplus    


2,946


1,675


Accumulated other comprehensive income (loss)       


1,230


(904)


Retained earnings (deficit)   


(7,463)


2,208

Total shareholders' equity                                                                                              


193,404


198,973






Total liabilities and shareholders' equity                                                                    

$

373,009

$

342,851

 

On behalf of the Board of Directors:

"Erol Uzumeri"                           

Director



"Richard P. Mavrinac"               

Director & Audit Committee Chair                                                                                                                     

 

ROOTS CORPORATION









Interim Condensed Consolidated Statement of Net Loss









(In thousands of Canadian dollars, except per share amounts)








(Unaudited)


















For the 13 and 26 week periods ended August 4, 2018 and July 29, 2017


















August 4, 2018 


July 29, 2017


August 4, 2018


July 29, 2017



(13 weeks) 


(13 weeks) 


(26 weeks)


(26 weeks)










Sales                                                                                       

$

60,197

$

58,115

$

111,226

$

106,346










Cost of goods sold                                                                   


27,052


27,111


49,011


49,384










Gross profit  


33,145


31,004


62,215


56,962










Selling, general and administrative expenses


37,245


33,775


72,549


65,205










Loss before interest expense and income










taxes recovery                                      


(4,100)


(2,771)


(10,334)


(8,243)










Interest expense


1,191


1,592


2,343


2,980










Loss before income taxes                                    


(5,291)


(4,363)


(12,677)


(11,223)










Income taxes recovery                                         


(1,210)


(1,137)


(3,006)


(2,884)










Net loss                                                                                  

$

(4,081)

$

(3,226)

$

(9,671)

$

(8,339)










Basic and diluted loss per share                                        

$

(0.10)

$

(0.08)

$

(0.23)

$

(0.20)










 

ROOTS CORPORATION









Interim Condensed Consolidated Statement of Comprehensive Loss







(In thousands of Canadian dollars, except per share amounts)







(Unaudited)

















For the 13 and 26 week periods ended August 4, 2018 and July 29, 2017












August 4, 2018


July 29, 2017


August 4, 2018 


July 29, 2017



   (13 weeks) 


(13 weeks)


(26 weeks)


(26 weeks)










Net loss

$

(4,081)

$

(3,226)

$

(9,671)

$

(8,339)










Other comprehensive income (loss),










net of taxes:











Items that may be subsequently












reclassified to profit or loss:













Effective portion of changes in fair














value of cash flow hedges


663


(3,096)


3,098


(2,074)





Cost of hedging excluded from














cash flow hedges


138


65


124


63



















Tax impact of cash flow hedges


(213)


808


(858)


536










Total comprehensive loss

$

(3,493)

$

(5,449)

$

(7,307)

$

(9,814)

 

ROOTS CORPORATION











Interim Condensed Consolidated Statement of Changes in Shareholders' Equity







(In thousands of Canadian dollars, except per share amounts)








(Unaudited)                                                                                          

















For the 26 week periods ended August 4, 2018 and July 29, 2017                  



















August 4, 2018 (26 weeks)                      


Share

capital


Contributed

surplus


Retained

earnings

(deficit)


Accumulated
other
comprehensive

income (loss)


Total












Balance, February 4, 2018                            

$

195,994

$

1,675

$

2,208

$

(904)

$

198,973












Net loss                                                                   




(9,671)



(9,671)












Net gain from change












in fair value of cash flow hedges,












net of income taxes     





2,364


2,364












Transfer of realized gain on cash












flow hedges to inventories, net












of income taxes   





(230)


(230)












Share-based compensation                              



1,315




1,315












Issuance of shares                                        


697


(44)




653












Balance, August 4, 2018                               

$

196,691

$

2,946

$

(7,463)

$

1,230

$

193,404


































July 29, 2017 (26 weeks)                                       


Share
capital


Contributed
surplus


Retained

earnings

(deficit)


Accumulated 
other
comprehensive 
income (loss)


Total












Balance, January 29, 2017                           

$

195,994

$

483

$

4,707

$

$

201,184












Net loss                                                              




(8,339)



(8,339)












Net loss from change 












in fair value of cash flow hedges, net












of income taxes                             





(1,475)


(1,475)












Transfer of realized loss on cash












flow hedges to inventories, net












of income taxes





(73)


(73)












Distributions declared                                            




(20,000)



(20,000)












Share-based compensation                               



195




195












Balance, July 29, 2017                                   

$

195,994

$

678

$

(23,632)

$

(1,548)

$

171,492

 

ROOTS CORPORATION





Interim Condensed Consolidated Statement of Cash Flows





(In thousands of Canadian dollars, except per share amounts)





(Unaudited)










For the 26 week periods ended August 4, 2018 and July 29, 2017












August 4, 2018  


July 29, 2017



(26 weeks) 


(26 weeks)






Cash provided by (used in):










Operating activities:






Net loss

$

(9,671)

$

(8,339)


Items not involving cash:







Depreciation and amortization


5,743


5,342



Share-based compensation expense  


1,315


195



Deferred lease costs (recovery)


(570)


424



Amortization of lease intangibles


271


509



Interest expense 


2,343


2,980



Income taxes recovery 


(3,006)


(2,884)


Interest paid  


(2,060)


(2,639)


Taxes paid   


(1,311)


(219)


Change in working capital:







Accounts receivable


(3,041)


(3,331)



Inventories 


(14,860)


(12,539)



Prepaid expenses 


(240)


200



Accounts payable and accrued liabilities


1,561


4,179



Deferred revenue 


(483)


(411)



(24,009)


(16,533)






Financing activities:






Issuance of long-term debt 


30,000


21,000


Long-term debt financing costs



(466)


Repayment of long-term debt 


(2,492)


(5,775)


Finance lease payments


(169)



Distributions paid    



(20,000)


Proceeds from issuance of shares 


653




27,992


(5,241)






Investing activities:






Additions to fixed assets


(18,115)


(5,078)


Tenant allowance received     


3,068


627



(15,047)


(4,451)






Decrease in cash                                               


(11,064)


(26,225)






Cash, beginning of period                                                  


1,809


25,257






Cash and bank indebtedness, end of period                                        

$

(9,255)

$

(968)

 

SOURCE Roots Corporation

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