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Roots Reports Fiscal 2019 Second Quarter Results and Provides Update to Fiscal 2019 Targets

CNW Group - Wed Sep 11, 6:00AM CDT

Roots ("Roots," "Roots Canada" or the "Company") (TSX:ROOT.TO), a premium outdoor lifestyle brand, today announced its financial results for its second quarter ended August 3, 2019 ("Q2 2019"). 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".

Second Quarter Fiscal 2019 Highlights

--  Total sales of $61.7 million, up 2.5% from $60.2 million in the
        second quarter of fiscal 2018 ("Q2 2018")
  o Direct-to-Consumer ("DTC") sales of $48.2 million, in line with
    $48.3 million in Q2 2018
    --  Comparable Sales Decline of (2.9%), on top of Comparable Sales
        Growth of 1.1% in Q2 2018
    --  Gross margin of 50.3%, compared to 55.1% in Q2 2018
  o Adjusted DTC Gross Margin of 56.7%, compared to 60.7% in Q2 2018
    --  Selling, general and administrative expenses of $40.0 million,
        up 7.4% from $37.2 million in Q2 2018
    --  Adjusted EBITDA of ($4.4) million, compared to $32,000 in Q2
        2018
    --  Basic loss per share of ($0.23), compared to ($0.10) per share
        in Q2 2018, and Adjusted Net Loss Per Share of ($0.15),
        compared to ($0.06) per share in Q2 2018
    --  Ended the quarter with 116 corporate-retail stores in Canada
        and eight in the United States
    --  Ended the quarter with 115 partner-operated stores in Taiwan,
        34 in China and one in Hong Kong

"Both men's and women's, our two largest product categories, were up year-over-year driven by our increasing success with key seasonal products; we delivered another quarter of better than expected eCommerce growth; and we completed the move from our legacy distribution centre," said Jim Gabel, President and Chief Executive Officer of Roots. "However, our Q2 financial results fell below our expectations, primarily as a result of negative store traffic and a delay in flow of product to stores as we transitioned to our new DC. We are pleased with the improving trends we have seen moving into Q3. We entered the quarter with a more seasonally appropriate offering and consumers are responding well to our back-to-school assortment. We are also seeing an improvement in the flow of goods from our DC, but we still have more work to do in advance of our peak holiday selling periods."

Mr. Gabel Added: "We remain confident in our ability to deliver year-over-year sales growth in fiscal 2019. The power of the Roots brand remains strong. We are a highly sought-after collaborator, most recently releasing a limited-edition Raptors NBA Championship jacket and launching a second capsule collection with multi-platinum singer/songwriter, Shawn Mendes. However, with lower than expected DTC sales in the first half of the year and the impact of macro-economic and geopolitical headwinds on our Asia business, we expect our year-end sales results to be at the low end, or fall slightly below our previously disclosed target range. In addition, with the softness in our Asia business, lower first half DTC gross margin, and incremental costs to complete the transition to our new DC, we now expect our Adjusted EBITDA and Adjusted Net Income to fall below our previously disclosed target range."

Summary of Second Quarter Fiscal 2019 Financial Results

SalesTotal Q2 2019 sales increased 2.5% to $61.7 million, from $60.2 million in Q2 2018, reflecting flat DTC sales (corporate retail store and eCommerce sales) and a 13.6% increase in 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).

Q2 2019 DTC sales were $48.2 million, in line with $48.3 million in Q2 2018. While the Company delivered growth in its two largest product categories, men's and women's, Roots recorded a Comparable Sales Decline of (2.9%) for Q2 2019. This was primarily due to a year-over-year decrease in store traffic and a delay in the flow of product to stores as the Company transitioned to its new distribution centre, partially offset by better than expected eCommerce growth and benefits from store relocations and renovations (the relocation and expansion of six stores, as well as the renovation of four stores since Q2 2018). Q2 2019 DTC sales also include the addition of two net new corporate-retail stores since Q2 2018.

Partners and Other sales for Q2 2019 were $13.5 million, up 13.6% from $11.9 million in Q2 2018, primarily as a result of the early delivery of certain orders to the Company's operating partner in Asia that were initially planned for Q3 2019.

Gross ProfitTotal gross profit for Q2 2019 was $31.0 million, a 6.4% decrease from $33.1 million in Q2 2018.

Q2 2019 DTC gross profit was $27.1 million, down 7.6% from $29.3 million in Q2 2018. Q2 2019 Adjusted DTC Gross Margin was 56.7%, down 400 basis points from a Q2 2018 Adjusted DTC Gross Margin of 60.7%. The year-over-year Adjusted DTC Gross Margin decline primarily reflects deeper discounting in Q2 2019 to improve the Company's overall inventory position in connection with the move to its new integrated distribution centre.

Q2 2019 gross profit in the Partners and Other segment of $3.9 million was essentially flat with Q2 2018.

Selling, general and administrative expenses (SG&A)Selling, general and administrative expenses for Q2 2019 were $40.0 million, up 7.4% from $37.2 million in Q2 2018. The year-over-year increase was predominantly driven by incremental costs to support a larger retail store footprint, costs resulting from higher omni-channel sales, higher store wages related to increased in-store fulfillment of online orders, as well as one-time distribution centre transition costs, including continued use of a third-party online order distribution facility.

Adjusted EBITDA, Net Loss & Adjusted Net LossAdjusted EBITDA (excluding the impact of IFRS 16) for Q2 2019 was ($4.4) million, down from $32,000 in Q2 2018. Q2 2019 net loss was ($9.7) million, or ($0.23) basic loss per share, compared to ($4.1) million, or ($0.10) basic loss per share, in Q2 2018. In the quarter, the Company recorded an income tax recovery of $3.2 million, compared to a recovery of $1.2 million in Q2 2018, with an effective income tax recovery rate of 25.1%, up from 22.9% in Q2 2018. Q2 2019 Adjusted Net Loss (excluding the impact of IFRS 16) was ($6.2) million, or ($0.15) per share, compared to ($2.4) million, or ($0.06) per share, in Q2 2018.

Q2 2019 IFRS 16 ImpactIn Q1 2019, Roots commenced reporting lease obligations according to IFRS 16, with leases reflected on the Company's balance sheet and rent expense being replaced with interest and depreciation on the Company's income statement. The Q2 2019 IFRS 16 impact to SG&A was a decrease of $0.9 million; the impact to interest expense was an increase of $2.3 million; and the increase to deferred tax recovery was $0.4 million, resulting in a $1.0 million increase in net loss. Both Adjusted EBITDA and Adjusted Net Loss for Q2 2019 exclude the impact of IFRS 16. Through the remainder of fiscal 2019, Roots will continue to provide adjusted results to accurately compare fiscal 2019 quarterly and annual performance to the same periods in fiscal 2018.

OutlookRoots remains confident in its ability to deliver year-over-year sales growth for fiscal 2019. Trends have improved into the third quarter, eCommerce continues to demonstrate strong growth, and the positive consumer response to the Company's back-to-school assortment is believed to be a good indicator for how new product introductions will be received in the second half of the fiscal year. In addition, the Company plans to complete another renovation and relocation and add two new corporate-retail stores by year-end.

SalesThe Company realized lower than expected DTC sales in the first half of the year. In addition, with the recent macro-economic and geopolitical headwinds the Company's Asia business is facing, Roots now expects to see year-over-year pressure on Partners and Other sales. As a result, Roots now expects fiscal 2019 sales to be at the low end, or fall slightly below, the Company's previously-disclosed target range of $358 to $375 million.

Adjusted EBITDA and Adjusted Net IncomeIn addition to factors affecting DTC sales and gross margin for fiscal 2019, Roots expects increased SG&A expenses, largely due to costs resulting from higher omni-channel sales, higher store wages related to increased in-store fulfillment of online orders, ongoing incremental distribution centre transition costs including continued use of a third-party online order distribution facility, as well as a negative impact from new U.S. tariffs. As a result, Roots expects fiscal 2019 Adjusted EBITDA and Adjusted Net Income results to fall below the Company's previously-disclosed target ranges of between $46 and $50 million and $20 and $24 million, respectively. The Company estimates that the softness in its Asia business and the ongoing incremental costs to complete the transition to its new distribution centre will have a negative impact on Adjusted EBITDA of approximately $5 to $6 million.

Conference Call and Webcast InformationRoots will hold a conference call to discuss the Company's fiscal 2019 second quarter results on September 11, 2019 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: 2048705. Please dial-in 15 minutes prior to the call to secure a line. The conference call will be archived for replay until September 18, 2019 at midnight and can be accessed by dialing 416-849-0833 or 1-855-859-2056 and entering replay passcode: 2048705.

A live audio webcast of the conference call will be available on the Events and Presentations section of the Company's investor website at https://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.

See Roots Interim 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 3, 2019 on the Company's investor website at https://investors.roots.com and on SEDAR at www.SEDAR.com.

About RootsEstablished in 1973, Roots is a premium outdoor lifestyle brand. We unite the best of cabin and city through unmistakable style built with uncompromising comfort and quality. We offer a broad range of products that embody a comfortable cabin-meets-city style including: women's and men's apparel, leather goods, footwear, accessories, and kids, toddler and baby apparel. Starting from a little cabin in Algonquin Park, Canada, Roots has grown to become a global brand. As at August 3, 2019, we had 116 corporate-retail stores in Canada, eight corporate-retail stores in the United States, 115 partner-operated stores in Taiwan, 34 partner-operated stores in China, one partner-operated store in Hong Kong and a global eCommerce platform. Roots Corporation is a Canadian corporation doing business as "Roots" and "Roots Canada".

Non-IFRS Measures and Industry MetricsThis 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 Adjusted DTC Gross Margin, EBITDA, Adjusted EBITDA, Adjusted Net Income (Loss), and Adjusted Net Income (Loss) per Share. This press release also refers to Comparable Sales Growth (Decline), 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 InformationCertain 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 current Annual Information Form 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 CORPORATIONInterim Condensed Consolidated Statement of Financial Position(In thousands of Canadian dollars, except per share amounts) (Unaudited)

As at August 3,       As at February
                                                                                               2,
                                                                         2019                  2019







              Assets





       Current assets:



            Cash                                                           $
            787       $
         1,991



            Accounts receivable, net                         11,374                 6,627



            Inventories                                      53,991                49,533



            Prepaid expenses                                  4,570                 6,443



            Income taxes recoverable                          2,681
            -



            Derivative assets                                   202                   366

                                                                                              ---


            Total current assets                             73,605                64,960





       Non-current assets:



            Loan receivable                                     562                   562



            Lease receivable                                  1,635
            -



            Fixed assets                                     74,623                64,163



            Right-of-use assets                             138,331
            -



            Intangible assets                               194,719               198,724



            Goodwill                                         52,705                52,705

                                                                                              ---


            Total non-current assets                        462,575               316,154





       Total assets                                                          $
            536,180     $
         381,114

    ===





              Liabilities and Shareholders' Equity





       Current liabilities:



            Bank indebtedness                                           $
            10,892      $
         12,409



            Accounts payable and accrued liabilities         22,871                22,291



            Deferred revenue                                  4,659                 5,498



            Income taxes payable
            -                6,445



            Current portion of lease liabilities             29,693
            -



            Current portion of long-term debt                 4,984                 4,984

                                                                                              ---


            Total current liabilities                        73,099                51,627





       Non-current liabilities:



            Deferred tax liabilities                         22,546                22,761



            Deferred lease costs
            -               10,063



            Finance lease obligation
            -                  504



            Long-term portion of lease liabilities          122,951
            -



            Long-term debt                                  122,693                80,031



            Other non-current liabilities
            -                1,424

                                                                                              ---


            Total non-current liabilities                   268,190               114,783

                                                                                              ---

                                                                   341,289               166,410


       Total liabilities





       Shareholders' equity:



            Share capital                                   196,903               196,853



            Contributed surplus                               4,920                 3,975



            Accumulated other comprehensive income              148                   268



            Retained earnings (deficit)                     (7,080)               13,608

                                                                                              ---


       Total shareholders' equity                                 194,891               214,704





       Total liabilities and shareholders' equity                            $
            536,180     $
         381,114

    ===

On behalf of the Board of Directors:

"Erol Uzumeri" Director"Richard P. Mavrinac" Director & Audit Committee Chair

ROOTS CORPORATIONInterim Condensed Consolidated Statement of Net Income (Loss)(In thousands of Canadian dollars, except per share amounts) (Unaudited)

For the 13 and 26 week periods ended August 3, 2019 and August 4, 2018

August 3, 2019     August 4, 2018  August 3, 2019        August 4, 2018


                                                         (13 weeks)         (13 weeks)      (26 weeks)            (26 weeks)






       Sales                                                        $
             61,683                     $
              60,197      $
        116,035    $
        111,226





       Cost of goods sold                                   30,674              27,052           56,515                 49,011

    ---




       Gross profit                                         31,009              33,145           59,520                 62,215





       Selling, general and administrative expenses         40,002              37,245           78,166                 72,549

    ---




       Loss before interest expense and income



       taxes recovery                                      (8,993)            (4,100)        (18,646)              (10,334)





       Interest expense                                      3,887               1,191            7,446                  2,343

    ---




       Loss before income taxes                           (12,880)            (5,291)        (26,092)              (12,677)





       Income taxes recovery                               (3,227)            (1,210)         (6,671)               (3,006)





       Net loss                                                    $
             (9,653)                   $
              (4,081)    $
        (19,421)   $
        (9,671)

    ===




       Basic and diluted loss per share                             $
             (0.23)                    $
              (0.10)      $
        (0.46)    $
        (0.23)

ROOTS CORPORATIONInterim Condensed Consolidated Statement of Comprehensive Income (Loss)(In thousands of Canadian dollars, except per share amounts)(Unaudited)

For the 13 and 26 week periods ended August 3, 2019 and August 4, 2018

August 3, 2019     August 4, 2018  August 3, 2019      August 4, 2018


                                                 (13 weeks)         (13 weeks)      (26 weeks)          (26 weeks)






       Net loss                                             $
            (9,653)                   $
            (4,081)    $
     (19,421) $
     (9,671)





       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                     (852)                663              510                3,098



       Cost of hedging excluded from



       cash flow hedges                                152                 138              238                  124





       Tax impact of cash flow hedges                  187               (213)           (199)               (858)





       Total comprehensive loss                            $
            (10,166)                   $
            (3,493)    $
     (18,872) $
     (7,307)

    ===

ROOTS CORPORATIONInterim 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 3, 2019 and August 4, 2018

August 3, 2019 (26 weeks)              Share     Contributed      Retained       Accumulated       Total
                                             capital         surplus      earnings             other
                                                                         (deficit)     comprehensive
                                                                                       income (loss)

    ---




       Balance, February 2, 2019                    $
          196,853                $
              3,975              $
      13,608  $
      268  $
      214,704





       Adjustment on adoption of IFRS 16
           -
              -       (1,267)
              -     (1,267)





       Balance, February 3, 2019                    $
          196,853                $
              3,975              $
      12,341  $
      268  $
      213,437

    ===




       Net loss
           -
              -      (19,421)
              -    (19,421)





       Net gain from change



       in fair value of cash flow hedges,



       net of income taxes
           -
              -
              -               549          549





       Transfer of realized gain on cash



       flow hedges to inventories, net



       of income taxes
           -
              -
              -             (669)       (669)





       Share-based compensation
           -             995
              -
              -         995





       Issuance of shares                        50             (50)
              -
              -
             -





       Balance, August 3, 2019                      $
          196,903                $
              4,920             $
      (7,080) $
      148  $
      194,891

    ===
August 4, 2018 (26 weeks)              Share     Contributed      Retained       Accumulated    Total
                                             capital         surplus      earnings             other
                                                                         (deficit)     comprehensive
                                                                                       income (loss)

    ---




       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

    ===

ROOTS CORPORATIONInterim Condensed Consolidated Statement of Cash Flows(In thousands of Canadian dollars, except per share amounts) (Unaudited)

For the 26 week periods ended August 3, 2019 and August 4, 2018

August 3, 2019    August 4, 2018


                                                                                        (26 weeks)        (26 weeks)




       Cash provided by (used in):





       Operating activities:



     Net loss                                                    $
       (19,421)             $
     (9,671)



     Items not involving cash:



     Depreciation and amortization                       18,770           5,743



     Share-based compensation expense                       995           1,315



     Deferred lease recovery
              -          (570)



     Amortization of lease intangibles
              -            271



     Interest expense                                     7,446           2,343



     Income taxes recovery                              (6,671)        (3,006)



     Interest paid                                      (2,659)        (2,060)


                                                          Payment of interest on lease
                                                           liabilities                                       (4,475)
            -



     Taxes paid                                         (2,166)        (1,311)



     Change in working capital:



     Accounts receivable                                (4,747)        (3,041)



     Inventories                                        (4,458)       (14,860)



     Prepaid expenses                                     1,873           (240)



     Accounts payable and accrued liabilities               580           1,561



     Deferred revenue                                     (839)          (483)



                                                                                          (15,772)          (24,009)





       Financing activities:



     Issuance of long-term debt                          45,000          30,000


                                                          Long-term debt financing costs                       (163)
            -



     Repayment of long-term debt                        (2,492)        (2,492)



     Finance lease payments
              -          (169)


                                                          Payment of principal on lease
                                                           liabilities                                      (10,381)
            -


                                                          Proceeds from issuance of shares
              -            653

                                                                                                                                ---

                                                                                            31,964             27,992





       Investing activities:



     Additions to fixed assets                         (15,879)       (18,115)



     Tenant allowance received
              -          3,068

                                                                                                                                ---

                                                                                          (15,879)          (15,047)






       Increase (decrease) in cash                                                            313           (11,064)





       Cash and bank indebtedness, beginning of period                                   (10,418)             1,809





       Cash and bank indebtedness, end of period                                                  $
           (10,105)                 $
     (9,255)

    ===

SOURCE Roots Corporation

View original content to download multimedia: http://www.newswire.ca/en/releases/archive/September2019/11/c6324.html

SOURCE: Roots Corporation

SOURCE: Roots

SOURCE: Roots Canada

Investor Relations: Kristen Davies, kdavies@roots.com, 416-781-3574 Ext. 4116; Public
Relations: Elyse Goody, egoody@roots.com, 416-781-3574 Ext. 4332

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