TORONTO, Dec. 5, 2017 /CNW/ - Roots ("Roots," "Roots
Canada" or the "Company") (TSX: ROOT), an iconic Canadian lifestyle
brand, today announced financial results for the third quarter
ended October 28, 2017 ("Q3 2017").
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.
Third Quarter Highlights
- Total sales increased 13.0% compared to the third quarter of
fiscal year 2016 ("Q3 2016"), to $89.7
million
- Comparable sales growth of 10.1%
- Gross margin expanded 180 basis points over Q3 2016, to
54.9%
- Adjusted EBITDA increased 20.5% over Q3 2016, to $16.3 million
- Reported EPS decreased 15.7% compared to Q3 2016, to
$0.12 per share, and adjusted EPS
increased 25.9% over Q3 2016, to $0.23 per share
Jim Gabel, President and Chief
Executive Officer of Roots Corporation, commented, "We are pleased
to have delivered strong financial results for the third quarter,
which demonstrates the strength of our brand and the early momentum
of our operational investments and strategic growth initiatives. In
addition to delivering 10.1% comparable sales growth, we continued
to make progress on our growth plans, including the expansion of
our Canadian and international footprint, and increased penetration
of our e-commerce business."
Gabel continued, "Our recent IPO was a significant milestone for
Roots and we are very excited to take this important step forward
in our development. While we are very proud of all that we have
achieved thus far, we believe we are in the very early innings of
unlocking our potential to capture the tremendous opportunity that
lies ahead."
Summary of Third Quarter Financial Results
Total sales increased by 13.0% to $89.7
million from $79.4 million in
Q3 2016. Sales in the Direct-to-Consumer ("DTC") segment were
$77.2 million, a 14.0% increase, as
compared to $67.7 million in Q3 2016.
The strong DTC segment results were driven by comparable sales
growth of 10.1%, and the opening of four net new corporate retail
stores since Q3 2016. We have also renovated or expanded five
corporate retail stores since Q3 2016, including the expansion of
our store within Yorkdale Shopping Centre, Toronto, Ontario, which became our first
enhanced experience store in Canada. Our increased investments
in marketing and people are continuing to contribute nicely to our
results. Sales in the Partners and Other segment were $12.5 million, a 7.1% increase, as compared to
$11.7 million Q3 2016. Partners and
Other segment results were driven by strength across all divisions,
including the opening of 11 net new stores in Asia by our partner since Q3 2016.
Gross profit increased by 16.9% to $49.3
million from $42.1 million in
Q3 2016. Gross profit margin increased 180 basis points to 54.9%
from 53.1% in Q3 2016. Gross profit in the DTC segment increased by
17.8%, with gross margin expansion of 190 basis points to 59.1%,
driven by our United Brand Range, or UBR, with improved sourcing
and more full-price selling. DTC gross margin also benefited from
favorable FX rates on goods purchased in US dollars. Gross profit
in the Partners and Other segment increased by 6.9%, with gross
margin of 29.1%, driven by an increase in wholesale sales to our
operating partner in Asia.
Selling, general and administrative expenses were $40.8 million, as compared to $32.3 million in Q3 2016, driven by incremental
costs to support higher sales, investments made in the growth of
our business, and costs incurred in relation to the Initial Public
Offering.
Adjusted EBITDA increased by 20.5% to $16.3 million from $13.5
million in Q3 2016.
The effective tax rate was 28.2%, as compared to 29.1% in Q3
2016. The decrease in the effective tax rate was primarily driven
by less non-deductible expenses incurred in Q3 2017 compared to Q3
2016.
Net income was $5.0 million, or
$0.12 per share, as compared to
$5.9 million, or $0.14 per share, in Q3 2016.
Adjusted net income increased by 25.9% to $9.5 million, or $0.23 per share, as compared to $7.6 million, or $0.18 per share, in Q3 2016.
Outlook
Based on our strong performance in the third quarter and
year-to-date, the power of our brand and business model, and the
ongoing progress we are making towards the execution of our UBR and
growth strategies, we are on track to achieve the following
financial targets by the end of fiscal 2019:
- Sales of $410 million to
$450 million, which implies a
compounded annual growth rate ("CAGR") of 13% to 17% from fiscal
2016 to fiscal 2019;
- Adjusted EBITDA of $61 million to
$68 million, which implies a CAGR of
14% to 18% from fiscal 2016 to fiscal 2019; and
- Adjusted net income of $35
million to $40 million, which
implies a CAGR of 18% to 23% from fiscal 2016 to fiscal 2019.
Conference Call Information
A conference call to discuss third quarter financial results is
scheduled for December 5, 2017, at
8:00 a.m. ET. The conference call can
be accessed live over the phone by dialing 1-877-407-3982 (U.S. and
Canada), or 1-201-493-6780
(International). A replay will be available from 11:00 a.m. ET on December
5, 2017 through December 12,
2017, and can be accessed by dialing 1-844-512-2921 (U.S.
and Canada), or 1-412-317-6671
(International), and entering replay passcode 13673768.
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 October 28, 2017, Roots' integrated omni-channel
footprint included 120 company retail stores in Canada, 4 company retail stores in
the United States, 109
partner-operated stores in Taiwan,
29 partner-operated stores in China and a global e-commerce platform that
shipped to 54 countries during Roots' most recently completed
fiscal year. 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, and adjusted net income 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.
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 "About this Prospectus – Forward-Looking Information" and
"Risk Factors" in the Company's final prospectus filed in
connection with its initial public offering on October 18, 2017 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.
Selected Interim Condensed Consolidated Financial
Information
The select financial information contained below should be read
in conjunction with the Company's unaudited interim condensed
consolidated financial statements for the 13 and 39 week periods
ended October 28, 2017, including the
related notes thereto, and the related MD&A. These documents
are available on SEDAR at www.sedar.com.
|
Interim Condensed
Consolidated Statement of Net Income (Loss):
|
(In thousands of
Canadian dollars, except per share amounts)
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
October 28,
2017
|
October 29,
2016
|
October 28,
2017
|
October 29,
2016
|
|
(13 weeks)
|
(13 weeks)
|
(39 weeks)
|
(39 weeks)
|
|
|
|
|
|
Sales
|
$
|
89,690
|
$
|
79,384
|
$
|
196,036
|
$
|
170,714
|
|
|
|
|
|
Cost of goods
sold
|
40,420
|
37,235
|
89,804
|
87,306
|
|
|
|
|
|
Gross
profit
|
49,270
|
42,149
|
106,232
|
83,408
|
|
|
|
|
|
Selling, general and
administrative
expenses
|
40,784
|
32,346
|
105,989
|
91,607
|
|
|
|
|
|
Income (loss) before
interest expense and income
taxes expense (recovery)
|
8,486
|
9,803
|
243
|
(8,199)
|
|
|
|
|
|
Interest
expense
|
1,551
|
1,473
|
4,531
|
4,515
|
|
|
|
|
|
Income (loss) before
income
taxes
|
6,935
|
8,330
|
(4,288)
|
(12,714)
|
|
|
|
|
|
Income taxes expense
(recovery)
|
1,956
|
2,427
|
(928)
|
(3,705)
|
|
|
|
|
|
Net income
(loss)
|
$
|
4,979
|
$
|
5,903
|
$
|
(3,360)
|
$
|
(9,009)
|
|
|
|
|
|
Basic and diluted
earnings (loss) per
share
|
$
|
0.12
|
$
|
0.14
|
$
|
(0.08)
|
$
|
(0.21)
|
|
Interim Condensed
Consolidated Statement of Comprehensive Income
(Loss):
|
(In thousands of
Canadian dollars, except per share amounts)
|
(Unaudited)
|
|
|
October 28,
2017
|
October 29,
2016
|
October 28,
2017
|
October 29,
2016
|
|
(13 weeks)
|
(13 weeks)
|
(39 weeks)
|
(39 weeks)
|
|
|
|
|
|
Net income
(loss)
|
$
|
4,979
|
$
|
5,903
|
$
|
(3,360)
|
$
|
(9,009)
|
|
|
|
|
|
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
|
1,025
|
-
|
(1,049)
|
-
|
|
|
Cost of hedging
excluded from cash flow hedges
|
13
|
-
|
76
|
-
|
|
|
|
|
|
|
|
Tax impact of cash
flow hedges
|
(277)
|
-
|
259
|
-
|
|
|
|
|
|
Total comprehensive
income (loss)
|
$
|
5,740
|
$
|
5,903
|
$
|
(4,074)
|
$
|
(9,009)
|
|
Interim Condensed
Consolidated Statement of Financial Position:
|
(In thousands of
Canadian dollars, except per share amounts)
|
(Unaudited)
|
|
|
|
|
|
|
As at October
28,
|
As at January
28,
|
|
2017
|
2017
|
|
|
|
Assets
|
|
|
|
|
|
Current
assets:
|
|
|
|
Cash
|
$
|
1,026
|
$
|
25,257
|
|
Accounts
receivable
|
5,563
|
4,946
|
|
Inventories
|
57,115
|
32,682
|
|
Prepaid
expenses
|
1,906
|
1,573
|
|
Total current
assets
|
65,610
|
64,458
|
|
|
|
Non-current
assets:
|
|
|
|
Loan
receivable
|
520
|
520
|
|
Fixed
assets
|
36,109
|
31,219
|
|
Intangible
assets
|
204,732
|
208,541
|
|
Goodwill
|
52,705
|
52,705
|
|
Total non-current
assets
|
294,066
|
292,985
|
|
|
|
Total
assets
|
$
|
359,676
|
$
|
357,443
|
|
|
|
Liabilities and
Shareholders' Equity
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
Bank
indebtedness
|
$
|
5,588
|
$
|
–
|
|
Accounts payable and
accrued liabilities
|
22,289
|
16,448
|
|
Deferred
revenue
|
3,198
|
3,840
|
|
Income taxes
payable
|
3,472
|
5,536
|
|
Current portion of
long-term debt
|
4,984
|
5,550
|
|
Derivative
liabilities
|
158
|
–
|
|
Total current
liabilities
|
39,689
|
31,374
|
|
|
|
Non-current
liabilities:
|
|
|
|
Deferred tax
liabilities
|
22,080
|
21,248
|
|
Deferred lease
costs
|
4,007
|
2,154
|
|
Finance lease
obligation
|
908
|
456
|
|
Long-term
debt
|
112,814
|
98,909
|
|
Other non-current
liabilities
|
1,859
|
2,118
|
|
Total non-current
liabilities
|
141,668
|
124,885
|
|
|
|
Total
liabilities
|
181,357
|
156,259
|
|
|
|
Shareholders'
equity:
|
|
|
|
Common
shares
|
195,994
|
195,994
|
|
Contributed
surplus
|
1,094
|
483
|
|
Accumulated other
comprehensive loss
|
(116)
|
–
|
|
Retained earnings
(deficit)
|
(18,653)
|
4,707
|
Total shareholders'
equity
|
178,319
|
201,184
|
|
|
|
Total liabilities and
shareholders' equity
|
$
|
359,676
|
$
|
357,443
|
|
Interim Condensed
Consolidated Statement of Cash Flows:
|
(In thousands of
Canadian dollars, except per share amounts)
|
(Unaudited)
|
|
|
|
|
|
|
October 28, 2017
|
October 29,
2016
|
|
(39
weeks)
|
(39
weeks)
|
|
|
|
Cash provided by
(used in):
|
|
|
Operating
activities:
|
|
|
|
Net loss
|
$
|
(3,360)
|
$
|
(9,009)
|
|
Items not involving
cash:
|
|
|
|
|
Depreciation and
amortization
|
8,043
|
7,085
|
|
|
Share-based
compensation expense
|
611
|
347
|
|
|
Deferred lease
costs
|
592
|
1,230
|
|
|
Amortization of lease
intangibles
|
701
|
964
|
|
|
Interest
expense
|
4,531
|
4,515
|
|
|
Income taxes
recovery
|
(928)
|
(3,705)
|
|
|
Interest
paid
|
(4,039)
|
(4,070)
|
|
|
Taxes paid
|
(262)
|
(181)
|
|
Change in non-cash
operating working capital:
|
|
|
|
|
Accounts
receivable
|
(617)
|
(170)
|
|
|
Inventories
|
(24,433)
|
(13,041)
|
|
|
Prepaid
expenses
|
(333)
|
(431)
|
|
|
Accounts payable and
accrued liabilities
|
5,998
|
6,611
|
|
|
Deferred
revenue
|
(642)
|
(1,003)
|
|
(14,138)
|
(10,858)
|
|
|
|
Financing
activities:
|
|
|
|
Issuance of long-term
debt
|
21,000
|
11,000
|
|
Long-term debt
financing costs
|
(999)
|
-
|
|
Repayment of
long-term debt
|
(7,162)
|
(2,775)
|
|
Issuance of common
shares
|
-
|
250
|
|
Finance lease
payments
|
(118)
|
-
|
|
Distributions
paid
|
(20,000)
|
-
|
|
(7,279)
|
8,475
|
|
|
|
Investing
activities:
|
|
|
|
Additions to fixed
assets
|
(9,664)
|
(8,358)
|
|
Tenant allowance
received
|
1,262
|
699
|
|
(8,402)
|
(7,659)
|
|
|
|
Decrease in
cash
|
(29,819)
|
(10,042)
|
|
|
|
Cash, beginning of
period
|
25,257
|
11,151
|
|
|
|
Cash and bank
indebtedness, end of period
|
$
|
(4,562)
|
$
|
1,109
|
|
Reconciliation of
Net Income (Loss) to EBITDA, Adjusted EBITDA, and Adjusted Net
Income:
|
(In thousands of
Canadian dollars, except per share amounts)
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
October 28, 2017
(13 weeks)
|
October 29, 2016
(13 weeks)
|
October 28, 2017
(39 weeks)
|
October 29, 2016
(39 weeks)
|
Net income
(loss)...........................
|
$
|
4,979
|
$
|
5,903
|
$
|
(3,360)
|
$
|
(9,009)
|
Add the impact
of:
|
|
|
|
|
Interest
expense...........................
|
1,551
|
1,473
|
4,531
|
4,515
|
Income taxes expense
(recovery)...............
|
1,956
|
2,427
|
(928)
|
(3,705)
|
Depreciation and
amortization................
|
2,701
|
2,422
|
8,043
|
7,085
|
EBITDA...................................
|
11,187
|
12,225
|
8,286
|
(1,114)
|
Add the impact
of:
|
|
|
|
|
|
COGS/SG&A:
Purchase accounting adjustments (a)
|
192
|
332
|
701
|
6,738
|
|
SG&A: Offering
transaction costs (b)...........
|
3,297
|
-
|
3,503
|
-
|
|
SG&A: Shareholder
fees and related costs (c)....
|
492
|
171
|
1,217
|
1,080
|
|
SG&A: Acquisition
transaction costs (d).........
|
-
|
6
|
29
|
305
|
|
SG&A: Fixed asset
impairments (e)............
|
-
|
-
|
-
|
-
|
|
SG&A: Legacy
stock option expense (f).........
|
388
|
128
|
583
|
347
|
|
SG&A: Other
non-recurring items (g)..........
|
587
|
267
|
1,018
|
1,390
|
|
SG&A: Non-cash
rent adjustments (h)..........
|
167
|
410
|
591
|
1,230
|
Adjusted
EBITDA............................
|
$
|
16,310
|
$
|
13,539
|
$
|
15,928
|
$
|
9,976
|
|
|
|
|
|
|
|
|
|
|
|
October 28, 2017
(13 weeks)
|
October 29, 2016
(13 weeks)
|
October 28, 2017
(39 weeks)
|
October 29, 2016
(39 weeks)
|
Net income
(loss)............................
|
$
|
4,979
|
$
|
5,903
|
$
|
(3,360)
|
$
|
(9,009)
|
Add the impact
of:
|
|
|
|
|
|
COGS/SG&A:
Purchase accounting adjustments (a).
|
192
|
332
|
701
|
6,738
|
|
SG&A: Offering
transaction costs (b)............
|
3,297
|
-
|
3,503
|
-
|
|
SG&A: Shareholder
fees and related costs (c).....
|
492
|
171
|
1,217
|
1,080
|
|
SG&A: Acquisition
transaction costs (d)..........
|
-
|
6
|
29
|
305
|
|
SG&A: Fixed asset
impairments (e).............
|
-
|
-
|
-
|
-
|
|
SG&A: Stock
option expense (f)...............
|
388
|
128
|
583
|
347
|
|
SG&A: Other
non-recurring items (g)...........
|
587
|
267
|
1,018
|
1,390
|
|
SG&A: Non-cash
rent adjustments (h)...........
|
167
|
410
|
591
|
1,230
|
|
SG&A:
Amortization of intangible assets acquired by
Searchlight
(i).............................
|
949
|
918
|
2,847
|
2,775
|
|
Total
adjustments..........................
|
6,072
|
2,232
|
10,489
|
13,865
|
|
Tax effect of
adjustments....................
|
(1,515)
|
(560)
|
(2,638)
|
(3,582)
|
Adjusted Net
Income.........................
|
$
|
9,536
|
$
|
7,575
|
$
|
4,491
|
$
|
1,274
|
_______________
|
|
Notes:
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|
(a)
|
In connection with
the Acquisition, we recognized acquired inventory at fair value in
accordance with IFRS 3, which included a mark-up for profit.
Recording inventory at fair value in purchase accounting had the
effect of increasing inventory and therefore will increase cost of
goods sold in subsequent periods as compared to the amounts we
would have recognized if inventory was sold through at cost. This
inventory was sold in Fiscal 2015 and Fiscal 2016 and has impacted
net income and EBITDA during those periods. As a result of the
Acquisition, we also recognized an intangible asset for lease
arrangements in the amount of $6,310, which is amortized over the
life of the leases and included in SG&A expenses. In our view,
these costs do not reflect the underlying profitability of the
business and would reduce the ability to compare such underlying
results to historical periods prior to the Acquisition.
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|
(b)
|
In connection with
the Offering, we incurred expenses related to professional fees,
legal, consulting, accounting, and travel that would otherwise not
have been incurred and are not recurring.
|
|
(c)
|
Represents the amount
paid pursuant to the management agreement with Searchlight and
consulting agreements with the Founders and certain of their family
members for ongoing consulting and other services. Subsequent to
the Offering, the management agreement and Founder consulting
services were terminated, and neither Searchlight nor the Founders
and their family members will receive these fees from us in
relation thereto going forward.
|
|
(d)
|
In connection with
the Acquisition, we incurred expenses related to professional fees,
legal, consulting, and accounting that would otherwise not have
been incurred and are not recurring.
|
|
(e)
|
Represents an
impairment charge taken against certain leasehold improvements for
stores where the forecast cash flows were deemed to be below the
carrying value.
|
|
(f)
|
Represents non-cash
share-based compensation expense in respect of the Legacy Equity
Incentive Plan and the Legacy Employee Option Plan (each as defined
in the Interim Financial Statements). The options granted under the
Legacy Equity Incentive Plan and the Legacy Employee Option Plan
were one-time events as part of putting in place and incentivizing
our management team following the Acquisition. No additional
options will be granted under the Legacy Equity Incentive Plan and
the Legacy Employee Option Plan following the Offering.
|
|
(g)
|
Predominately
represents expenses incurred in respect of the following matters:
(i) one-time recruitment costs incurred as part of the
Company's initial efforts to put in place its current senior
management team, namely the Chief Executive Officer, the Chief
Financial Officer and the Chief Merchandising Officer;
(ii) consulting costs in respect of the Company's UBR
initiative relating to a non-recurring project to redefine the
Roots brand and product offering under the new senior management
team; and (iii) consulting fees in respect of the Company's
distribution center capacity and expansion study relating to a
project that began in late-2016 and is expected to be completed by
early-2018. These costs have been identified as one-time costs
incurred in conjunction with the Acquisition and the implementation
of a new senior management team. Management has determined that
each of the above projects are non-recurring or infrequent in
nature and, accordingly, such matters do not reflect the underlying
profitability of the business and their inclusion would, therefore,
reduce the ability to compare such underlying results to historical
periods.
|
|
(h)
|
Under IFRS, we are
required to recognize rent expense on a straight-line basis over
the life of the lease. This adjustment removes the portion of the
straight-line rent adjustment that is non-cash expense in the
applicable financial period.
|
|
(i)
|
As a result of the
Acquisition, intangibles relating to customer relationships of
$7,766 with a useful life of 10 years and licensing arrangements of
$25,910 with useful lives ranging from four to 13 years were
recognized in accordance with IFRS 3. The amortization expense
resulting from the recognition of these intangible assets are
non-cash in nature and are a direct result of the Acquisition. If
the Acquisition had not occurred, such intangibles would not have
been recognized and, consequently, the associated expenses would
not have been incurred. Management is of the view that these costs
do not reflect the underlying profitability of the business and
would, therefore, reduce the ability to compare such underlying
results to historical periods prior to the Acquisition.
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|
|
|
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SOURCE Roots Corporation