- Sales decreased 8.5% year-over-year to $69.8 million
- Gross margin dropped 430 basis points to 56.5%; excluding
temporary premium freight costs and government subsidies, gross
margin down 135 basis points
- Net income totaled $2.2
million compared to $10.8
million in the third quarter of fiscal 2021
- Adjusted EBITDA1 amounted to
$7.3 million compared to $19.2 million in the third quarter of fiscal
2021
- Net debt reduced 21% year-over-year to $58.7 million
- Normal Course Issuer Bid renewed until Dec 2023
TORONTO, Dec. 9, 2022
/CNW/ - Roots ("Roots," "Roots Canada" or the "Company")
(TSX: ROOT), a premium outdoor-lifestyle brand, announced today
financial results for its third quarter ended October 29, 2022 ("Q3 2022"). All financial
results are reported in Canadian dollars unless otherwise stated.
Certain metrics, including those expressed on an adjusted basis,
are non-IFRS measures. See "Non-IFRS Measures and Industry Metrics"
below.
"Our third quarter results reflect a shift in the economic
environment since we last reported, which we expect to continue in
the fourth quarter of fiscal 2022," said Meghan Roach, President and Chief Executive
Officer of Roots. "For nearly 50 years, Roots has managed through
diverse economic conditions, numerous changes in consumer behavior
and, most recently, the global pandemic. We remain focused on our
strategic initiatives and believe that our brand strength and
strong balance sheet position us well over the medium and long
term."
"During the quarter, we also saw more pronounced discounting and
an enhanced focus on lifestyle products compared to casual fleece
offerings," continued Ms. Roach. "While we had anticipated this
shift, as people returned to offices and events, it accelerated
during the quarter and has impacted sales due to the relative
importance of each category to our business. We are continuing to
strategically manage our core inventory to maintain our promotional
discipline; however, we expect these factors to continue impacting
our sales and margins in the near term."
SELECT FINANCIAL
INFORMATION
(in '000s of CAD$,
except per share amounts)
|
Third quarter
ended
|
Year-to-date
|
October 29,
2022
|
October 30,
2021
|
Change
|
October 29,
2022
|
October 30,
2021
|
Change
|
Total
sales
|
69,782
|
76,291
|
(8.5 %)
|
160,655
|
152,540
|
5.3 %
|
Direct-to-Consumer
("DTC") sales
|
56,858
|
63,434
|
(10.4 %)
|
132,697
|
125,232
|
6.0 %
|
Partners & Other
("P&O") sales
|
12,924
|
12,857
|
0.5 %
|
27,958
|
27,308
|
2.4 %
|
Gross
profit
|
39,428
|
46,421
|
(15.1 %)
|
93,992
|
90,505
|
3.9 %
|
Gross
margin1
|
56.5 %
|
60.8 %
|
-430 bps
|
58.5 %
|
59.3 %
|
-80 bps
|
Selling, General and
Administrative
("SG&A") expenses
|
33,830
|
29,436
|
14.9 %
|
95,761
|
77,162
|
24.1 %
|
Subsidies and
abatements3
|
51
|
3,036
|
-
|
456
|
12,535
|
-
|
Net income
(loss)
|
2,209
|
10,766
|
-
|
(6,287)
|
4,652
|
-
|
Net income (loss)
per share
|
0.05
|
0.25
|
-
|
(0.15)
|
0.11
|
-
|
Adjusted
EBITDA2
|
7,276
|
19,158
|
-
|
3,443
|
19,518
|
-
|
1 Gross
margin is a supplementary financial measure that measures our gross
profit as a percentage of sales.
|
|
2 Adjusted
EBITDA is a non-IFRS Measure. See "Non-IFRS Measures and Industry
Metrics" below.
|
|
3Subsidies
and abatements are reported as a reduction to the related expense,
either as a decrease to cost of goods sold or to SG&A
expenses.
|
|
|
|
"Despite headwinds in the third quarter, we maintained a strong
financial position, reducing our net debt by 21% and lowering our
net working capital position by 10%," said Mona Kennedy, Chief Financial Officer of Roots.
"Although we expect short-term pressure on our gross margins from
economic and promotional forces, our strategy to reduce discounting
on core styles remains unchanged. While comfortable with our
inventory levels at the end of the third quarter, we expect a
combination of factors, including cost increases primarily related
to our shift to organic cotton, our pack-and-hold strategy on core
inventory, and lower sales, to raise our year-end inventory
balances."
THIRD QUARTER OVERVIEW
Total sales decreased 8.5% to
$69.8 million in Q3 2022 from
$76.3 million in the third quarter of
fiscal 2021 ("Q3 2021"). DTC sales (corporate retail store and
eCommerce sales) were $56.9 million, down 10.4% year-over-year.
This decrease was mainly driven by economic headwinds in the latter
part of the third quarter, an intensified promotional environment,
and an accelerated consumer shift from fleece products towards our
lifestyle assortments, which represent a smaller portion of the
Company's assortment. In addition, year-over-year sales were
negatively impacted by unseasonably warm weather during the
back-to-school selling period and heightened spending in the same
quarter last year.
P&O sales (wholesale Roots branded products, licensing to
select manufacturing partners and the sale of certain custom
products) rose 0.5% to $12.9 million in Q3 2022. The
increase was mainly due to a favourable foreign exchange impact of
$0.5 million on U.S. dollar sales in
Q3 2022 versus the same period in 2021, along with growth in sales
of custom Roots-branded products sold to business clients and sales
through Tmall.com in China. These
factors were partially offset by a reduction in the Company's
business in Taiwan and lower
royalties on licensed product sales.
Gross profit decreased 15.1% to $39.4
million in Q3 2022 from $46.4
million in Q3 2021, driven by moderated sales volumes and a
reduction in gross margin. Gross margin declined 430 basis points
("bps") to 56.5% in Q3 2022 from 60.8% in the same period last
year. This decline can be attributed to the temporary impact of
premium freight costs of 240 bps and a reduction in Canada Emergency Wage Subsidy ("CEWS") program
of 55 bps. Excluding these items, gross margin was down 135 bps
year-over-year due to increased discounts on targeted inventory and
higher costs of products.
SG&A expenses were $33.8
million in Q3 2022, up 14.9% from $29.4 million in Q3 2021. The increase can
largely be attributed to a $2.6
million reduction in pandemic-related government subsidies
and occupancy-related cost abatements in Q3 2022 compared to the
same period in 2021. Excluding these items, SG&A rose 5.7%
year-over-year due to higher store costs related to increased
operating hours, inflationary pressure on labour and eCommerce
shipping costs, as well as investments in talent and marketing.
Net income totaled $2.2 million,
or $0.05 per share, in Q3 2022,
versus $10.8 million, or $0.25 per share, in Q3 2021. Excluding the impact
of government subsidies and occupancy-related cost abatements, net
income decreased $6.4 million
year-over-year.
Adjusted EBITDA amounted to $7.3
million in Q3 2022 compared to $19.2
million in Q3 2021. Excluding the impact of government
subsidies and occupancy-related cost abatements, Adjusted
EBITDA declined $8.9 million
year-over-year.
YEAR-TO-DATE RESULTS
For the first nine months of
fiscal 2022 ("YTD 2022"), total sales reached $160.7 million, representing an increase of 5.3%
over sales in the first nine months of fiscal 2021 ("YTD 2021").
DTC sales rose 6.0% to $132.7 million
in YTD 2022 as compared to YTD 2021, while P&O sales improved
2.4% to $28.0 million during this
period.
Gross profit stood at $94.0
million, or 58.5% of sales, during YTD 2022, as compared to
$90.5 million, or 59.3% of sales, in
YTD 2021.
Net loss totaled $6.3 million, or
($0.15) per share, in YTD 2022, as
compared to net income of $4.7
million, or $0.11 per share,
in YTD 2021. Excluding the impact of government subsidies and
occupancy-related cost abatements, the net loss increased
$2.1 million year-over-year.
Adjusted EBITDA amounted to $3.4
million in the first nine months of 2022 compared to
$19.5 million in the corresponding
period in 2021. Excluding government subsidies and
occupancy-related cost abatements, Adjusted EBITDA declined
$4.0 million year-over-year.
FINANCIAL POSITION
At the end of Q3 2022, Roots had a
solid financial position with net debt of $58.7 million, down 21% from the end of Q3 2021.
As at October 29, 2022, the Company
also had unused borrowing capacity of $56.1
million available under its revolving credit facility. The
Company's leverage ratio, defined as total net debt to trailing
12-months Adjusted EBITDA, was 1.7 times at quarter-end.
NORMAL COURSE ISSUER BID RENEWAL
In a separate press
release issued today, the Company announced the renewal of its
Normal Course Issuer Bid ("NCIB") for its Common Shares through the
facilities of the Toronto Stock Exchange (or other alternative
Canadian trading systems) to repurchase for cancellation up to
2,119,667 Common Shares, representing approximately 10% of Roots
public float, during the 12-month period commencing December 16, 2022 and ending December 15, 2023.
Pursuant to its existing NCIB ending December 15, 2022, the Company has purchased to
date 581,743 Common Shares at a volume weighted average price per
share of $3.27 out of an authorized
total of 2,172,928 Common Shares.
ROOTS CARES
For nearly 50 years, Roots has been
committed to giving back to and partnering with communities in
need. With the Company's values of community, integrity,
freedom, and being genuine in mind, Roots is committed to embracing
individuality through respect, acceptance, representation, and
empowerment. The Company's philanthropic endeavours, now branded as
"Roots Cares", are focused on amplifying the values shared with
customers. Since February 2020, Roots
has donated approximately $3.1
million of cash and in-kind donations to various
organizations within the communities in which Roots operates.
CONFERENCE CALL AND WEBCAST INFORMATION
Roots will
hold a conference call to review its third quarter 2022 results on
December 9, 2022, at 8:00 a.m. ET. All interested parties can join the
call by dialing 416-764-8659 or 1-888-664-6392 and using conference
ID: 79507805. Please dial in 15 minutes prior to the call to secure
a line. The conference call will be archived for replay until
December 16, 2022, at midnight, and
can be accessed by dialing 416-764-8677 or 1-888-390-0541 and
entering the replay passcode: 507805#.
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 Consolidated Financial Statements and the Company's
Management's Discussion and Analysis of Financial Condition and
Results of Operations for the third quarter ended October 29, 2022, on the Company's investor
website at https://investors.roots.com and on SEDAR at
www.SEDAR.com.
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 International Financial
Reporting Standards as issued by the International Accounting
Standards Board ("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 (loss) 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. 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. For further information regarding
these non-IFRS measures, please refer to "Cautionary Note-Regarding
Non-IFRS Measures and Industry Metrics" in our management's
discussion and analysis for Q3 2022, which is incorporated by
reference herein and is available on SEDAR
at www.SEDAR.com or the Company's Investor Relations
website at https://investors.roots.com.
The table below provides a reconciliation of net loss to EBITDA
and Adjusted EBITDA for the periods presented:
CAD
$000s
|
Q3
2022
|
Q3
2021
|
YTD
2022
|
YTD
2021
|
Net income
(loss)
|
2,209
|
10,766
|
(6,287)
|
4,652
|
Adjust for the
impact of:
|
|
|
|
|
Interest expense
(a)
|
2,375
|
2,250
|
6,436
|
6,787
|
Income taxes expense
(recovery) (a)
|
1,014
|
3,969
|
(1,918)
|
1,904
|
Depreciation and
amortization (a)
|
7,310
|
7,446
|
21,688
|
22,603
|
EBITDA
|
12,908
|
24,431
|
19,919
|
35,946
|
Adjust for the
impact of:
|
|
|
|
|
SG&A: Rent expense
excluded from net income (loss) as a result ofIFRS 16
(a)
|
(5,729)
|
(5,780)
|
(17,405)
|
(17,736)
|
SG&A: Purchase
accounting adjustments (b)
|
(12)
|
26
|
(5)
|
66
|
SG&A: Stock option
expense (c)
|
97
|
265
|
409
|
633
|
SG&A: Changes in
key personnel (d)
|
–
|
56
|
(5)
|
237
|
SG&A: One-time
legal fees (e)
|
12
|
–
|
530
|
–
|
SG&A: Other
non-recurring items (f)
|
–
|
160
|
–
|
372
|
Adjusted
EBITDA
|
7,276
|
19,158
|
3,443
|
19,518
|
|
|
|
|
|
Notes:
|
|
|
|
(a)
|
The impact of IFRS 16 –
Leases accounting standard ("IFRS 16") in Q3 2022 and Q3
2021 was: (i) a decrease to SG&A expenses of $1,309 and $1,176,
respectively, which comprised the impact of depreciation on the
right-of-use ("ROU") assets, net of the exclusion of rent payments
from SG&A expenses, (ii) an increase in interest expense of
$1,186 and $1,314, respectively, arising from interest expense
recorded on the lease liabilities in the period, and (iii) a
deferred tax impact of $33 and $36, respectively, based on tax
attributes on the ROU assets and lease liabilities balances
recorded. The impact of IFRS 16 in YTD 2022 and YTD 2021 was: (i) a
decrease to SG&A expenses of $4,262 and $3,881, respectively,
which comprised the impact of depreciation on the ROU assets, net
of the exclusion of rent payments from SG&A expenses, (ii) an
increase in interest expense of $3,582 and $4,108, respectively,
arising from interest expense recorded on the lease liabilities in
the period, and (iii) a deferred tax impact of $180 and $60,
respectively, based on tax attributes on the ROU assets and lease
liabilities balances recorded.
|
(b)
|
As a result of
Searchlight Capital Partners assuming control of Roots in 2015 (the
"Acquisition"), we recognized an intangible asset for lease
arrangements in the amount of $6,310, which when excluding the
impacts of IFRS 16, is amortized, as a non-cash expense, over the
life of the leases and included in SG&A expenses.
|
(c)
|
Represents non-cash
share-based compensation expense in respect of our Legacy Equity
Incentive Plan, Legacy Employee Option Plan, and Omnibus Incentive
Plan.
|
(d)
|
Represents infrequent
expenses incurred in respect of the Company's efforts to recruit
for vacancies in key management positions and severance costs
associated with such employee separations. In YTD 2022, expense
recovery results from a reduced recruiting charge in comparison to
what had been previously accrued during the fourth quarter of
fiscal 2021.
|
(e)
|
In Q3 2022 and YTD
2022, this represents non-recurring legal costs incurred that are
outside the scope of normal operations.
|
(f)
|
In Q3 2021 and YTD
2021, this represents one-time closure costs incurred while
optimizing the footprint of one of our corporate retail stores as
well as start-up costs associated with the relaunch of the Roots
eCommerce website in China in the second quarter of fiscal
2021.
|
|
|
ABOUT ROOTS
Established in 1973, Roots is a global
lifestyle brand. Starting from a small cabin in northern
Canada, Roots has become a global
brand with over 100 corporate retail stores in Canada, two stores in the United States, and an eCommerce platform,
www.roots.com. We have more than 100 partner-operated stores in
Asia, and we also operate a
dedicated Roots-branded storefront on Tmall.com in China. We design, market, and sell a broad
selection of products in different departments, including women's
men's, children's, and gender-free apparel, leather goods,
footwear, and accessories. Our products are built with
uncompromising comfort, quality, and style that allows you to feel
at home with nature. We offer products designed to meet life's
everyday adventures and provide you with the versatility to live
your life to the fullest. We also wholesale through
business-to-business channels and license the brand to a select
group of licensees selling products to major retailers. Roots
Corporation is a Canadian corporation doing business as "Roots" and
"Roots Canada".
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
is 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.
SOURCE Roots Corporation