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.

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

Investor Relations, Kristen Davies, [email protected], 416-781-3574 Ext. 4116; Public Relations, Elyse Goody, [email protected], 416-781-3574 Ext. 4332

Related Links

http://www.roots.com