Ms. Meghan Roach reports

ROOTS REPORTS FIRST QUARTER 2023 RESULTS

Roots Corp. has released financial results for its first quarter ended April 29, 2023.

"Our Q1 2023 results aligned with our internal projections and reflect a challenging economic environment," indicated Meghan Roach, president and chief executive officer of Roots. "Considering our historical patterns, it is worth noting that the first quarter traditionally represents less than 15 per cent of our annual sales. Consequently, our results also include several of the strategic investments made in our business during the first half of the year that support our revenue-intensive second half.

"We observed notable strength across most of our apparel categories in the first quarter, particularly in dresses, skirts and activewear. While softness in demand for traditional fleece bottoms resulted in an overall year-over-year sales decline, our success in broadening our product range underscores the capacity of the brand to diversify and attract new customers. In Q1, we achieved our highest average unit revenue in the company's history, while maintaining gross margins above prepandemic levels."

"Despite the short-term sales and profitability headwinds, we remain confident in the long-term operating fundamentals of the business," said Leon Wu, chief financial officer at Roots. "The decline in gross margins were in line with our expectations, as we transition to sustainable materials, a strategic initiative that began in late 2022, and offered higher discounts on select seasonal inventory amidst the current competitive landscape. We continue to remain disciplined around promotions, with discount rates remaining significantly below prepandemic levels. We anticipate the gross margin declines to gradually moderate towards the latter half of the year.

"We have also made good progress towards right-sizing our inventory, aiming to achieve the right balance by the end of the second half of the year. By maintaining a robust balance sheet and ample liquidity, we remain well equipped to navigate the unpredictable macroeconomic conditions. Looking beyond the immediate challenges, we will continue to make prudent investments that generate sustainable growth and deliver long-term value to our shareholders."

First-quarter overview

Total sales decreased 3.7 per cent to $41.5-million in Q1 2023 from $43.1-million in the first quarter of fiscal 2022. Direct-to-consumer sales (corporate retail store and e-commerce sales) reached $35.4-million, down 5.3 per cent year over year. The year-over-year decrease in DTC sales was primarily driven by continued economic environment headwinds and a heightened promotional environment. Sales across most of the apparel categories and silhouettes generated positive year-over-year growth, but were not sufficient to offset the sales decline in select traditional fleece bottoms styles.

P&O sales (wholesale Roots-branded products, licensing to select manufacturing partners and the sale of certain custom products) amounted to $6.1-million in Q1 2023, compared with $5.7-million in Q1 2022. The 6.9-per-cent increase in sales was mainly due to higher sales from the company's international operating partner in Taiwan, increased royalties for the licensing of the Roots brand to select manufacturing partners, and a favourable foreign exchange impact on United States-dollar sales.

Gross profit reached $24.5-million in Q1 2023, compared with $26.2-million in Q1 2022, representing a year-over-year decline of 6.6 per cent. Gross margin was 59.0 per cent in Q1 2023, compared with 60.9 per cent in Q1 2022. The reduction in gross margin of 190 basis points is primarily due to higher product costs from the transition to sustainable materials, as well as heightened promotional activity, partially offset by lower freight premiums of 100 basis points. Gross margin was also affected by the unfavourable foreign exchange impact on U.S.-dollar purchases, offset by the release of a non-cash inventory provision.

SG&A (selling, general and administrative) expenses totalled $33.0-million in Q1 2023, compared with $31.3-million in Q1 2022. The 5.4-per-cent increase in SG&A expenses was mainly driven by higher store labour costs associated with longer operating hours, contractual increases in store rent costs, and higher corporate compensation expense.

Net loss totalled $8-million, or 19 cents per share, in Q1 2023, compared with a net loss of $5.3-million, or 13 cents per share, in Q1 2022.

Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) amounted to negative $5.8-million in Q1 2023, compared with negative $3.2-million in Q1 2022.

Financial position

Inventory was $50.4-million at the end of Q1 2023, compared with $39.2-million at the end of Q1 2022, representing an increase of $11.2-million, or 28.6 per cent. The year-over-year increase in inventory was primarily driven by $4.7-million of higher core inventory to be released for sale in the second half of 2023, under the company's pack-and-hold strategy, $2.9-million of higher product costs associated with the transition to sustainable materials, and an increase of $3.6-million from higher on-hand units, which was partially due to the earlier timing of inventory receipts.

As at April 29, 2023, Roots had a solid financial position with net debt of $41.0-million, up slightly from $39.4-million a year earlier. The company's leverage ratio, defined as total net debt to trailing 12-month adjusted EBITDA, was 1.7 times at the end of first quarter. Roots also had a total amount outstanding under its credit facilities of $56.5-million and had total liquidity of $74.0-million, including cash and borrowing capacity available under its revolving credit facility.

Normal course issuer bid

Under its normal course issuer bid program, Roots repurchased 461,812 shares for a total consideration of $1.4-million in Q1 2023. The NCIB allows the company to repurchase for cancellation up to 2,119,667 shares during the 12-month period ending Dec. 15, 2023. As of Q1 2023, 695,872 shares have been purchased under the current NCIB program.

Conference call and webcast information

Roots will hold a conference call to review its first quarter 2023 results on June 8, 2023, at 8 a.m. ET. All interested parties can join the call by dialling 416-764-8659 or 1-888-664-6392 and using conference ID 03827679. Please dial in 15 minutes prior to the call to secure a line. The conference call will be archived for replay until midnight on June 15, 2023, and can be accessed by dialling 416-764-8677 or 1-888-390-0541 and entering replay passcode 827679 followed by the pound key.

A live audio webcast of the conference call will be available on the company's website. 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.

About Roots Corp.

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 e-commerce platform. Roots has more than 100 partner-operated stores in Asia, and it also operates a dedicated Roots-branded storefront in China. Roots designs, markets and sells a broad selection of products in different departments, including women's, men's, children's and gender-free apparel, leather goods, footwear, and accessories. Roots' products are built with uncompromising comfort, quality and style, allowing you to feel At Home With Nature. Roots offers products designed to meet life's everyday adventures and provide you with the versatility to live your life to the fullest. Roots also wholesales through business-to-business channels and licenses the brand to a select group of licensees selling products to major retailers.

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