Ms. Meghan Roach reports

ROOTS REPORTS SECOND QUARTER 2023 RESULTS

Roots Corp. has released financial results for its second quarter ended July 29, 2023 (Q2 2023). All financial results are reported in Canadian dollars unless otherwise stated. Certain metrics, including those expressed on an adjusted basis, are non-IFRS (international financial reporting standards) measures.

"We are pleased with how our teams have performed and happy with the performance of our major new product launches despite the tough economic conditions. Our Beaver Canoe, Active and One collections showed strong growth within the quarter," commented Meghan Roach, president and chief executive officer of Roots.

"Our 50th anniversary celebrations launched mid-August, and we will continue the excitement throughout the next 12 months. Our customers will see a curated assortment of limited-edition products alongside capsule collections, collaborations and the relaunch of our renowned negative heel shoe. Our website's new editorial page showcases an engaging collection of customer stories of their experiences with Roots through the decades and, in September, we will launch a 50th anniversary commemorative print magazine. The initial reception of our anniversary launch has been positive," Ms. Roach added.

"We have made substantial progress towards improving our inventory position, which increased 2 per cent year-over-year compared to 29 per cent at the end of Q1 2023," said Leon Wu, chief financial officer of Roots. "Despite the competitive promotional environment, we have remained disciplined on our discounting while executing our inventory management strategies to minimize the impact on gross margin. By leveraging our pack-and-hold collections and tightening orders, we remain on track to rightsize inventory by the end of the year."

"Our robust balance sheet and ample liquidity also provides us with the financial resources to support our ongoing operations, future growth initiatives and capital management strategies. We continue to believe in the long-term fundamentals of the business and the value of our brand's distinctive positioning within the marketplace. Accordingly, we completed our largest share repurchases since implementing our NCIB program nearly two years ago, buying back more than 873,000 shares in Q2 2023," Mr. Wu added.

Second quarter overview

Total sales increased 3.4 per cent to $49.4-million in Q2 2023 from $47.8-million in the second quarter of fiscal 2022 (Q2 2022). DTC (direct-to-consumer) sales (corporate retail store and e-commerce sales) reached $37.1-million, down 3.5 per cent year-over-year. The year-over-year decrease in DTC sales was primarily driven by continued challenging economic conditions and the competitive promotional environment. Sales in Roots' emerging apparel collections delivered strong year-over-year growth, including a 50-per-cent increase in sales of its Active Collection. However, these increases were not sufficient to offset the continuing softness in demand for fleece bottoms, which represents a larger portion of DTC sales.

P&O (partners and other) sales (wholesale Roots branded products, licensing to select manufacturing partners and the sale of certain custom products) amounted to $12.3-million in Q2 2023 compared with $9.3-million in Q2 2022. The 31.7-per-cent increase in sales was driven by higher sales to the company's international operating partner in Taiwan, including earlier delivery of $2.6-million of orders, in addition to volume increases. The sales increase was partially offset by lower royalties for the licensing of the Roots brand to select manufacturing partners.

Gross profit reached $27.4-million in Q2 2023 compared with $28.3-million in Q2 2022, representing a year-over-year decline of 3.2 per cent. Gross margin was 55.5 per cent in Q2 2023 compared with 59.3 per cent in Q2 2022. The overall reduction in gross margin of 380 bps (basis points) is primarily due to a higher mix of lower-margin P&O sales in the quarter. DTC gross margin was 62.7 per cent in Q2 2023, down 130 bps from 64 per cent in Q2 2022 due to higher product costs from the transition to sustainable materials and increased sales mix of discounted products, partially offset by lower freight costs, including 40 bps from reduced use of air freight. DTC gross margin was also affected by unfavourable foreign exchange impact on U.S.-dollar purchases.

SG&A (selling, general and administrative) expenses totalled $32.3-million in Q2 2023 compared with $30.6-million in Q2 2022. The 5.6-per-cent increase in SG&A expenses was mainly driven by higher store labour costs, contractual increases in store rent costs and higher corporate compensation expense.

Net income (loss) totalled ($5.3-million), or (13 cents) per share, in Q2 2023, as compared with a net income (loss) of ($3.2-million), or (eight cents) per share, in Q2 2022.

Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) amounted to ($3-million) in Q2 2023 as compared with ($600,000) in Q2 2022.

Year-to-date results

For the first six months of fiscal 2023, total sales amounted to $90.9-million, representing flat sales compared with the first six months of fiscal 2022. DTC sales decreased 4.4 per cent to $72.5-million, while P&O sales increased by 22.3 per cent to $18.4-million. Gross profit stood at $51.9-million, or 57.1 per cent of sales, down from $54.6-million, or 60 per cent of sales, last year.

Net income (loss) was ($13.3-million), or (32 cents) per share, compared with ($8.5-million), or (20 cents) per share, last year.

Adjusted EBITDA totalled ($8.8-million) in the first half of 2023 compared with ($3.8-million) in the corresponding period in 2022.

Financial position

Inventory was $55.9-million at the end of Q2 2023, as compared with $54.8-million at the end of Q2 2022, representing an increase of $1.1-million, or 2 per cent. The year-over-year increase in inventory was primarily driven by $3.9-million of higher core inventory to be released for sale in the second half of 2023 under Roots' pack-and-hold strategy, $1.2-million of higher product costs associated with its transition to sustainable materials, and an increase of $2.6-million from higher on-hand units, which was partially driven by earlier timing of inventory receipts, offset by $6.6-million of lower in-transit units as the company strategically managed its inventory buys for the second half of the year.

As at July 29, 2023, Roots had a solid financial position with net debt of $50.9-million, largely flat from $50.2-million a year earlier. The company's leverage ratio, defined as total net debt to trailing 12-month adjusted EBITDA, was 2.3 times at the end of second quarter. Roots also had a total amount outstanding under its credit facilities of $57.8-million and had total liquidity of $61.1-million, including cash and borrowing capacity available under its revolving credit facility.

Normal course issuer bid

Under its normal course issuer bid (NCIB) program, Roots repurchased 873,806 common shares for a total consideration of $2.7-million in Q2 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. At the end of Q2 2023, 1.6 million shares had been purchased under the current NCIB program.

Conference call and webcast information

Roots will hold a conference call to review its second quarter 2023 results on Sept. 12, 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 39375093. Please dial in 15 minutes prior to the call to secure a line. The conference call will be archived for replay until Sept. 19, 2023, at midnight, and can be accessed by dialling 416-764-8677 or 1-888-390-0541 and entering the replay passcode 375093 followed by the pound key.

A live audio webcast of the conference call will be available on the events and presentations section of the company's investor 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 on Tmall.com 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. The company's products are built with uncompromising comfort, quality and style that allow 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. It also wholesales through business-to-business channels and licenses the brand to a select group of licensees selling products to major retailers. Roots is a Canadian corporation doing business as Roots and Roots Canada.

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