Mr. Jim Gabel reports
ROOTS REPORTS FISCAL 2019 SECOND QUARTER RESULTS AND PROVIDES UPDATE TO FISCAL 2019 TARGETS
Roots Corp. has released its financial results for its second quarter ended Aug. 3, 2019. Certain metrics, including those expressed on an adjusted or comparable basis, are non-IFRS (international financial reporting standards) measures.
Second quarter fiscal 2019 highlights:
Total sales of $61.7-million, up 2.5 per cent from $60.2-million in the second quarter of fiscal 2018:
- Direct-to-consumer (DTC) sales of $48.2-million, in line with $48.3-million in Q2 2018;
- Comparable sales decline of (2.9 per cent), on top of comparable sales growth of 1.1 per cent in Q2 2018;
- Gross margin of 50.3 per cent, compared with 55.1 per cent in Q2 2018:
Adjusted DTC gross margin of 56.7 per cent, compared with 60.7 per cent in Q2 2018;
- Selling, general and administrative expenses of $40.0-million, up 7.4 per cent from $37.2-million in Q2 2018;
- Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) loss of $4.4-million, compared with $32,000 in Q2 2018;
- Basic loss per share of 23 cents, compared with loss of 10 cents per share in Q2 2018, and adjusted net loss per share of 15 cents, compared with loss of six cents per share in Q2 2018;
Ended the quarter with 116 corporate-retail stores in Canada and eight in the United States;
Ended the quarter with 115 partner-operated stores in Taiwan, 34 in China and one in Hong Kong.
"Both men's and women's, our two largest product categories, were up year over year, driven by our increasing success with key seasonal products; we delivered another quarter of better than expected e-commerce growth; and we completed the move from our legacy distribution centre," said Jim Gabel, president and chief executive officer of Roots. "However, our Q2 financial results fell below our expectations, primarily as a result of negative store traffic and a delay in flow of product to stores as we transitioned to our new DC. We are pleased with the improving trends we have seen moving into Q3. We entered the quarter with a more seasonally appropriate offering and consumers are responding well to our back-to-school assortment. We are also seeing an improvement in the flow of goods from our DC, but we still have more work to do in advance of our peak holiday selling periods."
Mr. Gabel added: "We remain confident in our ability to deliver year-over-year sales growth in fiscal 2019. The power of the Roots brand remains strong. We are a highly sought-after collaborator, most recently releasing a limited-edition Raptors NBA Championship jacket and launching a second capsule collection with multiplatinum singer/songwriter, Shawn Mendes. However, with lower than expected DTC sales in the first half of the year and the impact of macroeconomic and geopolitical headwinds on our Asia business, we expect our year-end sales results to be at the low end, or fall slightly below our previously disclosed target range. In addition, with the softness in our Asia business, lower first half DTC gross margin, and incremental costs to complete the transition to our new DC, we now expect our adjusted EBITDA and adjusted net income to fall below our previously disclosed target range."
Summary of second quarter fiscal 2019 financial results
Total second quarter 2019 sales increased 2.5 per cent to $61.7-million, from $60.2-million in Q2 2018, reflecting flat DTC sales (corporate retail store and e-commerce sales) and a 13.6-per-cent increase in 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).
Second quarter 2019 DTC sales were $48.2-million, in line with $48.3-million in Q2 2018. While the company delivered growth in its two largest product categories, men's and women's, Roots recorded a comparable sales decline of (2.9 per cent) for Q2 2019. This was primarily due to a year-over-year decrease in store traffic and a delay in the flow of product to stores as the company transitioned to its new distribution centre, partially offset by better than expected e-commerce growth and benefits from store relocations and renovations (the relocation and expansion of six stores, as well as the renovation of four stores since Q2 2018). Second quarter 2019 DTC sales also include the addition of two net new corporate-retail stores since Q2 2018.
Partners and other sales for Q2 2019 were $13.5-million, up 13.6 per cent from $11.9-million in Q2 2018, primarily as a result of the early delivery of certain orders to the company's operating partner in Asia that were initially planned for Q3 2019.
Total gross profit for Q2 2019 was $31.0-million, a 6.4-per-cent decrease from $33.1-million in Q2 2018.
Second quarter 2019 DTC gross profit was $27.1-million, down 7.6 per cent from $29.3-million in Q2 2018. Second quarter 2019 adjusted DTC gross margin was 56.7 per cent, down 400 basis points from a Q2 2018 adjusted DTC gross margin of 60.7 per cent. The year-over-year adjusted DTC gross margin decline primarily reflects deeper discounting in Q2 2019 to improve the company's overall inventory position in connection with the move to its new integrated distribution centre.
Second quarter 2019 gross profit in the partners and other segment of $3.9-million was essentially flat with Q2 2018.
Selling, general and administrative expenses (SG&A)
Selling, general and administrative expenses for Q2 2019 were $40.0-million, up 7.4 per cent from $37.2-million in Q2 2018. The year-over-year increase was predominantly driven by incremental costs to support a larger retail store footprint, costs resulting from higher omnichannel sales, higher store wages related to increased in-store fulfilment of on-line orders, as well as one-time distribution centre transition costs, including continued use of a third party on-line order distribution facility.
Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization), net loss and adjusted net loss
Adjusted EBITDA (excluding the impact of IFRS 16) for Q2 2019 was a loss of $4.4-million, down from $32,000 in Q2 2018. Second quarter 2019 net loss was $9.7-million, or 23-cent basic loss per share, compared with a loss of $4.1-million, or 10-cent basic loss per share, in Q2 2018. In the quarter, the company recorded an income tax recovery of $3.2-million, compared with a recovery of $1.2-million in Q2 2018, with an effective income tax recovery rate of 25.1 per cent, up from 22.9 per cent in Q2 2018. Second quarter 2019 adjusted net loss (excluding the impact of IFRS 16) was $6.2-million, or 15 cents per share, compared with a loss of $2.4-million, or six cents per share, in Q2 2018.
Q2 2019 IFRS 16 impact
In Q1 2019, Roots commenced reporting lease obligations according to IFRS 16, with leases reflected on the company's balance sheet and rent expense being replaced with interest and depreciation on the company's income statement. The Q2 2019 IFRS 16 impact to SG&A was a decrease of $900,000; the impact to interest expense was an increase of $2.3-million; and the increase to deferred tax recovery was $400,000, resulting in a $1.0-million increase in net loss. Both adjusted EBITDA and adjusted net loss for Q2 2019 exclude the impact of IFRS 16. Through the remainder of fiscal 2019, Roots will continue to provide adjusted results to accurately compare fiscal 2019 quarterly and annual performance with the same periods in fiscal 2018.
Roots remains confident in its ability to deliver year-over-year sales growth for fiscal 2019. Trends have improved into the third quarter, e-commerce continues to demonstrate strong growth, and the positive consumer response to the company's back-to-school assortment is believed to be a good indicator for how new product introductions will be received in the second half of the fiscal year. In addition, the company plans to complete another renovation and relocation and add two new corporate-retail stores by year-end.
The company realized lower than expected DTC sales in the first half of the year. In addition, with the recent macroeconomic and geopolitical headwinds the company's Asia business is facing, Roots now expects to see year-over-year pressure on partners and other sales. As a result, Roots now expects fiscal 2019 sales to be at the low end, or fall slightly below, the company's previously disclosed target range of $358-million to $375-million.
Adjusted EBITDA and adjusted net income
In addition to factors affecting DTC sales and gross margin for fiscal 2019, Roots expects increased SG&A expenses, largely due to costs resulting from higher omnichannel sales, higher store wages related to increased in-store fulfilment of on-line orders, continuing incremental distribution centre transition costs including continued use of a third party on-line order distribution facility, as well as a negative impact from new U.S. tariffs. As a result, Roots expects fiscal 2019 adjusted EBITDA and adjusted net income results to fall below the company's previously disclosed target ranges of between $46-million and $50-million and $20-million and $24-million, respectively. The company estimates that the softness in its Asia business and the continuing incremental costs to complete the transition to its new distribution centre will have a negative impact on adjusted EBITDA of approximately $5-million to $6-million.
Conference call and webcast information
Roots will hold a conference call to discuss the company's fiscal 2019 second quarter results on Sept. 11, 2019, at 8 a.m. Eastern Time. All interested parties can join the call by dialling 647-427-7450 or 1-888-231-8191 and using conference ID: 2048705. Please dial in 15 minutes prior to the call to secure a line. The conference call will be archived for replay until Sept. 18, 2019, at midnight and can be accessed by dialling 416-849-0833 or 1-855-859-2056 and entering replay pass code: 2048705.
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.
See Roots interim consolidated financial statements and the company's management's discussion and analysis of financial condition and results of operations for the second quarter ended Aug. 3, 2019, on the company's investor website and on SEDAR.
About Roots Corp.
Established in 1973, Roots is a premium outdoor lifestyle brand. It unites the best of cabin and city through unmistakable style built with uncompromising comfort and quality. It offers a broad range of products that embody a comfortable cabin-meets-city style, including: women's and men's apparel, leather goods, footwear, accessories, and kids, toddler and baby apparel. As of May 4, 2019, it had 114 corporate retail stores in Canada, seven corporate retail stores in the United States, 115 partner-operated stores in Taiwan, 39 partner-operated stores in China, one partner-operated store in Hong Kong and a global e-commerce platform.
INTERIM CONDENSED CONSOLIDATED STATEMENT OF NET INCOME (LOSS)
(in thousands of dollars, except per-share amounts)
Aug. 3, 2019 Aug. 4, 2018 Aug. 3, 2019 Aug. 4, 2018
(13 weeks) (13 weeks) (26 weeks) (26 weeks)
Sales $61,683 $60,197 $116,035 $111,226
Cost of goods sold 30,674 27,052 56,515 49,011
Gross profit 31,009 33,145 59,520 62,215
Selling, general and
administrative expenses 40,002 37,245 78,166 72,549
(Loss) before interest expense and income
taxes recovery (8,993) (4,100) (18,646) (10,334)
Interest expense 3,887 1,191 7,446 2,343
(Loss) before income taxes (12,880) (5,291) (26,092) (12,677)
Income taxes recovery (loss) (3,227) (1,210) (6,671) (3,006)
Net (loss) (9,653) (4,081) (19,421) (9,671)
Basic and diluted (loss) per share (0.23) (0.10) (0.46) (0.23)
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