Roots Corporation (ticker: ROOT), a prominent lifestyle brand, revealed mixed financial results for Q1 2024 in their earnings call. The company reported a decrease in sales to $37.5 million from $41.5 million in the same quarter the previous year.
Despite this, Roots Corporation saw an improvement in direct-to-consumer gross margins and a reduction in SG&A expenses. The company is also making strides in strategic initiatives, including paid media investments and partnerships, and is experiencing growth in sales in the U.S. and Asia.
However, adjusted EBITDA losses widened to $8 million from a loss of $5.8 million in Q1 2023.
Key Takeaways
- Q1 2024 sales fell to $37.5 million from $41.5 million year-over-year.
- Direct-to-consumer sales dropped to $31.4 million from $35.4 million in Q1 2023.
- Gross margins in direct-to-consumer sales improved by 80 basis points.
- SG&A expenses were reduced by 3.1% compared to the previous year.
- Adjusted EBITDA losses increased to $8 million from $5.8 million in Q1 2023.
- Strategic initiatives are driving positive traffic and brand momentum.
- Sales in the U.S. and Asia regions are growing.
- Inventory challenges were noted, especially in the Cooper Fleece category.
- The company is investing in data analytics and AI to optimize inventory and customer engagement.
Company Outlook
- Roots Corporation is focused on driving growth and international expansion despite a cautious macro environment.
- The company plans to replenish inventory shortages before Q3, aiming for an optimal inventory level of $4-5 million.
Bearish Highlights
- The decline in sales is partly attributed to store closures and a cautious consumer discretionary spending environment.
- There was a specific inventory shortfall in the Cooper Fleece category, which impacted sales negatively.
Bullish Highlights
- Activewear, One, and Cloud categories experienced double-digit growth.
- Strategic initiatives are contributing to improved brand momentum.
- The company is seeing an increase in omni-channel traffic.
Misses
- The company missed the previous year's sales figures in Q1 2024.
- Adjusted EBITDA losses widened compared to Q1 2023.
Q&A Highlights
- The company discussed the benefits of their improved data analytics capabilities, including AI personalization and inventory optimization.
- Roots Corporation emphasized the potential for increased sales with the availability of more inventory for markdowns.
- Investment in data analytics is expected to enhance sales, profitability, and customer service.
Roots Corporation is navigating a challenging retail landscape with strategic investments in technology and international markets. While facing inventory challenges and a cautious spending environment, the company's focus on data-driven solutions and operational efficiency presents a forward-looking strategy aimed at long-term growth and profitability.
Full transcript - None (RROTF) Q1 2024:
Operator: Good morning, ladies and gentlemen, and welcome to the Roots Corporation Q1, 2024 Analyst Conference Call. At this time all lines are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Monday, June 10, 2024. I would now like to turn the conference over to Meghan Roach, President and CEO. Please go ahead.
Meghan Roach: Good morning everyone. Thank you for joining our Q1 2024 earnings call. As a reminder, the first half of the year remains seasonally small for Roots financially, with Q1 typically representing approximately 15% of annual sales. First quarter sales came in at $37.5 million compared to $41.5 million last year, with direct-to-consumer sales of $31.4 million relative to $35.4 million in Q1 2023. Direct-to-consumer gross margins grew 80 basis points and strong cost management drove a decline in SG&A of 3.1% year-over-year. Adjusted EBITDA losses amounted to $8 million in Q1, 2024 compared to a loss of $5.8 million in Q1, 2023. Notably, free cash flow improved by 1.7% year-over-year and we reduced net debt by 22.7% compared to this time last year. Despite a small financial impact, we made significant progress across several important strategic initiatives this quarter, which I will highlight before turning the call to Leon to review our financial performance in more detail. We saw positive traffic on an omni-channel basis, driven by the continued performance of our paid media investments, SEO enhancements and several dynamic partnerships in Q1. We maintained our positive brand momentum and customer engagements by improving our creative assets, partnerships and events. In the first quarter we marked Barbie's 65th anniversary on International Women's Day with a special collection and an event in one of our Toronto flagship stores. Our second collaboration with Barbie, it generated strong engagement with new and existing customers. We raised awareness of our sustainability efforts significantly through a focus campaign showcasing the preferred fibers and materials used in our products such as organic cotton. As we shared last quarter, over 90% of our products are now made with these sustainable materials. We also recently completed a renovation of one of our flagship stores in the Toronto Eaton (NYSE:ETN) Centre. With the renovation, we now have a dedicated location for our Conquest, now back [ph] to our heritage and association with nature throughout the store, a refreshed facade, digital screens and a merchandising layout to better showcase our collection. At the end of the quarter we also introduced our brand ambassador program. The main objective of the program is to increase brand visibility through genuine and relatable representatives who reflect our brand values, build a stronger connection with our target audience by using the personal touch of our ambassadors, and to drive increased consideration of Roots across several key categories. The initial engagement with our ambassadors has been excellent and we look forward to strengthening these partnerships in the third and fourth quarter. From a product perspective, several categories such as Activewear, One and Cloud had double-digit growth in the quarter. However we faced some inventory challenges in our Cooper Fleece category, which performed very well in Q4, but left us with insufficient supply to satisfy demand in this quarter. Leon will provide more details on this later in our discussion. Over the last few years we've also been working on enhancing the infrastructure at Roots and investing in the technology that will enable our value creation initiatives from an operational standpoint. In the first quarter we debuted our Data warehouse and our first of several AI initiatives in 2024 focused on inventory optimization and allocation. Although it is still in its initial stages, our AI based inventory allocation of systems should optimize inventory distribution at stores and account for local variations in demand as it learns over time. In our next phase of AI implementation later this year, our focus is to enable more personalized and relevant content and recommendations to our customers online. From an international perspective our performance in the U.S. and Asia also remains strong with both regions achieving growth in this first quarter. As we reflect on the quarter and the remainder of the year, we are pleased with the progress our team has made towards our strategic plan and initiatives. We continue to be cautious around the broader macro environment with consumer discretionary spending remaining under pressure, despite the recent reduction in interest rates. Our focus remains on driving growth to enhance mature product portfolio, increase marketing efforts, improve engagement with consumers and longer-term international expansion. I will now turn the call over to Leon Wu, our Chief Financial Officer.
Leon Wu: Thanks Meghan and good morning everyone. Total sales were $37.5 million in Q1, 2024, as compared to $41.5 million in Q1, 2023. The decline in year-over-year sales were driven by the direct-to-consumer segment, while sales in our partners and others segment were flat year-over-year. DTC sales were $31.4 million, down 11% relative to $35.4 million a year ago. The decline in sales were entirely driven by lower discount sales, as our inventory position was much cleaner than a year ago. Growth in full price sales partially offset the decline in markdown sales. However, this growth was negatively impacted by the stronger sell-throughs of our Cooper Fleece collection during Q4, 2023, which resulted in lower inventory of our core styles and missed full price sales in Q1. During the quarter, we also temporarily closed two of our larger stores as they underwent renovations to improve the customer experience with our brand. This accounted for $0.6 million of the year-over-year DTC sales decline during the renovation period, and we have since seen strong year-over-year growth from these two stores since reopening. Partners and other sales were $6.1 million, largely flat to last year. These segments drove positive wholesale sales to Asia, to both our Taiwan operating partner and to our China Tmall platform. This was offset by lower royalties from licensing our brand to select manufacturing partners. Total gross profit was $22.1 million in Q1, 2024, down 9.7% compared to $24.5 million last year. Total gross profit margin was 59% in both Q1, 2024 and 2023. The decrease in gross profit was driven by lower DTC sales, partially offset by margin expansion in that segment. As Meghan mentioned, we are very pleased with the progress made on improving our product margins. DTC gross margin was 62.1% in the quarter, 80 basis points higher than 61.3% in Q1, 2023. The increase in DTC gross margin was as a result of over 250 basis points improvement in our product margin, driven by improved product costing and lower discount sales. This margin improvement was partially offset by an unfavorable foreign exchange impact on U.S. dollar purchases and a lower year-over-year accounting inventory provision taken at the prior year end, which would have benefited at Q1. SG&A expenses were $32 million in Q1, 2024, down 3.1% from $33 million last year. The reduction in SG&A expenses were driven by savings from ongoing cost management initiatives and lower variable selling costs, partially offset by higher store personnel costs as a result of legislative minimum wage increases in 2023. In Q1, 2024, net loss was $8.9 million or $0.22 per share compared to a net loss of $8 million or $0.19 per share in the prior year. Adjusted EBITDA was a loss of $8 million compared to a loss of $5.8 million in Q1, 2023. We continue to make good progress in strengthening our balance sheet and cash flow. At the end of Q1, our inventory was $35.4 million down almost 30% as compared to $50.4 million at the end of Q1, 2023. The year-over-year decrease in inventory was primarily driven by the strong sell-through of our pack-and-hold inventory over last year. In addition, stronger than expected Q4 sell-throughs of our core Cooper Fleece styles drove an amplified year-over-year inventory decline of over 50% in this collection, which led to missed full price sales this quarter. We expect to replenish these styles ahead of the second half of our fiscal year. Notwithstanding the replenishment opportunities, we are pleased with a lower inventory balance achieved. Through continuous rebalancing of our assortment and AI powered improvements to our inventory allocation and replenishment capabilities, we expect that sales growth can be attained through improved inventory productivity, without having to refer back to the historical inventory levels. Our free cash flow was $14.6 million outflow in Q1, 2024, improving from $14.9 million in Q1, 2023. The improved free cash flow reflects our ongoing efforts to manage our working capital components. Net debt was $31.7 million at the end of Q1, 2024, down 23% as compared to $41 million at the end of Q1, 2023. Our net leverage ratio measured as net debt over a trailing 12-month adjusted EBITDA was just under 1.8x at the end of Q1, 2024. In closing, we remain optimistic about the long-term profitable growth opportunities for Roots. In addition to the benefits from the execution of our strategic initiatives that Meghan outlined, we expect that product gross margin tailwinds will continue through the rest of 2024 as a result of product cost reductions obtained through improvements made to our sourcing strategy. Furthermore we anticipate that the replenishment of our core collections by Q3 will support full price sales growth ahead of our two larger selling quarters, which historically represented over 70% of our total sales. This concludes our prepared remarks for Q1, 2024. With that operator, please open the line for questions.
Meghan Roach: Operator just checking in that you can hear us. Sorry everyone, we've had a few challenges this morning with the phones. Operator? Thank you for your patience everyone. We're just figuring out a few meeting issues on the operator side. Give us a few minutes.
Operator: Apologies for the technical difficulties. I am now back. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Brian Morrison from TD (TSX:TD) Cowen. Go ahead please.
Brian Morrison: Thank you. Good morning, Meghan. Good morning, Leon.
Meghan Roach: Good morning.
Leon Wu: Good morning, Brian.
Brian Morrison: Question for either of you actually. In terms of the comp in the quarter, I'm wondering if you might be able to break down to the best of your ability, what you think was caused by trading of consumer discretionary spend and what was caused by your inventory sell-through from Q4. And Leon, maybe just confirm the store closures that you referred to. They are not in the comp.
Meghan Roach: Yeah Brian, why don't I jump in and then Leon can comment on this also. So the store closures are not in the comp, which is why you see the difference between the comp and the total decline in sales and the comp is obviously better. A couple of things I'd highlight. So it's still early on the quarter in Q2, but we have seen improvements in trends with the renovated stores reopening and also with newness [ph] coming in. We have continued to be see impact by the Cooper Fleece inventory, last of it in comparison to Q4, but we do expect to have replenished that core fleet before the start of our third quarter. And then I would say generally, you know we've saw an omni-channel increase in traffic and we have doubled the growth in Active, One and Cloud from the Q1 perspective. So we are seeing and we did see an improvement in trends in the quarter as we got closer to April, with the stores reopening and just the newness coming in from a product perspective also to offset the lack of Cooper Fleece. So in terms of how much is it, discretionary spending versus the broader inventory, I mean from our perspective it's difficult to kind of pull those out entirely. And we noticed in the quarter, we did see a decline in markdown sales, so obviously the consumer discretionary spending will be more pressured. If we had more inventory to put on markdown, obviously we think that could have potentially risen sales a bit more. So we do think there is an impact from a macro perspective, but part of it and the biggest part we think is really the Cooper Fleece inventory and Alaska House [ph].
A - Leon Wu: Yeah, and I’ll just echo you Meghan. So the two stores are not included in cost.
Brian Morrison: Okay, and maybe just take that one step further Meghan. In terms of what you are seeing at the consumer level with respect to traffic and basket and conversion, maybe just elaborate on those drivers please.
Meghan Roach: Yeah. I mean I say from a returning customers perspective, I'd break it in two pieces. So we are seeing new customer acquisition and that's positive from our perspective. It's great to see the customers are attracted to the products we're showing, the new campaigns we have and just kind of our overall increase in engagement. Our returning customers, what we are seeing there is that when they are coming and shopping with us, which you know we're seeing some great frequency of that, the overall basket sizes are a little bit lower. Now, from our perspective, that's really again driven by the fact that Cooper Fleece is one of our core product categories and again there's no such inventory there in the first quarter and into the second quarter as we would like. But we are seeing some great performance as I mentioned again with Active, with One and with Cloud and so it's predominantly a conversion driven for us as opposed to traffic driven at this point.
Brian Morrison: Okay. And Leon, maybe you can just elaborate, the investment in working capital maybe dollar terms or what you think is required in order to get yourself back to – I realize it's lower than previous, but what is the optimal level in terms of how much working capital will be required. And was the message that you tried to convey on the call there, is that you expect that this is going to drive year-over-year sales growth as we get to the back half of the year?
Leon Wu: Yeah Brian, it's a good question I'll take it as it regards to inventory, because that's our largest working capital component. So when we think about inventory, the message I wanted to do emphasize is that we aren't looking to get back to prior levels of high-end inventory, and when we call out the inventory shortages, it's really in very specific pockets, namely being Cooper Fleece. So when I think about our inventory, we are down from $50 million down to about $35 million. We do want to get it back up. I would say probably $4 million to $5 million would have been the ideal point, but again it isn't going back to the historical levels. And as we talked about in our recording, we are looking to receive a large component of the replenishment ahead of Q3, which will help us go into the peak of selling period.
Meghan Roach: And maybe if I can just add on here Brian, going back to our fourth quarter, we did see really good performance in Cooper Fleece in the fourth quarter, and just from a timing and inventory purchasing perspective, what we had done is because we saw such great performance in the fourth quarter, we pulled forward a portion of our Q1 inventory into the fourth quarter to sell it and we just couldn't replenish that Q1 inventory fast enough, you know to be able to take advantage of the demand in the first quarter.
Brian Morrison: Understood. Meghan maybe last question. You talked about your improvement in data analytics capabilities in the omnichannel. What are the benefits from this? I mean it sounds like AI personalization, it sounds like inventory optimization, but what are some of the key benefits you expect from your improved capabilities?
Meghan Roach: Yeah, I think there's quite a few actually. So I'd say from the inventory perspective, it goes everywhere from you know reducing amount of dormant styles within the different stores, because obviously the AI platform is enabling us to make sure that we're moving inventory around between the stores or in fact utilizing it. We also as an example right now, our stores, you go into our store and you don't find an item in our store, you're able to order that online and having it shipped to you. So we're actually now taking into consideration in this new platform, the items that are ordered online in stores, to make sure that those stores in the future fulfill those items. So it's really a wide variety of things from an inventory perspective, so everything around replenishment allocations and then from the future perspective, helping us think about our order cadence in terms of what we should be ordering upfront to make sure we maximize sales. So it should theoretically improve inventory terms over time. And then from the broader AI perspective, I think the data warehouse investment was obviously quite key. That should really help us continue to have that one view of the customer, which is really important to improving our engagement with them on a go forward basis. It also improves overarching the underlying ability for us to drive analytics from the company perspective, which is really important. And then as we go forward into the year, we think about other AI platforms. Obviously you know the investments as we mentioned on the personalization from an online perspective is key, and that should impact it from an email perspective, from a search perspective online, you know the carousels of the products that you see. So pretty comprehensive again there in terms of the positive benefits we anticipate. And then on the go forward from that is thinking about how do you drive further engagement from a customer service perspective to and through different AI platforms that are present. So you know really when we looked at where we could make applications of AI our focus as I think I've mentioned in some previous calls, was around identifying areas we thought we saw value creation drivers in the business and then going back and thinking about how to invest in those places from an AI perspective to really drive growth and improvements from a sales perspective and a profitability perspective over time.
Brian Morrison: Okay, that's all for me thanks very much and good luck.
Meghan Roach: Thank you.
Operator: Thank you. There seems to be no further questions at this time. I'd now like to turn the call back over to Ms. Roach for final closing comments.
Meghan Roach: Thank you everyone for joining us for our Q1 2024 Earnings Call. We hope you all have a great summer and we look forward to seeing you in the fall.
Operator: Thank you, ma'am. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.
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