Roots Corporation

Thank you, operator. Good morning, everyone, and thank you for joining us.

Meghan Roach, our Chief Executive Officer, will discuss our fiscal 2021 first quarter operational performance, as well as our strategic outlook for the fiscal year. Then, she'll turn the call over to Mona Kennedy, our Chief Financial Officer, who will discuss our financials in greater detail.

After that, we will open up the call to questions. Megan?

Thank you, Kristen. Good morning, everyone, and thank you for joining us.

Over the past five quarters, we've navigated unprecedented disruption in our industry as a result of COVID-19. However, by remaining focused on what we can control, we’ve significantly strengthened the fundamentals of the business, establishing a solid base on which to build long-term profitable growth.

Our first quarter results highlight the continuous segments of our customers for the brand and enthusiast responses to new price initiatives, and positive deltas of [indiscernible] pockets. We also highlighted the continued strength in our omni-channel capabilities, as customers take advantage of our multi-channel shopping experience, and our success in driving operational and cost efficiencies.

In terms of gross margin [ph] specifically, we generated improvements year-over-year, as well as significant progress relative to Q1, 2019. During the quarter, we continue to leverage our digital capabilities, our single pool inventory at our distribution center and our store fleet to successfully serve our customers through omni-channel lens.

eCommerce increased approximately 50% year-over-year, helping to offset declines caused by store closures. As we have seen in previous periods where our stores were open, our customers were also shopping with high intent to purchase, which results in store conversions continuing to outperform prior years.

From a product perspective, we generated excitement with new and existing customers, through a series of partnerships and collaborations, including Révolutionnaire, Emma Knight, and Avengers STATION. We also partnered our [indiscernible] and weekend design limited edition war jackets during the quarter that created significant brand hype.

In many cases, these products sold out within days of launching. Collaborations and partnerships will continue to play an important role in the business going forward.

As highlighted in previous quarters, these relationships enable us to seek new customers to test new categories, and even within our core products and create excitement amongst our loyal customer base. While customers love our collaborations, our heritage pieces also played a significant role in driving our business in the quarter.

We continue to see many of our core products in the top sellers, and we released the new sweater collection, [indiscernible] incredibly positive customer response. The collection we launched of our [indiscernible] logo in the company’s archives, and iconic colors and sold out.

We also saw an opportunity to attract new customers and give existing customers a reason to buy newer items by playing with color decisions. For example we offer seven new colors in our brand bags and the response is a great success.

It's a good reminder that as a brand and we've been around for almost 50 years, we have deep archives of incredible products. We see significant opportunity to continue to innovate within our existing products.

And as we saw in the quarter, even small things could prove to be very impactful. I'm now going to discuss strategy.

We also continue to test new products, particularly those that can be made at other factories. In 2020, we demonstrated our ability to successfully expand beyond our many leather product by producing scrubs and then fabric masks in our factory.

In Q1, 2021, we tested the premium fleece collection with our first ever limited-edition drop at Kansas City, embroidered at our leather factory in Toronto. Each sweatshirts represented three and a half hours of artistry, more than 154,000 stitches in nine sets of hands and 22 colors of thread.

While with the small product line we saw thousands sold in a single weekend at a price more than double that of our sweatshirts on the site. Turning briefly to our international business, Taiwan showing signs of recovery, although we continue to expect volatility as they worked through the impacts of multi-waves of COVID-19.

China is also progressing in the right direction for us, and we continue to believe in the long-term growth potential in the United States. In both the United States and China, we also continue to believe the business strategy is the most appropriate for us in the near-term.

At this stage, in the majority of our dress and apparel stores are in Canada, a market that remained significantly challenged by the impacts of COVID-19. As such, our continued success in navigating these unprecedented times says a lot of the strength of the brands, our products and our business.

Over the longer-term, we believe we can extend the strength internationally to drive further growth. Accelerating diversity, equality, equity inclusion, and delivering a positive impact within our communities remain important areas of focus for us and take us to the Roots brands.

During this quarter, we donated a portion of our sales and remaining Canada fabric masks to select collaboration and [indiscernible] organizations. The first is the Black Academy which is dedicated to breaking down barriers of discrimination and combating systematic racism in Canada, by inspiring Anglophone and Francophone black talent across the country.

For the second gen, our growing mentorship program designed to help the next generation of women leaders to develop professional skills, pursue higher education and build a successful career path. And I'm also personally excited with the expertise in mentoring programs in 2021.

We also played a role in supporting vaccine roll out here in Ontario. We raised the vaccination clinic for our team and the surrounding communities at a distribution center.

And we also gave employees paid time off to encourage them to get vaccinated. The team worked tirelessly to support the rollout of these vaccinations, and we are continuing to do our part in the global fight against the pandemic.

It was encouraging to moving into a more hopeful phase. While the battle continues for many in our thoughts are with those who have been affected by COVID-19, and the communities and countries that are at early stages in their recovery than we are here in Canada.

We also continue to direct diversity, equality, equity and inclusion initiatives within our organization. We are pleased with our progress and we're maintaining our momentum behind these efforts.

Our business is about long-term meaningful change. It will take time and as we all know the work around diversity, equality, equity and inclusion is never done.

As we look through the second quarter as the uncertainty of the pandemic remains in Canada, including government mandated store closures that are currently expected to persist for a while. Over the last five quarters, we've been focused on what we can control and thoughtfully responding to that which we cannot.

For example, while we cannot control the provincial swirl bidding plans or the changes in government subsidy programs, we are maintaining discipline within our operations to help offset these impacts where possible. And overall, we have strengthened the fundamentals of the business over the last five quarters, in a way that have positioned us well for future growth.

We are optimistic that with the vaccine rollout accelerating, we will start to see increasing market recovery in the core. We're confident that as we slowly emerge from this pandemic, patrons will continue to seek exceptional clothes without sacrificing the comfort, quality and versatility to which they've become accustomed.

We also continue to believe that digital convenience will be important to customers going forward. These are all areas of strength for Roots and in many cases have been for almost 50-years.

The focus on long-term we plan to amplify our iconic brand with great creative, strong product execution and targeted investments focused on driving possible growth, all while continuing to support our communities. [Indiscernible] technology knowledge of our team and their continued hard work and perseverance.

The actions we took in 2020, which have carry forward into 2021 have had a meaningful impact on the business, and position us well from a great future post-COVID-19.

Thanks, Meghan, and good morning, everyone. During the first quarter and now into our second quarter, we continue to face headwinds and uncertainty as a result of government mandated store closures and operating limitations.

Nonetheless, in Q1, 2021, we delivered sales growth, gross margin expansion and bottom-line improvements. Our Q1 results continued to demonstrate a few key factors, customer excitement for and loyalty to the brand, our robust omni-channel capabilities and our success in driving operational and cost efficiencies.

Now looking at our financial results in greater detail, total sales in the first quarter were $37.3 million, up 24.7% from total sales of $29.9 million last year. DTC sales were $31.4 million, a 27.6% improvement over $24.6 million last year.

Our year-over-year sales increase was driven by stores, eCommerce and the P&L segment. Our stores were closed for approximately 30% of the quarter in comparison to 50% last year.

So, we naturally saw higher sales just by the nature of being open for more of the quarter. However, we're also encouraged by having seen sales close to pre-pandemic 2019 and 2020 levels, when our stores were all open in the quarter.

In terms of eCommerce, as we have seen in previous quarter, eCommerce growth moderate as stores reopen. However, online sales were still up approximately 50% year-over-year, and that is on top of the growth we achieved in Q1, 2020.

On the partners and other front sales were $5.9 million, up from $5.3 million last year. This was primarily a result of an increase in our Asia partner business in Taiwan, which was significantly impacted by temporary store closures and reduced traffic last year, as a result of COVID-19.

It was also the result of a shift in timing of wholesale orders that contributed to higher sales in the quarter. We had another quarter of strong growth margin improvement as a result of our continued promotional discipline.

At 61.2%, our DTC gross margin for the first quarter improved 320 basis points over the 58% we recorded last year. We continue to manage our expenses tightly, while closely monitoring our topline performance.

We recorded $25.9 million in selling, general and administrative expenses for Q1, 2021, down from $27.8 million last year. The year-over-year decrease predominantly reflects our continued efforts to reduce costs and increase efficiencies.

These savings were partly offset by higher variable costs as a result of the year-over-year increase in DTC sales, as well as higher costs related to investments in talent and marketing. Our Q1 SG&A also reflects $2.5 million in government wage and rent subsidy, which compares to $1.3 million last year.

In addition, we realized $1.7 million in SG&A savings related to the U.S., predominantly as a result of the permanent closure of seven of our U.S. stores a year ago.

Reflecting our sales growth, gross margin expansion, cost savings and the benefit of government subsidies that helped offset the impact of store closures in the quarter, we recorded an adjusted EBITDA of negative $2.5 million, a $5 million improvement over negative $7.5 million, we recorded in Q1, 2020. Now turning to inventory, our inventory balance at the end of the quarter was $42.5 million, while up slightly over $40.3 million a year ago, it is primarily a result of our pack and hold strategy.

As I'm sure you're aware, there are industry wide concerns about delivery delays, largely as a result of the evolving pressures on our supply chain from COVID outbreaks in India, Southeast Asia, as well as congestion at the ports. We aren't seeing any material impact at the moment, as we took precautions early and moved delivery dates up in our calendar.

So, while in some cases product is arriving later than initially planned, it continues to be seasonal and relevant. It is the buffers that we have built in that are being squeezed or lost.

Nonetheless, this is something we continue to monitor very closely, and we can turn to our pack and hold inventory layer and get in to bridge delays as needed. At quarter-end, we had an outstanding revolver balance of $10.5 million, and had net cash of $4.1 million with net debt of $76.4 million, down from $97.3 million in Q1, 2020.

Subsequent to the quarter, on the back of our strong profitability in 2020, we amended our credit agreements. We extended the original maturity date of September 2022, to September 2024, demonstrating the ongoing support by our lenders.

In addition, the amendment reduced by $75 million revolving credit facility to $16 million, reflecting improvements in the borrowing needs of our business. We are pleased with our Q1 results, including the significant improvements in gross margin, SG&A and adjusted EBITDA relative to Q1, 2019, pre-pandemic.

As we're not progressing through Q2, 2021, and government restrictions are slowly lifting, we have been able to reopen our stores in Quebec and Nova Scotia, and today we're reopening 26 of our 62 Ontario locations at 15% capacity. Nonetheless, we anticipate having a higher number of temporary corporate retail store closures in Ontario, which is our largest market and typically includes our highest revenue source, in comparison to the second quarter of last year.

In addition, we are operating under tighter government mandated capacity limitations than last year. To partially offset the short-term pressures, we will continue to manage costs and leverage government programs.

However, due to the changes in the program, the government wage subsidy is available at a declining rates compared to Q2, 2020. To put it into context, in Q2, 2020, the subsidy rate was 75%.

Under the new formula, our effective rate would have been less than half of that for the same period. We remain confident in our ability to deliver on the areas of the business within our control.

Through all of our efforts over the last five quarters, we have reduced our cost base, captured efficiencies, strengthen the overall fundamentals of the business, all while continuing to build on nearly half a century of brand string. As such, as government operating restrictions ease and short-term pressures alleviate, we expect to return to recovery.

In closing, I wanted to echo Meghan’s gratitude for the entire Roots’ team for another quarter of hard work and commitment, despite the ongoing challenges as a result of the pandemic. With that, operator, please open the line to questions.

Hi, good morning. Meghan and Mona, first question, you've done a very good job of optimizing your gross margin and SG&A.

I'm curious if you feel maybe outside of scale, if there is any additional identifiable buckets for further improvement, and maybe specifically through your omni-channel capabilities?

Sorry, Brian. You cut out a little bit there.

The sound is not very good. Do you mind repeating your question?

Sure. Sorry, Mona.

You've done a very good job of optimizing your gross margin and SG&A. I'm just curious if you feel maybe outside of scale, if there's any additional identifiable buckets for further cost improvement, specifically through your omni-channel capabilities.

I think, when I kind of like think about margin and costs, those are areas that we're going to continue to focus on, as it relates to the business, right. So as our omni-channel business kind of expands, we will continue to focus on those areas to improve contribution margin.

So when I think about cost savings, we've had a number of areas where we've seen permanent cost savings, as it relates to the U.S. as it relates to our store labor being more efficient, as it relates to our corporate costs being more efficient.

So, I think those are permanent cost savings that we're going to continue to see. And on the margin front, you've seen that coming off five quarters in a row, we're working on it, and we're seeing great expansion on margin, so we're going to continue to work on it.

And as it relates to omni, it's going to become more of our business. We're going to see customers basically shopping where they want to shop.

So that's where our focus is going to shift. And, we've got strategies to focus on that as well.

And then I’d just add, I think -- sorry, your question, Brian was also are we going to see any significant profits, especially in omni-channel that we're going to see more potential cost savings. I think we've identified a few additional areas that we are looking at for cost savings, but I think we in 2020 took out a lot, and so I don't think you should expect to see significant incremental cost saving coming into second-half of this year.

Okay. And just on a temporary basis, so is there any costs associated?

I mean, you're doing a very admirable job of this shift between eCommerce and bricks-and-mortar with the lockdowns. I'm just wondering if there's any costs associated with the shift during the lockdowns.

And has this hampered your inventory position at all?

No, it hasn't really hampered our inventory position, obviously being able to fulfill orders from stores and doing curbside has given customers access to inventory. So we've been able to actually access the inventory at stores that have been closed.

So no, I wouldn't say that it has hampered it. And I think we've kind of managed that fine.

As you know, in eCommerce, obviously, there's incremental shipping costs that the stores don't have, but also stores have rent that eCommerce doesn't have right. So there's obviously a give and take.

But, I wouldn't say it has hampered added incremental costs.

Okay. And last question, I guess.

Your pack and hold strategy, I'm wondering if there's a specific season that this pertains to. I would have thought that it would have been spring, summer merchandise, and that we would start to see a lessening impact from this.

So, our pack and hold strategy, it was inventory bullets for spring and summer and also for fall and winter, and we had a pretty even split. We also didn't expect that our stores were going to be closed for a lot of Q1 and also a lot of Q2.

So, obviously the pack and hold strategy didn't move as we had strategized, but as stores will open in Ontario starting today, we’re hoping to kind of see movements in the summer and spring inventory. And then we still have some for the fall as well.

The pack and hold inventory that we're sitting on for the fall is actually helping that right now, given the challenges at the ports and the delay in shipment. So, we're actually quite happy about that strategy and it's benefiting us more than we had expected.

And I can only presume that you feel this is more current as well.

Yes.

All right. Thank you very much.

Good morning, everyone. Congratulations on the hard work in this quarter, and the narrowing of the loss.

I've got a couple of questions. The first one is, what more can you tell us about your experience in Q1 in the U.S., now that you've got an omni -- for all intents and purposes in online and your strategy there?

What did you see in the markets where you closed stores? And did your -- the revenue in the U.S.

in the quarter, did it get in line with what you expected would happen, if it is along the lines of this new strategy or approach to the U.S. market?

Good morning, Patricia. Yeah, I think we're not going to give you specific details as it relates to each market, and the store disclosure we don't go through.

But, I think overall, we continue to be happy with our strategy in the U.S. We do believe that a digitally led strategy for us in the near-term is the right way to go.

We think we have a lot of potential to continue to grow our eCommerce business there, and so we're happy with the way it's currently performing. But it is important part for our business.

And so, there is a lot of opportunities still to drive growth. And there's still a lot that we need to do to continue to develop our footprint there.

Okay. Thank you for that.

And then, secondly, you noted in the quarter that you’ve had higher marketing expenses, and I just have two questions around that. What is the outlook for marketing for the remainder of the year?

And then secondly, presumably, given the strong sales that you have with that marketing efforts really provided some fuel to drive the top-line [indiscernible], a worthwhile investment for you?

Yeah, absolutely. I think, last year the pandemic had just started in Q1, right.

So we did everything we could to cut costs, as we had so much uncertainty in front of us. And as we said this year, we're making decisions based on returns.

So, as kind of we're being more strategic with our marketing spending, I would expect a little bit of elevated spending with marketing, just because we're going to be investing in areas where there's return. And also additionally, stores were open more in Q1 of this year, which then results in higher marketing spending and investment as it relates to stores.

So there's going to be a little bit of linkage around store openings as well.

And if I may, I’ll ask a third question. So, Q1 was a very -- it was a quarter where you accomplished a lot in terms of creating excitement, and you pointed out all the number of things that you do with the collaboration and partnerships.

Should we expect that same level of innovation or new product and partnerships et cetera, as we move through the remainder of the year? Or, was this just a particularly concentrated effort?

We have a lot of collaborations and partnerships coming later on in the year. We've got a few meaningful ones coming more towards the fall, which is our peak trading period.

So I think Q1 typically is lower sales period for us, so we tend to try to push things a little bit more into peak before we keep our eyes on the brand. That being said, from the product innovation perspective, you should continue to expect to see product innovation from us throughout the year.

I'm not sure if we saw in the second quarter, but we've been doing a lot of testing and learnings. So as an example, our product [ph] grew as I mentioned at the beginning of the call, which was made in Canada, and then embroidered at our leather factory, that was $198, and it sold out in days.

And our typical Corona outline is no more than $78 to $84 range. So we continue to test the premium fleece.

We're continuing to test new products as it relates to other categories. We have new products that come in, and then in the fall, we have a number of new product categories and innovations that are coming in.

So, one of our main focus areas as we go forward is to test innovation in our product categories. And then we see these scaled strategy is quite important to drive future growth.

So you should definitely continue to see more collaborations and also more innovation product integrated form.

Okay, tremendous. I look forward to that.

Thank you.

Thank you. I missed it.

I didn’t hear that. Well, thank you.

Good morning. I just wanted to follow-up on a couple of things here.

Specifically, gross margin performance was quite strong in the quarter. You sort of came out of Q4 expecting gross margins to be flat year-over-year.

So, I’m curious sort of where you saw outperformance against your expectations through Q1?

Yeah, absolutely. So, in terms of gross margins, we continue to reduce depth and breadth of promotions, as we kind of communicated over the past few quarters.

And we saw some additional opportunities this year to reduce some promotions that we didn't think we're going to have as much of an impact. For example, we’ve had 20% off and eCommerce last year as the pandemic had just started.

Also, we had a customer appreciation event in early March of last year that we didn't do this year. So, we saw some margin improvement there.

And we're going to continue to focus on that. I think, probably your follow-on question will be are you going to expect to see similar margin improvements in Q2?

And, I think, I would have to say that I don't think so. We're going to continue on these strategies.

But as you know, we had already started on these strategies in Q2 of last year, so we're going to be comping some of that. And we don't have a lot of additional promotions to eliminate.

We're going to continue to focus on full price sales. But given that, we had incremental store closures in Q1 of this year, and now going into Q2, and there's some inventory that we'll have to get through.

So, we have to kind of see how the customers show up and what the demand for the product is. So, I wouldn't expect similar margin improvements in Q2, but we're really happy with our results in Q1.

Okay. That's great.

Thanks, Mona. So, maybe expanding beyond Q2, the way we were thinking about gross margins through the year was, this reduced promotional activity continuing, but then maybe kicking in again a little bit in Q4, assuming more of a normalized environment.

Is that still your expectation for the year?

Yes. As you know, in Q4 of last year, we were closed during Black Friday, and a few of the highly promotional areas, and we missed some promotional sales.

So yes, I would expect that in Q4, we will see some margin decline associated with having a more normalized environment.

Right. Okay.

That's helpful. Thank you.

Can you give a little bit of color around your channel profitability in-store versus eCommerce? Just trying to assess how much -- how mix through the pandemic and coming out of the pandemic will impact margins, as you have seen shifts between in-store versus eCommerce sales?

From a margin perspective and profitability in-store and eCommerce are pretty equivalent. And, I don't think it has really impacted our results by that much.

We continue to focus on as we look at it, and if there was any shift we correct for it. So, I would have to say that there isn't really that much of an impact.

In eCommerce, we've got more variable costs. So costs will go up and down as units go up, including shipping costs.

And in stores, obviously, we have more fixed costs. And that kind of the past year, we've been able to turn some of those fixed costs into variable.

As you know, we've been able to reduce labor, we've been able to negotiate better rents. So, I would say they're fairly equivalent, and I wouldn't say our profitability has been impacted by too much.

Okay. Thank you.

And then maybe just finally, it sounds like you're opening only 26 of 62 stores in Ontario, as stores are allowed to reopen today. Is there any reason why you're not opening 62?

And then, I guess, as you think about ongoing opening enrollment, do you expect to have your full store network opened in Ontario?

Yeah, I’ll take that one, Steven. So unfortunately, the government mandated closures the way they've done it is that you can only reopen in Ontario today if you have a street front location.

So of our stores, the 62 stores that we have in Ontario, only 26 of them have street front locations. So we and other retailers will not be able to open our mall-based stores.

And we anticipate, as the government has indicated that by July 2, they're hoping to go and open all base stores. So we, I think, like everyone else are hoping that happens earlier.

But for the time being, our expectation is that it will be early July before we can open our full suite of stores in Ontario.

Okay. That's helpful.

Okay. Thank you so much, and congrats on your performance.

Thank you.

Thank you.

Hi, good morning.

Good morning.

Good morning.

So, just given the puts and takes involved with Q2, regarding store openings and eCommerce grow, are you starting to see kind of similar double digit DTC growth year-over-year in Q2 versus maybe Q1?

Yeah. I think we're not going to give specific guidance on the quarter.

I think that when we look at Q2, we want to make sure that we give you just all the information in terms of what we're seeing in light of the government mandated changes. And so, I think that like fair to say is that our stores are going to be closed longer, more stores are going to be closed in Q2, and for a longer period of time than they were last year.

In addition to that, the stores that are open are operating at lower operating capacity. So, I think you have [ph] a steady consideration.

I don't think that the growth that we saw in Q1 is repeatable in Q2 as a result of that. But, I think, our stores are opening today and 26 is in Ontario, and we are hoping that we'll see some good returns from our customers.

And because we do have a high desirability to get out of the house and go shopping. But from our perspective, I think you need to take into consideration that year-over-year from the Q2 perspective, more stores are going to be closed, and they're operating at a lower capacity than they were in 2021 – I’m sorry, in 2020.

Right. Okay.

So, maybe put it different way, if restrictions around COVID are completely removed as they have been in t U.S., are you guys comfortable with your ability to get your stores backup their full speed right away? Or, is there may be a process involved, that's required to do so?

From the things that are under our control, we're ready to go. I think, it's more about how comfortable the customer is, in terms of showing up in stores.

I think there's going to be a ramp up period. I don't think -- traffics have been down.

Customers aren't comfortable going into stores. So, I think we're going see declines in traffic.

But, conversion has been high. So, whether that conversion is going to completely offset the traffic decline, or how big that traffic decline is going to be, I think are still a big question mark.

We're going to look at it very closely. And as stores open today in Ontario, and see how the customers are showing up, but I don't think it's going to be right up to the way it was and back to normal, because customers have an adjustment period that they need to get through.

That's fair. And then maybe just with regards to your premium fleece in the quarter.

I mean, longer-term and higher level, should we be expecting Roots to move towards that kind of more premium offering in that price range going forward?

Not as for our full collection. I think, the way we view our collection is just like many other brands is that, it's important for us to have a premium offering within the collection, because we have the desirability from our existing and new customers to buy into those types of products.

We think Made in Canada is important. We stated here, using the skills and the artistry that we have in our leather factory to do different and unique things, it's something that people are desiring.

And when we did those premium products, so far, what we've seen is that it is a mix of existing and new customers. So definitely we see customers who are buying a lower priced items are seeing the crafting and quality of the Roots brand and are interested and excited to buy something in a more premium level.

So you should think about it as it's going to continue to be kind of a collaborations where, there's cream on the top, right. So we've got our core product offering that we will continue to offer and innovate in.

We're going to have premium fleece and other items like, other leather items, et cetera to kind of draw that to customer and that would be very interesting in improved price. But we're not proposing this as a shift in strategy where all of our products end up in premium.

It's going to be a nice mix of premium items that are drawing a unique and different customer base, as well as giving our existing loyal customers something special to buy.

All right. Thanks.

That’s it for me.

Thank you, operator. That ends our scheduled call today.

We really appreciate all of your time. We look forward to see you next quarter.