Roots, the iconic Canadian apparel brand, has reported its earnings for the fourth quarter and full year of fiscal 2023, showcasing resilience in the face of economic challenges. Despite a slight decline in total revenue and direct-to-consumer sales, the company achieved an increase in gross margin and net income, along with a significant reduction in inventory and net debt. The company's strategic focus on expanding its Activewear category and sustainable product offerings, alongside investments in e-commerce and international markets, positions Roots for future growth.
Key Takeaways
- Roots' total revenue decreased by 2.9% to $108.2 million in Q4, with direct-to-consumer sales down by 0.8% to $97.8 million.
- Gross margin improved by 210 basis points, contributing to a gross profit increase of 0.7% to $63.4 million.
- Net income for the quarter rose by 12.6% to $14.6 million, supported by reduced SG&A expenses and gains from lease modifications.
- The company reduced its inventory by 34.2% and net debt by 31.6%, while doubling its free cash flow.
- Strategic priorities for the upcoming year include improving product margins, leveraging data analytics, enhancing marketing, expanding the Activewear collection, and focusing on growth in Asia.
Company Outlook
- Roots expects to face sales headwinds in the first half of 2024 but aims to leverage its strong brand equity and customer loyalty for long-term growth.
- Investments in data analytics and AI technology are planned to improve product margins and marketing execution.
- The company is focused on expanding its Activewear collection and capitalizing on momentum in Asia.
Bearish Highlights
- Increased interest rates have impacted consumer spending, contributing to the decline in total revenue and direct-to-consumer sales.
- Supply chain normalization may lead to lean inventory levels and potential missed sales opportunities in core product categories.
- International sales, although growing, still contribute a small percentage to overall revenue.
Bullish Highlights
- Roots doubled its free cash flow and significantly reduced both inventory and net debt, enhancing financial stability.
- The Activewear category grew by 45%, and more than 90% of Roots products are now made with sustainable materials.
- Strategic inventory management and lower in-transit goods contributed to the decrease in inventory position.
Misses
- Specific sales percentages for the Activewear category were not disclosed, despite its reported growth.
- The company did not provide detailed guidance on expected financial performance for the upcoming year.
Q&A Highlights
- No further questions were asked during the earnings call, indicating that the presented information was comprehensive.
Roots (ROOT), with its focus on sustainability and strategic international expansion, particularly in the US and China, continues to adapt to the evolving retail landscape. The company's solid performance in key financial metrics, amidst macroeconomic headwinds, demonstrates its ability to navigate through market challenges. As Roots prepares for the first half of 2024, it remains committed to its strategic priorities and the pursuit of opportunities that may arise in the market.
Full transcript - None (RROTF) Q4 2023:
Operator: Good morning. My name is Kennedy, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Roots' Fourth Quarter and Full Year Earnings Conference Call for Fiscal 2023. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question-and-answer session. [Operator Instructions] On the call today we have Meghan Roach, President and Chief Executive Officer; and Leon Wu, Chief Financial Officer. Before the conference begins, the company would like to remind listeners that the call including the Q&A portion may include forward-looking statements of its current and future plans, expectations and intentions, results, level of activities, performance, goals or achievements, or any other future events or developments. This information is based on management's reasonable assumptions and beliefs in light of information currently available to Roots, and listeners are cautioned not to place undue reliance on such information. Each forward-looking statement is subject to risks and uncertainties that could cause actual results to differ materially from those projected. The company refers listeners to its fourth quarter management's discussion and analysis and/or its annual information form dated April 9, 2024 for a summary of the significant assumptions underlying forward-looking statements and certain risks and factors that could affect the company's future performance and ability to deliver on these statements. Roots undertakes no obligation to update or revise any forward-looking statements made on this call. The fourth quarter earnings release, the related financial statements and the management's discussion and analysis are available on SEDAR as well as on the Roots Investor Relations website at www.investor.roots.com. A supplementary presentation for the Q4 2023 conference call is also available on the Roots Investor Relations site. Finally, please note that all figures discussed on this conference call are in Canadian dollars unless otherwise stated. Thank you. You may begin your conference.
Meghan Roach: Good morning, everyone. Thank you for joining us today for our Q4 2023 earnings call. Despite the headwinds posed by the significant interest rate increases over the last two years that have impacted consumer discretionary spending and our fourth quarter revenue, we delivered solid performance across several key metrics. As we continue to navigate the current economic landscape, we remain proud of the team's dedication and focus on our major strategic initiatives, which will position the company for long-term growth as the market normalizes. During the fourth quarter, total revenue declined by 2.9%, while our direct-to-consumer sales were down slightly at negative 0.8%. Our gross margin increased by 210 basis points, leading to an adjusted EBITDA decrease of 1.5% year-over-year. On an annual basis, we also significantly reduced our inventory by 34%, drove net debt down by roughly 32%, and more than doubled our free cash flow. Leon will take you through these financial results in more detail. But before we turn to Leon, let me highlight some of our key accomplishments from the fourth quarter in 2023, as well as our strategic outlook for 2024. In Q4, we saw positive traffic trends across our stores and our website. We also enhanced our brand presence and creative production. The launch of the 50th anniversary campaign brought new customers to the brand and reminded existing customers of our rich heritage and quality product offerings. Our enhanced studio and our team as well as the addition of a creative director in residence, led to better content creation, highlighted in our robust holiday campaign and our summer be recruiting campaign, which captures the minds of consumers. Our notable international collaborations during the fourth quarter and the year included Barbie and CLOT. Barbie played to our strength with our predominantly female consumer base. It also enabled us to showcase our impressive offering across sweats and leather to a new audience. With the only Canadian Barbie doll, the partnership also formed a solid part of our gifting strategy in the fourth quarter. CLOT, our first Asia focused partnership sold well across multiple international markets and facilitated a more physical on the ground presence with its distribution in classic g-stores in Asia. It also helps position us well for future market development. Our core collections also continue to drive positive momentum. We continue to grow our Activewear category, which increased by 45% year-over-year, and grew as a percentage of total sales. Cooper fleece sales also stabilized on an annual basis and grew in the fourth quarter. We successfully launched several new product initiatives. Most notably more than 90% of our products are now made with sustainable materials such as organic cotton or recycled polyester. And we also saw growth in our Taiwanese business, which has been renovating stores, enhancing its online presence, and engaging with a new younger audience. In 2023, we also enabled Canadian stores to ship to our U.S. consumers, which significantly increased the availability of our assortment to the market. As a result, e-commerce sales to the U.S. increased double-digits during the fourth quarter and year. In China, we also shifted to a new more established partner on Tmall, reflecting our positive growth to date and our belief in the long-term opportunities in the market. We made significant new hires across marketing, technical and product development, and data analytics. And we also reorganized several major groups to optimize our organizational efficiency and effectiveness. Looking ahead, we have identified several opportunities to enhance our performance further and position ourselves for long-term success. Here are some of our key strategic priorities. We will continue to improve our product margin with product cost reduction already secured in 2024 and incremental targets in place for 2025. We have been able to do this without reducing our product quality and in many places improving it. We're also making strategic investments in a data lake, and AI technology to improve both the online and store experience as well as conversion. In the near-term, our focus is to enable more personalization and relevant content as well as recommendations to our customers online. In store, we plan to use AI to enhance merchandising and replenishment. And our data lake will also strengthen our data driven insights across the company. With our new Chief Marketing Officer now in place, enhancing awareness and consideration of Root, and its product franchises is also a key priority. We are focused on improving marketing execution, such as launching a brand ambassador program, creating more engaging and diverse content, and investing in targeted and efficient media channels. We are also expanding our year round Activewear collection, which now incorporates more performance and sustainability features and building out our product offerings including an elevated mating handle line. We will also be capitalizing on our momentum in Asia, by making more targeted investments in China, which is emphasized by our recent switch in Tmall Partners and partnerships with local influencers and celebrities. We are proud of what our team has achieved this quarter and throughout the year. We have continued to innovate and adapt to the changing consumer preferences and behaviors, while staying true to our core values of quality, comfort and sustainability. We've also made significant progress on our strategic initiatives, such as expanding our product portfolio, improving our product margins, enhancing our e-commerce capabilities and growing our international presence. We are confident that we have a solid foundation to build on as we enter 2024 and beyond. However, I want to emphasize that we continue to expect economic headwinds in the first half of the year. Over the medium to long-term, we believe we have a unique opportunity to leverage our brand equity and our loyal customer base to capture more market share and drive long-term growth and profitability. I will now turn the call over to Leon Wu, our Chief Financial Officer.
Leon Wu: Thanks, Meghan, and good morning, everyone. I'll start by covering our fourth quarter results, followed by a quick summary of our fiscal 2023 performance. As a reminder, our fourth quarter fiscal year 2023 contains an extra week such that Q4 of 2023 results comprises of 14 weeks and fiscal year 2023 results comprises of 53 weeks. Unless otherwise noted, comparisons reference the respective 13-week and 52-week fiscal periods in 2022. Where meaningful, I will highlight the financial impact of the extra week. Q4 sales were $108.2 million a decrease of 2.9%. DTC sales were $97.8 million down 0.8% compared to $98.5 million last year. The extra week in fiscal 2023 represented $2.2 million of DTC sales. As Meghan mentioned, DTC sales were driven by strong demand in our core products as we saw positive performance during market wide Black Friday and Cyber Monday periods. We saw positive year-over-year traffic patterns across both channels throughout Q4, reflecting the ongoing strength of the Roots brand as a destination during our strongest quarter. However, this was offset by declines in conversion, reflecting the tighter consumer discretionary spending in the current macroeconomic environment within Canada. Our average basket size has remained consistent year-over-year, indicating that when customers are ready to transact, they are spending the same amount with Roots. Partners and other sales were $10.5 million, down 90% compared to $12.9 million last year. The decline in sales was primarily driven by a wholesale order to select retail partners that Roots chose to not repeat last year. On a full year basis, our partners and other sales were $40.2 million compared to $40.9 million last year, which excluding the Q4 wholesale order that did not repeat reflected positive growth in the Asia market. Total gross profit was $63.4 million in Q4 2023, up 0.7% compared to $63 million last year. Total gross profit margin was 58.6%, up 210 basis points compared to total gross profit margin of 56.5% last year. The increase in the total gross profit margin was driven by a higher mix of higher margin DTC sales this year, and improvements in gross margins within both operating segments. DTC gross margin was 59.9% in the quarter, 120 basis points higher than 58.7% in Q4 2022. The increase in DTC gross margin was as a result of a lower inventory provision in Q4 2023 due to the healthier inventory position ending the year. Our DTC gross margin also increased from improved product costing and lower freight costs, including 60 basis points from lower air freight, but was offset by a higher mix of sales during discounted periods such as Black Friday and an unfavorable foreign exchange impact on U.S. dollar purchases. As of Q4 2023, we have largely caught the product margin impacts from the transition to sustainable materials that began in Q3 2022. Furthermore, we anticipate further year-over-year product margin upside in 2024, resulting from the investments made to advance our sourcing function, partially offset from the ongoing foreign exchange headwinds on U.S. dollar purchases versus last year. SG&A expenses were $41.2 million in Q4 2023, down 3.9% from $42.9 million last year. The decline in SG&A expenses was driven by gains arising from lease modification under the IFRS 16 leasing standards and lower variable selling costs. This was partially offset from higher store and corporate personnel costs, including from the increased minimum wage in Ontario that began in October, and impacts from this extra fiscal week in Q4 2023. Like Meghan mentioned, we have invested to make substantial improvements to our business operations in 2023. As we look ahead to 2024, we expect total SG&A to grow at similar rates as current inflationary levels. Net income totaled $14.6 million or $0.36 per share in Q4 2023 as compared to Q4 2022 net income of $13 million or $0.31 per share. This equates to an increase of 12.6% on a total basis or an increase of 16.1% on a per share basis. Adjusted EBITDA was $23.2 million in Q4 2023 compared to $23.5 million for the same period last year. Now turning over to our balance sheet and cash flow. Our inventory position ended the year at $36.2 million down $18.8 million or 34.2% as compared to $55 million at the end of 2022. The year-over-year decrease in inventory was driven by both a $12 million reduction in on hand inventory, as we strategically managed our purchases during the year and sold through our pack and hold collections and $6.8 million of lower in transit goods, partially due to the later timing of shipments from our vendors during the year. We entered fiscal 2023 with approximately $8 million of pack-and-hold core inventory. At the end of the year, we have sold through over 80% of this inventory at comparable discount rates at the rest of our assortment, validating the merits of this strategy to both manage inventory levels and preserve margins. While we are pleased with the overall reduced inventory levels, the strong fourth quarter demand of certain core product categories like Cooper fleece exceeded our expectations. As a result, we anticipate there may be missed sales opportunities during the first half of the year as we work to replenish our stock in those specific areas. The improved inventory position and continued discipline surrounding our capital investments were key drivers to the improvement of our free cash flow, which was $12.4 million on a full year basis, up 187% compared to $4.3 million in the last year. As a result, we have continued to deleverage our balance sheet, ending the year with net debt up $17 million, down 31.6% as compared to $24.8 million last year. Our net leverage ratio, measured as net debt to adjusted EBITDA was less than 0.9x, and we will look to further deleverage by the end of next year. In closing, I am proud of our team's progress in improving our inventory health and driving cash flow growth to reduce our net debt, while navigating through the challenging operating environment. We expect sales headwinds will persist in the first half of 2024, driven by the macroeconomic challenges and missed inventory opportunities in certain core collections, but we are optimistic that the progress made in 2023 will set us up for long-term profitable growth and the consistent delivery of strong annual free cash flows. This concludes our prepared remarks for Q4 2023. With that, operator, please open the line for questions.
Operator: [Operator Instructions] And your first question comes from the line of Brian Morrison from TD Securities.
Brian Morrison: Can you please talk about consumer behavior, what you've seen through the start of fiscal 2024, just in terms of are you continuing to see strong traffic and conversion being impacted by the macroeconomic environment? And maybe just elaborate on your comments, you expect to see headwinds through the first half of the year. Does that imply you should see strength in the second half?
Meghan Roach: Yes. So I think what I would say is a few things. I mean, obviously, we're all waiting with [David Brett] this morning to see what the Bank of Canada says about interest rates. I do think that interest rates are paying a big impact on consumer discretionary spending broadly. We saw that in the fourth quarter, and we expect to continue to see that in the first half of the year. So our expectation, I think, consistent with the market expectation is that there should be some easing of that into the second half of the year, which should have a positive impact on consumer discretionary in general. So I think that that's kind of the overall macro perspective that we have. I would say more broadly, what we're really focused on in our business is, what we're seeing from a traction perspective with our key collections. So continue to see some great demand as it relates to core and Activewear as Leon alluded to in his comments. And, obviously, excited to see some of the new stuff that we have coming now to see the reaction from a consumer perspective. But we're obviously taking into consideration the overall macro headwinds that continue to be present and that we expect to be present at least until the second half of the year.
Brian Morrison: Are you able to share I mean, the Activewear growth is, quite impressive. Are you able to share what percentage of sales that makes up at this point in time, or is that too detailed?
Meghan Roach: At this point, people say silent on it, but it's -- in it's what I can tell you is that has been increasing as a percentage of sales, over the last year. So we are seeing an increased penetration, but we haven't disclosed specifically the percentage this quarter.
Brian Morrison: And then in terms of inventory, obviously, I understand the sell through has been very good. You have to replenish to a certain extent in certain brands. Can we expect with supply chain normalization that you're going to be running a pretty lean inventory despite the replenishment that has taken place from Permian on a going forward basis?
Leon Wu: Hi, Brian. Sure. I could take that one. We do see that the supply chain timing and the lead times have normalized quite a bit over the last few months. That being said, I would say that at the current levels, there are certain pockets of inventory like our core, especially in Cooper fleece, where we would prefer to be in a higher inventory position than we currently are, and that's where we shared we may be missing some sales on the table contributing to Q1 and Q2 headwinds. But in the long run, I would say that the current inventory levels or just slightly above it is where we would like to be in the short-term. And in the long run, we do want to improve the productivity of the inventory.
Brian Morrison: Okay. And, Leon, while I've got you, the comment with respect to lease modifications to change, is that a permanent change? I understand SG&A is going to grow in line with inflation, I think your comment was. But should we expect the change that occurred in the fourth quarter? Is that a permanent impact upon your financial performance?
Leon Wu: I'm not quite sure in terms of what you're referring to in terms of permanent. So this is related to a few stores that we decided to either close or change the lease terms in the next year, and that was what's driving some of the savings. So, yes, we'll continue to look at our real estate fleet. And, as we find opportunities to optimize that and drive savings there, we will.
Brian Morrison: And, Meghan, can you comment maybe on the size of the footprint right now? I see that we've had some store reductions over the past 12-months. Are we content with where we are, or would or will we be evaluating maybe a smaller footprint going forward?
Meghan Roach: We'll see right now. Maybe I'll just send Leon, then you can go. But so I think what we are trying to do right now is really focus on not necessarily looking at the number of stores we have, but also the productivity of the stores as well as the footprint in terms of where our consumers are and where we think we're going to have the benefit of those consumers going forward. And so we've been doing a lot of research from an analytics perspective really to be focusing on, where cross shopping is amongst consumers and then also what that means for a strong footprint. So, Leon, if you want to go into that more detail, maybe I'll pass it on to you.
Leon Wu: Yes. I would say that the strategy we've been looking at in terms of using pop ups as a testing the market continues to be very robust in a way for us to enter into new markets as well. A lot of the stores we're actually closing are also just stores that we either are consolidating or moving to a larger location or even stores where we have strong performance of the Infiniti stores often through these tests and their models. So I would say that the current fleet is a good size, but we'll always continue to look at where there's opportunity to either move around stores or improve the efficiency. That's where we would really be focusing attention on.
Brian Morrison: And international sales, are we able to say the percentage that comes from the U.S. at this time or if it's disclosed?
Meghan Roach: It's a small percentage, but we're seeing good growth. And I think, as we talked about in previous quarters, our focus in the U.S. has really been around this multiphase strategy. Right? So the first phase of that was, really getting our digital platform coming and then focusing on digital, then kind of pop-up in more physical locations. And we were excited about the fact that in Q4 this year, we were able to enable our Canadian stores to ship to U.S. destinations. And so as a result of that, we really have increased the overall inventory pool, and that's what's been driving some really positive momentum in sales. So we don't distort specifically that percentage, right now, although you can see a lot of details in our financial statements in regards to international and other. But broadly, we are very happy with the momentum that we're seeing there and continue to believe there's a good opportunity for us in the U.S.
Brian Morrison: Very good. Last question. I will say in a challenging year, I still think that what might be overlooked here is just how impressive and strong your free cash flow performance was. Can you maybe just comment upon, did you renew your NCIB or with leverage down under one term pre-IFRS 16, do you have any intention of, being active with an NCIB, or is your preference to, repay debt at this point in time?
Leon Wu: We'll continue to assess the market to see where it's going. A lot of the free cash flow this year is coming from the reduction of inventory. Obviously, that is great and in a position we want to be from net debt. But as we look into next year, as we anticipate headwinds in the first half of the year, we just want to be prudent and make sure that we are still maintaining a strong balance sheet. And where the opportunity to arrive is, we'll look at alternative, options as well.
Operator: Thank you. And we currently have no questions at this time. I would like to turn it back to Meghan Roach for closing comments.
Meghan Roach: Thank you for joining our Q4 2023 earnings call. With that operator, you can conclude the call.
Operator: Thank you, Meghan, and thank you, Leon. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.
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