Roots Corporation

Good morning, ladies and gentlemen, and welcome to the Roots Corporation Q1 2024 Analyst Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Monday, June 10, 2024. I would now like to turn the conference over to Megan Roach, President and CEO. Please go ahead.

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 directed consumer sales of $31.4 million relative to $35.4 million in Q1 2023. Directed 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 that 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 omnichannel 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 engagement 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 focused 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 Centre. With the renovation, we now have a dedicated location for our Connors West, Nas backdoor heritage and association with nature throughout the store, a refreshed facade, digital screens, and merchandising layouts to better showcase our collections. At the end of the quarter, we also introduced our brand ambassador program. The main objective of the program is to increase brand visibility to 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 routes 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 Fleet category, which performed very well in Q4, but left us with insufficient supply to satisfy demand in this quarter. Leanne 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 system 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 initiative. 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 through enhancements to our product portfolio, increased marketing efforts, improved engagement with consumers, and longer-term international expansion. I will now turn the call over to Leon Wu, our Chief Financial Officer.

Thanks, Megan, 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 other segments were flat year-over-year. PTC 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. The segment drove positive wholesale sales to Asia to both our Taiwan operating partner and through 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 Megan 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 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 the 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 trillion 12-month adjusted EBITDA, was just under 1.8 times at the end of Q1 2024. In closing, we remain optimistic about the long-term profitable growth opportunities for REITs. In addition to the benefits from the execution of our strategic initiatives that Megan 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. Without operator, please open the line for questions.