Roots Corporation

Good morning, ladies and gentlemen, and welcome to the Roots Corporation Q2 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. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Friday, September 13, 2024. I would now like to turn the conference over to Ms. Megan Roach, CEO. Please go ahead.

Good morning, everyone. Thank you for joining our Q2 2024 earnings call. Second quarter sales came in at $47.7 million compared to $49.4 million last year, with direct-to-consumer sales of $36.4 million relative to $37.1 million in Q2 2023, and comparable sales were nearly flat. Direct-to-consumer gross margins declined 100 basis points, while product margins improved by 230 basis points. Adjusted EBITDA losses were stable compared to Q2 2023, at $3.1 million relative to $3.0 million in the prior year. Notably, we also continued to strengthen our balance sheet reducing net debt by 20% compared to this time last year. As a reminder, the first half of the year remains seasonally small for Roots financially, K-50 representing approximately 30% of annual sales. Before I review the highlights for this quarter, I will also briefly touch on our early back to school results. We were pleased to see growth during the back to school period, underscoring the strength of our product portfolio and the effectiveness of our ongoing initiatives in branding, and enhancing the in-store experience. While it is early in the third quarter, these results speak to the strength of the brand and its inherent relevance amongst new and existing consumers. Now turning to our second quarter highlights. In June, we introduced the summer version of our Cloud Sweat, an ultra-soft cotton fleece product with minimal logos and more fashion-forward silhouette that resonated extremely well with consumers. Our active collection also experienced another quarter of double-digit growth. Active Now represents a core offering for Roots and an area we will continue to depend upon as part of our go-forward strategy. This summer, we also saw strong sell-through of our Northern Athletics Collection with the momentum around Canada and sports in the lead-up to the Olympics. As mentioned last quarter, we faced some inventory challenges in our Cooper Case Collection in Q1 and the start of Q2, which impacted sales. However, we ended the quarter in a healthy inventory position in this product offering, which benefited us in late July in the Q3. As indicated in a separate press release earlier today, Corinna Sheinfeld, Chief Product Officer, will be stepping down at the end of 2024. We do not intend to replace the Chief Product Officer role. However, we have commenced a search for senior-level design talent with international experience in the outdoor and active sectors. As mentioned, active has been a fast-growing area of the business. We are also seeking to continue reconnecting our product with our outdoor route Since joining us in 2020, Karina has been an exceptional partner, establishing a go-to-market process and products in line with our brand vision and direction. I have appreciated Karina's passion and commitment to the brand, and it is a testament to her leadership that she leads us with a strong team that I'm confident can support the brand in its next phase of evolution. In early September, we hosted an exclusive event to launch our fall and holiday products. The first collection fully influenced by our creative director of residence, Joey Gawlish. attendees, including key influencers, industry leaders, and media, had the opportunity to explore the craftsmanship, creativity, and innovation behind the collection in a carefully curated presentation. However, it was not only about unveiling products. It was about sharing the story of how our vision for the season aligned with the evolving desires of our consumers. This launch set the tone for a pivotal moment in our seasonal strategy, and the collection bends time and style before our thinking trends. From a marketing perspective, last quarter we launched our Brand Ambassador program with the goal of enhancing brand visibility through authentic, relatable representatives who embody our core values. This initiative aims at strengthening connections with our target audience through the personal engagement of our ambassadors while driving greater consideration of roots across key product categories. The initial results have exceeded our expectations, and we see this program as a pivotal driver for future growth. helping us reach both new and existing customers more effectively. Our teams have been thoughtfully enhancing our marketing assets and refining our brand messaging as we prepare for the second half of 2024. These efforts are already reflected in our Back to School and newly launched fall campaigns, which both highlight our enhanced creative direction. We have focused on creating more resonant, compelling content that not only aligns with consumer trends, but also deepens our connection with our audience. These initiatives are setting the stage for a stronger, more impactful presence as we approach the critical holiday season. During the quarter, we continue to roll out our improved store concept, with construction commencing on our new door on Robson Street. Our enhanced store experience, as illustrated by our Eden Center renovation earlier this year, blends Roop's deep heritage and nature with a brighter, more modern aesthetic. We will have numerous stores undergoing renovations in 2025 under this new concept. We are also making significant strides in our AI initiatives this year, focusing on areas where AI can drive the most impact across our business. While some of our AI tools are still in their early phases, we are seeing promising progress and expect these technologies to further enhance operational efficiency and customer engagement. For example, we are now engaging in daily inventory replenishment to stores, enabled by our AI-driven allocation system. With additional AI solutions set to go live next quarter, we are confident that these investments will continue to create long-term value and competitive differentiation in the marketplace. From an international perspective, we generated another strong quarter of double-digit growth in the U.S. and China's digital channels, and we continue to see medium-term growth opportunities in both markets. On that, I will turn the call over to Leon Wu, our Chief Financial Officer.

Thanks, Megan, and good morning, everyone. Total sales were $47.7 million in Q2 2024, down 3.4% as compared to $49.4 million in Q2 2023. DTC sales were $36.4 million, down 1.8% relative to $37.1 million a year ago. The decline in sales was driven by closures of select stores since Q2 of last year, That's part of our ongoing store fleet optimization initiatives to consolidate less profitable stores and drive same-store sales growth. Our DTC comparable sales were nearly flat, reflecting our upward trajectory in comparable sales relative to last quarter. Comparable e-commerce sales grew, offset by declines in comparable store sales from primarily off-price focused store locations due to cleaner year-over-year inventory, which resulted in less markdown sales, and two locations heavily impacted by construction immediately outside of our store. As Megan mentioned, we are very pleased with the performance of our core product categories. Our active collection continues to drive double-digit year-over-year growth, Our minimal logo Quouse fleece collection saw tremendous customer response and surpassed our expectations. And our Cooper fleece collection, which drove year-over-year sales headwinds in the first half of the year due to inventory shortages, saw sales strengthen in the back half of Q2 as replenishment was received. Partners and other sales were $11.3 million, down 7.9% as compared to $12.3 million last year. This was largely driven by the earlier timing of certain sales to our Taiwan operating partner in Q2 of last year, partially offset by increased royalties from the licensing of the Roots brand to select manufacturing partners. Total gross profit was $26.9 million in Q2 2024, down 1.9% compared to $27.4 million last year. Total gross profit margin was 56.4% in Q2 2024, 90 basis points compared to Q2 2023. The decline in gross profit dollars was driven by lower sales, partially offset by higher gross margins due to an increased mix of higher margin licensing royalties. DTC gross margin was 61.7% in the quarter, down 100 basis points from 62.7% last year. Our DTC gross margin is comprised of the margins earned on product sales and other impacts, such as foreign exchange, freight, and accounting adjustments. During the quarter, our product margin increased by 230 basis points. driven by improvements to costing as part of our ongoing sourcing strategy and lower discounting due to our improved inventory position. This was offset by the combined impact of an unfavorable foreign exchange impact on U.S. dollar purchases, the timing of certain import duty recoveries received, and a lower year-over-year accounting inventory provision taken at the prior year end, which would have benefited Q2 2023. We are pleased with the progress made on improving our product margins through improved sourcing strategies and expect year-over-year product margin expansion to continue through the rest of the fiscal 2024. However, we expect that the current volatility in the supply chain, driven by both global ocean freight capacity limitations and recent domestic transportation labor disruptions, along with the ongoing higher US dollar relative to the Canadian dollar, to offset a portion of the product margin gains. SG&A expenses were $31.8 million in Q2 2024, down 1.5% from $32.3 million last year. The reduction in SG&A expenses was driven by savings from ongoing cost management initiatives, including lower store occupancy costs and lower variable selling costs. This was partially offset by higher store personnel costs as a result of legislative minimum wage increases since 2023. In Q2 2024, net loss was $5.2 million, or 13 cents per share, improving from a net loss of $5.3 million, or 13 cents per share, a year prior. Adjusted EBITDA was a loss of $3.1 million compared to a loss of $3 million in Q2 2023. Now turning to our balance sheet and cash flow metrics. At the end of Q2, our inventory was $44 million, down 21% as compared to $55.9 million at the end of Q2 2023. The year-over-year decrease in inventory was primarily driven by the strong sell-through of our pack-and-hold inventory since last year, and lower off-price seasonal inventory, reflecting our improved inventory health. By the end of Q2, we have received the necessary replenishment for our core fleets collections heading into the fall season. Our free cash flow was a $9 million outflow in Q2 2024, as compared to an outflow of $7.2 million in Q2 2023. The increased year-over-year cash outflow was due to a return to our seasonal inventory purchase cadence ahead of the fall and winter seasons. which was reduced last year due to the higher pack and hold inventory levels that we had. Net debt was $40.8 million at the end of Q2 2024, down 20% as compared to $50.9 million at the end of Q2 2023. Our net leverage ratio, measured as net debt over a trailing 12-month adjusted EBITDA, was 2.3 times at the end of Q2 2024. I will now pass it back to Megan for closing remarks.