Roots Corporation

Good morning, my name is Elliot, I'll be your conference operator today. At this time, I would like to welcome everyone to the Roots third quarter earnings conference call for fiscal 2024. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there'll be a question and answer session. If you'd like to register questions during today's event, please press style one on your telephone keypad. On the conference call begins, the company would like to remind listeners that the call including the Q&A portion may include forward looking statements concerning 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 and listeners are cautioned not to place undue reliance on such information. Each forward looking statement is subject to risk and uncertainties that could cause actual results to differ materially from those projected. The company refers listeners to its third quarter management's discussion and analysis dated December 10th, 2024 and or its annual information form 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 third quarter earnings release, the related financial statements and the management's discussion analysis are available on CEDA as well as the Roots investor relations website at .roots.com. Supplementary presentation for the Q3 2024 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 now begin your

comments. Thank you, operator. Good morning everyone and thank you for joining our Q3 2024 earnings call. On the call today, I will briefly review our third quarter financial results which our CFO, Lian Wu, will cover in more detail and then discuss our operational highlights and early reads and our holiday results. Our strong back to school momentum continued throughout the third quarter with total sales finishing at $66.9 million compared to $63.5 million last year, a .3% increase year over year. The growth was driven by both segments. BTT sales increased .8% to $54.2 million and partners and other sales through 12% to $12.7 million. In addition, our comparable sales increased by .8% with growth coming from both e-commerce and stores. On top of our strong sales growth, we achieved gross margin expansion of 160 basis points to improve product costing, lower discounting, and scaling of our operating costs. This resulted in adjusted ETA at $7.1 million or .6% of sales, growing 29% from $5.5 million or .7% of sales last year. We also continue to see improvements in our balance sheets and our inventory composition heading into the fourth quarter. Now turning to our third quarter operational highlights that drove growth year over year. We remain focused on enhancing our brand visibility and the corresponding marketing assets and brand messaging. This was executed through full funnel marketing initiatives that produced an authentic and relatable experience for our customers. Our brand ambassador program, which launched in the first quarter of this year, continued to generate organic connections with our target audience and resulted in strong engagement metrics across key social channels as well as product content that aligned with our key collections during the season. In September, we launched a multi-year partnership with the Nature Conservancy of Canada. This partnership is a natural extension of our brand, caring for the very landscapes that inspire us. Our third quarter back to school fall campaign also provided consumers with a new modern perspective of group and contained compelling content that really resonated in our key commercial periods. The success of these two campaigns was reflected in the strong sales of the collections featured. Our holiday campaign, Anything Roots, Everything Holiday, aims to connect with consumers through multiple touch points, underscoring why Roots continues to be a wardrobe favorite and makes the perfect thoughtful gift during the holiday season. We also launched a first of its kind experiential activation at The Well in downtown Toronto. This pop-up transported visitors to the nostalgic scenes featured in our campaign, reuniting the magic of the season and reinforcing why Roots is synonymous with the Canadian holidays. Designed to evoke the warmth and charm of classic holiday traditions, the experience also offered guests the chance to connect with loved ones through personalized greeting cards while discovering our new winter collection. In early December, we also announced our partnership with WNBA and Canada's first WNBA team, the Toronto Tempo. This partnership reinforces our commitment to athletics and community. We look forward to sharing our new products associated with the WNBA and the Toronto Tempo in early 2025. From a product perspective, we are pleased with the strong reception to both our Steve Milne units and our core collections. Our fall signature collection, the first collection fully influenced by our creative director, Joe Goulash, saw strong sell-throughs on its key pieces and also consumers a modern logo and innovative styling options to complement our core collection. Our adult active collection continues to be one of the fastest growing product offerings at Roots, growing to over 40% -over-year. As this collection becomes the core year-end offering, we continue to see upside growth in this area. Our core fleece collection complies with our iconic Cooper fleece, genuine free one fleece, and the ultra soft minimal logo cloud fleece experience strong -over-year growth and accelerating momentum from the first half of the year. These collections were highlighted in our -to-school campaigns and also benefited from the improved inventory position that negatively impacted sales in the first half of the year. In October, Roots was also recognized at the Canadian Arts and Fashion Awards for outstanding achievement, celebrating the brand's rich heritage and In early November, we launched our whimsical collaboration with Wicked, inspired by the land of Oz. Products included an enchanting collection of soft flex, graphic tees, and custom varsity jackets and bags made in our Toronto leather factory. This collaboration brought both new and existing customers to the brand. Earlier this month, we also welcomed our new head of design, Bee Nam. A graduate of Parsons School Design, Bee brings 20 years of fashion design, product development, and brand strategy to the role, including the experience of prominent global casual and future brands. We're excited to have her join the team and look forward to sharing her impact in the quarters to come. The execution of our operational initiatives and our focus on executional excellence continue to serve as cornerstones for improving the customer experience and enabling profitable growth. During the third quarter, we completed the first phase of our new flagship store on Robson Street in downtown Vancouver. Upon completion of the final phase of the middle of 2025, the new 4,000 square foot location situated next to the current store will feature our new contemporary design concept that incorporates the forest and other nature-inspired motifs, modern visual features, a brighter color palette, and fixture elements focused on improving the customer shopping experience. The project marks one of several upcoming renovations in our most prominent location, starting in 2025, to support the enhancement of our brand initiatives. We also mark the first anniversary of the launch of our Endless Isle platform. This tool has improved the ability of customers to access our entire collection when in store, and we have seen double-digit increases in the in-store order placements, ensuring more customers leave our stores with the products they desire. We are also starting to realize the early benefits of the adoption of our AI initiative. Q3 reflects the second quarter since launching our AI-driven management system, and we have seen notable improvements in our inventory efficiency metrics of stores and improving customer experience through inventory availability. We are excited about the potential in this area, as the systems gather more data and improve its algorithms. We see this tool as a key component to supporting accelerated growth at stores. We also launched the first phase of our AI-driven online solutions that provides curated messaging through own communication channels, intended to improve response rates and the relevance of content sent to customers. In addition, we enable customer communication through SMS messaging. The second phase of this solution is expected to go live in early 2025, which will further curate the experience of our e-commerce website based on the past shopping preferences of each visitor. Before turning the call to Leon, I would like to briefly provide early reads on the holiday period following into Q4. We are pleased that the third quarter momentum continues throughout the first five weeks of the fourth quarter, which includes the Black Friday and Cyber Monday period. While it is still early, the preliminary results underscore the long-term growth opportunities of Roots and its enduring brand affinity with new and existing customers, especially during the holiday period. As a reminder, the fourth quarter has historically counted for nearly half of our annual revenue. With that, I will pass the call to Leon, who will review the third quarter financial results in more detail.

Thanks, Meghna, and good morning, everyone. Total sales were $66.9 million in Q3 2024, up .3% as compared to $63.5 million in Q3 2023. DTC sales were $54.2 million, up .8% relative to $52.2 million a year ago. Notably, our DTC comparable sales grew .8% during the quarter and were positive across both channels. The increase in DTC sales was driven by strong performance in our core product collections like Cooper Fleece, Plow Fleece, and Actif, which was further amplified through our -to-school and fall marketing campaigns and improved in stock position. Our investments in AI-driven store replenishment and store scheduling, enhancements to our store experience at key flagship locations, and the Omni-channel endless aisle capabilities launched last year together also led to improved conversion. The growth in DTC sales was partially offset by closures of select stores since Q3 2023 as part of our ongoing initiative to optimize our store fleet by consolidating less profitable stores and driving comparable sales growth. We are pleased with the sales momentum built since the tail end of Q2 2024, achieved by building the brand through captivating brand campaigns, improved customer experience, and curated product assortments, all while remaining disciplined on our discounting. Partners and other sales were 12.7 million, up 12% from 11.3 million last year. The sales increase was driven by higher sales to our international operating partner in Taiwan as a result of earlier timing of last year's Q3 orders shipping earlier in Q2 and by higher royalties from the licensing of the Roots brand to select manufacturing partners. As a reminder, there was an extra week in the fourth quarter of fiscal 2023, which represented 2.2 million of sales last year. Total gross profit was 40.2 million in Q3 2024, .2% compared to 37.1 million last year. The growth in gross profit dollars was driven by increase in sales across both business segments and the increase in the gross profit margin across both segments. Total gross profit margin was 60% in Q3 2024, up 160 basis points compared to Q3 2023. DTC gross margin was 64% in the quarter, up 160 basis points from .4% last year. As a reminder, 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 250 basis points, driven by the continued improvements to costing as part of our ongoing sourcing strategy and remaining discipline surrounding our discounting. This was partially offset by an unfavorable foreign exchange impact on U.S. dollar purchases. We expect further upside to our product margin through costing opportunities into the next year, partially offset by the stronger U.S. dollar relative to the Canadian dollar. SG&A expenses were 34.5 million in Q3 2024, up .1% from 33.8 million last year. The increase in SG&A expenses was primarily driven by increases to store personnel costs as a result of legislative minimum wage increases throughout 2023 and recently in October 2024, and higher variable selling costs. As a percentage of sales, SG&A expenses scaled from .2% of sales last year down to .6% of sales this year. In Q3 2024, that income was 2.4 million, or six cents per share, improving from 0.5 million, or one cent per share last year. Adjusted EBITDA was 7.1 million, increasing .8% compared to 5.5 million in Q3 2023. Now turning to our balance sheet and cash flow metrics. At the end of Q3, our inventory was 60.4 million, down 2% as compared to 61.4 million at the end of Q3 2023. The -over-year decrease in inventory was primarily driven by the strong sell-through of our pack and hold inventory over last year, and lower off-price inventory. This was largely offset by increases to both on-hand seasonal styles and in-transit core replenishment and upcoming styles, reflecting a cleaner inventory composition and improved inventory health. We have also been focused on improving the productivity of our inventory stores through our automated replenishment system launched earlier in the year. Early benefits include the capability to enable daily replenishment, improve store inventory turns, and reduce dormant stock. Our free cash flow was a 6 million outflow in Q3 2024, as compared to an outflow of 1.7 million in Q3 2023. The increased -over-year cash outflow due to a return to our seasonal inventory purchase cadence for our fall and winter season, which was reduced last year due to the higher pack and hold inventory levels. Net debt was 46.9 million at the end of Q3 2024, down .3% as compared to 52.9 million at the end of Q3 2023. Our net leverage ratio, measured as net debt over trailing 12-month adjusted EBITDA, was 2.4 times as at Q3 2024, improving from 2.6 times at the same time last year. With that, I will now pass it back to Megan for closing remarks.

Thanks, Leon. In closing, the strong third quarter results and the positive early fourth quarter momentum reflects the immense long-term growth potential of the brand. We are entering 2025 with a stronger inventory composition and a healthy balance sheet, and with marketing, product, and operations working in unison. We are optimistic about maintaining positive momentum as we navigate the evolving consumer landscape. Operator, we will now open the line for questions.

Thank you. If you would like to ask a question, please press star followed by one on your phone keypad. If you would like to withdraw your question, please press star followed by two. When preparing to ask a question, please ensure your device is unmuted locally. First question comes from Andrew Lopez with TD Cohen. Your line is open. Please go ahead.

Thank you. Hi, good morning, Megan and Leon, and congrats on the strong quarter. Just want to start with the state of the consumer. Good morning. Yes, I just want to start with the state of the consumer. What are you seeing to start a Q4 in general and from competitors, inclusive of any impact of the short and hold of the selling period? And relative to this, what is driving your outperformance both in terms of product and as a result of your digital marketing initiatives in place?

Hi, Andrew. Maybe I'll take that and Leon can have some additional comments. So I would say from a how we're finding perspective, so from a Q3 perspective, we obviously saw very strong results and we continue to see this momentum in Q4. So we're very happy with that. What we think is happening from a consumer perspective with us specifically is it's really a combination between strong marketing efforts we've had, great quality products, and you're seeing that across the number of product categories. So active, core fleets, which includes cloud, one, and many of our seasonal product items also. And then in addition to that, you're seeing us just have great operational excellence. So we go into our stores, digital merchandising is great, the store staff are wonderful, and online we're seeing equal growth as we were seeing in stores. So it's a combination I think of us executing across a number of different facets in the business that we're really seeing positive momentum. And so I can't comment on the broader consumers that relate to our competitive side, but I know from our perspective, we are seeing the consumer out there and shopping with us during the holiday season.

Okay. And you have any-

Sure. Yeah, Andrew, I'll add on to additional things. So you mentioned the shorter holiday season. So we are acknowledging that there's five less shopping days between Black Friday, Cyber Monday, and the Christmas season. That being said, we're still early in the quarter. So so far, we're seeing the positive momentum like Megha mentioned, but it's something that we'll continue to monitor as we go into the holiday period. The other thing that has been positive for us is just the strong inventory composition that we've had going into the holiday season. So last year we were carrying a lot more pack and hold inventory. And as a result, it was a different amount of seasonal offerings to the consumer. This year we had a much more relevant composition of inventory for the holidays. And as well, we're actually dropping a new seasonal assignment for December and early next year, which that should also continue to bring customers back.

Okay. Yeah, that answers my question. I guess I just want to maybe follow up in terms of promotional activity that you're maybe seeing in the market, just in terms of any kind of pull forwards.

Yeah, well, from our perspective, we continue to be disciplined around promotions. So we typically follow the consistent cadence with previous years. We shared a little bit earlier but nothing material. And we haven't seen any pull forwards based on our financial results, based on our cadence of promotions. We remain disciplined around the amount of promotions we've given, the quantity of promotions in terms of the depth. And then what we're actually seeing happening this season is really some strong sell through of our products. And so less of a need to promote as you get closer to the end of the year.

No, I mean, that makes sense in terms like your seasonal offerings are more aligned and reducing that need for any kind of promotional activity. So just on that, how do you feel your inventory and product are being compared to last year in Q4? And exiting the year, where do you expect to be on seasonal inventory?

Yeah, so we're in a much cleaner state this year than last year. So last year, we had a lot more carry forward. And if you remember, Ben, as a result of that, when we carried forward, sorry, when we pulled inventory from Q1 to the holiday season to supplement that, it left us with a bit of a deficit in Q1 and Q2 of 2024. So we're in a much better spot this year, carrying relevant seasonal inventory into the holidays with planned units dropping for December and into the new year. So I would say that if we looked ahead, inventory's in a great spot, not only from a balance perspective, but also from a competition perspective.

Okay. And then last one for me is just, sorry, if you could just provide a little bit more color on the store closures in the quarter. I wasn't sure if I was understanding that.

Yeah, so as part of our ongoing strategy, we continue to look at our store portfolio and identify locations that may not be performing as well as others. The positive is that roots generally makes profit in each of our locations, but we identify opportunities to really consolidate some of these stores and focus on some of our top doors. So as we go into next year, you should expect us to really capitalize on some of our flagship locations, which we have been doing. We just recently announced a flagship in Vancouver that we're excited about. So overall, we're really looking to enhance the customer experience. And that's part of our ongoing real estate strategy to look at our fleet. But as a result, you still see that really positive comp sales and that's a strategy we want to continue with. Okay.

I guess that would be excluded those store closures from the comps, right? That's correct. Okay. Perfect. Okay. That's it for me. Thanks. Thanks to you both and congrats in the strong quarter again.

Thanks. We have no further registered questions. So I'll now hand back to Megan Roach for any final remarks.

Thank you, operator. Thank you everyone for joining the call today. And thank you also to our entire team for their hard work, which enabled the positive results leading up to our bideous time of year. We look forward to providing you with an update on our fourth quarter and fiscal 2024 results in April. And we wish everyone a safe and enjoyable holiday period.

Ladies and gentlemen, today's call is now concluded. We'd like to thank you for your participation. You may now disconnect your lines.