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 speaker's remarks, there'll be a question and answer session. If you'd like to register a question during today's event, please press star one on your telephone keypad. On the call today, we have Megan Roach, President and Chief Executive Officer, and Leon Wu, Chief Financial Officer. Before 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 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 third quarter management's discussion and analysis, dated December 10, 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 www.investors.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 conference.

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, Leon Wu, will cover in more detail and then discuss our operational highlights and early reads in 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 5.3% increase year-over-year. The growth was driven by both segments. DTC sales increased 3.8% to $54.2 million, and partners and others' sales grew 12% to 12.7 million. In addition, our comparable sales increased by 5.8%, 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 EBITDA at 7.1 million, or 10.6% of sales, growing 29% from 5.5 million or 8.7% of sales last year. We also continue to see improvements in our balance sheet 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 campaigns also provided consumers with a new, modern perspective of Roots 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, aimed to connect with consumers through multiple touchpoints, underscoring why Ruth 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, reigniting the magic of the season and reinforcing why Ruth 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 the 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 seasonal newness and our core collections. Our fall signature collection, the first collection fully influenced by our creative director, Joey Golish, saw strong selfies on its key pieces and offered 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 by over 40% year-over-year. As this collection becomes a core year-end offering, We continue to see upside growth in this area. Our core fleece collection, comprised of our iconic Cooper fleece, gender-free one fleece, and the ultra-soft minimal logo cloud fleece, experienced strong year-over-year growth and accelerating momentum from the first half of the year. These collections were highlighted in our back-to-school campaigns and also benefited from the improved inventory position that negatively impacted sales in the first half of the year. In October, Ruth was also recognized at the Canadian Arts and Fashion Awards for outstanding achievement, celebrating the brand's rich heritage and commitment to quality, authenticity, and innovation. In early November, we launched our whimsical collaboration with Wicked, inspired by the land of Oz. Products included an enchanting collection of soft sweats, 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, B. Nam. A graduate of Parsons School of Design, B. brings 20 years of fashion design, product development, and brand strategy to the role, including experience at prominent global casual and athletic 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 by 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 digital features, a brighter color palette, and fixture elements focused on improving the customer shopping experience. The project marks one of several upcoming renovations and our most prominent location started in 2025 to support the enhancement of our brand initiative. We also marked the first anniversary of the launch of our endless aisle 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 placement, 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 replenishment system, and we have seen notable improvements in our inventory efficiency metrics at 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 algorithm. 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 solution 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 returning the call to Leon, I would like to briefly provide our 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 accounted for nearly half of our annual revenue. With that, I will pass the call to Leon, who will review his third quarter financial results in more detail.

Thanks, Megan, and good morning, everyone. Total sales were 66.9 million in Q3 2024, up 5.3% as compared to 63.5 million in Q3 2023. DTC sales were 54.2 million, up 3.8% relative to 52.2 million a year ago. Notably, our DTC comparable sales grew 5.8% 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, Plough Fleece, and Active, which was further amplified through our back-to-school and fall marketing campaigns and improved in-stock positions. 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 assortment, 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, up 8.2% compared to $37.1 million last year. The growth in gross profit dollars was driven by an 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 62.4% 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 margins through costing opportunities into the next year, partially offset by the stronger US dollar relative to the Canadian dollar. SG&A expenses were $34.5 million in Q3 2024, up 2.1% from $33.8 million last year. The increase in SG&A expenses was primarily driven by increases to SOAR 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 53.2% of sales last year down to 51.6% of sales this year. In Q3 2024, that income was $2.4 million, or six cents per share, improving from $0.5 million, or $0.01 per share, last year. Adjusted EBITDA was $7.1 million, increasing 28.8% 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 $68.4 million, down 2% as compared to $61.4 million at the end of Q3 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 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 at 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 year-over-year cash outflow was 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 11.3% 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.