Roots Corporation

After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then followed by one on your telephone keypad. If you would like to withdraw your question, please press star followed by two on your 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 risk and uncertainties that could cause actual results to differ materially from those projected. The company refers listeners to its fourth quarter management discussion and analysis dated April 8, 2025, and or its annual information forum 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 analysis are available on SEDAR, as well as on the Roots Investor Relations website. at www.investors.routes.com. A supplementary presentation, the Q4 2024 conference call, is also available on the Routes 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.

Thank you, Operator. Good morning, everyone, and thank you for joining our Q4 2024 earnings call. On the call today, I will briefly review our fourth quarter financial results, which our CFO, Leon Wu. Thank you, operator. Good morning, everyone, and thank you for joining our Q4 2024 earnings call. On the call today, I will briefly review our fourth quarter financial results, which our CFO, Leon Wu, will cover in more detail, and then discuss our operational highlights. Our strong Q3 momentum continued into the fourth quarter, our largest quarter of the year. Total Q4 sales reached 110.8 million compared to sales of 108.2 million last year, representing an increase of 2.4% year-over-year. Excluding the 53rd week in 2023, Q4 2024 sales grew 4.5% year-over-year. This sales growth was driven by exceptional performance in our direct-to-consumer segment, where comparable sales increased by 7.5%, marking our highest comparable sales growth since 2017. Numerous initiatives improved our direct-to-consumer sales, from the enablement of AI-driven inventory allocations, which improved in-store product options for customers, to our enhanced marketing investments, which drove higher engagement and made Roots top of mind for consumers during the holidays. Beyond our strong sales growth, gross margin expanded 270 basis points, reflecting our ability to optimize product costs and reduce discounting, leading to an adjusted EBITDA for the quarter of 25.3 million, or 22.8% of sales. increasing 9.1% from 23.2 million, or 21.4% of sales last year. To close the year, we also continue strengthening our balance sheet, with net debt ending at 7.3 million, a 56.7% reduction compared to 2023, and a substantial reduction from our peak of over 96 million in 2019. I will now turn to our fourth quarter operational highlights that drove our positive year-over-year performance. During the quarter, We successfully executed several incremental marketing initiatives as we focused on elevating our brand messaging and increasing our engagement with customers during our largest sales training quarter of the year. Our holiday campaign delivered strong results. The 360-degree approach of our Anything Ruth, Everything Holiday campaign reaffirmed Ruth as the ultimate gifting destination for the thoughtful gifter. By focusing on emotional engagement and holiday memories, We blended nostalgia with a modern twist to create ownable and engaging content. We amplified our programming with an experiential activation that immersed customers in the campaign and drove strong social media content creation, resulting in year-over-year improvements in earned media and organic social impressions. Working with Google and our media partners, we also focused on optimizing the messaging and channels where our campaigns, products, and branding appeared, which included branching out into streaming and other relevant platforms. Our wicked collaboration products and marketing efforts resulted in significant brand heat with a very positive customer response. One of our main products, a unique cardigan, sold out numerous times, highlighting customer demand for our differentiated product partnerships. Our increased focus on brand ambassadors also played a more significant role in our Key4 performance than in previous years, enabling us to speak to more consumers across multiple geographies with varied interests. And finally, the First Roots external template collection which launched in Q4, marked our latest efforts to reconnect with Roots heritage in athletic and sports partnerships. The collection received notable attention with our Made in Canada handcrafted leather jackets becoming a focus for media and consumers. In 2025, Roots will continue to invest more heavily in marketing to increase the brand's top of mind awareness amongst consumers. Our investments will continue to focus on additional advertising, brand ambassador partnerships, and increased awareness during our season low periods of relevance to the brand. From a product perspective, we experienced another quarter of strong growth in our key collections, as our iconic favorites and newness resonated well with consumers during and after the holiday period. We achieved another quarter of robust growth in our adult activewear collection, with sales rising more than 40% year-over-year and continuing to become a more meaningful proportion of our sales. This category will continue to be an area of focus to the brand, and as we look to diversify our product offering, This is one of the ways we can complement our core products. Our core fleece collections, inclusive of Cooper Fleece, One, and Cloud, also drove positive sales growth in the fourth quarter. The ability to maintain strong full-price sales needs for important collections also contributed to our improved gross margins. Within the quarter, we diminished unproductive inventory as we leveraged our AI-driven allocation system to reduce dormant inventory at our stores. Our visual merchandising teams also improved the flow of our stores and established engaging holiday windows throughout the season. This quarter, we took important steps to enhance our operational efficiency, our customer insights, and our customer experience across our omnichannel touchpoints with the usage of our AI inventory management and replenishment systems, the data warehouse we established earlier in 2024, and the implementation of Bloomreach. At the end of the quarter, we successfully completed the initial implementation of our AI tools focused on our online channel, By using a leading digital experience platform, we plan to enhance our e-commerce capabilities at Roots by delivering a more personalized and data-driven shopping experience to improve customer engagement and conversion rates. By leveraging AI-powered search, merchandising, and content personalization, we are optimizing product discovery and tailoring interactions to meet our customers' preferences. This investment reinforces our commitment to digital innovation and long-term growth. As mentioned previously, By leveraging AI for advanced inventory optimization, we are better aligning product availability with real-time demand, reducing excess stock, and minimizing lost sales. This improved agility allows us to respond more effectively to shifting consumer preferences while driving efficiency and margin improvements. The data warehouse has helped enable the implementation of these AI tools, while consolidating important customer and sales data to provide a more comprehensive view of shopping behaviors and trends. With these enhanced insights, We were refining our personalization strategies, improving demand forecasting, and strengthening customer relationships, ultimately supporting more informed, data-driven decision-making across the business. This quarter, we also continued investing in the evolution of our retail footprint through strategic store renovations, ensuring that our physical locations reflect the premium quality and heritage of the Roots brand. These upgrades are designed to enhance the in-store experience, creating a more inviting, modern, and immersive shopping environment that aligns with our customers' expectations. From refreshed store layouts and improved lighting to the integration of digital touchpoints, these renovations are aimed at strengthening brand engagement and driving increased foot traffic. In the fourth quarter, we also opened our new Chinook store in Calgary, and in 2025, customers will see enhanced roof experiences on Robson Street in downtown Vancouver, Vaughan Mills in Greater Toronto Area, and our store in the Mont Tremblant Village, amongst other smaller store improvements. We continue to see benefit from optimizing our store front print and investing in these improved store experiences. Through the combination of an increased brand presence, innovation in our key product franchises, and a continued focus on creating positive customer touchpoints, we are excited for the long-term growth potential of Roots. I will now turn the call over to Leon Wu, our Chief Financial Officer.

Thank you, Megan, and good morning, everyone. I'll start by covering our fourth quarter results, followed by a summary of our full year 2024 performance. As a reminder, there was an extra week in our last year's fiscal fourth quarter, such that Q4 2023 comprised of 14 weeks and full year 2023 results comprised of 53 weeks. Unless otherwise noted, references to the prior year results will be the respective 14 week and 53 week periods. Where meaningful, I will highlight the financial impact of last year's extra week. Starting with sales. Q4 2024 sales were 110.8 million, an increase of 2.4% as compared to 108.2 million in Q4 2023. Excluding the 2.2 million of DTC sales generated during the extra week in the prior year, total sales increased by 4.5%. DTC sales were 101.2 million in the quarter, An increase of 3.6% as compared to $97.8 million last year, or 6% excluding the extra week. Our DTC comparable same-store sales grew 7.5% during the quarter and was positive across both channels. The strong DTC sales performance during our largest quarter reflects the product, marketing, and operational functions working in unison. Our sales were driven by continued strength in our core fleece collections, including our iconic Cooper Fleece and Minimal Logo Cloud Fleece, along with our seasonal fleece collections. Our active collection also had another quarter of double-digit growth. The captivating holiday brand campaign and experiential activations drove increased traffic to Roots, while our AI-driven store replenishment and store scheduling capabilities along with store investments to enhance our customer experience, improved conversion. Partner and other sales were $9.6 million in Q4 2024, down 8.6% as compared to $10.5 billion last year. The segment is primarily driven by wholesale sales to our operating partner in Taiwan. While underlying sales to customers in Taiwan were up year over year, we recognized a temporary reduction in wholesale orders as they optimized their inventory levels. We expected the decline to continue into the first half of 2025, but believe in the expertise of our local operating partner and the long-term trajectory of the market. The decline in Taiwan wholesale orders was partially offset by strong performance in our other wholesale and licensing business and double-digit growth in our China Tmall e-commerce sales. Looking back at our full fiscal year, total sales were $262.9 million in 2024, up 0.1% as compared to $262.7 million last year, or an increase of 0.9%, excluding the extra fiscal week in 2023. Total sales in the first half of 2024 declined 6.3%, negatively impacted by inventory deficits in our core fleet collections, driven by stronger than anticipated demand in the prior holiday season. This was addressed by the start of the second half of the year, which represents a much larger portion of annual sales. Sales in the second half of 2024 grew 3.5% or 4.8% excluding the extra week last year. We are pleased with the accelerating sales momentum achieved through compelling brand messaging initiatives to improve our omni-channel customer experience and curated product assortments. Total gross profit was $68 million in Q4 2024, up 7.2% compared to $63.4 million last year. The growth in gross profit dollars was driven by an increase in DTC sales and the increase in the gross profit margin across both segments. Total gross profit margin was 61.3% in Q4 2024, up 270 basis points compared to Q4 2023. DTC gross margin was 62.4% in the quarter, up 250 basis points from 59.9% last year. The DTC gross margin expansion was driven by 280 basis points improvement in our product margin through improvements to costing and promotional discipline. partially offset by the unfavorable foreign exchange impact on U.S. dollar purchases. We expect to build on the upside to our product margin from costing opportunities into next year. However, we expect these to be offset by the stronger U.S. dollar relative to the Canadian dollar. Total gross profit for the full year was $157.1 million, an increase of 3.1% from last year. SG&A expenses were $45.2 million in Q4 2024, up 9.6% from $41.2 million last year. Of the increase, $2.2 million pertained to non-cash accounting lease modification gains last year, and $0.7 million pertained to the unfavorable revaluation of cash settled instruments under our share-based compensation plan. Excluding these two items, SG&A expense increased by $1 million, or 2.3%, and was driven by higher variable selling costs and marketing expenses. Full-year SG&A expenses were $143.5 million, up 2.3% versus last year. In Q4 2024, our accounting net loss was $21.7 million, as compared to net income of $14.6 million in Q4 2023. This decline was entirely driven by a non-cash impairment on intangible assets. Based on conservative perspectives on the global economy due to the current market dynamics, the impairment of intangible assets accounting adjustment is calculated through our comparison of the estimated recoverable value of our business against its carrying value. We do not expect the impairment charge to have any impact on our future operations and long-term growth potential. nor affect our liquidity, cash flows, or compliance with any financial and operating covenants. Excluding the impairment, net income would have totaled $15 million, up 2.9% versus last year. This equates to 37 cents per share, improving 2.8% compared to Q4 2023. Adjusted EBITDA was $25.3 million, increasing 9.1% compared to $23.2 million in Q4 2023. On a full year basis, our net loss was $33.4 million as compared to $1.8 million net income last year. Excluding the impact of the impairment, our 2024 net income would have been $3.3 million or $0.08 per share, improving from $1.8 million or $0.05 per share last year. Full year adjusted EBITDA was $21.3 million, increasing from $19.9 million in 2023. We are pleased to see the year-over-year scaling of our profit margins, both in Q4 and on a full year basis. Now turning to our balance sheet and cash flow metrics. At the end of 2024, our inventory was $41 million. up 13.4% as compared to $36.2 million at the end of 2023. The increase in inventory was primarily driven by an increase in core style units on hand, addressing the shortages in this area ending 2023, and higher in transit inventory to support our spring 2025 assortment. In addition to the improved inventory availability, we are ending the year in a cleaner inventory composition than last year, where a greater mix of on-hand units pertain to the current season or year-round styles. During Q4 2024, we generated $39.4 million of free cash flow, an increase of 9.3% as compared to $36.1 million in Q4 2023. The increase in free cash flow was driven by higher sales and lower cash taxes paid during the quarter. Net debt was $7.3 million at the end of 2024, down 56.7% as compared to $17 million at the end of 2023, and represents our lowest ever net debt. Our net leverage ratio, measured as net debt over trailing 12-month adjusted EBITDA, was under 0.4 times. In a separate release today, We announced our intention to commence our share repurchase program where normal course issuer bid for the repurchase of up to 1.3 million of our common shares, which represents 10% of our public flow. The decision to commence the NCIB reflects our strong cash flow and balance sheet position and our confidence in the long-term growth potential and value of Roots. I will now pass it back to Megan for closing remarks.

Thanks, Leon. As we look forward to 2025, we remain focused on executing our strategic initiatives while navigating an evolving retail landscape. While early in the first quarter, we saw our Q4 momentum continuing into Q1, including low double-digit direct-to-consumer comparable sales growth throughout the first eight weeks. Through continued investments in digital innovation, operational efficiencies, and brand engagement, we are positioning roots for long-term resilience and growth. While we remain mindful of external market dynamics, we have limited sales exposure to the US market. Operator, you may now open the call for questions. We'll cover in more detail and then discuss their operational highlights.

Thank you very much. To ask a question. please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally. We now have a question from Andrew Lopez and TD Karen. Please go ahead. Your line is open.

Thanks. Good morning, and thanks for the question. I'm just going to start with the consumer here. To the extent you can and realizing it's a seasonally weak quarter, what have you seen in terms of consumer trends including any negative impact from tariffs or on tariffs, sorry, on traffic and basket, and then just declining consumer confidence. And on the positive, any bi-Canadian themes that you see you taking hold?

Yeah, absolutely. Good morning, Andrew. So from our perspective, we have limited exposure to the tariffs. We have a relatively small business in the US market, and so we're not seeing any significant impact on our business thus far as it relates to that specifically. From a consumer perspective, obviously we are looking to see what happens in Canada over the longer term. From our perspective, we're mainly obviously focused on the consumer confidence over the long term, as well as looking at FX. But what I can say is that eight weeks into the first quarter, we saw low double-digit growth from a comp sales perspective. So thus far, we are seeing solid performance in our business. As it relates to the Canadian Buy Canada movement, we are incredibly proud to be a Canadian brand. And so from that perspective, we do hope that consumers continue to look for Canadian brands out there and continue to support them, as all of us are supporting the economy more broadly. We particularly have seen an increase in searches for Canada products on our website, but more fundamentally, what we saw was momentum in the Q4 period continuing into Q1. So it's very difficult for us to tell specifically what any uplift might be from Buy Canada, as opposed to our businesses continuing to trend well out of the fourth quarter.

Okay, great. And then just maybe following up on that, so you're just saying low impact tariffs. In terms of exposure to USD sourcing. What does that look like? And what initiatives do you have in place to offset or preserve margin loss from those exposures?

Yeah, Andrew, good morning. So on the US dollar perspective, we do source a significant amount of our products in US dollars, but also alongside local manufacturing in Canada, as well as with local vendors. So we do engage in a hedging program to lock in on US dollars about 12 months in advance, which gives us some visibility into that cost and allows us to manage it appropriately. So overall, it is a more volatile foreign exchange market, but I feel great about our position relative to the predictability, given that we have a large amount of hedges in place.

Okay, great. Just a couple more for me. I recall you had an ambitious marketing initiatives upon the last call. Looking forward to fiscal 25. So does that outlook get fine-tuned either to the upside or downside given today's uncertain outlook?

I think it's really important from a consumer perspective to continue to be top of mind. So from our perspective, we are continuing to invest behind things like our brand ambassador program, making sure that we're thinking about our advertising channels more robustly. So you saw in the fourth quarter, we extended into things like streaming. We have had more outdoor advertising. We had some events and activities for our consumers. So we're going to continue to invest behind those things. Obviously, when we look at our business, we think about the different markets we're in and we move our money around to be focused on the markets where we see the most potential. And we're going to continue to do that this year.

Okay. Maybe last one. How are you approaching your inventory for the fall winter season? Same thing with the economic uncertainty and consumer uncertainty. And just how do you anticipate your automated replacement will work there?

Yeah, good question, Andrew. I mean, I want to first reiterate Megan's comment where in the first eight weeks, we are still seeing low double-digit growth. So it is encouraging and giving us some optimism in terms of the long-term growth, especially for the rest of the year. That being said, we are mindful of what could potentially, or we're mindful of monitoring how the consumer reacts over time. The good thing about our holiday and fall and holiday buys is that it is heavily comprised of core favorites that we will bring back year-round. So it's something that we don't have a lot of seasonal inventory that would quote unquote bad at the end of the season. So we're confident that the inventory will support the grill as it arrives. And also we won't present with inventory health challenges in the long run.

OK, yeah, and I guess I recall you saying maybe that you were looking into Q1. You guys are in pretty good inventory position in terms of noncurrent. Yes, yes.

We have a great composition of inventory at the end of the year going to Q1. So I guess safe to say that that's working pretty well so far, the automated replenishment.

Yes. Maybe I'll just sneak one more in here. I'm sorry. I'll just sneak one in here.

Yes, you're fine. Automated replenishment is doing well. Go ahead. Okay.

Yeah. I just want to ask... In terms of like, what leverage are you guys targeting for the 25 with your NCIB?

So we continue to manage our net debt appropriately and each year we continue to deliver. Ultimately with the NCIB, given the current market dynamics, we saw some great opportunities to buy back shares and return value to the shareholders. So we will continue to assess our capital management based on how the market evolves and based on how the performance of the business trends. But ultimately, we thought that the NCAB was a great opportunity at this time. That's great.

Congratulations on the strong quarter. Thanks for the question.

Thank you.

As a reminder, to ask a question, please press star followed by one on your telephone keypad. We currently have no further questions, so I'll hand back to Megan for some closing remarks.

Thank you, Operator. Thank you everyone for joining us today for our strong fourth quarter results release. We look forward to speaking to you in the first quarter.

This concludes today's call. Thank you very much for joining. You may now disconnect your lines.