Roots Corporation (ROOT) Earnings Call Transcript & Summary

Good morning. My name is Alexis, and I will be your conference operator today. At this time, I would like to welcome everyone to Roots Corporation Fiscal 2021 Annual Meeting of Shareholders. Before the meeting begins, Roots would like to remind listeners that some of the statements made this morning may contain forward-looking statements. These are subject to a number of risks and uncertainties that could cause actual results to differ. Roots refers listeners to the cautionary statements contained in its financial reports and other public documents for full details. I will now turn the line to Roots' Chairman of the Board, Erol Uzumeri.

[Technical Difficulty] you to the fiscal 2021 Annual Meeting of Shareholders of Roots Corporation, which I would like to now formally call to order. In accordance with our bylaws, Kaleb Honsberger, Roots' General Counsel, will act as secretary of the meeting. I would also ask Louise Waltenbury of Computershare Investor Services, Roots' transfer agent, to act as scrutineer of the meeting. The notice of the annual meeting was mailed to shareholders on June 22, 2022. We have received an affidavit of Computershare Investor Services confirming the mailing. I direct that a copy of this affidavit be kept with the records of this meeting. I've received the scrutineers' preliminary report on the attendance of this meeting of shareholders. The secretary has confirmed that there is a quorum present. I would ask that the secretary file a copy of the scrutineer's report with the minutes of this meeting. Of the approximately 42.2 million issued and outstanding shares, approximately 30 million or 71% are represented. I therefore declare that the meeting is properly constituted for the transaction of business for which it has been called. I'll begin today's meeting by outlining how the voting and questions will be addressed in this virtual meeting format. The primary difference in how we will conduct today's meeting is the manner in which voting will take place. Usually, and this year is no exception, the majority of shareholders submit their proxies or voting instructions in advance of the meeting. Under our normal practice, registered shareholders or duly appointed proxy holders, who wish to vote at the meeting, would be required to attend the meeting in person. As this meeting is being held virtually via live webcast, voting during the meeting will take place on our virtual webcast platform. [Technical Difficulty] today's meeting, voting on all matters will be conducted by electronic ballot. Registered shareholders and duly appointed proxy holders will be asked to vote on each business item after the presentation of each item. When you are asked to vote, you can do so using the Voting icon on the right side of your screen. You will only have a certain amount of time to do so when the polls are open. If you've voted in advance of the meeting, and you do not wish to revoke your previously submitted proxy, then you do not need to vote during the meeting. Another manner in which the virtual meeting will be different is with respect to questions, which will be accepted through the online platform. To submit a question, please use the Q&A feature of the online platform. When submitting a question, please identify whether it relates to a motion being considered as part of the formal business of the meeting or whether it is general in nature. We will address questions directly related to a particular motion at the appropriate time of the meeting and take general questions until after the formal business has been completed. Questions with common themes may be grouped together for efficiency. I encourage you to submit your questions as early as possible and to keep your questions brief. Please note that only registered shareholders or duly appointed proxy holders are entitled to vote at the meeting. And official shareholders who have not duly appointed themselves as proxy holders are not able to vote at the meeting. However, all registered shareholders and duly appointed proxy holders may ask questions. I'll now turn to our formal business. The items of business of the meeting are described in the management information circular, which accompanied the notice of meeting sent to all shareholders. There are 3 items of business to be considered today. First, to receive Roots' consolidated financial statements for the 52-week period ended January 29, 2022; second, to elect directors; and third, to reappoint the auditors and authorize the directors to fix their remuneration. To make the best use of our time, I will move and second all proposals, which are called for in the notice of meeting. I now place before the meeting the fiscal 2021 consolidated financial statements of Roots and the auditors' report thereon. These are included in the annual report, which has been made available to shareholders. No action needs to be taken by shareholders with respect to such financial information -- such financial statements. We will now proceed to the election of directors. It is my pleasure to introduce the other Director nominees, Phil Bacal; Mary Ann Curran; Greg David, Dale Lastman, our Lead Independent Director; Rich Mavrinac, Chair of our Audit Committee; Dexter Peart; Meghan Roach, our President and CEO; and Joel Teitelbaum. Our management information circular contains detailed biographies setting out the professional qualifications and experience of these nominees. 9 directors are to be elected. All of the nominees have consented to stand for election to the Board. Online proposed nominees are currently members of the Board. In keeping with best governance practices, our shareholders voting by proxy for directors individually rather than by a full slate. I'm pleased to report that based on proxies received by the scrutineer in advance of the meeting, each director received -- each director nominee received votes in favor of their election from at least 99.5% of votes cast. I will now move and second the nomination of each of the previously mentioned director nominees to hold office until the next Annual Meeting of Shareholders, or until their successors are duly elected or appointed. Roots' bylaws require that nominations of directors by shareholders be received by the directors at least 30 days in advance of the meeting in order to be valid. As no nominations other than those set forth in the management information circular, and included for election at this meeting were received prior to the deadline, the nominations are closed. As this is an uncontested election, Roots' majority holding policy will apply, which, in short, means that any director receiving more withhold votes than votes for is required to promptly offer their resignation for consideration by the Board as described in the management information circular. You have now heard the motion for the election of directors. I would ask registered shareholders or duly appointed proxy holders to cast their votes through the online portal. As we mentioned, voting today will be conducted by electronic ballot. I will now take a moment to ask that the balloting be open to registered holders and duly appointed proxy holders. The polls are now open, and at this point, all registered shareholders and proxy holders, who are properly logged in with their control numbers or invite code and wish to vote will be able to see on the screen all motions being brought forth at this meeting. Please register your votes by accessing the voting page and selecting the For or Withheld buttons next to the name of each proposed director nominee. As a reminder, if you have already voted or sent in your proxy, there is no need to do anything unless you wish to change your vote. [Voting]

Thank you for casting your votes. We will now proceed with the final order of business, the reappointment of the auditors of the company for the ensuing year and to authorize the directors of the company to fix the remuneration of the auditors. The Audit Committee of the Board of Directors of the company has approved, subject to shareholder confirmation, the reappointment of KPMG LLP, chartered professional accountants, as the auditors of the company. I move and second that KPMG be reappointed auditors of the company until the next Annual Meeting of Shareholders and that the Board of Directors be authorized to fix their remuneration. Per the motion, I will now take a moment to ask that the balloting be opened and would ask registered shareholders or duly appointed proxy holders to cast their votes through the online portal. At this point, all registered holders and proxy holders, who have properly logged in with their control numbers or invite code and wish to vote, will be able to see this motion on their screen. As a reminder, if you have already voted or sent in your proxy, there is no need to do anything unless you wish to change your vote. I'll now pause to allow you to vote. [Voting]

Thank you for casting your votes. The polls are now closed. This brings us to the end of voting on the items of business before this meeting. We have been informed by the scrutineer that the preliminary vote report shows that each of the proposed director nominees have been duly elected as directors of Roots to hold office until the next Annual Meeting of Shareholders or until they resign or their successors are duly elected and appointed, and KPMG LLP, chartered professional accountants, are reappointed auditors of the company and that the directors are authorized to fix the auditors remuneration. As there is no further business to be brought before the meeting, I now move and second the formal termination of the meeting and declare the formal portion of this meeting terminated. At this time, I'll pass the meeting to Meghan Roach, President and CEO, for a short management presentation and Q&A period. Meghan?

Thank you, Erol. Now that the formal part of the annual meeting is over, we will move to our management presentation. If you are following along with us, the presentation was posted this morning on our website, investors.roots.com under Investors. As a start, please turn to Slide 4. For those of you unfamiliar with our story, Roots is a global lifestyle apparel brand. We started in a small cabin in Northern Canada in 1973. Since then, Roots has become a global brand, with over 100 corporate retail stores in Canada, 2 stores in the United States, and an e-commerce platform that serves over 55 international markets. We also have more than 100 partner-operated stores in Asia and operate a dedicated Roots branded storefront on Tmall.com in China. Roots' unique selling point is our timeless offering of high-quality, comfortable clothing. We are an iconic Canadian brand with a global presence. Turning to Slide 5. Our values serve as a guiding light for our long-term strategy. We believe in the power of the community. We strive to be a place of diversity, inclusivity and open-mindedness. We aim to be genuine in everything we do. This means we draw inspiration from global sources. However, we never forget where we came from with regards to our Canadian heritage. Third, integrity is very important to us. We always aim to do what is right and build tracks within our community. And finally, freedom is a key value that is reflected in our daily operations and our products. We celebrate the individuality of style as a form of self-expression. Now please turn to Slide 6, where we will review our fiscal 2021 results. Fiscal 2020 proved to be a strong year for Roots. In an unprecedented market environment, with supply chain disruptions and the lingering pandemic, we delivered growth in revenue, gross margin and profitability. Revenue increased 13.9% year-over-year to $273.8 million, and gross margin improved by 140 basis points to 59.5%. Direct-to-consumer gross margin expanded by 150 basis points to 61.3% in 2021. On the profitability side, net income and adjusted EBITDA totaled $22.8 million and $50.1 million, respectively. We attribute our success to a disciplined focus on our key priorities in 2021. We leveraged our omnichannel platform to deliver robust sales growth. We offered a compelling mix of heritage and new products to meet customers' evolving needs. And we reduced promotional days to 23 in 2021, down from 140 in 2020 and 213 in 2019 to elevate our brand and improve margins. We also remain focused on operational excellence to improve efficiencies and increase profitability. Finally, we continued our corporate social responsibility efforts by giving back to the communities in which we live. As you can see, Roots made significant progress against its profitable growth strategy in 2021. Turning to our 2021 operational highlights on Slide 7. We introduced our One Collection, designed with a gender free fit, sustainable materials and extended sizing. Our One Collection is made with organic cotton and recycled polyester, while being one of the most comfortable collections within the Roots' lineup. It also uses gender-free numerical sizes from 1 to 8, enabling customers to focus on how they want to feel in their clothes rather than be restricted by the limits of conventional sizing. The market response has been very positive, establishing One as a permanent collection within the Roots' offering. We also provided more sizes for iconic Salt & Pepper sweats based on our customer demand and moved many of our kin, baby and toddler collections to be gender free. Demand for our core products category also remains strong, especially with hybrid work becoming the norm. People are seeking comfort, quality and versatility in their apparel, both at work and at home. I'm equally pleased with the strong momentum generated by our Journey Collection, our performance offering for consumers. This collection offers technical features such as antibacterial fabric, moisture-wicking, and UV protection. Customer traction has been robust, with sales growing over 40% year-over-year in 2021, and this trend continued in the first quarter of 2022. I'm also excited about the potential of our Premium Studio [ Sleep ] Collection. Each studio piece is a limited edition and involves a unique design that is embraided at our leather factory in Toronto. These superior quality items, often supported by high-profile collaborations, are treated very much like Sneaker Drop and have sold out at price points over $200. In addition, we have a strong pipeline of products to support further growth in 2022. This includes the relaunch of Beaver Canoe this summer in celebration of its 48th anniversary. Other highlights in 2022 included successfully navigating through supply chain disruptions, inflationary pressures and the lingering effect of the COVID-19 pandemic. These challenges remain in 2022 to varying degrees, but we have a proven track record of dealing with them head on through effective contingency plans. A prime example is that we have been air freighting selected collections to ensure that we have a full lineup in place for the revenue-intense second half of the year. As previously mentioned, we kept promotional days to a minimum in 2021. Roots is not a fast fashion brand. We are known for offering comfort and quality to loyal customers who have a long-standing relationship with our brand. We know customers see the value in our products at full price, and we want them to purchase new items when they come up first. As a result, we have painstakingly peeled back promotions in recent years to increase profitability, resulting in better gross margins. This disciplined approach towards promotions also created a higher price benchmark for the brand, allowing us to offer highly coveted items like the limited-edition studio [ sleep ] and our Varsity Jacket. Moving on to our expanded commitment to corporate social responsibility on Slide 8. We are well on our way to having most of our apparel made with sustainable materials by the end of 2022. This represents an achievement in an area where our team has been at work, hard at work over the past 3 years. We have briefly joined several leading organizations in the apparel industry focused on sustainability, including the Sustainable Apparel Coalition, which is the industry's leading alliance for measuring sustainability. These memberships reflect our commitment to reducing our environmental footprint and promoting social justice throughout the global supply chain. In addition, with the company's values of community, being genuine, integrity and freedom well entrenched, we regrouped our philosophic efforts under our Roots Cares program. During the past year, we've donated approximately $1 million of cash in kind donations to various organizations through the Cares and $3 million in February 2020. Finally, we recently ranked amongst Canada's best employers for diversity according to Forbes Magazine. Diversity, quality, equity and inclusion remain an important focus for Roots' and one of our key priorities. Next, on Slide 9. I would like to highlight our 4 main pillars driving profitable growth at Roots. First, we want to offer an elevated omnichannel experience to our customers wherever, however and whenever they shop. In 2021, more than 70% of our e-commerce traffic came from mobile devices, and we remain focused on further elevating our digital capabilities to create a more seamless, frictionless experience for consumers. During the first quarter of 2022, we continued omnichannel infrastructure enhancements, and we expect to have most of these completed in the second half of the year. Second, we intend to reinforce the Roots' brands globally. In a brand health assessment conducted last year, we earned a Net Promoter Score of 78 from customers, reflecting their love and enthusiasm for Roots. We intend to increase brand awareness to a broader audience through ongoing collaborations with artists, celebrities and influencers. A few high-profile names that we have partnered with include the Weekend, Swedish House Mafia, and [indiscernible] along with local artists like Benny Bing and Morningstar, who have a passionate fan base. We are committed to growing and raising the Roots brand to the next level on a global scale. At the end of 2021, we shipped to more than 55 countries through our e-commerce platform, with an estimate -- established presence in Canada and Taiwan. We continue to see significant growth opportunities in both markets. And over the medium term, our expansion plans include the United States and China, where we plan to take a digitally-led approach to these markets. Third, we will continue to progress on our corporate social responsibility initiative with a near-term focus on shifting a large portion of raw materials to sustainable fibers, establishing a baseline for future sustainability measures and intensifying efforts to integrate diversity, equity, quality and inclusion into our daily operations. And fourth, we will maintain operational excellence across the organization. During the pandemic, we developed skill sets that allowed us to improve operational efficiency and reduce costs without sacrificing customer service. Now on Slide 10, we will review our Q1 2022 results that were released last month. Roots delivered solid results amid a dynamic environment in the first quarter. Sales increased 15.3% year-over-year to $43.1 million. Our strong performance can mainly be attributed to growth in customer traffic. Gross margin improved by 340 basis points to 60.9% in the first quarter of 2022, primarily as a result of higher product margins and our discipline around promotions. In terms of bottom line, adjusted EBITDA amounted to a loss of $3.2 million in the first quarter of 2022, compared to a loss of $2.5 million last year. However, of note, last year's adjusted EBITDA included $3 million in government subsidies and rent abatements compared to only $0.1 million in Q1 2022. Excluding these items, our adjusted EBITDA improved by $2.2 million year-over-year. Net loss in the first quarter of 2022 totaled $5.3 million or $0.13 per share versus $4.9 million or $0.12 per share for the same period last year. Now moving on to our solid financial position on Slide 11. At the end of the first quarter, net debt stood at $39.4 million, which is nearly 50% less than the same time last year. Our net leverage ratio was also healthy at 0.8x at the end of Q1. In summary, fiscal 2022 is off to a solid start, with greater store traffic driving sales growth in the first quarter, while we have maintained our promotional discipline. Our results reflect the strength and enduring strength and the positioning of our brands in the marketplace. And finally, moving to Slide 12. I want to conclude with our outlook for the rest of fiscal 2022. The overall market environment is improving with customers coming back to our stores. It should be noticed, however, we will not benefit from government subsidies or rent abatements this year compared to benefits totaling approximately $12.8 million in fiscal 2021. In terms of mitigating ongoing supply chain disruptions, we have taken a proactive stance, which includes finding the optimal balance between air freight, premium and regular ocean freight as well as strategically managing our pack and hold inventory. As outlined in our Q1 2022 conference call last month, we expect an impact on our DTC gross margin of 150 to 250 basis points in the second half of the fiscal year. In the meantime, we are focused on executing our long-term profitable growth strategy. Roots has a history of nearly 50 years, which fosters passion, pride and resilience throughout the organization. These key attributes, combined with our strong brand equity, lays the foundation for a sustainable growth platform. I would like to thank our entire team for their dedication and hard work throughout fiscal 2021 and continuing into 2022. We remain focused on operational excellence throughout all levels of the organization. And despite external challenges, our agility and resilience will allow us to continue driving solid results. We will now open the floor to questions, and I invite Trevor Heisler of MVC Capital Markets Advisors to read any questions submitted.

Thank you, Meghan. Please wait a moment while I gather any questions submitted through the online portal. I do not see any questions submitted through the portal. I would now like to turn the meeting back over to Meghan for her closing remarks.

Thank you, Trevor. This concludes our management presentation at the Annual Meeting of Shareholders. On behalf of the Roots' team, thank you for joining us today.

This concludes the meeting. You may now disconnect your lines.