Roots, the Canadian lifestyle retailer, reported earnings on an adjusted basis rose 25.9 percent in the third quarter as sales grew 13 percent.
Third Quarter Highlights
• Total sales increased 13 percent compared to the third quarter of fiscal year 2016 (“Q3 2016”), to $89.7 million
• Comparable sales growth of 10.1 percent
• Gross margin expanded 180 basis points over Q3 2016, to 54.9 percent
• Adjusted EBITDA increased 20.5 percent over Q3 2016, to $16.3 million
• Reported EPS decreased 15.7 percent compared to Q3 2016, to 12 cents per share, and adjusted EPS increased 25.9 percent over Q3 2016, to 23 cents per share
Roots completed an initial public offering in October.
Jim Gabel , president and chief executive officer of Roots Corporation, commented, “We are pleased to have delivered strong financial results for the third quarter, which demonstrates the strength of our brand and the early momentum of our operational investments and strategic growth initiatives. In addition to delivering 10.1 percent comparable sales growth, we continued to make progress on our growth plans, including the expansion of our Canadian and international footprint, and increased penetration of our e-commerce business.”
Gabel continued, “Our recent IPO was a significant milestone for Roots and we are very excited to take this important step forward in our development. While we are very proud of all that we have achieved thus far, we believe we are in the very early innings of unlocking our potential to capture the tremendous opportunity that lies ahead.”
Summary of Third Quarter Financial Results
Total sales increased by 13 percent to $89.7 million from $79.4 million in Q3 2016. Sales in the Direct-to-Consumer (DTC) segment were $77.2 million , a 14 percent increase, as compared to $67.7 million in Q3 2016. The strong DTC segment results were driven by comparable sales growth of 10.1 percent, and the opening of four net new corporate retail stores since Q3 2016. We have also renovated or expanded five corporate retail stores since Q3 2016, including the expansion of our store within Yorkdale Shopping Centre, Toronto, Ontario , which became our first enhanced experience store in Canada. Our increased investments in marketing and people are continuing to contribute nicely to our results. Sales in the Partners and Other segment were $12.5 million , a 7.1 percent increase, as compared to $11.7 million Q3 2016. Partners and Other segment results were driven by strength across all divisions, including the opening of 11 net new stores in Asia by our partner since Q3 2016.
Gross profit increased by 16.9 percent to $49.3 million from $42.1 million in Q3 2016. Gross profit margin increased 180 basis points to 54.9 percent from 53.1 percent in Q3 2016. Gross profit in the DTC segment increased by 17.8 percent, with gross margin expansion of 190 basis points to 59.1 percent, driven by our United Brand Range, or UBR, with improved sourcing and more full-price selling. DTC gross margin also benefited from favorable FX rates on goods purchased in US dollars. Gross profit in the Partners and Other segment increased by 6.9 percent, with gross margin of 29.1 percent, driven by an increase in wholesale sales to our operating partner in Asia .
Selling, general and administrative expenses were $40.8 million , as compared to $32.3 million in Q3 2016, driven by incremental costs to support higher sales, investments made in the growth of our business, and costs incurred in relation to the Initial Public Offering.
Adjusted EBITDA increased by 20.5 percent to $16.3 million from $13.5 million in Q3 2016.
The effective tax rate was 28.2 percent, as compared to 29.1 percent in Q3 2016. The decrease in the effective tax rate was primarily driven by less non-deductible expenses incurred in Q3 2017 compared to Q3 2016.
Net income was $5 million , or 12 cents per share, as compared to $5.9 million , or 14 cents per share, in Q3 2016.
Adjusted net income increased by 25.9 percent to $9.5 million , or 23 cents per share, as compared to $7.6 million , or 18 cents per share, in Q3 2016.
Based on our strong performance in the third quarter and year-to-date, the power of our brand and business model, and the ongoing progress we are making towards the execution of our UBR and growth strategies, we are on track to achieve the following financial targets by the end of fiscal 2019:
• Sales of $410 million to $450 million , which implies a compounded annual growth rate (CAGR) of 13 percent to 17 percent from fiscal 2016 to fiscal 2019;
• Adjusted EBITDA of $61 million to $68 million, which implies a CAGR of 14 percent to 18 percent from fiscal 2016 to fiscal 2019; and
• Adjusted net income of $35 million to $40 million, which implies a CAGR of 18 percent to 23 percent from fiscal 2016 to fiscal 2019.
Photo courtesy Roots