Roots Corporation reported that total fiscal third quarter sales were CN$66.9 million for the 13-week period ended November 2, a 5.3 percent increase compared to CN$63.5 million in Q3 2023.
The Canada-based outerwear and sportswear brand reports in Canadian dollars (CN$) unless noted otherwise.
The company reported DTC to be CN$54.2 million for the period, up 3.8 percent compared to CN$52.2 million posted in the 2023 Q3 period. DTC comparable sales grew 5.8 percent during the quarter and were reportedly positive across both channels.
“The increase in DTC sales was driven by strong performance in our core product collections like Cooper fleece, Cloud fleece and Active, which was further amplified through our back-to-school and fall marketing campaigns and improved in-stock position,” detailed company CFO Leon Wu on a conference call with analysts.
Wu said investments in AI-driven store replenishment and store scheduling, enhancements to the store experience at key flagship locations, and the omni-channel endless aisle capabilities launched last year also led to improved conversion. He said the growth in DTC sales was partially offset by closures of select stores since Q3 2023 as part of the company’s ongoing initiative to optimize its 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,” Wu said.
Partners & Others (P&O) sales, which include wholesale Roots branded products, licensing to select manufacturing partners and the sale of certain custom products, were CN$12.7 million in the quarter, up 12 percent from CN$11.3 million in Q3 last year. Higher sales reportedly drove the sales increase to the company’s international operating partner in Taiwan due to 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.
Wu noted that the extra week in the fourth quarter of fiscal 2023 represented CN$2.2 million of sales last year.
Income Statement Summary
Total gross profit was CN$40.2 million in Q3 2024, up 8.2 percent compared to CN$37.1 million in Q3 last year. The growth in gross profit dollars was reportedly 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 60.0 percent of sales in Q3, up 160 basis points compared to 58.4 percent in Q3 2023. DTC gross margin was 64.0 percent of sales in the quarter, up 160 basis points from 62.4 percent in Q3 last year.
Wu noted that the company’s 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,” Wu shared. “This was partially offset by an unfavorable foreign exchange impact on US 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 CN$34.5 million in the third quarter, up 2.1 percent from CN$33.8 million in Q3 last year. The increase in SG&A expenses was primarily driven by increases in store personnel costs due to legislative minimum wage increases throughout 2023, and recently in October 2024, and higher variable selling costs.
As a percentage of sales, SG&A expenses declined from 53.2 percent of sales last year down to 51.6 percent of sales this year.
Net income was CN$2.4 million, or 6 cents (Canadian) per share, improving from CN$0.5 million, or 1 cent (Canadian) per share in Q3 last year. Adjusted EBITDA was CN$7.1 million, increasing 28.8 percent compared to CN$5.5 million in Q3 2023.
Balance Sheet and Cash Flow Summary
Inventory was CN$60.4 million at quarter-end, down 2 percent as compared to CN$61.4 million at the end of Q3 2023. Wu said the year-over-year decrease in inventory was primarily driven by the strong sell-through of the company’s pack-and-hold inventory over last year and lower off-price inventory, 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,” Wu added. “Early benefits include the capability to enable daily replenishment, improve store inventory turns, and reduce dormant stock.”
Free cash flow was a CN$6 million outflow in Q3 as compared to an outflow of CN$1.7 million in Q3 2023. The increased year-over-year cash outflow was reportedly due to a return to the company’s seasonal inventory purchase cadence for the fall and winter season which was reportedly reduced last year due to the higher pack-and-hold inventory levels.
Net debt was CN$46.9 million at the end of Q3 2024, down 11.3 percent as compared to CN$52.9 million at the end of Q3 2023.
The company’s net leverage ratio, measured at net debt over trailing 12-month adjusted EBITDA, was 2.4X at quarter-end, improving from 2.6X at the Q3 quarter-end last year.
“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 periods,” added company President and CEO Meghan Roach. “While it is still early, the preliminary results underscore the long-term growth opportunities at 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.”
Established in 1973, Roots is a global lifestyle brand. Starting from a small cabin in northern Canada, Roots has become a global brand with over 100 corporate retail stores in Canada, two stores in the United States and an eCommerce platform, roots.com.
Image courtesy Roots Corporation
