Earnings call transcript: Roots Q4 2024 sees sales growth, stock dips

Roots Inc. (ROOTS.TO) reported its financial results for the fourth quarter of 2024, showcasing a modest increase in sales and a significant improvement in profitability. Despite these positive results, the company's stock experienced a decline in premarket trading, dropping by 1.02% to $107. According to InvestingPro analysis, the stock is currently trading above its Fair Value, with a high P/E ratio of 73.9x. The company's strategic focus on digital innovation and expanding its product line appears to be paying off, although market reaction was subdued.

Key Takeaways

• Total sales in Q4 2024 rose by 2.4% year-over-year to $110.8 million.
• Adjusted EBITDA increased by 9.1% year-over-year, representing 22.8% of sales.
• Gross margin improved significantly, expanding by 270 basis points to 61.3%.
• Net debt was reduced by 56.7% to $7.3 million.
• The stock price fell by 4.13% in the most recent trading session.

Company Performance

Roots demonstrated resilience in Q4 2024 with a notable increase in sales and profitability. The company's strategic initiatives, including launching new product collections and enhancing digital platforms, contributed to its performance. Despite the positive financial results, the stock market's response was muted, reflecting broader market trends and investor caution.

Financial Highlights

• Revenue: $110.8 million, up 2.4% year-over-year.
• Adjusted EBITDA: $25.3 million, up 9.1% year-over-year.
• Gross Margin: 61.3%, a 270 basis point improvement.
• Net Debt: Reduced to $7.3 million, a decrease of 56.7% from the previous year.

Market Reaction

In premarket trading, Roots' stock declined by 1.02% to $107. This movement reflects a cautious investor sentiment despite the company's solid financial performance. With a beta of 2.42, InvestingPro data shows the stock typically experiences higher volatility than the market. The stock's recent decline of 4.13% in the regular session aligns with this characteristic, though it's worth noting the impressive 183% gain over the past six months.

Want deeper insights? InvestingPro subscribers have access to 15+ additional ProTips and comprehensive financial metrics for Roots, including detailed valuation analysis and growth projections.

Outlook & Guidance

Roots is optimistic about its future, with plans to continue investing in marketing and digital innovation. The company expects growth in its activewear and core fleece collections, supported by a new share repurchase program of up to 1.3 million shares. Forward guidance projects steady revenue growth, with significant improvements anticipated in EPS by FY2026. InvestingPro's comprehensive analysis indicates a Financial Health Score of "GOOD," suggesting strong fundamentals despite current market volatility.

Executive Commentary

CEO Megan Roche emphasized the company's commitment to digital innovation and brand engagement, stating, "Through continued investments, we are positioning Roots for long-term resilience and growth." CFO Leon Wu highlighted the profitability improvements, noting, "We are pleased to see the year-over-year scaling of our profit margin."

Risks and Challenges

• Market Volatility: The stock's recent decline suggests potential investor concerns about market conditions.
• Economic Dynamics: Fluctuating consumer confidence and economic factors could impact sales.
• Competition: Increasing competition in the retail sector may pressure margins.
• Currency Fluctuations: Although hedging strategies are in place, currency changes could affect costs.
• Supply Chain: Potential disruptions could impact inventory and delivery schedules.

Roots' Q4 2024 performance reflects strategic successes in product innovation and operational efficiency, yet market reactions indicate caution among investors. The company's future growth will depend on its ability to navigate economic challenges and maintain its competitive edge.

Full transcript - Root Inc (ROOT) Q4 2025:

Sammy, Conference Operator: Good morning. My name is Sammy, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Roots Fourth Quarter and Fiscal Year twenty twenty four Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

On the call today, we have Megan Roche, 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 and 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 fourth quarter management's discussion and analysis dated 04/08/2025, 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 and analysis are available on SEDAR as well as on the Roots Investor Relations website at www.investors.roots.com. A supplementary presentation for the Q4 twenty twenty four 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 begin your conference.

Megan Roche, President and Chief Executive Officer, Roots: Thank you, operator. Good morning, everyone, and thank you for joining our Q4 twenty twenty four earnings call. On the call today, I will briefly review our fourth quarter financial results, which our CFO, Leon Thank you, operator. Good morning, everyone, and thank you for joining our Q4 twenty twenty four earnings call. On the call today, I will briefly review our fourth quarter financial results, which our CFO,

Leon Woo, 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 $110,800,000 compared to sales of $108,200,000 last year, representing an increase of 2.4% year over year. Excluding the fifty third week in 2023, Q4 '20 '20 '4 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 allocation, 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 two seventy basis points, reflecting our ability to optimize product costs and reduce discounting, leading to an adjusted EBITDA for the quarter of $25,300,000 or twenty two point eight percent of sales, increasing 9.1% from $23,200,000 or 21.4% of sales last year. To close the year, we also continued strengthening our balance sheet with net debt ending at $7,300,000 a 56.7 reduction compared to 2023 and a substantial reduction from our peak of over $96,000,000 in 2019. I will now turn to our fourth quarter operational highlights that drove a 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 trending quarter of the year. Our holiday campaign delivered strong results. The 360 degree approach of our anything Ruth, everything holiday campaign reaffirm Ruth as the ultimate gifting destination for the thoughtful gifter. By focusing on emotional engagement and holiday memories, we blend in 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 Wiki collaboration products and marketing efforts resulted in significant brand heat with a very positive customer response. One of our main products and 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 Q4 performance than in previous years, enabling us to speak to more consumers across multiple geographies with varied interests. And finally, the first Roots external tempo collection, which launched in q four, marked our latest efforts to reconnect with Roots heritage in athletic and sports partnership.

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 investor partnerships, and increased awareness during our seasonally 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 resonate 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. 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 at important collections also contributed to our improved gross margin. 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 touch points 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 ecommerce capabilities at Ruth 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 are 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 touch points, these renovations are aimed at strengthening brand engagement and driving increased foot traffic. In the fourth quarter, we also opened our niche and next store in Calgary. And in 2025, customers will see enhanced youth experiences on Robson Street in Downtown Vancouver, Vaughan Mills in Greater Toronto area, and our store in the Mont Tremont Village, amongst other smaller store improvements.

We continue to see benefit from optimizing our store footprint and investing in these improved store experiences. Through the combination of an increased brand presence, innovation in our key product franchises and the continued focus on creating positive customer touch points, 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.

Leon Wu, Chief Financial Officer, Roots: 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 twenty twenty three comprised of fourteen weeks and full year 2023 results comprised of fifty three weeks. Unless otherwise noted, references to the prior year results will be the respective fourteen week and fifty three week period. Where meaningful, I will highlight the financial impact of last year's extra week.

Starting with sales. Q4 twenty twenty four sales were $110,800,000 an increase of 2.4 as compared to $108,200,000 in Q4 twenty twenty three. Excluding the $2,200,000 of DTC sales generated during the extra week in the prior year, total sales increased by 4.5%. DTC sales were 101,200,000 in the quarter, an increase of 3.6% as compared to $97,800,000 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 routes, 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 $9,600,000 in Q4 twenty twenty four, down 8.6% as compared to $10,500,000,000 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 expect the decline to continue into the first half of twenty twenty five, 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 $262,900,000 in 2024, up 0.1% as compared to $262,700,000 last year or an increase of 0.9% excluding the extra fiscal week in 2023.

Total sales in the first half of twenty twenty four declined 6.3, negatively impacted by inventory deficits in our core fleece 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 twenty twenty four 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 omnichannel customer experience and curated product assortment. Total gross profit was $68,000,000 in Q4 twenty twenty four, up 7.2% compared to $63,400,000 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 twenty twenty four, up two seventy basis points compared to Q4 twenty twenty three. DTC gross margin was 62.4% in the quarter, up two fifty basis points from 59.9% last year. The DTC gross margin expansion was driven by two eighty 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 for 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 CAD157.1 million, an increase of 3.1% from last year. SG and A expenses were CAD45.2 million in Q4 twenty twenty four, up 9.6% from $41,200,000 last year. Of the increase, dollars 2,200,000.0 pertained to non cash accounting lease modification gains last year and $700,000 pertained to the unfavorable revaluation of cash settled instruments under our share based compensation plan. Excluding these two items, SG and A expense increased by $1,000,000 or 2.3% and was driven by higher variable selling costs and marketing expenses. Full year SG and A expenses were $143,500,000 up 2.3% versus last year.

In Q4 twenty twenty four, our accounting net loss was $21,700,000 as compared to net income of $14,600,000 in Q4 twenty twenty three. This decline was entirely driven by a noncash impairment on intangible assets. Based on conservative perspectives of 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 $15,000,000 up 2.9% versus last year.

This equates to $0.37 per share, improving 2.8% compared to Q4 twenty twenty three. Adjusted EBITDA was $25,300,000 increasing 9.1% compared to $23,200,000 in Q4 twenty twenty three. On a full year basis, our net loss was $33,400,000 as compared to $1,800,000 net income last year. Excluding the impact of the impairment, our 2024 net income would have been $3,300,000 or $08 per share, improving from $1,800,000 or $05 per share last year. Full year adjusted EBITDA was $21,300,000 increasing from $19,900,000 in 2023.

We are pleased to see the year over year scaling of our profit margin, both in Q4 and on a full year basis. Now turning to our balance sheet and cash flow metrics. At the end of twenty twenty four, our inventory was $41,000,000 up 13.4% as compared to $36,200,000 at the end of twenty twenty three. 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 twenty twenty five assortment. In addition to the improved inventory availability, we are ending the year in a cleaner inventory composition to last year, where a greater mix of on hand units pertain to the current season or year round styles.

During Q4 twenty twenty four, we generated $39,400,000 of free cash flow, an increase of 9.3% as compared to $36,100,000 in Q4 twenty twenty three. The increase in free cash flow was driven by higher sales and lower cash taxes paid during the quarter. Net debt was $7,300,000 at the end of twenty twenty four, down 56.7 as compared to $17,000,000 at the end of twenty twenty three and represents our lowest ever net debt. Our net leverage ratio measured as net debt over trailing twelve month adjusted EBITDA was under 0.4 times. In a separate release today, we announced our intention to commence our share repurchase program or normal course issuer bid for the repurchase of up to 1,300,000.0 of our common shares, which represents 10% of our public float.

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.

Megan Roche, President and Chief Executive Officer, Roots: 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 U.

S. Market. Operator, you may now open the call for questions. So we'll cover in more detail and then discuss our operational highlights.

Sammy, Conference Operator: Thank you very much. We now have a question from Andrew Lopez from TD Cowen. Please go ahead. Your line is open.

Andrew Lopez, Analyst, TD Cowen: Thanks. Good morning, and thanks for the question. 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 on tariffs sorry, on traffic and basket, and then just declining consumer confidence. And on the positive, any bi Canadian teams that you that you see taking hold?

Megan Roche, President and Chief Executive Officer, Roots: 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, you know, 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 that's how 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 in our website. But more fundamentally, what we saw was momentum in the q in the q four period continuing into q one. And so it's very difficult for us to tell specifically what any uplift might be from Buy Canada as opposed to our business, which continue to trend well out of the fourth quarter.

Andrew Lopez, Analyst, TD Cowen: 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 the preserved margin loss, from those exposures?

Leon Wu, Chief Financial Officer, Roots: Yes, 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 the US dollars about twelve 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.

Andrew Lopez, Analyst, TD Cowen: Okay. Great. Just a couple more for me. I recall you had an ambitious marketing initiative, upon the last call. Looking forward to fiscal twenty five.

So does that outlook get fine tuned either to the upside or downside, given today's uncertain outlook?

Megan Roche, President and Chief Executive Officer, Roots: 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 gonna 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.

Andrew Lopez, Analyst, TD Cowen: Maybe last one. How are you approaching your inventory for the fallwinter season? Same thing with with the economic uncertainty and consumer uncertainty. And just how do you anticipate your automated replacement to move work there?

Leon Wu, Chief Financial Officer, Roots: Yes. Good question, Andrew. I mean, wanna first reiterate Megan's comment where in the first eight weeks, we are still seeing both double digit growth. So it is encouraging and giving some optimism in terms of the long term growth, especially for the rest of the year. That being said, I, 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 on 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, go bad at the end of the season. So we're confident that the inventory will support the growth as it arrives, and, also, we won't present with inventory health challenges in the long run. Okay. Yeah.

And I guess you

Andrew Lopez, Analyst, TD Cowen: I I recall you saying maybe that you were, looking into q one. You guys are in pretty good inventory position, in terms of noncurrent. Correct. Those were in there. But

Leon Wu, Chief Financial Officer, Roots: Yes. Yes. We have a great composition of inventory at the end of the year going to q one.

Andrew Lopez, Analyst, TD Cowen: So I guess, state to state, that's that's working pretty well so far, the automated replenishment.

Leon Wu, Chief Financial Officer, Roots: Yes. The So maybe I'll just sneak one

Andrew Lopez, Analyst, TD Cowen: more in here. I'm sorry.

Leon Wu, Chief Financial Officer, Roots: I'll just sneak one in here

Megan Roche, President and Chief Executive Officer, Roots: in automated replenishment is doing well. Go ahead. Okay.

Leon Wu, Chief Financial Officer, Roots: Yep.

Andrew Lopez, Analyst, TD Cowen: I just wanted to ask, in terms of, like, what leverage are you

Leon Wu, Chief Financial Officer, Roots: guys targeting for the fiscal twenty five with the your NCIB? So we continue to manage our net debt appropriately, and each year, we continue to delever. 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 NCIB was a great opportunity at this time.

Andrew Lopez, Analyst, TD Cowen: Okay. That's great. Congratulations on the strong quarter. Thanks for the questions.

Megan Roche, President and Chief Executive Officer, Roots: Thank you.

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