Good morning. My name is Anes, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Roots fourth quarter and fiscal year 2021 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask questions during this time, simply press star, then the number one on your telephone keypad. If you'd like to withdraw your question, please press star, then the number two. On the call today, we have Meghan Roach, President and Chief Executive Officer, and Mona Kennedy, Chief Financial Officer of Roots.
Before the call begins, the company would like to remind listeners that the call, including the Q and A portion, may include forward-looking statements of our recurring 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 assumption and belief in light of information currently available to Roots. Listeners are cautioned not to place under 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 and fiscal 2021 management's discussion and analysis and/or its annual information form dated April 6, 2022. For a summary of these 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 and fiscal year 2021 earnings release, the related financial statements, and the management discussion and analysis are available on SEDAR as well as on the Roots Investor Relations website at www.investors.roots.com. Finally, please also note that all figures discussed on this conference call are in Canadian dollars unless otherwise stated. Thank you. Ms. Roach, you may begin your conference.
Good morning and welcome to our earnings call. We had an excellent fourth quarter, which marked a great finish to the year. We delivered growth in revenue, growth margin, Adjusted EBITDA, and grew adjusted earnings per share by 23% compared to 2020 and 24% on a two year figure basis. I will be walking you through the key highlights of our fourth quarter and our annual performance before passing the call to Mona. She will dive into our financial results in more detail. However, before I do, I want to acknowledge the terrible situation in Ukraine. One of our key values at Roots is freedom. While we do not have operations in Ukraine or Russia, a winter version of our beloved cap and sock is made in Ukraine, and we have colleagues and friends with family in the region.
We are making donations to Roots Cares to save the children and supporting where we can. While our stores reopened and certain government mandates were relaxed, the COVID-19 pandemic continued, with this variant causing a surge in cases during the latter part of the fourth quarter. As such, we continue to prioritize the health and safety of our team, the consumers we serve, and the communities where we operate locations, maintaining stringent protocols while providing a welcoming, enjoyable customer experience. Now shifting to our financial results. We had a great year and a great quarter. Our success can be attributed to our key focuses in 2021. We leveraged our omnichannel platform. We delivered compelling assortments. We focused on increasing full price sales by reducing promotional days. We continued our focus on our operational excellence, and we further our efforts in sustainability, diversity, equity, equality, and inclusion.
We advanced these initiatives while navigating industry-wide disruption in the supply chain and resulting from COVID-19. I would like to thank our talented and dedicated team for their ongoing contribution and steadfast commitment to delivering strong results. We are all operating in a very challenging environment, and your efforts in representing the values and authenticity of the Roots brand show in our financial performance. Turning to our financial performance. Overall, we grew all of our key financial metrics in the fourth quarter and 2021 as a whole. With sales growing 22% compared to Q4 2020, this is our fourth consecutive quarter of year-over-year sales growth. We saw a very favorable response to new products such as the One Collection, which was a huge step forward for us as a brand with a gender-free fit, sustainable materials, and extended size range.
One is also a great example of the innovation that we are bringing to our core categories. We continue to see meaningful growth opportunities with this collection and have several new silhouettes and fabrics coming out this spring. Outside of the One Collection, we are now also offering more sizes and many of our iconic Salt & Pepper Sweats, and we have moved much of our baby and childhood collections to be gender-free. I'm also pleased with the progress that we are making in introducing more sustainable materials into our clothing. In the fourth quarter, we had more items made with sustainable materials than we had in any past season, and we are committed to increasing the percentage of items made with these preferred fibers going forward. By the end of 2022, we anticipate having most of our apparel made with sustainable materials.
Roots also continues to benefit from several favorable consumer trends that we are uniquely positioned to respond to. The demand continues for comfortable and versatile clothing, especially with hybrid work becoming the norm for many people. We have continued to see the benefit of our brand positioning in a market where customers are seeking out comfort and quality. Our more technical athletic offerings, the Journey Collection, has also continued to benefit from the strength of athletic apparel as a category. I was also particularly pleased to see in the fourth quarter the continued success of our core product category. We are not a fast fashion brand, and the strong performance of our core favorites has, as customers are continuing to respond positively to products.
As we noted throughout 2020 and 2021, the global pandemic accelerated the digital platform, given the extended period of store closures in the last two years. At Roots we were well positioned to capitalize on this change, particularly given our unified pool of inventory. We continue to be focused on serving our customers wherever, however, and whenever they choose. We also remain focused on further elevating our digital capabilities to create a more seamless, frictionless experience for consumers. The fourth quarter also reflects our continued discipline around promotion and our shift in product strategy. We discussed in previous quarters how we have painstakingly peeled back promotion after promotion. I'm incredibly proud of the work we have done as a team in this area.
It is a pleasure to be able to highlight that promotional days dropped to 23 in 2021 from a high of 213 in 2019. In Q4 specifically, there were 19 promotional days, down from 26 in Q4 2020 and 66 in Q4 2019. This discipline led to an increase in our DTC gross margin of 150 basis points compared to Q4 2020 and 610 basis points relative to Q4 2019. Notably, we achieved these margins despite the continued supply chain challenges in the quarter, particularly with ocean freight, which has historically represented the primary form of transportation for our products. As Mona will discuss later, this team showed great agility in navigating the disruptions through the use of air freight and several strategies to ensure we had robust inventory levels in the fourth quarter.
With our strong sales and gross margin expansion, we grew Adjusted EBITDA to CAD 30.6 million in Q4 compared to CAD 26.1 million in both the Q4 2020 and Q4 2019. On a full year basis, our Adjusted EBITDA has increased to CAD 50.1 million, 29.4% higher than 2020 and 92.3% higher than 2019. We delivered on these results through the operational excellence applied across our segments, including the efficiency, flexibility, and agility of our omnichannel platform. The focus of our design teams on elevating our core favorites and relaunching new products, all while staying true to the brand's authentic heritage and the proficiency of our team in navigating the supply chain challenges that we and our industry have continued to face.
Before I shift to our strategic focuses for 2022 and beyond, I wanna highlight our ongoing commitment to making meaningful changes in society in line with our core values. We've already discussed our investment in sustainable materials, and in previous quarters we highlighted the organizations we have joined to move forward sustainability at Roots. Another way we are bringing our values to life is through Roots Cares. For 48 years, Roots has been committed to giving back to partnering with communities in need. With the company's values of community, integrity, freedom, and being genuine in mind, we are now grouping all of our philanthropic efforts under Roots Cares. During the year, Roots donated approximately CAD 1 million of cash and in-kind donations to various organizations through the Roots Cares initiative. Now switching to our strategic focuses for fiscal 2022.
We continue to believe we are uniquely positioned in the marketplace with our rich heritage and enduring brand affinity, and now have a strong foundation off which to build profitable growth. We expect to continue to drive strong performance supported by our four main pillars. The first remains offering an elevated omnichannel experience to our customers. We will continue to enhance and elevate our already robust mobile and web experience through our investments in upgrading it on our online platform and our omnichannel offering. During 2021, more than 70% of our e-commerce traffic came from mobile devices, and we continue to see upside in our mobile conversion rates compared to those of our desktop users. Notably, to further augment our capabilities in this area, we hired a new vice president of e-commerce and customer experience who joined us in late March.
He previously held senior roles at SSENSE, Brown Thomas, and Macy's , and brings with her a wealth of online experience to the role with a global perspective. I will also be more personally involved in e-commerce, brand development, and marketing going forward. The second pillar is reinforcing the Roots brand positioning globally. In our recent brand health assessment, we earned an NPS score of 78 from our customers, which speaks to the love and enthusiasm of our customers for the Roots brand. We are proud of our heritage and the innovative path that we have taken over the last 48 years. We are committed to growing and leveraging our core values to bring Roots to an increasing global scale. At the end of 2021, we shipped to over 55 countries through our e-commerce platform, and we had an established presence in Canada and Taiwan.
We see significant growth remaining in both markets. Over the medium term, our geographic expansion plans include the United States and China. While small, we are pleased with the performance of our Tmall Store, which we relaunched in July of 2021. We are seeing a nice build in sales as local consumers find and embrace our product quality, innovation, and brand values. We look forward to building upon our initial success and incorporate key learnings into future deliveries. The third pillar is continuing our progress on CSR initiatives with a focus in the near term on shifting a large portion of our materials to preferred fibers, establishing a baseline for future measurement of our progress on sustainability, and integrating our efforts around diversity, equality, equity, and inclusion into our daily operations.
We've recently appointed a senior director of sustainability who previously held roles at Canada Goose and Patagonia and will help to progress on our sustainability pillar. Our final pillar, and one that has been important to us as we have managed through the pandemic, is maintaining operational excellence across the organization. We have a strong balance sheet, which allows the company to invest in and supports future growth while returning value to shareholders through things like the NCIB program, which we initiated in December 2021. In summary, our performance in 2021 reflects the culmination of our efforts over the last two years to strengthen Roots fundamentals and to establish a platform in which to drive future growth. We are continuing to see positive trends in our business at the start of the year.
While disruptions continue in the macro environment, we are confident that our agile business model, enduring brand strength, robust product offering, and operational discipline have poised us well to advance our key priorities in 2022. With that, I will turn the call over to Mona. Mona?
Thanks, Meghan, and good morning, everyone. We're pleased to deliver fourth quarter and fiscal year results with strong top and bottom-line performance. We've been showing our ability to delight our consumers with strong assortments, even with external challenges that led to inventory delays and higher freight costs. Overall, our brand and products are resonating with existing and new customers. Our operational excellence is boosting results, and our agility and flexibility is helping us navigate external challenges. As we look to 2022, we're closely monitoring cost inflation and industry-wide supply chain disruptions. We plan to continue to be strategic with our pricing, and we'll be taking selective price increases over the course of the year. Now let's delve into our Q4 2021 results. You can refer to our earnings release for more information and reconciliations to our IFRS measures.
Total sales in the fourth quarter were CAD 121.3 million, up 22% from CAD 99.4 million last year. DTC sales were CAD 110.6 million, up 20.5% from CAD 91.8 million last year, despite a significant reduction in promotional days. We also scaled back on our biggest events of the year, including Black Friday and Cyber Monday, and we were more selective with discounting during Boxing Week. This quarter, we benefited from having our full suite of stores open and operational in the quarter compared to only 65% of our stores open last year. We were still negatively impacted by the Omicron variant due to increased capacity constraints, limited staff availability, and reduced operating hours in certain locations.
In our partner and other segment, Q4 2021 sales were CAD 10.7 million, up from CAD 7.6 million last year. This increase reflects the strength of our Asia business due to higher volumes and strong growth in sales of custom Roots branded products to business clients. I'm very pleased that we achieved sales at 95% of pre-pandemic 2019 levels, despite the significant shift in our promotional strategy. What is even more encouraging is that we saw growth in our total gross profit dollars compared to Q4 2019. This is reflective of the success of our promotional strategy, as the number of promo days were reduced from 66 in Q4 2019 to 19 in Q4 2021. We continue to be pleased with our DTC growth margin performance.
Our gross margin increased by 150 basis points to 61.3% from 59.8% last year, and up 610 basis points from 55.2% in Q4 2019. This improvement in margin is reflective of our more disciplined promotional stance. We were pleased to see the solid expansion in gross margin in light of the inflationary freight costs and the use of higher cost air freighting to mitigate delayed receipts. Higher freight costs put 270 basis points of pressure in the quarter. Now moving to SG&A. We continue to be very pleased in managing our costs while also investing strategically for growth. SG&A expenses were CAD 45.7 million for Q4 2021 compared to CAD 39 million last year.
This increase partially reflects a CAD 3 million reduction in temporary rent abatements and government subsidies since Q4 2020. Excluding these one-time impacts, SG&A expenses would have increased by CAD 3.7 million, reflecting higher store labor costs as stores were fully reopened and investments in talent and marketing, partially offset by a reduction in non-cash impairment charges. We didn't leverage on our SG&A spend compared to 2020 and 2019 because of the more efficient management of costs at our stores, distribution center, and e-commerce operations. Higher sales and expansion of gross margin drove Adjusted EBITDA to CAD 30.6 million, a 17.4% increase over CAD 26.1 million last year. The improvement we achieved in EBITDA is even more pronounced if you exclude the impact of temporary rent abatements and government subsidies.
Excluding these one-time impacts, Adjusted EBITDA would have been CAD 30.4 million in Q4 2021 compared to CAD 22.3 million in Q4 2020. An improvement of CAD 8.1 million or 36.3%. Q4 2021 net income increased to CAD 18.1 million, or CAD 0.43 per share, up from CAD 12.3 million or CAD 0.29 per share last year. Turning to our balance sheet highlights. We ended Q4 with an inventory balance of CAD 41.3 million, down 2.7% from CAD 42.4 million last year. This improvement is reflective of the sell down of our pack and hold inventory and the success of our strategies to tackle supply chain challenges during the quarter.
Additionally, while we're still facing inventory delays and an unpredictable environment, we believe that the composition of our inventory is healthy as we enter Q1. We continue to benefit from our capital light model and deliver very strong free cash flow. Over the past two years, we have significantly reduced net debt. Net debt at the end of the year was CAD 26.6 million compared to CAD 61.9 million at the end of 2020 and CAD 95.8 million at the end of 2019. We also returned capital to shareholders by purchasing shares through our NCIB. As of the end of the year, we have repurchased 205,000 shares under the NCIB program that we initiated in mid-December of 2021. A few comments on full year results before I turn the call over for questions.
We delivered a very solid year of financial performance in which we expanded sales, growth margin, and Adjusted EBITDA above last year. Additionally, as we compare our results to the pre-pandemic levels in 2019, we have seen growth margin expansion, SG&A efficiencies, a significant improvement in Adjusted EBITDA and free cash flow. A few highlights when comparing to 2020. Total sales improved 13.9%. DTC growth margin improved by 150 basis points. Adjusted EBITDA improved by 29.4% to CAD 50.1 million. EPS improved by 74.2% to CAD 0.54. In summary, we had a strong finish to an outstanding year for Roots, reflecting both our operational discipline, flexibility and resilience. We faced unexpected external challenges and still drove solid results. We're starting fiscal 2022 with a focused strategy and great confidence.
This is supported by our healthy financial position to continue on our positive momentum in the quarters and years ahead. We look forward to updating you on our first quarter 2022 results in June. With that, operator, please open the line to questions.
Thank you. Ladies and gentlemen, we will now conduct the question-and-answer session. If you'd like to ask a question, press star, then the number one on your telephone keypad. If you'd like to withdraw your question, press star two. We also ask that you limit your time to one question plus one follow-up before cycling back into the queue. If you're on the speaker phone, please leave the handset for pressing any keys. One moment please for your first question. Your first question comes from Patricia Baker with Scotiabank. Please go ahead.
Yeah, good morning and congratulations on a great end to the fiscal year. I have several questions. I'll ask one follow-up, and then I'll get back in the queue. In your discussion of the pillars and where your focus is going to be going forward, when you spoke about reinforcing the Roots brand and you mentioned both China and the U.S. as a focus, can you just elaborate a little bit more about what exactly you're going to be doing in those two markets to reinforce the brand?
Hi, Patricia. Yes, absolutely. I think we've talked about in previous quarters that we really view, obviously, Canada and Taiwan, our core markets. We have a very established presence in both those regions. We have, over the last six months plus been kind of reestablishing our presence outside of Canada. In the Chinese market, we relaunched Tmall, as we mentioned before, and we're really focusing on driving more of a premium brand positioning there. We're doing things like, you know, customizing products in the marketplace. We are engaging a specific PR agency there. We're really engaging in a social media presence in a more in-depth basis. All the things we do to basically, you know, relaunch the brand in the right way with a good brand awareness and presence.
Similarly, in the U.S. market, we now have appointed our own U.S. PR agency. We are looking at, you know, digital expansion in all these markets. You know, we're doing much more partnerships. You may have seen that we did a partnership with The Weeknd for his birthday party in February. We're doing other, you know, types of events and influencer partnerships to really build up brand awareness in the marketplace. This really is about kind of us building up the brand awareness and focusing in the medium term on how can we establish ourselves a presence in these marketplaces to drive growth.
I think as Mona mentioned in the call, you know, early days in China, but so far we've been really happy with the growth we've seen in our Tmall platform, and we're continuing to expect that we'll have some good success in these markets going forward.
Okay. Thank you very much for that. One of the other things you mentioned as a challenge is, you know, staff availability and the shortage of labor. Can you just talk about what that situation is like now? Has there been any improvement? Perhaps, what kind of strategies did you engage in? What did you do to try and, you know, mitigate the impact of that challenge? Did you change anything about how you're running your stores or anything?
Yeah, I think in the fourth quarter, we were in a lucky position because while there was definitely a high demand for staff, we were able to get the staff we needed both in our stores and in our distribution center to be able to meet the increased demand. We are really happy where we ended out. There's definitely more increased demand for staff in the marketplace, and so we are looking at things like, you know, being competitive with our wages. We're really focused on having a great culture of place to work, and we see customers and also employees again and again telling us that they love working at Roots, which is obviously something that, you know, helps to retain them. Overall, we've also become a bit more efficient in terms of our labor usage, you know, across the facilities.
You know, it's been in comparison to previous years, we've been able to attract staff at lower levels than we needed before. We feel pretty good about our current situation from a staffing perspective, and we were really happy with the staffing levels we had in Q4. There's definitely a lot of demand in the marketplace for good staff today.
Okay, thank you. I'll get back in the queue.
Thank you. Ladies and gentlemen, as a reminder, if you have any questions, please press star one. With that, your next question comes from Stephen MacLeod with BMO Capital Markets. Please go ahead.
Thank you. Good morning.
Morning. Good morning.
Morning. I just wanted to follow up on the just sort of the global expansion commentary that you had, Meghan. You mentioned the U.S. Are you referring to the U.S. solely in terms of having an e-commerce presence or is there something more to that?
Yeah. Stephen, I think we've been pretty clear in previous quarters when we think about the U.S. market. We really want to focus on building up the brand awareness there, focus on a digitally led expansion strategy, and then it goes from a digitally led pop-ups to eventually stores, right? You know, we haven't explicitly given specific direction on, you know, how we are going to grow in that marketplace from store expansion perspective, et cetera. Needless to say that, you know, in the medium term, we are focused on continue to expand that marketplace, and we're taking a measured approach that focuses on making sure we have the right brand awareness, we've got the right partners, we've got the right people focused on it, and it'll be digitally led first with those other patterns coming afterwards.
Okay. That's great. I just wanted to see sort of what you're seeing with respect to inflation, inflationary pressures, and you mentioned you're taking some price. I just wanted to get a sense as to, you know, how much of the inflationary pressures you're able to cover off with price and whether you've seen things abate at all in terms of your cost pressures.
For sure. Like everybody else, we're facing cost pressures going into the year. We believe, you know, we are in a good position. We have a desired brand, and we have an ability to take price increases, and we've shown that over the past two years as we've eliminated promotions. We've seen significant improvement in our average unit revenues. Going into this year, we're expecting to obviously, like everybody else, see cost pressures on freight. We're expecting to see cost pressures on labor. As you know, there was a minimum wage increase in Ontario, in this year. We're expecting to see some cost inflation on raw material as well. You know, the way we're hoping to tackle that is through strategic and selective price increases in 2022.
We're gonna try to maintain our margin dollars. We're feeling very good about that. We expect to continue with our lower promotional cadence. Our products have been quite desirable, and we've been able to sell them at full price. We're feeling pretty good about that.
Okay. That's great.
Maybe just to add on to that.
Yeah.
Just maybe to add on, Stephen, I mean, I think what's very unique about the Roots brand is we've been making some of these products for over 40 years, right? We need exceptional quality. When we're looking at the pricing that we offer today, we do believe that, you know, there's a great value even if we have slight increases in certain prices. We're really looking at, you know, the value we're offering consumers, the brand strength, the brand presence, and then thinking about, you know, how we can obviously offset some of these inflationary measures. We're trying to make sure that when we're increasing prices, it's also reflective of the value and not just increasing prices for the sake of offsetting costs.
Okay. That's very helpful. Then maybe just finally, if I could, I was just wondering if you could just highlight any merchandising new product wins that you saw in the quarter and anything that you expect to have for this year.
Yeah, absolutely. I mean, I have to, you know, highlight again the One Collection. You know, we really saw a great customer response to One. It was gender-free, sustainable, and we had an extended sizing. You know, the minimal logos, you know, combined with all of that, I think people really resonated with the product. What was great about it was attracting new customers but also existing customers. We were seeing people, you know, add on to their existing, you know, purchasing from Roots. That for us is a great product offering. You know, I mentioned in the script that we're expecting to see that come out in more silhouettes and more fabrics starting in the spring. We're gonna continue to expand on the One Collection offering, and it continues to be a good seller for us.
The other thing I would mention is, you know, we have this collection right now called the Journey Collection, which if you've gone on our website recently, you'll have seen it many places, which is a bit more of like an activewear type collection. You know, we're seeing great demand for that also. Customers are really resonating with the comfort, the softness, and this ability to wear something that's incredibly versatile. It's not just about going and working out. You can wear it outside for a walk, lots of different things. That's continuing to perform well. I think the third thing I'd highlight is really our Studio Collection. We mentioned in a number of quarters ago that we were gonna try to test more of these higher price point items. That's made in Canada.
It's Studio Fleece that is made in Canada and then embroidered at our leather factory. We're selling these items for, you know, upwards of CAD 250 now, and they're selling out. We've recently done a number of collaborations with different artists. We did kind of one with Morningstar, an Indigenous artist for Women's History Month. We did one with Benny Bing, who is a Black artist, Black History Month. We've also done a number of collaborations, you know, with different partners over the last six months, like for gift shops over the holidays. We're really just seeing great traction with that item, and we're continuing to focus on ways to expand into that category.
That's great. Thank you so much.
Thank you. Your next question comes from Brian Morrison with TD Securities. Please go ahead.
Hi. Good morning.
Morning.
Good morning, Brian.
Good morning. Just a couple follow-up questions from me, please. Meghan, sorry if I missed, but can you maybe just give an update on the business, how it's performing into Q1? I assume it must be positive considering all the government restrictions you had to endure last year.
Yeah, absolutely. Mona actually will tackle this question.
Good morning, Brian. Q1, we're pleased that with the start of Q1, things are going really well. As you know, obviously, freight continues to be a challenge, and there's going to be product delays that we've been facing. From an air freight perspective, we don't expect to have much air freighting coming into Q1. As you know, obviously there won't be any more government subsidies. We won't have any rent abatements. From a sales recovery perspective, we're feeling good. I think the one thing I should mention is that our tourist and urban locations are recovering, as tourists are coming back into Canada, as people are starting to go back into work and into kind of urban locations. We're feeling good as we go into Q1, and our inventory is in a great position as well, and we're comfortable with the composition of it.
Excellent. Mona, maybe I can follow up with just you're active with your NCIB, but with all your free cash flow and forecast free cash flow, it looks to me like you're gonna have a very underlevered balance sheet. I'm just wondering if you're thinking of another way to return capital to shareholders, whether rather than just maxing out your NCIB, could you be looking at potentially a dividend as well?
You know, we are always looking at different alternatives and different ways of managing our business, for as you know, we continue to look at our capital structure with the board and make sure that we invest in the right places. We will continue to do that. We're not disclosing any further information on future plans for the cash flow. As you know, you know, there's a lot of uncertainty this year. There's volatility in China. There's volatility of the war. There's a looming recession. With all of that in mind, I think we're being cautious in terms of providing any guidance. You know, yeah, we're feeling good. Our net debt is CAD 26.6 million. Our debt li-
Thank you. There are no further questions at this time. Ms. Roach, you may proceed.
Thank you for joining us for the fourth quarter. We're looking forward to speaking to you in Q1, and we hope you stay safe and healthy.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.