Good morning. My name is Pam, and I will be your conference operator today. At this time, I would like to welcome everyone to Roots' first quarter earnings conference call for fiscal 2022. 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 a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, please press star followed by two. On the call today, we have Meghan Roach, President and Chief Executive Officer, and Mona Kennedy, Chief Financial Officer of Roots.
Before the conference call begins, the company would like to remind listeners that the call, including the Q&A portion, may include forward-looking statements of our 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 the 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 first quarter management's discussion and analysis and/or its annual information form dated April 6, 2022, 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 the ability to deliver on these statements.
Roots undertakes no obligation to update or revise any forward-looking statements on this call. The first quarter earnings release, the related financial statements, and the management discussion analysis are available on SEDAR, as well as on the Roots' Investor Relations website at investors.roots.com. A supplementary presentation for the Q1 2022 conference call is also available on Roots' Investor Relations site. Finally, also note that all figures discussed on this conference call are in Canadian dollars unless otherwise stated. Thank you. You may now begin your conference.
Good morning and welcome to our earnings call. I'm very pleased to report that Roots delivered solid first quarter results. Most notably, sales increased 15.3% year-over-year to CAD 43.1 million. Our strong performance can mainly be attributed to growth in customer traffic. This results from strong comparable sales year-over-year and in part the temporary store closures due to lockdowns in several regions in Canada during part of Q1 2021. Before we go any further, I want to pause to thank the team for all of their hard work. Everyone has done a phenomenal job, especially given the circumstances in which we have been operating. The market environment continues to be dynamic. Our performance reinforces the strength of our brand and further validates our omni-channel growth strategy.
It also speaks to the desirability of our enhanced product portfolio, the traction that we are continuing to gain through our elevated brand positioning, and the demand for the high quality, comfortable, and versatile clothing that Roots offers. Now, in the prior quarter, I outlined four main growth pillars. The first is offering an elevated omni-channel experience to serve our customers wherever, however, and whenever they seek to shop. This includes corporate retail stores, pop-up locations, e-commerce, and international business partners. Roots currently ships to more than 55 countries and generates approximately CAD 100 million in system-wide sales in Asia on an annual basis. During the first quarter, we continued to progress our omni-channel infrastructure enhancements. We expect the majority of these to be completed in the second half of 2022.
In the interim, we are continuing to offer a robust suite of options for our customers online and in stores to support their shopping preferences. Our second growth pillar consists of reinforcing our brand position globally. With international partners and our e-commerce platform, our brand's reach is already broad. However, we continue to further leverage the brand outside of Canada. This pillar also includes enhancing our product portfolio to better reflect our consumer targets and continuing to drive engagement with the brand among existing and new customers. Our substantial brand equity and our premium offering resulted in strong demand for our products in the first quarter. We are continuing to invest in our Journey collection, our performance offering for consumers seeking the same right-hand feel and quality that Roots has been associated with for decades. This collection offers more technical features such as antibacterial fabric, moisture wicking, and UV protection.
We have spent the last year testing a range of styles and continue to see excellent demand and upside potential with Journey. Customer traction has been strong, with sales growing over 40% year-over-year in fiscal 2021. This excellent momentum has continued into the fourth quarter of 2022. We also mentioned in the fourth quarter our success in offering more sizes in the One collection. In Q1, we also extended the sizes available in our Salt and Pepper fleece. We will be using customer demand indicators to roll out more sizes across different parts of our collection during the remainder of 2022. You know, as customer preferences evolve post-pandemic, perhaps most notable in our first quarter was the significant growth experienced in our Core Fleece program.
While we continue to expand this offering with the use of different size logos, colors, and updated fits, our Core Fleece remains a timeless style that has been a customer favorite for decades. Our ability to consistently deliver a compelling product offering led direct-to-consumer growth margin to expand 180 basis points year-over-year to 63%. We have a robust product pipeline for the remainder of the year, and this includes the relaunch of Beaver Canoe in the summer to celebrate its 40th anniversary. Now let's turn to our enduring brand strength. With a history spanning almost five decades, Roots retains many loyal followers and a highly attractive customer base that has shown a willingness to pay for the unique features and benefits we offer. Through collaborations with artists, celebrities, and influencers, we continue to promote brand awareness to a broader global audience.
In February, we hosted The Weeknd's 30th birthday party in Las Vegas, where the Canadian artist wore a custom varsity jacket by Roots. Handmade in our Toronto leather factory, the jacket commemorated the launch of his Dawn FM album. This represents our 10th year of collaborating with The Weeknd and the XO brand. During the quarter, we also partnered with local artists Benny Bing and Mornings tar in a series of limited edition studio fleece and varsity jackets. Benny Bing's piece, based on his incredible painting, Elite, celebrated the beauty of Black women using vibrant colors and took over five hours to sew. Mornings tar, a mixed French First Nations illustrator, painter, and muralist, partnered with us for International Women's Day, and she created a piece that celebrated the diverse qualities of women.
The artistry and passion that went into making these pieces made them highly coveted and also very quick to sell out. Within our third growth pillar, we are focused on taking a progressive approach to enhancing corporate social responsibility at Roots. During the first quarter, we joined the Sustainable Apparel Coalition. This apparel, footwear, and textile industry's leading alliance for measuring sustainability. The coalition developed the Higg Index, a standardized value chain measurement tool for all industry participants. Our membership reflects our commitment to reducing our environmental footprint and promoting social justice throughout the global supply chain. Aligned with this initiative, we anticipate having most of our apparel made with sustainable materials by the end of 2022. Our beloved Salt and Pepper and Cooper Beaver fleece products are already made with some recycled content.
As we move these collections to organic cotton in the autumn, we will see a significant volume shift to sustainable materials. Roots is not a fast fashion brand. Our move towards sustainable materials is only the latest initiative in our commitment to helping our customers build a timeless wardrobe of high-quality, comfortable clothing. Our final growth pillar remains operational excellence across the organization to drive long-term profitable growth. Mona will discuss this during her overview of the financial results. Before passing on to Mona, I want to note that in the short term, we continue to manage through the industry-wide supply chain disruptions, inflation, and the lingering global effects of the COVID-19 pandemic. Roots has weathered many similar periods of disruption throughout its almost 50 years of existence, and we continue to believe in its enduring brand affinity and exceptional product offerings.
I will now turn the call over to our CFO, Mona Kennedy.
Thanks, Meghan, and good morning, everyone. As mentioned, Roots delivered solid Q1 2022 results amid a fluid market environment. Total sales increased 15.3% to CAD 43.1 million in the first quarter of 2022 from CAD 37.3 million in the first quarter of 2021. DTC sales reached CAD 37.4 million, up 19% year-over-year. This solid performance reflects strong same-store sales growth as we saw significant traffic recovery in stores. Additionally, we were cycling over some temporary store closures from lockdowns last year. P&O sales amounted to CAD 5.7 million in the first quarter of 2022 compared to CAD 5.9 million last year. The slight decline mainly stems from a reduction in our Taiwan business, partially offset by strong sales growth of custom Roots branded products to business clients and by additional sales through Tmall.com in China.
Gross margin improved significantly during the first quarter, rising 340 basis points to 60.9%. In DTC, gross margin improved 180 basis points, 63%, driven by higher merchandise margins that reflect our discipline on promotions where it reduced markdowns. We also benefited from a favorable impact of foreign exchange rates on U.S. dollar purchases. These factors were partially offset by lower government subsidies as well as higher transportation and airfreight costs for certain products. Additional airfreight costs negatively impacted DTC margin by 100 basis points. Moving to SG&A, we reported expenses of CAD 31.3 million, up 21% from last year. However, excluding the year-over-year impact of government subsidies and temporary rent abatements, SG&A expenses only rose 9.3%. We gained leverage on our SG&A expenses versus last year.
This increase was essentially due to higher store labor costs as stores were fully open this year, and we also had some investments in talent in our head office. Adjusted EBITDA stood at a loss of CAD 3.2 million in the first quarter of 2022 compared to a loss of CAD 2.5 million last year. It's important to note that last year's adjusted EBITDA included CAD 2.9 million of incremental rent abatements and government subsidies. Excluding these items, our adjusted EBITDA improved by CAD 2.2 million year-over-year. This last figure allows us to appreciate all the initiatives our team put forward to stimulate sales and improve operating profitability. We're very pleased with the progress accomplished to this day.
The net loss in the first quarter of 2022 amounted to CAD 5.3 million or CAD 0.13 per share versus CAD 4.9 million or CAD 0.12 per share last year at this time. Turning to our balance sheet highlights. Our inventory position is healthy, standing at CAD 39.2 million at quarter end. This compares to CAD 41.3 million at the beginning of the quarter and CAD 42.5 million at the end of the first quarter a year ago. Although supply chain pressures remained, we're comfortable with our inventory composition entering Q2. In addition, we believe that our inventory is generally low risk as core products account for approximately two-thirds of inventory. We also ended the first quarter in a solid financial position.
At the end of the quarter, net debt stood at CAD 39.4 million, which was nearly 50% less than at the same time last fiscal year. Our net leverage ratio was also very strong at 0.8x at the end of Q1. During the first quarter, we repurchased 377,000 shares for a consideration of CAD 1.2 million under our NCIB program. Since initiating the program last December, we have repurchased 582,000 shares out of an authorized amount of nearly 2.2 million shares until December 15, 2022. In summary, fiscal 2022 is off to a good start with a greater store traffic driving sales growth in the first quarter while maintaining our promotional discipline. Our results reflect the power and positioning of our brand in the marketplace.
Q2 is also tracking nicely, and we're pleased to see customers coming back to our stores. This said, we will not benefit from any subsidy or abatement this year, as opposed to the benefits totaling approximately CAD 6.5 million last year in Q2. In the meantime, the entire Roots team is working hard to alleviate supply chain pressures, and we're confident about the strategies we're putting forward. We're taking a proactive stance with respect to transportation and logistics, including finding the optimal balance between air freight, premium, and regular ocean freight, as well as strategically managing our pack and hold inventory. Based on what we see in terms of shipping rates and production flow, we currently expect an impact on DTC growth margin of about 150-250 basis points in the second half of the fiscal year.
That said, our objective is to have products in stores on time at the most efficient cost possible. As Meghan mentioned, we're focusing on executing our long-term profitable growth strategy. Roots' history of nearly 50 years fosters passion, pride, and resilience throughout the organization. These key attributes, along with our strong, appealing brand, lay the foundation for a sustainable growth platform. Our sound financial position, meanwhile, provides us with the flexibility to confidently move ahead and create lasting value for our shareholders. I would like to thank our entire team for a solid quarter. We remain focused on operational excellence throughout all levels of the organization. Despite external challenges, our agility and resiliency will allow us to continue driving solid results. We look forward to updating you on our second quarter results in September. With that, operator, please open the line for questions.
Thank you. Ladies and gentlemen, we will now begin the question -and- answer session. If you have a question, please press star followed by one on your touchtone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be pulled in the order they are received. Should you wish to decline from the polling process, please press star followed by two. If you're using a speakerphone, please lift your handset before pressing any keys. One moment for your first question. Your first question comes from Brian Morrison with TD Securities. Please go ahead.
Yes, good morning.
Good morning.
Good morning.
Hi. Meghan, we've seen some major retailers in the U.S. see a shift away from the casualization movement during the pandemic. I'm wondering if you're seeing this trend. If so, how do you adapt to it when it takes hold? Maybe just comment on Mona's prepared remarks that said that Q2 is tracking nicely. Maybe some color on that.
Yes, absolutely. The short answer is no actually. We haven't seen any negative impact from the casualization of the wardrobe. If anything, the fact that people are still living a hybrid lifestyle, where they're spending two to three days, you know, in a week in the office and other days at home, is continuing to positively impact our purchases of our core items. I think actually in my prepared remarks, I had mentioned that we actually saw significant growth in our core offering in the first quarter. We haven't seen any negative impact on the brand at all of any shifts around in trends.
I think the big focus for us is we are a brand that's been around for 50 years, and a lot of our core offering has been something that we've offered for many, many years. We continue to see customers being very compelled to buy the products we offer because we really feel that we have a unique differentiated position in the marketplace.
Okay, thank you for that.
I think you had a question, sorry Brian, with Q2.
Yeah
Momentum continues to be strong, and we're very happy with the way things are trending.
Excellent. Then Mona, your comment about the 150-200 basis points of drag with respect to, I believe it was freight costs in the second half of the year. Is that DTC? Is that consolidated? Do you have any ability to offset that, or is that what you believe is gonna happen?
That's DTC, so it's 150-250 basis points in the second half of the year. Ability to offset it, I mean, we're generally working on margin as you see and we'll continue to do that in terms of trying to full-price products at full price and things of that nature. As we've mentioned kind of in Q4 and previously, we're also looking at strategic price increases to potentially offset that.
Okay, last question.
I think the other thing, Brian. Sorry, I just wanted to add onto that. I think the other thing that we're doing is, you know, we're giving you a range of estimates, but we're obviously continuing to work on our side, to determine, you know, where we can obviously, you know, speed up the flow of goods or minimize air freight. I think, you know, we wanted to be, you know, transparent with the marketplace to give, you know, a rough estimate of what we anticipate in the second half of the year, but we're obviously trying to minimize it as much as we possibly can.
Okay, thank you. Last question. Meghan, you had a very active NCIB when you reported your Q4 results right through mid-April, and then all of a sudden it stopped. It was about 377,000 shares. I'm wondering why that happened and what your plan is with respect to the NCIB going forward?
Yeah, I know we've been.
One more and then I'll let Mona.
Yeah. Thanks, Meghan. So we've been active on our NCIB, Brian, as you mentioned. We purchased 377,000 shares in Q1, and since its inception, 582,000 out of the, you know, approximately 2 million that we announced. Our intention is to continue to buy shares opportunistically from time to time. But, you know, as you know, there's a lot of uncertainty ahead of us and ahead of all retailers and all companies in general in the market. We're remaining cautious in providing any guidance on that.
Do you plan to complete your 2 million share repurchase plan?
I, as I said, we're being cautious in providing any guidance on that, so I won't specifically provide that.
Okay, I'll follow up later. Thank you.
Your next question comes from Patricia Baker with Scotiabank. Please go ahead.
Yeah, good morning, everyone. Brian asked a number of my questions, but I just wanna follow up on the impact of the expedited air freight on DTC margins in the back half. You're saying that it's 150-250 basis points in the second half of the year. Would that be equally felt in Q3 and Q4?
Good morning, Patricia. In terms of equity, yeah, I would say so. There is a bit more pressure in Q3 than there was last year. Given some closures.
Okay
In China, we've had to air freight a bit more product for Q3 of this year than we did last year. If you're comparing to last year, you'll see more pressure in Q3. You'll see equal pressures in Q4 as well. As Meghan mentioned, it's a dynamic situation and we continue to monitor it. There might be. This is, you know, a rough estimate that we're providing, but there should be pressure in Q4 as well.
Okay. Thank you.
I think it's important to know. Sorry, Patricia, just jumping in. I think it's important to know that the way the air freight works is it obviously is capitalized into our inventory, and so, you know, it hits the P&L as we sell the inventory down. What we're trying to do is obviously bring in inventory as, you know, as early as we can to make sure we capitalize and meet the demand for the second half of the year. I think I would just note also that our strategy really isn't any different than it was in 2021. We're really looking at the quantities of air freight and comparing them to levels that we spent last year.
From that perspective, we're continuing to, like you know, take the same strategy in terms of our approach to air freight and be very tactical in terms of where we use it and continue to be obviously mindful of the fact that these are temporary increases in cost that we're obviously incurring, and on a long-term basis, we anticipate rates to continue to decline.
Okay, thank you, to both of you for that. Thank you.
Your next question comes from Matthew Lee with Canaccord Genuity. Please go ahead.
Hi, team. Congrats on the strong quarter. I know that things are relatively fluid right now, but given your promotional discipline and, you know, supply chain strength. You know, what type of gross margin profiles can we expect you to achieve long term? Is it fair to say that the kinda steady-state consolidated gross margins are probably closer to the mid-60s% once supply chain issues abate?
We're not providing that guidance, particularly in the current environment, Matthew, where you know we've been working very hard over the past 8 quarters on margins. As you've seen, there's been continuous margin improvement. It's something that's a focus for us continuously. As you know, in the short term, there are pressures on margins, so it's really hard to provide that guidance and not really that smart for us to do that at this point. We will remain disciplined with our promotional activities. As you know, our average unit revenue has gone up significantly since 2019, so we'll continue to do that. Our focus is on full-price selling. You know, we're bringing in some new categories with new features with higher prices. We're working on margins, but not providing that guidance.
We've now mentioned the number of times there are short-term pressures from an air freight perspective in Q3 and Q4 that we're experiencing.
Right. Okay. I know that you were talking a lot about transportation, but have you seen any inflation in terms of material costs?
We have seen some inflation in terms of material costs. As you know, cotton prices have been quite volatile and going high. In terms of fuel costs, obviously there's an impact on that as well. We have taken some strategic price increases in the first half of the year and maybe so in the second half of the year to offset that. You know, we haven't really seen significant resistance from customers. As you know, since we've removed promotions, customers have been receptive of that. Strategic pricing increases also haven't really faced much resistance, so we're feeling good about that.
Right. Maybe a different approach to an earlier question. You know, your current balance sheet is in really good shape, cash flows returning. Can you just give us an understanding of your capital priorities between, you know, dividend buybacks and potentially M&A?
Sure. You know, as we indicated during our Q4 conference call, we're always looking at different alternatives and different ways of managing our business, and we continue to look at our capital allocation with the board. You know, at this time we're staying the course on future capital allocation plans. There's a lot of uncertainty, as I mentioned, and you all know. In that context, we're being cautious in providing any guidance. Yes, all the financial position, debt levels are, you know, at the lowest levels they've been for a really long time, and we're in a good cash position, so we're really proud of that.
I think, Matthew-
Okay, thanks.
We're always looking for ways.
Oh.
We're always looking for ways, sorry, Matthew, to maximize shareholder value, right? I think from our perspective, we feel good about our liquidity levels. We feel good about our debt levels. We're gonna continue to monitor the, you know, the macro environment and be considerate and planful in terms of how we think about our cash allocations, you know, as we continue to see how the rest of the year trades out in the macro environment.
Okay, thanks so much.
Ladies and gentlemen, as a reminder, if you do have any questions, please press star one. Your next question comes from Stephen MacLeod with BMO. Please go ahead.
Thank you. Good morning.
Good morning.
Morning.
Lots of great color in the Q&A so far. Lots of my questions have been answered, but just wanted to focus in on two things. I know you talked about Q2 tracking nicely. I'm just curious if you think about sort of where Q1 ended and where you are today, have you seen any changes in consumer spending, just with respect to inflation and rising rates and some of the caution we're seeing in the markets right now?
No. You know, we took a small price increase actually in our core products at the start of Q1, and we really saw, just for an example there, no impact on consumer shopping behavior with us. Our customers are continuing to show a willingness to pay for all the unique features and benefits that we offer, and I think that customers are seeing that we have really high-quality products, so they know that they're investing in something that will last. You know, from our perspective, we haven't seen any negative impact. I think if you think about the macro environment in general, you know, we are really happy with sales momentum going into Q2, and our inventory levels are lower.
When we think about the composition of inventory going into the second half of the year, we feel good about that, and we also feel good about the solid financial position that we're in with the good liquidity and the leverage ratios that we have. That's been all positive. The final thing that I'd mention is that, you know, we have a pretty attractive customer demographic. You know, with the elevated brand positioning, we're seeing that our customers so far have been less impacted by the cost inflation in terms of their purchasing habits. We're continuing to see that willingness to pay for the unique features and benefits that we offer, as I mentioned. You know, that's really our focus going forward.
Great. Thank you. In your prepared remarks, Meghan, I think you were talking about some of the omni-channel improvements.
Mm-hmm.
that you expect to see in the back half of the year. Can you just give some color, maybe specifics around what improvements you are expecting to see?
Yeah. I think we've talked about in the last few quarters the fact that we're continuing to make some investments in enhancing the infrastructure of our omni-channel environment. I think as we go into the second half of the year, you know, a big focus for us is really on mobile enablement. While the existing website is obviously mobile enabled, we wanna continue to make sure that we have a robust back end that's gonna support the continued functionality that we wanna add. I think as you go into the latter half of the year, you know, we're continuing to make sure that we have things like endless aisle, buy online, pick up in store, all those key characteristics that customers are seeking.
A lot of our infrastructure investments are around continuing to make sure that we maintain that very symbiotic relationship between online and in stores. You should continue to see a more seamless ability to transact, you know, in stores, you know, if you wanna do an online transaction. Online, you should see the site become faster. You should see kind of the usability improve overall. I think our focus going forward is really on continuing to improve both mobile enablement as well as the online conversion. We're really making sure that we're investing in places that will enable us to do that going forward.
Great. That's great color. That's all for me. Thank you.
Thank you.
There are no further questions at this time. Please proceed.
Thank you, operator. That concludes today's call, and thank you again for joining us. We look forward to updating you on our progress when we report the second quarter in September of this year.
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 good day.