Earnings Call: Q2 2022

Sep 10, 2021

Earnings release

Good morning. My name is Sylvie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fiscal 20 21 Second Quarter Conference Call. Room. On the call today, we have Megan Roche, Chief Executive Officer Mona Kennedy, Chief Financial Officer and Kristin Davies, Head of Investor Relations for Ruth. 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 about current and future plans, expectations and intentions, results, levels of activities, performance, goals or achievements or any other future events or developments. Route. This information is based on management's reasonable assumption and beliefs in light of information currently available to route and its listeners are cautioned not to place undue reliance on such information. Each forward looking statement is subject to risk and uncertainty that could cause actual results to differ materially from those projected. The company refers listeners to its fiscal 2021 Second Quarter Management Discussion and Analysis End or its annual information form dated April 7, 2021, 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. Route. Route undertakes no obligation to update or revise any forward looking statements made on this call. The fiscal 2021 Q2 earnings release, the related financial statements and the management's discussions and analysis are available on SEDAR Please also note that all figures discussed on this conference call are in Canadian dollars unless otherwise stated. Thank you. Ms. Davies, you may begin your conference. Root. Thank you, operator. Good morning, everyone, and thank you for joining us. Megan Roche, our Chief Executive Officer, will discuss our Rusco 2021 Q2 operational performance as well as our strategic outlook for the fiscal year. Then she will turn the call over to Mona Kennedy, our Chief Financial Officer, router who will discuss our financials in greater detail. After that, we will open up the call for questions. Megan? Thank you, Kristen. Good morning, everyone, and thank you for joining us. We're very pleased with our 2nd quarter results. Our profitable growth demonstrates the desirability of our brands, our loyal customer base, strong fundamentals and the work of an incredible team. Throughout the quarter, we continue to successfully adapt to the ongoing disruptions in our industry caused by COVID-nineteen. Driven by DTC sales gains, We delivered overall sales growth despite our stores in Ontario, our largest market being closed for approximately 15% longer than in Q2 last year. In addition, our ongoing efforts to drive operational cost efficiencies, specifically as it relates to gross margin SG and A, generating improvements year over year and relative to Q2 2018, All of our stores were open. During the quarter, we continued to benefit from our omni channel capabilities. With more stores reopening as we move throughout the quarter, We achieved healthy year over year store sales team and Ontario's specificity when stores reopened. We saw significant year over year improvements that more than offset the temporary increase in store closures in that region. Root. As stores continue to be an important connection point with our loyal customers, we also opened 5 pop ups in the quarter, bringing the total number to 11. These capital light stores have proven to be low risk, high reward purchase to showcasing key products and collections, capturing a trend driven and female traffic However, e commerce remains above pre pandemic level and online continues to be an important channel for attracting new customers into the brand. Turning briefly to our international channel. While we continue to see volatility in Taiwan as they work through the impact of multiple waves of COVID-nineteen, we remain confident in the brand strength in that region. In China, we have relaunched our digital platform. And in the U. S, we continue to be pleased with the progress of our digital platform. We remain confident in the long term growth potential in that market. From a product perspective, we continue to generate excitement with new and existing customers through collaboration. In July, we came together with a fellow iconic Canadian brand Tim Hortons. We We created a limited edition leather c fold, which is on both Tim Hortons coffee cup. It was made at our Toronto Lava factory. We also collaborated with Canadian artist, Jason Logan, the Maternal Ink Company, an unlimited edition collection of 1 of a kind natural ink hand dyed premium sweatshirt. Our product excitement has continued beyond the quarter. We recently released an award jacket collaboration with The Weeknd's and Japanese artist, Mr. Roots. In our capital question in celebration of the relaunch of Bunch Music on TikTok dropped exclusively online atroots.com earlier this week. However, one of the most exciting launches this year was officially announced this morning, the ONE collection. With a focus on removing boundaries and Encouraging Individual Expression, one of the new C collection, which embodies our journey towards the future of Root. What is a gender free fit, It is offered in extended sizing and contains sustainable materials. It reflects an ongoing brand commitment that extends across all aspects of our business and route. The changes to commerce we continue to evolve our product range and in store experience. We're creating pieces that inspire inner confidence and individuality, Route. It is designed for customers to focus on the fit that expresses their personal style, not size. We work with real people, not only models to develop an entirely new size chart. The new size chart runs from 1 to 8, which is more conventional sizing would align to a woman's extra small to 4 XL and a men's double extra small to 3 XL. We then had over 50 people from both inside and outside the company trying multiple sizes to ensure we perfected our new sizing chart at every step. 1 marketing campaign features a vibrant and diverse cast of all sizes, ethnicities and gender identity. It will also work to create a fit focus with the size integrated shopping experience in our stores and online. One is about our commitment to invest in sustainable materials also. We've curated the entire food line from adults through the kids turning 80% organic cotton and 20% organic recycled fibers. I applaud everyone who's been involved in bringing this business to life. It has been a significant undertaking and it's an important step forward in making The Root shopping experience more inclusive. We also see many long term growth opportunities for us in these areas. As I discussed in previous quarters, delivering a positive impact Root. It's an important focus for the entire team at Root. It's an integral part of who we are as a brand today and it's fundamental to where we're going. Root. I'm incredibly proud of the direct support we continue to provide to many well deserving organizations. In the Q2, we donated a portion of sales from our Made in Canada Fabrics Mass and We also donated 13,000 of our made in Canada masks to First Nations in Manitoba and Ontario in partnership with Save the Children's National Reconciliation program. In addition, we continue to make progress in our diversity, equality, equity, inclusion initiatives across our organization. With our efforts informed by responses and feedback Ruth team members across North America. The newest developments in this area include the launch of our DEI platform Together at Ruth And the creation of a new role, appointing the company's 1st ever diversity, equality, equity and inclusion specialist. We've also become an employer partner with Canada's Lean Diversity and Inclusion Organization, Canadian Center For Diversity and Inclusion. These are all meaningful steps in our diversity, equality, equity, inclusion journey and ones we believe will further accelerate our progress. As we look to the remainder of the fiscal year, our near term operating environment remains fluid. We are navigating the recent surge in the Delta variant, industry wide supply chain headwinds, route, including closures in countries where we source, escalating freight costs and delays due to port congestion and demand for transportation. However, we continue to run the business in route and the manner needed to successfully adapt and mitigate these impacts when possible. In early 2020, we outlined the major strategic pillars in the areas of brand, channel, product and operational excellence that we deemed important to running a business and returning it to profitable growth. We've made significant progress against these pillars over the last 18 months and we are happy with the strong foundation we've built. As we look to the future of Root and ways we can drive lasting growth, our focus will remain on the following: Root. Savaging Root is a brand beloved by customers globally, which means continuing to invest in building beautiful products, creating brand level of exciting partnerships, limited edition drop brand additive collaboration, further investing in sustainable materials, programs and processes, being a customer centric and a customer informed approach to all that we do Our secondary focus is maintaining our strong position as an omnichannel brand. Over the last year and a half, we've proven our ability to support our digital penetration that has far exceeded our historical level. While we expect e commerce to continue to normalize at somewhat lower levels once we've exited the pandemic, we still expect it to be elevated and remain a more meaningful portion of our business going forward. In improving customer order management. Our 3rd area of focus is continued operational excellence. We will continue to focus on operational efficiency, Repositioning our price value occasion with a reduction in promotional depth and breadth and managing costs to further strengthen profitability and free cash flow generation. We will also continue to pursue profitable growth opportunities by making investment decisions anchored on the return on investment in each mission. We've made significant progress over the last 18 months. And while we continue to navigate short term uncertainties, our focus remains on maximizing the successful business over the long term. With the high quality, comfort and versatility of our products, we also continue to be well positioned to capitalize on the ongoing capitalization of the recommended With that, I'll turn the call to Mona to discuss our financial results in greater detail. Mona? Thanks, Megan, and good morning, everyone. During the Q2, despite continued headwinds and uncertainty as a result of mandated store closures and operating limitations, customer base, the benefits of our omni channel capabilities and our continued success in driving operational and cost efficiencies. Looking at our financial results in greater detail. Total sales in the Q2 were $38,900,000 up 1.8 percent from $38,200,000 last year, driven by DTC sales growth. For the quarter, Root. DTC sales were $30,400,000 a 6.6% improvement over $28,500,000 last year, end of the quarter compared to approximately 45% of Q2 2020. E commerce sales continue to play an important role in the quarter And while they moderated with the increase in store activity, we still delivered significant growth over pre pandemic levels. On the Partners and Other front, sales were $8,500,000 down from $9,700,000 last year. This was primarily the result of two factors, which I have mentioned on our last call. We had another quarter of strong gross margin improvement as a result of our continued promotional discipline as well as in quarter decisions to further adjust our planned promotions given the positive customer response and strong full price selling we were seeing. If you go back to 2019, there was a tremendous amount of promotional discounting to drive the top line, while margins were slowly eroding. Room. However, we strongly believe this approach is a better way for us to continue to build our brand and maintain brand Equity over the long term. We continue to manage our expenses tightly while closely monitoring our top line performance. We recorded $21,800,000 in selling, general and administrative expenses for Q2 2021 compared to $21,400,000 last year. We recorded higher costs related to investments in talent and marketing in the quarter. However, they were effectively offset by rent savings. 6,000,000 in government rents and wage subsidies, down from 4,400,000 in Q2 2020. Reflecting our sales growth, Gross margin expansion, cost management and the benefit of government subsidies that helped offset the impact of store closures in the quarter, We recorded an adjusted EBITDA of $2,900,000 a $1,800,000 improvement over the $1,100,000 we recorded in Q2 2020. Now turning to inventory. We're happy with our current inventory balance, which was $47,500,000 at the end of the quarter. Root, which is down from $58,600,000 a year ago, primarily as a result of delivery delays and the fact that we are now starting to sell through some of our pack and hold inventory from last year. As Megan mentioned earlier and we discussed last quarter, We, like our peers, continue to face supply chain disruption. However, since last quarter, the situation has worsened industry wide. As a result, we have taken further actions to mitigate the impact on our business. We continue to strategically manage our inventory and promotions and will make in quarter decisions as necessary around planned promotional activity. We are also using airfreight for key seasonal programs. While we would likely see an impact on margins, largely in the Q4, we believe bringing the inventory in as quickly as we can is the most prudent course of action right now. We're also leveraging our pack and hold inventory to bridge delays as needed. The situation is dynamic and we continue to monitor it closely. We're working diligently to manage the business for the best possible outcome, especially as we move into our busy holiday season. At quarter end, we had outstanding revolver credit facility borrowings of $17,500,000 and had net cash of 8,400,000 Root with net debt of $77,100,000 down from $101,300,000 in Q2 2020. Root. Overall, we're pleased with our Q2 results. While we continue to face COVID-nineteen driven challenges in Q3, primarily on the supply chain side, We remain confident in our ability to deliver on the areas of the business within our control. We are a stronger business and an even more resilient and agile team than we were 18 months ago. Even more importantly, through all of the work we have done, we are well positioned to keep building on nearly 50 years of brand strength and maximize the long term success of the business. With that, operator, please open the line to questions. The the And your first question will be from Brian Morrison at TD Securities. Please go ahead. Route. Mona, I want to go back to your question on inventory heading into holiday season, pretty standard question, but maybe Just elaborate on the supply chain challenges. Will you have the desired product in place and will you have the ability to chase route. Good morning, Brian. The situation is pretty dynamic and we're monitoring it closely and we have a dedicated team working on it. As I discussed on the call, we're taking the best steps to mitigate it. We are continuing to strategically manage roots. So we're working diligently on it and we're managing the business for the best possible outcomes and we believe we will be in a good positions. But you know what, it changes every day. And we're basically making the right decisions every day to ensure that we have the best holiday. So can you maybe just elaborate on the pack and hold strategy? I assume this is not seasonal merchandise from spring, but it will be current Winter fall merchandise that will be in the stores during the holiday season? Yes, absolutely. So if you remember last year in Q3 and Q4, we implemented a pack and hold strategy where we basically packed up some product that was meant for that season that we couldn't actually sell because the stores were closed. It's products that have never seen the floor and also its product that has a core inventory. So that is a product that we're going to reintroduce back into the stores and it's going to look new and it's going to feel new and it's really going to kind of fill the holes where we need them. Okay. And then turning to Ontario stores, can you maybe just touch on the traffic as the stores reopen in June July and maybe back to school relative to last year? Room. We've had some really healthy traffic and some really healthy sales in our stores when they reopened, particularly in Ontario. I think we were pleasantly surprised room. By the number of people that we had coming back in stores and they intend to purchase. So I think that was great. And I think from a back to school perspective, we don't specifically comment on that But the one thing I would say is that we are continuing to really trade the business in the manner that we think is best for the longer term growth. And route. So one of the things we will see is that we did reduce the discounting that we do during the back to school period and more this year than we had last year. We usually have a sweat sale around this time and we decided to do more of targeted sale on specific products, as we were seeing good sell throughs with some of the costs we had before. Okay. And then last question and I'll turn it over. Just in terms of you touched on the geographic reach and your progress on the U. S. And China digital presence. What's your strategy going room. Yes. I think what we'll focus on 1st and foremost is the digitally led strategy. So I think that we have a lot of potential in the U. S. And China, And those are both for us longer term markets where we see bigger growth. And obviously, from an apparel perspective, the U. S. And China are obviously largest markets globally. So Obviously, we do see a lot of big potential of those reasons specifically. We do see other markets where we do have some interesting traction on our online route. And so we're going to be optimistic in terms of leveraging those markets to drive further growth. But definitely the focus in the near term is on the U. S. And China and then we're going room. And when you look at the other markets, just based on how we see the market trending. Okay. Thank you very much. Thank you. Thank you. Next question will be from Patricia Baker at Scotiabank. Good morning, everyone. Route. The promotional discipline, which has been pretty impressive, and you guys have been engaged in that for a period of time now. Do you have any sense of whether how your customer's feeling about that and how close they are to getting used to Root being different from a promotional perspective and Ruth. Sort of recognizing the kind of the new approach at Ruth. Good morning, Patricia. It seems like as we kind of see in our margin performance, it seems that the customers are responding to it well. We're selling a lot more product at full price. Route and the depth of our promotions have gone down and they still performed similarly as they did before. So I think historically, If you look at 2019, we just went too deep and too frequent with promotions. And now with having removed that, we've seen that it seems that the customers are still responding of product. So we feel like it's performing well. We're going to continue to go ahead with the same strategy in the future. Route. As you see, we've seen a 7 10 basis points improvement in our margin compared to 2019, which has been fantastic. Vision for the business and it is elevating the brand in general. No, I don't want to give you a quick anecdote. Just to add on that, I was in the store last week and I saw a customer who was looking at their salt and pepper slice and indicated they owned them for quite a long period of time and asked me when they were going sale because they're quite interested in buying them. When I told her that they weren't going on sale, she immediately went to the cash and bought them, right? So it takes a little while to train customers again We are not going on sale and it's been a year and a half, but obviously a year and a half during the pandemic period. So I think we still have a little bit of retraining to do for the customers to understand the roof in the fact that we're not going on sales. But as Mona mentioned, we've seen some great traction with it so far. No. Thank you very much for that anecdote. And that's kind of what I was getting at because I route that the route of the past with respect to promotions is not the route today. And I guess, a point I would make is that Root. It's probably the combination of that promotional discipline change, but also all partnerships and stuff and limited items and the newness that you're putting in there, which is also The two things combined are probably having a really positive impact on elevating the brand, I would assume. Absolutely. We're seeing some great traction with our collaborations. And I think as we've seen in previous quarter and in this quarter, I mean, we did a variety of unique collaborations. So we did something with New Orleans, We did something like the weekend and the Japanese are our sister. We just launched Much Music. So we've done a variety of different collaborations that have attracted, I think, different consumer bases. And what's interesting about those things is we're seeing people who are part of our existing consumer based clients, but we're also attracting a new consumer to the brand. And so we're continuing to envelope that Thank you. And your next question is from Stephen MacLeod at BMO. Please go ahead. Thank you. Good morning, everyone. Route. Can you just comment a little bit about what you've seen in terms of foot traffic and basket sizes, conversion trends or conversion rates or Anything like that, that gives us a sense of how consumers are coming back to the store? Yes, absolutely. So we don't route. I think that from a high level, what I can tell you is we continue to see really strong AURs. The promotional discount is obviously helping us. The lack of promotional The equation is continuing to really help us in that specific area. Traffic again is obviously an area that we saw rebound given that our stores were closed. In Ontario specifically, once they were reopened, obviously, big, big offsets in traffic overall from that perspective. So continued healthy traffic, continued to see a strong intent to purchase when our customers are in room. And overall just healthy sales growth from a store base perspective, which is generally positive. Great. Thank you. And then e commerce, I know you didn't disclose, but you sort of mentioned that e commerce route. Moderated a little bit from stores reopen, which would make sense, but store remains above pre pandemic levels. In the past, you've given sort of percent of sales or percent growth. Can you talk about or give some specifics around how e commerce performed in the quarter? Yes. So I think we talked about in previous calls how we really view ourselves as omnichannel retailer, And I think I was pretty transparent upfront in previous calls about the fact that we expected to see some moderation in e commerce business when stores reopen just given the massive store base we do have across Canada and how we are really trying to build ourselves into a seamless omnichannel retailer and brand where people can shop with us for whatever way they want. So we're on a go forward basis, we're really not taking this close in e commerce specifically because we think they really feed each other. And so from that perspective, we're focused on the overall DTC growth. And that's what we see what we saw. Room. Our stores were open. We saw shifting between the two channels. We saw customers continue to shop both channels, but we did see some customers who shifted back and stepped into the retail channel. And I think as we mentioned in previous calls, one of the things we did last year, we do a survey of our consumers to ask them about their in store expectations and experiences. And the thing that consistently came back was a significant portion of our customers wanted to go into our stores to touch and feel our products and also a number of customers in and around 30%, thirty route. Only when we shop in the physical store environment. So again, we think that's one of the reasons we're seeing the healthy return to store growth. And e commerce continues to bring new And as we had mentioned, it continues to be a higher percentage of overall sales, compared to pre pandemic levels and us versus pre pandemic levels, but route. Right. Okay. That makes sense. And then maybe just finally in terms of SG and A. The SG and A was sort of held tight in the quarter just given the stores being closed continue to be closed. Can you talk about how you expect that to trend sort of in the back end of the year as you see more stores reopen where you sit today with all stores open but one? We're managing our SG and A tightly. We're focusing on areas where we need to invest for the returns that we expect. As you would have seen in our commentary, roof. Our SG and A was higher in marketing and we're investing in the areas that we need to. So I guess, into that kind of Q3 and Q4, I Ruth. I think what you need to keep in mind is that, yes, stores are going to be open. So obviously, labor is going to be higher, particularly in Q4. In Q3, all the stores last year were open. Room. So you didn't see too much of an impact there. But in Q4, you would have to see labor going up. I think the other thing that you need to keep in mind is rent. So route. So rent expense was down this quarter. But as we go into Q3 of Q3, you'll remember that last year, we had really big abatements ahead of in Q3. So we won't be experiencing those at the same level in Q3. And then I guess lastly, I should say the subsidies. So the subsidies, as you know, are ending on October 23. So obviously, the rate is going down and it's also based on revenue decline. So I would expect that to be a lot lower in Q3 and then non existent in Q4. And then the rent subsidy, I would expect to be route in lower in Q3 as well, given that our stores are now open and the biggest portion of that subsidy is related to store closures. Route. Okay. That's very helpful. Okay, great. Thank you so much. Thank you. Next question will be from Matthew Lee at Canaccord. Board. Please go ahead. Hey, good morning. Most of my questions have already been asked. But just in terms of the stores, given that they've been closed on and off over the last Do you foresee any type of significant renovations required, especially given the transition of the brand? I think, yes, we've commented on this previously. From a renovation perspective, our stores are well invested. They look good. They're in a good shape. Route. But we continue to look at them and ensure that they're in the shape that the customers need them to be, right? So our business is omnichannel. We need to make sure that their route. Our stores are fulfilling the needs of the customer. From an investment perspective, as you see over the past year and a half, we've been doing pop ups that are very low in capital and allow us to test different models. And then based on these different models, we may make different decisions route next year and in future years in terms of the format of the stores. But in general, I wouldn't expect substantial investments in that area that are coming with the appropriate bottom line returns. Right. And then can you maybe elaborate a little bit on the route. Yes, absolutely. We have a long term partner in Taiwan who's been there for over route. 15 years, and we're continuing to partner with them going forward. They've been fantastic partners for us. It's a great relationship. And so it's really just modifications to financial terms to route. Just reflect the way we're operating with them, so more specifically focused on wholesale margins as opposed to our royalty plus wholesale base. So should we continue to expect to see that going forward? All right. Thanks. Thank you. And at this time, ladies, we have no other questions. Please proceed. Thank you, operator. Well, that concludes our call for today. We appreciate all of you coming to the call, and we look forward to speaking to you in the Q3. Route. Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending.