Good morning. My name is Michelle. I'll be your conference operator today. At this time, I would like to welcome everyone to The Roots Fourth Quarter and Full Year 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 would like to ask a question during that time, simply press star, the one on your telephone keypad. If you would like to withdraw your question, please press star followed by the two. On the call today, we have Meghan Roach, 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&A portion, may include forward-looking statements of 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 and/or its annual information form dated April 4, 2023, 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 2022 conference call is also available on the Roots investor relations site. Please note that all figures discussed on this conference call are in Canadian dollars unless otherwise stated. Thank you. You may begin your conference.
Good morning and welcome to our earnings call. At the start of fiscal 2022, we outlined the following four growth pillars for Roots: offering an elevated omni-channel experience to our customers, reinforcing our brand position globally, taking a progressive approach to corporate social responsibility, and delivering operational excellence. Before we review the financial results, I will discuss our progress against these pillars in what proved to be a challenging economic environment in the second half of 2022. From an omni-channel perspective, we completed our website re-platforming in September. Its benefits also include more real-time data on consumer trends, enhanced mobile navigation, better search capabilities, and a more seamless back end for order management and customer support.
Our new web platform will enable us to be more agile and was a necessary step to facilitate future strategic initiatives. Alongside the website re-platforming, we also improved our international e-commerce presence, which now allows customers to shop the brand in several different currencies. We also partnered with NewStore to leverage their order management and store fulfillment solutions to reduce shipping time, to improve inventory accuracy, and to optimize inventory sell-through across the company. With our one pool of inventory across retail and online, NewStore's proprietary reading logic enables Roots to allocate order requests across our more than 120 physical locations in Canada and our distribution center based on specific prioritization criteria. This allows us to accelerate order fulfillment and to improve the overall customer experience for both online and in-store shoppers.
In 2023, we will continue to enhance our online offering, and in Q1, we appointed a new paid media agency to expand our online presence, optimize our spend, and improve customer targeting. During 2022, we also continued to reinforce and enhance our brand globally. Although overall sales declined in Q4 2022, our emerging collections performed very well. We have continued to invest in building out activewear, a segment that grew by more than 30% in the fourth quarter. Similarly, sales in the One Collection, our first fleece offering in a gender-free silhouette, sustainable materials, and extended sizing, more than doubled in 2022 and grew by more than 30% in Q4.
Cloud, a minimal logo fleece offering for women with more fashion-forward designs, also exceeded our expectations in Q4 2022 and continues to be a best seller in the current quarter. This growth did not offset lower sales in select traditional sleep styles. It speaks to the upside potential of the brand as we continue to innovate and expose consumers to our broader offering. Throughout 2022, we continued to partner with celebrities and brands that expanded our audience and showcased our heritage products in new and interesting ways. We created handmade leather accessories for The Weeknd's North American stadium tour, custom jackets and small leather goods in support of Elton John's farewell tour, and partnered with emerging designers such as Adidem Asterisks*, which introduced new customers to Roots. Outside of these North American partnerships, we enhanced our presence in new markets.
While our expansion into China remains nascent, we have experienced good sales momentum and are increasingly gaining traction with influencers, celebrities, and major fashion publications. As we commence our fiftieth year in August 2023, we expect our brand momentum to continue to be strong. We recently appointed a new creative director in residence, Joey Gollish, founder of the acclaimed fashion label Mr. Saturday, and Canadian Men's Wear Designer of the Year in 2022. Joey shows a deep love for Roots and provides a unique perspective that will support our long-term growth objectives. In this newly created role, he will initially work closely with our Chief Product Officer, Karuna Scheinfeld, to bring our 50th anniversary to life. We are excited to introduce this new creative influence to the brand.
We have several exciting launches also planned for the upcoming year, including limited edition products, the reissue of heritage classics, and new global collaborations. We also recently hired a new creative agency to support the launch of our anniversary in August. As we seek to grow our customer base outside of our traditional channels, we also signed an agreement with Stadium Live, a leading online platform for Gen Z sports, culture and entertainment fans in early 2023. This initiative forms part of an overall strategy to expand our brand and connect with younger audiences. In tandem with Stadium Live, we will provide customers with an immersive virtual experience that allows them to fully engage with our brand and products on a deeper level. We intend to deliver a unique collection of digital branded experiences and physical products to this distinct customer base. Moving to corporate social responsibility.
We have made significant strides in corporate social responsibility in the last year. We took important steps in establishing a broader foundation for our CSR program, including creating a senior director of sustainability role, conducting risk assessments, peer benchmarking, materiality analysis, and stakeholder surveys. Having taken these preliminary steps in our CSR roadmap, we are now progressing along three key areas: climate action, social labor, and material and product innovation. By adopting a structured approach, we aim to improve our internal decision-making, reduce our impact on nature, and enhance the communities in which we live. We are confident that this approach will lead to continued success on our CSR journey. In connection with our focus areas, we successfully transitioned the majority of our collections to preferred fibers and materials in Q4 2022.
This decision to become a more sustainable brand definitely comes at a higher cost due to the price of these materials compared to conventional offerings. However, as a brand with roots in nature and the Canadian outdoors, this investment represents a long-term commitment to more sustainable products. We look forward to sharing further updates on our progress in the coming year. Leo will shortly review our financial performance and initiatives surrounding operational excellence in more detail. At a summary level, after a strong start to fiscal 2022, challenging market conditions in the second half drove sales and earnings lower on a full year basis. In line with our expectations, sales declined 8.1% year-over-year in Q4 2022 and 0.6% in fiscal 2022 compared to fiscal 2021.
Adjusted EBITDA totaled CAD 23.5 million in Q4 2022 compared to CAD 30.6 million in Q4 2021. We view these economic headwinds as temporary nature. We expect sales and margins to be under pressure in the short term as the environment remains uncertain. Despite the current environment, Roots remains in a solid financial position with ample liquidity and free cash flow generation on an annual basis. While we intend to remain prudent, we are focused on long-term profitable growth and will be making investments in several areas in 2023 to support our long-term growth objectives. In Canada, we have high brand awareness, which creates an opportunity to create new customer acquisition and increase lifetime value amongst our loyal customer base. We see a large untapped market in Canada for Roots, particularly amongst our younger generation.
As discussed, we've introduced attractive new products in 2022, and we intend to build off the strength of these franchises. We plan to test new non-fleece lifestyle products starting in Q1 2023, build off our activewear success with new styles, and expand our product collaborations globally. We also look forward to relaunching some updated heritage styles and categories in line with our 50th anniversary in the second half of 2023. As we enhance our customer communication and targeting in conjunction with our new paid media agency, creative agency, and Creative Director in Residence, we will also be testing a new brand ambassador affiliate program and a referral program in the first half of 2023.
In support of our broader ambitions, we will also continue our investments in improving data analytics and customer insights. Outside of Canada, as we highlighted previously, our focus on international expansion continues to remain in the U.S. and China, where we see long-term potential for the brand. I remain pleased with the margin expansion that the team has generated since I joined Roots in early 2020, we also see upside in our 2024 product costs under our newly appointed Senior Director of Sourcing, even though our margins in 2023 will face some headwinds. We also believe in our pack-and-hold strategy for inventory, which we initially implemented during the pandemic with a successful outcome and have re-implemented at the end of 2022.
This strategic decision was one of the factors that temporarily raised our inventory levels, which we expect will right-size by the end of the fiscal year. Leon will address inventory levels in more detail. We continue to make substantial progress each year in pursuit of our long-term goals. We remain well-positioned to navigate through this temporary period of economic instability with our disciplined growth strategy, the appeal of our brand, and the strength of our balance sheet and liquidity. I want to thank the Roots team for their continued commitment and hard work in 2022. On that, I will now pass the call over to our CFO, Leon Wu.
Thanks, Meghan, and good morning, everyone. This marks my first conference call as CFO of Roots, and I look forward to sharing updates on our financial performance and operational focus areas. Over the last few years, we have made significant progress to improve the fundamentals of the business and strengthen our balance sheet. I'm excited about our long-term opportunities to drive profitable growth as we navigate through short-term economic headwinds in 2023. Turning to our Q4 2022 results. Total sales decreased 8.1% to CAD 111.5 million from CAD 121.3 million in the fourth quarter of 2021. As Meghan referenced, we invested to grow our activewear, One, and Cloud Fleece collections, which gave our consumers the opportunity to experience our broader, innovative product offering and expand the Roots assortment in their wardrobes.
While we are pleased with the strong performance of our emerging collections, it did not offset the declines in select traditional fleece styles. Combined with the economic headwinds and intensified promotional environment, Q4 2022 direct-to-consumer sales were CAD 98.5 million, down 10.9% year-over-year. We addressed these factors during our Q3 conference call and the impacts they had on our results through Black Friday and Cyber Monday. While the year-over-year decline subsequently stabilized towards the latter part of the fourth quarter, the initial part of Q4 represented a larger portion of the total sales. Partners and other segment sales rose 20.9% to CAD 12.9 million in Q4 2022. The increase was mainly due to higher sales to our international operating partner in Taiwan. Growth in the wholesale of Roots-branded products to select retail partners and favorable foreign exchange impacts.
Turning to gross margin. Total gross profit decreased 12.9% to CAD 63 million in Q4 2022 from CAD 72.4 million in Q4 2021, driven by reduced sales volume and a lower gross margin on DTC sales. DTC gross margin was 58.7% in Q4 2022 compared to 61.3% in Q4 2021. Excluding the impact of higher inventory provisions in Q4 2022, adjusted DTC gross margin declined 180 basis points year-over-year. This decline was primarily due to the higher product costs from the transition to sustainable materials and increased discounts on targeted inventory. These factors were partially offset by a 170 basis point margin improvement from lower air freight costs incurred in Q4. In the second half of 2022, air freight costs were 1.3% of DTC sales.
We expect short-term gross margin headwinds into 2023. I would like to share with you how we believe these various elements will impact our margin in the upcoming year. First, we made a decision to invest in becoming a more sustainable brand, and we began transitioning our products to preferred fibers and materials starting Q3 2022. The shift to sustainable materials result in a higher product cost, which we will not comp until late 2023. We have purchased most of our 2023 collections prior to the declines we observed in the global commodity prices. We do not expect to realize the full benefit from reduced input costs until 2024.
Secondly, due to the ongoing promotional environment, we expect the margin impact of markdowns in the first half of 2023 to be similar to the higher trends witnessed in Q4 2022. We stand by our strategy to minimize off-market storewide discounts, and we will continue to leverage our pack-and-hold inventory strategy to protect our core product offerings. As a result, we expect our markdowns to remain below pre-pandemic levels. Finally, we have seen improvements in global freight markets during recent months, resulting in our goods arriving on time or earlier than expected and eliminating the need for air transportation. We anticipate this will represent a meaningful margin tailwind for us starting in the back half of 2023 As we compare against air freight costs incurred in 2022.
SG&A expenses were CAD 42.9 million in Q4 2022, down 6.2% from CAD 45.7 million in Q4 2021. The decrease can largely be attributed to reduced corporate payroll costs and lower variable selling costs. This was partially offset by higher store labor costs as a result of increased hourly wage rates and higher e-commerce fulfillment expenses. We will continue to be disciplined in managing our costs as we navigate through the current macro uncertainties and inflationary pressures. However, as Meghan alluded to, we are looking beyond these short-term headwinds and will keep investing in longer-term strategic growth initiatives, which will translate into a slightly higher SG&A year-over-year. Adjusted EBITDA amounted to CAD 23.5 million in Q4 2022, compared to CAD 30.6 million in Q4 2021.
Net income totaled CAD 13 million, or CAD 0.31 per diluted share in Q4 2022, vs CAD 18.1 million or CAD 0.42 per diluted share in the same period last year. Moving to our balance sheet. Our inventory position increased 33% or CAD 13.7 million to CAD 55 million at the end of 2022. There are 4 main factors driving this increase. First, our reported inventory balance includes both on-hand inventory and inventory that is in transit from our suppliers. Due to global supply chain challenges last year, when 2023 spring and summer orders were placed, we strategically pulled ahead the timing of our orders. Consequently, our in-transit inventory accounted for CAD 4.4 million, or approximately 1/3 of the total year-over-year increase.
Second, our pack-and-hold strategy on core inventory to be released for sale in the second half of 2023 represented CAD 3.5 million of the increase. Third, following initiatives to improve the sustainability of our products, the higher associated product costs drove CAD 1.7 million of the total increase. Finally, the remaining third of the total increase was due to higher on-hand inventory for sale. Managing our inventory is a major focus for 2023. As a reminder, the majority of our assortment remains in core silhouettes and year-round styles. We expect to see inventory levels start to decrease year-over-year in the second half of 2023 as we adjust our Q3 and Q4 inventory purchases, release our pack-and-hold collections, and continue to take a methodical approach to manage seasonal styles.
At the end of fiscal 2022, we had a solid financial position with net debt of CAD 24.8 million, down 7% from the end of 2021. Our net leverage ratio stood at 0.9 times at year-end. Our total liquidity was CAD 91.9 million, which includes CAD 31.9 million in cash and available borrowing capacity. Following the year-end, we amended our existing credit facility to extend the maturity by two years to September 2026 under the current terms. During fiscal 2022, Roots repurchased more than 600,000 shares under our NCIB for a total consideration of CAD 2 million. Following the year-end, we repurchased nearly 200,000 additional shares for approximately half a million CAD.
We have implemented an automatic share purchase plan with a designated broker, enabling us to purchase shares for cancellation during regular scheduled blackout periods over the term of our NCIB. In closing, we are proud of the team's work navigating through the challenging business environment by strategically managing our inventory and maintaining strong liquidity. Given a robust balance sheet and disciplined approach to managing our cash flows, we are well positioned to face the uncertain macroeconomic climate. We will continue to drive operational efficiencies and remain committed to prudent capital allocation by constantly evaluating the most effective use of our resources to generate sustainable long-term shareholder value. This concludes our prepared remarks. With that, operator, please open the line for questions.
Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, please press star followed by the number one on your telephone keypad. If your question has been answered and you would like to withdraw from the queue, please press star followed by the number two. And if you are using a speakerphone, please lift your handset before pressing any keys. One moment please for your first question. Your first question will come from Matthew Lee at Canaccord. Please go ahead.
Hey, good morning. Thanks for taking my question. You know, maybe a general one to start. Can you just provide some color into the drivers of the kind of continued intense promotional activity as you step into 2023, and what are the closures from the large retailers in Canada have any impact on that?
Yeah, absolutely. Good morning, Matthew. We definitely observed a deeper level of discounting across peers in the third and fourth quarter. I think what we're seeing now is increased price sensitivity amongst consumers. We're, I mean, we've talked about this in the past. We're not a fast fashion brand, we are not participating in massive deep discounting. If you look at our pack-and-hold strategy and core collections, we're continuing to apply that strategy. You'll see that being brought out next year. We're applying discounts on seasonal products at the relevant time. I think you are definitely seeing consumers shifting a bit more to choosing items that are on sale as they become more price sensitive. Really, if you focus on our overall business, that's not something that really we're targeting.
If you think about our overall, discount levels, they continue to remain well below pre-pandemic levels.
Right. Okay. Maybe you can talk about the feedback you've been receiving on the switch to sustainable materials. Are you finding that customers are willing to pay that premium offsetting the higher costs?
Listen, I think that when we look at our overall business, what we're seeing is really good performance in categories like active and One and Cloud. If you look at some of those sustainable materials and some of them are not sustainable materials, I would say that as a business, you know, we continue to have an opportunity to talk more about the sustainable materials we have to the broader marketplace. When we do surveys, our consumers, especially the younger consumers, tell us that they're looking for brands that do have sustainable materials to lean into. We continue to believe in our growth strategy. We continue to think we have an opportunity to talk about it more in the market to attract new customers into the fold along the lines of it.
The products that we've launched that are sustainable, you know, so far we've seen some good traction on them.
All right. Thanks. I'll pass the line.
Ladies and gentlemen, once again, if you would like to ask a question, please press star one at this time. Your next question will come from Stephen MacLeod at BMO Capital Markets. Please go ahead.
Thank you. Good morning. I just wanted to circle around on one thing that you mentioned about the sales cadence through the quarter, and it sounded like after a tougher first half, things sort of stabilized in the back half of tail end of the quarter. I'm just curious what you're seeing on a Q1 to date basis. Any color you could provide?
Absolutely. We're seeing gradual signs of stabilization, which is positive. You know, I think as Leon alluded to in the prepared remarks, you know, we saw more deeper declines at the beginning of the fourth quarter, and that started to gradually, I guess, reside as we got to the end of the fourth quarter. Q1 really is showing gradual signs of stabilization. I would say that, you know, what has been positive is the collections we called out previously active, and some of the other ones continue to show some nice growth. But select traditional styles are still seeing a little bit of underperformance relative to previous years.
Okay, that's great. Thank you. When you think about the puts and takes on gross margin, you know, you talked about the elevated product costs but partially offset by some of the tailwind from freight. Just curious if you can give some color on how you think fiscal 2023 margins may shape?
Yeah. Good morning, Stephen. On regards to DTC margins, I would really break it up into three elements. You mentioned air freight, air freight is something that really impacted us in the second half of 2022. I would expect that given the improvements in the supply chain, we would not need to rely on air freight going through 2023. We quantified and disclosed that air freight represented about 130 basis points of H2 gross margin on a DTC basis. You could expect that that would be a good tailwind for us in the second half of the year. The next two elements are the cost and markdown elements.
Firstly, on the markdown elements, we do expect that at least in the first half of the year, that we will continue having similar year-over-year markdown trends as we saw in Q4. Just again, as we are working through a promotional environment and as we work through some of the very select seasonal inventory. From a cost perspective, we don't expect significant cost improvements in 2023, and there's a couple of reasons for that. The first one is, as a result of us moving towards more sustainable products, we are comping that extra cost only starting Q3 or late Q3. The second part is that because we bought most of our materials and products ahead of the commodity price decreases, we don't anticipate benefiting from the reduced commodity prices until early 2024. Hopefully that gives you some of the elements of the margin movements.
Yeah, that's great color. Thanks, Leon. Just on the air freight, did you say it was a 320 basis point impact in the back half?
CAD 130.
130. Okay. That's great. Thanks so much. I'll turn it back to the line.
At this time, we have no further questions, so I will turn the conference back to Meghan Roach for any closing remarks.
Thank you for joining us for our fourth quarter earnings call. We look forward to speaking to you about Q1 in the coming months.
Ladies and gentlemen, this does conclude your conference call for this morning. We would like to thank everyone for participating and ask you to please disconnect your lines.