I listened to the Roots Corp. (XTSE: ROOT) Q2 fiscal 2025 earnings call on September 10th. The call was hosted by Meghan Roach (CEO) & Leon Wu (CFO). The storied brand has taken advantage of recent Canadian patriotism to drive very strong comparable store sales by partnering with Molson & Canada Dry.
GAAP Financials (all in $ CDN)
Roots traditionally sells about 30% of it’s sales volume in the first half of the year and runs at a loss.
Sales in Q2 were $ 50.8 million, up + 6.3% year/year. The retailer posted a + 17.8% comp store sales growth for the quarter, the highest growth rate since the company went public in 2017. This strong growth was a result of success in: omni-channel retailing, branding & marketing and execution. The lifestyle, active & sweats category saw strong sales growth.
Direct-to-consumer sales were $ 41 million in the quarter, up +12.7%. See management commentary below for steps taken by Roots to drive sales in this division.
Partner & other sales were $9.7 million in Q2, down – 14.2 % to last year. This was primarily driven by Roots’ Taiwan partner who bought less product to optimize inventory, partially offset by strong sales with China’s Tmall, B2B wholesale customers & licensing revenue.
In Q2, sales include 5 less stores than last year, also renovations disrupted sales at other stores being upgraded.
Gross profit was $ 30.8 million in the quarter, up + 14.5% as both revenue segments saw increases in rate.
Gross margin rate was 60.6%, an increase of +400bps year/year. This gain was due to a combination of: greater sales mix of direct-to-consumer sales which yield higher margins, sourcing strategies, disciplined markdown management & a mix shift to higher margin categories. Specifically, the direct-to-consumer segment had a gross margin rate of 63.2 %, up + 150 bps while the partner & other segment had a gross margin rate of 60.7% up + 430 bps. Within the direct-to-consumer segment, rate improved due to: better costing & lower discounting, partially offset by foreign exchange rates.
SG&A was $ 34.7 million or 68.3% of sales, up +9.1% from Q2 last year which was $ 31.8 million or 66.5% of sales. This increase was due to increased compensation costs as a result of share price increases, investments in marketing & other personnel costs. This was partially offset by lower occupancy costs.
The retailer had an operating loss of – $ 3.9 million or -7.6% of sales for Q2, up from $ -4.9 million or -10.3 % of sales in Q2/24.
Roots posted a net loss of – $ 4.4 million in Q2, a 16.1% improvement to last years loss of -$5.2 million.
For the first half of 2025, Roots generated negative cash from operating activities of – $14.4 million, down from – $ 10.5 million in the first half of 2024. This was caused primarily by a large negative swing in “Accounts payable and accrued liabilities” & higher inventories year/year.
Roots has $ 1.93 million in cash on hand, down roughly -30% from last year. Meanwhile, account receivable is up significantly, from $7.49 million to $11.29 million (up + 50% to last year). Long term debt has been reduced from $ 39.1 million to $ 33.4 million, a drop of about -15%. Roots retained earnings deficit increased from -$15.7 million to -$46.3 million.
Inventory is $ 49.9 million, up +13.9% to last year. Roots repurchased 492,000 common shares in the quarter, valued at $ 1.5 million.
Management Commentary
In July, the retailer launched it’s new “Roam” collection in activewear. This line included it’s proprietary breathing technology which made the garments moisture and odor resistance, while preserving Roots traditional softness.
Roots also activated 2 brand collaborations in Q2: 1) Molson x Roots “Beer Sweats” & 2) Canada Dry x Roots collection. These launches included select pop-up stores and significant marketing, which helped increase brand awareness. Roots also utilized double the number of brand ambassadors in Q2 to drive brand affinity and marketing funnels. Finally, Roots launched select golf & tennis inspired activations.
Also in July, Roots opened it’s Vancouver flagship store. The unit is a blend of nature & technology which includes a moss wall, numerous digital screens and a reference to Stanley Park. Since it’s launch, Roots has seen a “notable” increase in sales in the market.
Roots also re-launched it’s updated Mount Tremblant store in July. This location also includes digital screens in it’s upgrades.
The brand is focused on authentic storytelling, which according to management drives conversion.
Roots is selective in how it allocates capital, using money to update stores in key locations while rightsizing stores in other less promising locations.
Roots Share Price Dynamics
Roots stock opened on September 10th at $3.24 (earnings day) and closed at $3.20. The stock was down – 1.25% over the last month but up + 48.4% over the last year.
My Commentary
Roots is an interesting specialty retailer. Owned mostly by private equity (Search Light Capital), the retailer is traded publicly in Toronto. I think Roots was wise to leverage the recent buy-Canadian movement in marketing and collaboration, which no doubt helped drive significant comp store sales growth. Gross margins are high at 60% + but Roots has a large SG&A expense (68% of sales in Q2) that is more than double that of GAP (~33% in Q2) and much higher than Lululemon (~38% in Q2). Some of this heightened expense may be due in part to fees that Search Light Capital may charge the business to manage it. With inventories high, it will be interesting to see how Roots performs in Q3 & Q4 and whether they can maintain this strong sales momentum.
What do you think?
Thanks for reading!
Bruce Winder
Retail Analyst
Bruce Winder Retail – BWR
416-705-5627/bwinder@brucewinder.com
NOTE: The comments above are my own personal opinion and do not represent investment advice. See a professional investment advisor.
