Earnings call transcript: Roots Corp reports Q1 2025 sales growth and stock uptick

Roots Corp (ROOTS) reported its Q1 2025 earnings, showcasing a notable performance with sales climbing to $40 million, a 6.7% increase year-over-year. The company also saw an improvement in its adjusted net loss per share, which narrowed to $0.18 from $0.20 the previous year. Following the announcement, Roots' stock experienced a 4.23% rise, closing at $3.33. According to InvestingPro data shows strong financial health metrics, with analysts expecting continued profitability growth this year. Subscribers can access detailed growth forecasts and 10+ additional ProTips about the company's future prospects.

Full transcript - Roots Corp (ROOT) Q1 2026:

Elliot, Conference Operator: Good morning. My name is Elliot, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Riggs First Quarter Earnings Conference Call for Fiscal twenty twenty five. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

On the call today, we have Megan Roche, 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 and A portion, may include forward looking statements concerning 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 first quarter management discussion and analysis dated 06/12/2025, and or its annual information form 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 first quarter earnings release, the related financial statements, and the management's discussion analysis are available on SEDAR as well as on Roots' Investor Relations website at www.investors.roots.com. A supplementary presentation for the Q1 twenty twenty five conference call is also available on the Roots' Investor Relations site. Finally, please note that all figures discussed on this conference call are in Canadian dollars unless otherwise stated. Thank you.

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You may now begin your conference.

Megan Roche, President and Chief Executive Officer, Roots: Thank you, operator. Good morning, everyone, and thank you for joining our Q1 twenty twenty five earnings call. On the call today, I will briefly review our first quarter financial results and discuss highlights from our strategic initiatives before passing it on to Root's CFO, Leon Wu. We started the year strong. Q1 sales totaled $40,000,000 compared to $37,500,000 in Q1 twenty twenty four, representing a 6.7 increase year over year.

The direct to consumer segment, which reported comparable sales growth of 14.1%, drove these exceptional results. Over the last year, the team has dedicated efforts to improving conversion across our channels through a series of initiatives focused on in store customer engagement, digital merchandising, inventory availability and improved omni channel capabilities. Our positive first quarter results reflect these concentrated cross functional efforts, and we continue to expect upside from these initiatives. During the quarter, gross margin also expanded by 80 basis points, reflecting a combination of improved product costs and reduced discounting, partially offset by foreign exchange, which Leon Wei will discuss in more detail. Given the seasonality of Roots with approximately 30% of sales generated in the first half of the year, seasonal fluctuations exist in our underlying earnings, with the first half typically generating a loss and the second half positive earnings.

While this remains a normal part of our business cycle, we were pleased to see a 16.8% reduction in adjusted EBITDA losses excluding the DSU revaluation in Q1 twenty twenty five. Our balance sheet also remains healthy. Our enhanced inventory balance positions us well to support growth and net debt declined 6.7% year over year. I will now turn to the highlights of our strategic initiatives in the first quarter. Despite a dynamic environment, we remain focused on executing a clear, disciplined strategy designed to drive sustainable growth, deepen customer connections and strengthen our position as a premium lifestyle brand.

As discussed in previous calls, at the end of twenty twenty four, we launched a new multipronged marketing strategy with investment focused on paid media, customer engagement, and elevating our brand messaging. In March, we announced a long term partnership with NCAA Canadian basketball player, Toby Fornier of Duke University. Toby is our first ever female activewear ambassador, and this relationship underscores Root's commitment to supporting emerging female athletes and highlights the breadth of its soft performance based activewear. As part of the partnership, Shelby will appear in sports adjacent marketing content, representing Ruth's activewear off the court and the Ruth's hand on the court through her passion and dedication to excellence. A natural extension of our WMB licensing partnership, this brand ambassadorship deepens our commitment to empowering the next generation of female athletes and loving the playing field in sports.

Our brand ambassador program completed its first full year cycle this quarter also and has exceeded overall expectations. In Q1, we continued to overachieve total benchmark impressions and engagement. Influencers remain a key driver of our marketing strategy, meeting our diverse customer base where they already scroll, shop and engage with what they trust and look up game. Over the next year, one can expect Roots to continue expanding its ambassador roster to elevate awareness and connect more consumers with the brand's functions. We are also continuing to make consumer engagement an essential part of our strategy through events.

We had several events through the first quarter, including our in store celebrations of International Subnet Day and the debut of our Women in Sport digital series for International Women's Day. We are excited to continue surprising and delighting consumers through meaningful events in the months and year ahead. All of these initiatives have been supported by a multipronged marketing investment strategy that includes a notable year over year increase in paid media, which has generated strong returns. In Q1, we also saw new and existing products resonating with our customers. Customers are buying Roots for its hallmarks, comfort, craftsmanship, and premium materials.

Together with our new silhouettes and refreshed design details, these trademarks have supported good results across our collection. Consumers continue to choose roots for the trust we have built around quality and softness. Our fish program, for example, remains a standout category with sustained strength in both heritage styles and new collections. We are also seeing strong adoption of updated cuts, which offer a modern take on comfort while staying true to the brand's DNA. This blend of timeless comfort with thoughtful, fashion forward updates is demonstrating real staying power.

It is reinforcing that Roots is not just part of our customers' wardrobe. It is part of their lifestyle. This momentum in our core collection and the success of our new programs gives us confidence as we continue to balance innovation with the consistency our customers expect from us. Retail optimization and store experience improvements form another pillar of our multiyear strategy. Over the past year, we have made intentional decisions to exit underperforming stores while concentrating resources on high potential locations where we see strong brand resonance and opportunities for traffic growth.

As part of our capital allocation strategy, we are investing in locations that support long term profitability and customer engagement. These investments are guided by data driven insights and a clear focus on financial returns. At the same time, we are maintaining financial flexibility to ensure we can respond quickly to evolving market conditions and opportunities. In parallel, we've begun testing and implementing elements of an updated store design toolkit. These enhancements are rooted in customer feedback and in store analytics, and they are aimed at elevating the shopping experience while reinforcing the Roots brand identity.

Features under evaluation include refreshed merchandising layouts, modern materials and finishes, digital screens, and flexible fixture systems that allow for quicker adaptation of seasonal stories. The goal is to create a more immersive, intuitive, and inspiring retail environment, one that aligns with our brand direction and deepens emotional connection with customers. Our stores are not only a point of sale, but extensions of our brand ethos, and we remain committed to ensuring they deliver both inspiration and convenience. As we roll out this new toolkit, we will continue to test and learn, applying our findings to optimize design, customer flow, and operational efficiency across the network. Our most recent store renovation, Vaughan Mills, in the Greater Toronto Area reflect these enhancements.

The Root stores in Robson Street in Denton, Vancouver and in the Mount Trombone Village are also currently under construction and expected to open in the second half of twenty twenty five under the new model. During the quarter, we also welcomed Rosie Puzer in the newly created role of Head of Omnichannel Growth. Rosie brings extensive experience to the role from several Canadian brands with deep customer loyalty and extensive networks across Canada. The final piece of our strategy that I will discuss this quarter is our focus on operational excellence. Operational excellence remains a core pillar of our strategy, and we are taking a holistic approach to enhancing efficiency and agility and to set the business up for long term growth.

This includes the continued integration of advanced technologies, whether these be artificial intelligence or machine learning, but it also extends to broader process improvements that are modernizing how we operate day to day. On the technology front, we continue to identify areas where recent advancements can improve our business in multiple areas, including enabling us to better align our product offering with customer demand, developing a more personalized customer experience on digital channels, and realizing efficiencies in customer service and returns. In parallel, we are investing in process improvements across areas such as product development, sourcing, and merchandising. And we are streamlining workflows, focusing on reducing time to market and increasing cross functional coordination to enhance speed and decision making, and these efforts are allowing us to react more quickly to trends and improve our execution at scale. We are also evolving our marketing capabilities by adopting more data driven tools to personalize engagement and better measure return on investment.

This is helping us improve the efficiency of our spend while deepening customer connection. Altogether, these initiatives reflect our broader commitment to building a more agile, efficient, and technology enabled organization, one that is well positioned to support future growth while maintaining a strong operational foundation. I would like to thank the entire team for your dedication and hard work this quarter. It is because of you that we've been able to achieve these fantastic results. I will now turn the call over to Leon Wu, our Chief Financial Officer.

Leon Wu, Chief Financial Officer, Roots: Thank you, Megan, and good morning, everyone. This marks our third consecutive quarter of delivering on year over year sales growth, gross margin expansion and improvements to our adjusted EBITDA, reflecting the combined efforts from our entire team through executing on all parts of our business while navigating a dynamic operating environment. Starting with our sales. Q1 twenty twenty five sales were $40,000,000 increasing 6.7% as compared to $37,500,000 in Q1 twenty twenty four. Within total sales, first quarter DTC sales were $34,600,000 this year, an increase of 10.2% compared to last year.

Our DTC comparable same store sales grew 14.1% in the quarter with double digit comps in both channels. As Megan noted, the strong growth in our DTC segment was driven by the combined benefits of improved product duration, including better in stock positions on our core product offerings, a focus to improve the omnichannel customer experience, amplified by the halo impact from our ongoing investments to build brand excitement. We saw sales growth in both our core product collections and seasonal offerings, reflecting Root's ability to attract customers through our iconic favorites while adding excitement and expanding basket sizes through relevant newness. Our partner and other sales were 5,400,000 in Q1 twenty twenty five, down 11.3% compared to last year. The decline in this segment was driven by the reduction in wholesale sales to our operating partner in Taiwan as they work through their inventory optimization initiatives during this year.

This decline was offset by double digit sales growth in our remaining lines of business in the segment, including China Tmall e commerce sales. Due to the higher profitability of the growth areas within our Partners and Other segment, the profitability of this segment improved 7.8% year over year despite a temporary decline in partner and other sales. Total gross profit was $24,600,000 in Q1 twenty twenty five, up 11.2% as compared to $22,100,000 last year. The growth in gross profit dollars was driven by gross margin expansion in both segments and the higher year over year DTC sales. Total gross margin was 61.5%, up two fifty basis points compared to Q1 twenty twenty four.

Q1 twenty twenty five DTC gross margin was 62.9%, up 80 basis points compared to 62.1% last year. The DTC gross margin expansion was driven by two seventy basis points improvement to our product margin, driven by continued improvements to our product costing and lower discounting. This was partially offset by the unfavorable year over year foreign exchange on U. S. Dollar purchases and an increase in overseas freight costs.

We expect to build on the upside to our product margins through costing opportunities throughout this year. However, we expect these to be offset by the stronger U. S. Dollar relative to the Canadian dollar. While our sales exposure in The United States is low, we are monitoring the tariff developments closely as there may be headwinds to our DTC gross margin, primarily through potential increases to overseas freight rates as the market anticipates a response to the dynamic environment.

SG and A expenses were $33,300,000 in Q1 twenty twenty five as compared to $32,000,000 last year, an increase of 4.1% or 1,300,000 Within SG and A expenses, there was $500,000 of incremental year over year costs pertaining to the unfavorable revaluation of cash settled instruments under our share based compensation plan. Excluding this item, SG and A expenses would have increased by $800,000 or 2.6% year over year, primarily reflecting higher investments in marketing with variable selling costs largely offset by savings from our fleet optimization initiatives. We have seen the strong momentum gained from investing in authentic brand storytelling, increased brand reach and memorable brand experiences. We continue to believe in our long term growth benefits on lock through marketing and anticipate similar levels of increased spend in the second quarter, accelerating as we enter our peak fall and holiday seasons. As a result of the sales growth, gross margin expansion and scaling of our SG and A expenses, our adjusted EBITDA amounted to a loss of $7,100,000 this year, improving from $8,000,000 loss in Q1 twenty twenty four or an improvement of 10.7%.

Our Q1 adjusted net loss per share was a loss of $0.18 per share, improving from a loss of $0.20 per share last year. As a result of the strong appreciation in our share price during the quarter, we recorded a $500,000 DSU revaluation expense in Q1 twenty twenty five as compared to less than $100,000 last year. This expense reflects the fair value true up in our cash settled deferred share units issued to our Board of Directors, which increases as our share price increases. Without the DSU revaluation expense impacts, our adjusted EBITDA would have improved by 16.8%, and our adjusted net loss per share would have improved from a loss of $0.20 per share last year to a loss of $0.17 per share this year. As Megan mentioned, due to the seasonality of our business and with the first half of the year only accounting for approximately 30% of our total annual sales, We typically generate small operating losses during this period, offset by earnings in the larger second half of the year.

Now turning to our balance sheet and cash flow metrics. Our Q1 twenty twenty five ending inventory was $40,500,000 as compared to $35,400,000 last year, representing an increase of 14.5. The year over year increase in inventory was primarily driven by improved inventory position from our core collections, which was under stock last year and negatively impacted our first half results. In addition, a portion of the inventory increase was driven by higher in transit inventory to support the upcoming summer and back to school seasons. During Q1 twenty twenty five, our free cash outflow was $21,800,000 an increase of $7,200,000 as compared to an outflow of $14,600,000 last year.

The increased year over year cash outflows was driven by a planned restock to our core inventory collection to support first half twenty twenty five sales and the timing of certain monthly occupancy cost payments. Due to the seasonality of our business, we typically see cash outflows as we build up our working capital ahead of our peak season before generating larger cash inflows through the higher volume fall and holiday seasons. As shared last quarter, we announced our intention to commence our share repurchase program, where normal course issuer bid, for the repurchase of up to 1,300,000.0 of our common shares, which represents 10% of our public float. In Q1, we repurchased 115,000 shares for a total consideration of $300,000 We have approximately 1,200,000.0 shares remaining on our NCIB program that is in effect until April ten of twenty twenty six. Net debt was $29,600,000 at the end of Q1 twenty twenty five, down 6.7% as compared to $31,700,000 at the same time last year.

Our net leverage ratio measured as net debt over trailing twelve month adjusted EBITDA was approximately 1.3 times. Subsequent to the quarter, we also amended our existing credit agreement to extend the maturity date by one year until 09/06/2027. In addition, the amendment reduced the revolving credit facility size from $60,000,000 down to $45,000,000 and introduced higher annual maximum repayment terms on excess cash flow. The amendment reflects the strong partnership we have with our banking syndicate and our ongoing commitment to improve our balance sheet health through reductions in net debt. I will now pass it back to Megan for closing remarks.

Megan Roche, President and Chief Executive Officer, Roots: Thanks, Leon. Undoubtedly, the broader market experienced meaningful volatility in the first quarter of twenty twenty five. Our results during this period speak to the enduring brand appeal and our continued efforts to drive sustainable growth. We remain focused on executing our strategic initiatives and managing those items within our control while navigating the evolving global landscape. Our strong direct to consumer sales momentum has continued during the first five weeks of the second quarter.

However, we still have a significant period to go, which includes our important back to school launch in July, and we look forward to discussing this with you in the future quarter. Operator, you may now open the call for questions.

Elliot, Conference Operator: Thank you. Our first question comes from Andrew Lopez with TD Cowen. Your line is open. Please go ahead.

Andrew Lopez, Analyst, TD Cowen: Thanks. Good morning. Maybe I'll start with the consumer. I might have missed what you said on the first five weeks of Q2, but what trends are you seeing so far, in Q2 fiscal twenty five? And any pullbacks or trade downs being observed, maybe on some weakening consumer sentiment you might be seeing?

Megan Roche, President and Chief Executive Officer, Roots: Good morning, Andrew. No. We haven't seen any weakening and or pull back from that perspective. The first five weeks of q two were strong, so we saw the continued strong momentum from q one into q two. And we haven't seen anything from a consumer perspective that would suggest the consumers purchasing us are seeing any weakening in their spending.

Andrew Lopez, Analyst, TD Cowen: Okay. And how's that how's that looking in terms of comp? Are you guys able to speak in terms of

Megan Roche, President and Chief Executive Officer, Roots: We're not disclosing comp for the second quarter at this point, but we can tell you that we've seen a continuation of the strong momentum from q

Leon Wu, Chief Financial Officer, Roots: one. Okay.

Andrew Lopez, Analyst, TD Cowen: Okay. And maybe just looking at the marketing initiatives, if you can just provide an update on kind of the cadence for the rest of the year. I guess, will that still be elevated in the back half? And are you fine tuning this either up or down based on, the state of the consumer?

Megan Roche, President and Chief Executive Officer, Roots: We do anticipate having elevated marketing spend throughout the year. Part of our strategy this year is to take all of the great things we've done and make sure we get them in front of consumers. When you think about the changes we've made over the last four or five years, things like improving our product offering, not just the materials we use, such as sustainable materials, but the breadth of it, the fashion aspect of it, things like afterward launch, which continues to perform very, very well for us. So we wanna make sure that we're getting those new products in front of consumers and also making sure that we're speaking to them about the modernization we've done around the brand. So you will continue to see us investing behind, you know, paid media.

There's some elevated spend there. As I mentioned, increasing spending around different events, our brand ambassador program, which allows us to get in front of consumers where they shop, scroll, or engage. That's something we continue to invest behind. So you will continue to see that. Obviously, as we look forward to the rest of the year, we're continuing to monitor what's happening globally.

And so we continue to look at how we could adjust spend if necessary to ensure that we're being reflective of market conditions. But at this point, we continue to believe that investing behind that marketing spend is important for the brand, and we are seeing some good returns.

Andrew Lopez, Analyst, TD Cowen: Okay. And, yeah, just on the the return portion of that, I guess you're you're kinda speaking to, getting kind of better visibility on to return investment on your marketing spend. Is that are you able to provide any more clarity on that on that piece at all? Or

Megan Roche, President and Chief Executive Officer, Roots: Yeah. When we look at our marketing spend,

Leon Wu, Chief Financial Officer, Roots: obviously, we're

Megan Roche, President and Chief Executive Officer, Roots: looking into a bunch of different, yeah, we're looking into a bunch of different pieces. Right? So there's obviously, the lower funnel part of it where it's, you know, the ROAS is quite clear because you're looking at paid media spend, for example, like, a Google, or maybe a Netflix or something like that. And so that's very clear clear to us. And then we're obviously investing more, though, in the top of funnel with the awareness and consideration set through things like our events, or some of the other activities that I mentioned for brand ambassador programs.

And so what we're obviously doing is we continue to elevate our spend here, and We're also continuing to test and learn. So things that work for us, we're doubling down on, and we're continuing to track, you know, how that's driving performance. And then we'll see it up across a couple different metrics. So we do benchmark ourselves on things like email open rates or click through rates or grow within the market, let's say, from a typical paid media perspective. But we do even also look at things like engagement and impression.

And, ultimately, what we're trying to determine is the spending that we're making on any one campaign. Is that driving people back to our stores or back online? So we're seeing traffic improvements, we're seeing conversion improvements, Or are we seeing people purchasing that product category more that's being advertised than other categories? So we're looking at it across a number of different metrics, and it's, you know, a layered approach depending on what kind of marketing we're using.

Andrew Lopez, Analyst, TD Cowen: Okay. Great. And then maybe just one more for me. On P and L, so what are you seeing in terms of rightsizing of partner inventories and I guess on the demand side there as well? And are you still expecting that to stabilize in H2 this year?

Megan Roche, President and Chief Executive Officer, Roots: When we look at our business for P and L, I mean, he's breaking into a couple of pieces, as Leon mentioned. The Taiwan business specifically is sitting a little bit of an inventory overhang from last year, and so we do anticipate them to work through that for the rest of this year. But we overall have a very strong partnership with them. We've been in that market for twenty six years. You know, we have 119 stores across the country.

And so we we do believe there's continuation of strong performance in the longer term. But we we anticipate them having to work through some of this inventory over the next year as they right size and optimize what they're looking at. More broadly in the P and O segment, as Leonel mentioned also, we've seen some really strong growth in China, so some double digit growth there. We also saw double digit growth in the other aspects of the P and O segment. So as we talked about on the call, what's great about that is you're seeing the margin in P and O go up even though there's been some slight reduction in the sales in the P and segment this quarter.

So overall, we still believe the P and has a lot of opportunity for growth. We think it's a very strong segment with us overall, and there's obviously some work through of inventory as it specifically relates to Taiwan this quarter. But overall, there's a lot of health and growth opportunities

Andrew Lopez, Analyst, TD Cowen: there. Okay. That's great. Congratulations on the, on the strong performance in q one. Thanks.

Megan Roche, President and Chief Executive Officer, Roots: Thank you.

Elliot, Conference Operator: We have no further questions. I'll now hand back to Megan Roche for any final remarks.

Megan Roche, President and Chief Executive Officer, Roots: Thank you for joining us for our Q1 twenty twenty five earnings call. We look forward to speaking to you in future quarters, and I hope you have a wonderful summer.

Elliot, Conference Operator: Ladies and gentlemen, today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.

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