Roots stock dives 14% after retailer lowers profit target for the year
Canadian clothing retailer Roots says it won’t reach profit targets this year as its net loss more than doubled during the second quarter compared with the same period in 2018 because of lower-than-expected store traffic and problems shifting to a new warehouse.
Roots stuck plunged 14.6 per cent to $2.34 on the Toronto Stock Exchange.
The Toronto-based company’s net loss for the three months to Aug. 3 inflated to $9.7 million compared with $4.1 million during the same period a year ago, Roots said in a statement.
Earnings before interest, taxes, depreciation and amortization plummeted to a $4.4 million loss for the period compared with a $32,000 uptick a year earlier, Roots said. Comparable sales fell 2.9 per cent versus a 1.1 per cent gain in the corresponding quarter in 2018, it said.
The quarter’s financial results “fell below our expectations, primarily as a result of negative store traffic and a delay in flow of product to stores as we transitioned to our new distribution centre,” Roots President and CEO Jim Gabel said in the statement.
Roots, an iconic Canadian brand that started in 1973 and once designed the nation’s Olympic athlete uniforms, faces obstacles as online marketers erode the share of bricks and mortar retailers. Direct-to-consumer sales in the year’s first half were lower than the company forecast while macro-economic and geopolitical headwinds on its Asian business are forcing the company to lower sales expectations slightly below the targeted range of $358 to $375 million, it said.
The combination of softer Asian business, lower first half direct-to-consumer gross margin and incremental costs to complete the transition to its new distribution centre, means the company expects adjusted EBITDA and adjusted net income to fall below its previously disclosed target ranges of $46 and $50 million, and $20 and $24 million, respectively, it said.
The Asian business downturn and the costs to complete the distribution centre transition will lower this year’s EBITDA by $5 million to $6 million, it said.
Gabel was more upbeat about the current quarter, saying “consumers are responding well to our back-to-school assortment” and there’s been an improvement in the flow of goods from its warehouse. “But we still have more work to do in advance of our peak holiday selling periods,” the CEO said.
The company has maintained what it calls direct-to-consumer sales, from its corporate retail store and through e-commerce, at $48.2 million during the quarter compared with $48.3 million a year ago. Total sales during the three months expanded 2.5 per cent to $61.7 million from $60.2 million during the year-ago period, it said.
Roots has 116 corporate-retail stores in Canada, eight corporate-retail stores in the U.S., 115 partner-operated stores in Taiwan, 34 partner-operated stores in China, one partner-operated store in Hong Kong and a global e-commerce platform, it said. The company also plans to complete another renovation and relocation and add two new corporate-retail stores by year-end, it said.
The company is betting on improved sales growth this year, in part through online revenue increases and partnerships.
“The power of the Roots brand remains strong,” Gabel said. “We are a highly sought-after collaborator, most recently releasing a limited-edition Raptors NBA Championship jacket and launching a second capsule collection with multi-platinum singer songwriter Shawn Mendes.”