Roots Corp

TSX:ROOT

Earnings Call Transcript

[Operator]

Good morning. My name is Elliot, and I will be your conference operator today. At this time, I would like to welcome everyone to Root's Second Quarter Earnings Conference Call for Fiscal 2025.

[Operator Instructions]

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 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 second quarter management's discussion and analysis dated September 9, 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 second 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. Supplementary presentation for the Q2 2025 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. You may now begin your conference.

[Meghan Roach, executive]

Thank you, operator. Good morning, everyone, and thank you for joining our Q2 2025 earnings call. On the call today, I will discuss the highlights of our financial performance and strategic initiatives in the quarter before passing it on to Leon Wu.

Roots performance in the second quarter was exceptionally strong. Q2 2025 sales of $50.8 million rose 6.3% year-over-year, driven by direct-to-consumer comparable sales growth of 17.8%, our highest comparable sales growth since the company went public in 2017. Our sales reflect the continued execution of a cohesive, multipronged omnichannel strategy focused on creating a compelling product offering, a seamless omnichannel experience for our customers and investing behind engaging branding and marketing.

During the second quarter, our lifestyle, active and sweats categories all experienced growth, which speaks to the positive impacts of our diversification efforts. In late July, we also launched a new addition to our active category, the Roam collection, one of our most significant innovations to date. Designed to life on the move, it further enhances Roots usability for travel. Roam incorporates proprietary breathing technology, which delivers performance at every layer while preserving the signature Roots softness. The products have moisture wicking, odour-resistant properties and stain and water repellency while feeling incredibly soft in the skin.

This collection gives our customers versatile functional options that bridge performance and lifestyle, staying true to Roots commitments to quality and innovation.

Further supporting our sales during the second quarter, we executed two highly visible brand-right collaborations that were aimed at driving demand and engagement during the summer period and resonated nationally. Our Molson Canadian X-Roots co-branded drop featured the Canadian, Canadian can and the first ever insulated can holder crafted from our Salt & Pepper fleece. Time to launch around Canada Day, the collaboration included an event in Ontario Cottage Country alongside the chance to win products.

The program delivered extensive media and social engagement around Canadian Pride and summer occasions. The Canada Dry x Roots limited edition summer collection was made in Canada capsule with a small selection of apparel and accessories inspired by [indiscernible] dry creative. It was supported by an experiential pop-up in Toronto in July and a second drop in late August. The activation combined product storytelling with sampling to deepen engagement and conversion.

Together, these collaborations amplified brand heat, reinforced our heritage positioning and extended our reach for authentic Canadian cultural moments. We will continue to use selected partnerships and experiences to elevate brand perception and support full price sell-through into fall.

Our brand ambassador program also scaled significantly this quarter with a number of partners in market doubling year-over-year. By developing content that spans the full marketing funnel, our ambassadors are helping us to reach targeted audiences in priority markets with authentic storytelling that strengthens brand affinity and drives conversion. This continues to be a cornerstone of our marketing strategy.

We also increased our consumer engagement through events that brought the brand to life in dynamic and accessible ways. A highlight included our golf and tennis inspired activation, where we transformed a parking lot into a family and nature-friendly urban experience. Our direct-to-consumer sales growth also reflects improvements in our store footprint in the quarter.

In early July, we opened our new Vancouver flagship and expanded in design forward space that showcases our latest retail concept. The store blends nature and technology, including a preserved moss wall with a custom moss bever, a commission light box ceiling featuring Stanley Park, allographic screens and large-format digital screens. This opening enhances our presence in the top Canadian market and provides a modern platform for product discovery.

Since the opening, Roots has realized a notable increase in sales in the market. Our updated Mont-Tremblant store also reopened in July. As a year-round travel destination, this store plays [indiscernible] in the local area with a design that fits perfectly into its beautiful surroundings while adding modern touches such as digital screens to provide additional brand touch points for consumers.

In addition to Root's impressive sales growth, gross margins also expanded 430 basis points year-over-year. This reflects both the continued strength of our direct-to-consumer margins due to Root's improved sourcing strategy and more disciplined markdown management as well as a shift to higher-margin business lines in our Partners and Other segment.

The lower markdowns reflect our investments in AI-driven allocations and replenishment software as part of our commitment to building a more agile, efficient and technology-enabled organization. As mentioned in previous quarters, due to the seasonality of Roots with approximately 30% of sales generated in the first half of the year, seasonal fluctuations exist in our underlying earnings. And as a result, Roots typically generates a loss in the first half of the year and positive earnings in the second half.

We were pleased to see the improved sales and gross margins lead to a 47.9% reduction in adjusted EBITDA losses, excluding the impact of the DSU revaluation in Q2 2025. As we enter an important second half, our balance sheet remains healthy, and our inventory positions us well to support our growth ambitions.

I will now turn the call over to Leon Wu, our Chief Financial Officer.

[Leon Wu, executive]

Thank you, Meghan, and good morning, everyone. I'm excited to be sharing our second quarter results, reflecting the fourth consecutive quarter of strong growth in sales, gross margin and profitability while reducing our net debt. Despite the dynamic global operating environment, Roots continues to build positive momentum as we head into the second half of the year.

Starting with sales. Total sales in Q2 were $50.8 million, increasing 6.3% as compared to $47.7 million in Q2 2024. The growth in our total sales was driven by our direct-to-consumer segment, which achieved $41 million in sales, marking a 12.7% increase relative to last year of $36.4 million. Notably, our comparable same-store sales grew 17.8% in the quarter, and the growth was equally impressive on a 2-year stack basis of 17.6%.

Our DTC sales growth reflects a strong customer response to both our core favorites and lifestyle pieces from the spring and summer collections and the brand building excitement from our ongoing investments in brand campaigns, increasing out-of-home and digital media presence and through exciting collaborations and activation events.

We continue to invest in our store fleet, focused on providing the best brand experience during every customer visit, while driving long-term comparable sales growth and boosting overall 4-wall profitability. This strategy involves prioritizing capital to update our stores in key locations and in certain instances, purposely consolidating or resizing our stores. As a result of this strategy, we operated with 5 less stores during Q2 2025 as compared to last year and had temporary store disruptions at two larger locations during the renovations that took place in Q2, which partially offset the strong DTC sales growth in our comp stores.

Construction at our Robson Street flagship store in Downtown Vancouver and the renovation of our store in the heart of Mont-Tremblant Village in Quebec were both completed in July. We are very pleased with the early read on their results and the refined experience offered at each location. Our partner and other sales were $9.7 million in Q2 2025, down 14.2% 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 continue to work through their inventory optimization initiatives during this year.

Consistent with the prior quarter, this decline was partially offset by strong double-digit sales growth momentum in each of our other lines of business within the segment, comprised of China Tmall e-commerce, B2B wholesale and licensing royalties. Due to the higher margin of these businesses, the gross profit of the partner and other segment improved 10.1% year-over-year despite the temporary decline in the segment's sales.

Total gross profit was $30.8 million in Q2 2025, up 14.5% as compared to $26.9 million last year. The growth in gross profit dollars was driven by the gross margin expansion in both segments and the higher year-over-year DTC sales growth. The total gross margin was 60.7%, up 430 basis points compared to Q2 2024. Q2 2025 DTC gross margin was 63.2%, up 150 basis points compared to 61.7% last year.

The DTC gross margin expansion was driven by 170 basis point 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. SG&A expenses were $34.7 million in Q2 2025 as compared to $31.8 million last year, marking an increase of 9.1%.

Within SG&A expenses, there was $0.6 million of incremental year-over-year costs recognized pertaining to the unfavorable revaluation of cash settled instruments under our share-based compensation plan, which is directly tied to increases in our share price. Excluding this item, SG&A expenses would have increased by $2.3 million or 7%, primarily reflecting the higher variable costs from our sales growth, supported by higher investments in marketing and personnel costs. This increase was partially offset by occupancy-related savings from our store fleet strategy.

We have seen great initial results from our marketing initiatives over the last few months, balancing short-term sales driving marketing tactics with long-term investments that enable authentic brand storytelling, increased brand reach and memorable brand experiences. As we head into the peak fall and holiday seasons, we expect to accelerate our marketing investments to build on the brand momentum and support long-term growth.

Our Q2 2025 net loss was $4.4 million, improving 16.1% relative to last year, and our net loss per share was $0.11, improving 15% year-over-year. Similarly, our Q2 2025 adjusted EBITDA was a loss of $2.1 million, improving 32% as compared to a loss of $3.1 million last year. The strong improvement in our profitability reflects the strong store sales growth and margin expansion achieved during the quarter.

As a result of the continued appreciation in our share price during the quarter, we recorded a net incremental $0.6 million DSU revaluation expense in Q2 2025 as compared to Q2 2024. Without the DSU revaluation expense impacts, our net loss would have improved by 26.8% and our adjusted EBITDA would have improved by 47.9%. As mentioned last quarter, due to the seasonality of our business and with the first half of the year only accounting for approximately 30% of total annual sales, we typically generate small operating losses during the first 2 quarters, offset by earnings in the larger second half of the year.

Now turning over to our balance sheet and cash flow metrics, which reflect the strong sales and profitability results in the quarter. Our Q2 ending inventory was $49.9 million, increasing 13.5% as compared to $44 million last year. The year-over-year increase in inventory, largely consistent with our DTC sales increase was primarily driven by improved inventory positions of our core collections and seasonal newness for the upcoming fall and holiday selling periods.

Our Q2 free cash outflow was $6.9 million, improving from an outflow of $9 million last year. The year-over-year improvement in free cash flow were driven by sales growth, ongoing management of working capital and earlier receipt of inventory that would have been paid for in the first quarter of this year, but reflected in the second quarter last year.

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 season.

During Q2, we repurchased 492,000 common shares for $1.5 million under our normal course issuer bid. As of the end of the quarter, we were eligible to repurchase up to 740,000 common shares under the current NCIB program, which is in effect until April 10, 2026.

Our net debt was $38.1 million at the end of Q2 2025, down 6.5% as compared to $40.8 million at the same time last year. Our net leverage ratio measured as net debt over trailing 12-month adjusted EBITDA was approximately 1.6x.

I will now pass it back to Meghan for closing remarks.

[Meghan Roach, executive]

Thank you, Leon. We were pleased with the performance of our business during the second quarter. The first 5 weeks of Q3, which include the back-to-school period, continue to show positive trends. Undoubtedly, uncertainty remains in the global economy. We remain focused on executing our strategic initiatives and managing those items within our control while navigating the evolving global landscape. We look forward to updating you on our fall and early holiday results in December.

Operator, you may now open the call for questions.

[Operator]

[Operator Instructions]

We have a question from Brian Morrison with TD Cowen.

[Brian Morrison, analyst]

I want to ask a question. So congratulations on the strong top line. I want to understand your marketing going forward. I understand the impact from seasonality this quarter. But just in terms of the strategy, do you continue to have elevated marketing plan for sales to grow into operating leverage? Or is this going to get pared back over time? Maybe just a little detail on your marketing campaigns?

[Meghan Roach, executive]

Yes. For this year, we do plan to have elevated marketing expenditures because we are planning to continue to emphasize the key aspects of the brand that I think we believe the market hasn't had a chance to really explore and see over the last couple of quarters or the last couple of years.

So you will see us continuing that into the third and fourth quarter. And that will include things like increased investments on brand ambassadors, more events at store locations and more prominent individuals being part of our campaigns as we get into the fourth quarter. So that is something we anticipate being elevated for the rest of the year. However, we are looking at the business overall and trying to drive operating leverage. So although we are investing higher levels in marketing, we do hope this translates into higher sales. And over the longer term, we are really focused on driving continued operating leverage into the business.

[Brian Morrison, analyst]

Okay. And then in terms of your store optimization, clearly, it's working here. But are you pleased now with both the number of stores you have and the format of the stores that you have? Are they where you want?

[Leon Wu, executive]

Yes, Brian, this is a strategy that we will continue to look on both opportunistically as well as based on our lease flow. Generally, all of our stores or most of our stores are profitable. We are happy with the evolution, especially with our top-tier stores. And as we look into the next few years, we do see a few stores on our road map that are great potential renovation stores and/or optimization stores. But it's something that we'll continue to look at. And we also brought our Head of Omnichannel, Rosie last quarter, which will together continue to work through that.

[Brian Morrison, analyst]

Okay. And sorry, Meghan, it was tough to get on the phone with the operator, but I did want to ask your back-to-school comment, you said positive trends are ongoing. Does that indicate that -- to the extent she can talk about, does that indicate that trends are similar from a same-store sales perspective as to what we just saw in Q2 or just positive trends relative to year-over-year?

[Meghan Roach, executive]

Yes, we're looking at it on a year-over-year basis. So we've seen positive growth year-over-year. It's really early in the quarter. So we're not giving much more specificity around the quantum of that. As you can imagine, September, October as a whole are pretty big months also within our quarter. But we're happy with the way that things are trending and how our products are resonating with consumers.

[Brian Morrison, analyst]

Okay. That's all for me. Congratulations.

[Operator]

[Operator Instructions]

We have no further questions. So I'll now hand back to Meghan Roach for any final remarks.

[Meghan Roach, executive]

Thank you for joining us this quarter. We are really happy to see our financial results and the great performance in the second quarter. We look forward to speaking to you in December.

[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.