Roots shares go to seed after loss posted
Lower store sales, distribution woes weigh on quarterly results
Roots might be an iconic Canadian brand, but that hasn’t meant much to the stock market.
The Canadian clothing retailer saw its shares drop again Wednesday after reporting a second-quarter loss of $9.7 million or 23 cents per share, more than double the $4.0 million loss the company suffered in the same period a year ago. By mid-afternoon Wednesday shares had dropped more than 15 per cent, falling 43 cents to $2.31 per share.
It’s just the latest precipitous plunge for the company whose initial public offering in 2017 was an unmitigated disaster.
The company’s shares, which were initially priced at $12, dropped to $10 on their opening day. They’ve been dropping fairly steadily ever since.
Comparable sales, a key retail metric, fell 2.9 per cent in the company’s second quarter due to the decline in store traffic and product delays.
That’s not a huge surprise to retail consultant Lisa Hutcheson, who says the company hasn’t really shown any sense of urgency, nor has it kept up with changing consumer tastes.
“Not much has changed in their strategy since the IPO — no significant store growth or marketing,” said Hutcheson, managing partner at J.C. Williams Group. “Roots hasn’t changed its product assortment very much in many years. They haven’t created a reason for people to shop in their stores.”
Keeping some of its historic mainstays such as leather bags made in Toronto is another problem, Hutcheson suggested. Keeping up with changing consumer
attitudes toward animal products is crucial.
“They are heavily based on leathers and many companies are moving away from real leather — along with the popularity of beyond meat and plant based foods,” said Hutscheson.
Roots blamed much of the bigger-than-expected loss in its most recent quarter on issues with a new, centralized distribution centre which will eventually be supplying stores and online orders. CEO Jim Gabel admitted on a conference call with analysts that problems rolling out the new distribution system meant that there were some empty shelves, but insisted the issues — and extra expenses — were short-term.
“We are investing in the business to support our long-term growth,” said Gabel.
“Until you go into a live environment, you start pressure testing it with meaningful volumes, that’s when you start to see some potential challenges,” Gabel added.
The distribution centre is currently only operating at 60 per cent of capacity, Gabel said.
“Store traffic continues to be a challenge,” said Gabel, adding weekday sales are not hitting company targets.
Some of the traffic slowdown came from weather-related issues in certain markets, he said, noting the conversion rate for consumers making purchases things in store rather than just browsing also dropped in some outlets. RBC Capital Markets retail analyst Sabahat Khan, who rates Roots “sector perform,” said the market is getting tougher for clothing retailers generally.
“Although Roots has built strong momentum over the recent years, we believe it could become increasingly difficult for the company to deliver against its F2019 targets as the apparel retail operating backdrop becomes more challenging,” wrote Khan in a report issued after the latest results. He cut his price target for Roots shares to $3.50 from $4.
Lower comparable sales were partially offset by better than expected e-commerce sales and benefits from store relocations and renovations as overall sales totalled nearly $61.7 million for the quarter, up from nearly $60.2 million in the same quarter last year.
The lowered outlook comes partly from macroeconomic and geopolitical challenges in the three Asian markets where Roots operates — China, Hong Kong and Taiwan, said Gabel.
The company is already seeing an impact on the business and expects it will continue throughout the remainder of its 2019 financial year.
The company also said its adjusted earnings before interest, taxes, depreciation and amortization and its adjusted net income will fall short of its previous estimates of $46 million to $50 million and $20 million to $24 million, respectively.