Media and Financial Statement Analysis - Roots Corp
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Financial Analysis of Roots Corp. (2022-2023)
This report provides a comprehensive financial analysis of Roots Corp., a global lifestyle brand, from the fiscal year 2022 to the third quarter of 2023. The analysis is based on the company's financial statements and management's discussion and analysis (MD&A) reports, which have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).
Roots Corp., established in 1973, operates in various markets worldwide, including Canada, the United States, and Asia. As of July 29, 2023, the company operated 105 corporate retail stores and 13 temporary pop-up locations in Canada, two corporate retail stores in the United States, and an eCommerce platform, roots.com. The company also has more than 100 partner-
operated stores in Asia and operates a dedicated Roots-branded storefront on Tmall.com in China.
The financial analysis covers a range of key performance indicators and financial metrics, including sales growth, inventory management, and profitability. It also examines the company's strategic initiatives and responses to the challenging economic conditions that have impacted its financial performance, such as improving inventory management, maintaining promotional discipline, transitioning to sustainable materials, and strengthening full-price sales.
The report aims to provide a detailed understanding of Roots Corp.'s financial performance and the factors influencing it during the specified period. It should assist in making informed decisions about the company's financial health and future prospects.
FY 2022
Total Sales: $272.12 million
Net Income: $2.46 million
Gross Margin: 57.7%
Debt-to-Equity Ratio: 32.4%
Interest Coverage Ratio: 2.10
2023 (Q1-Q3)
Total Sales: $154.43 million (YTD)
Net Loss: $(26.08) million (YTD)
Key Ratios
•
Roots Corp. has a debt-to-equity ratio of 32.4%, with total debt at CA$56.33 million and total shareholder's equity at CA$173.81 million.
•
The company's interest coverage ratio is 1.3x, indicating that its earnings can cover its interest expenses.
•
Roots' cash ratio is 0.43, showing its ability to meet short-term obligations.
•
The company's gross margin is 57.7%, indicating its profitability in the retail industry.
Balance Sheet Insights
•
Roots' balance sheet shows total assets of CA$362.79 million and total liabilities of CA$188.88 million.
•
The company's total shareholder's equity is CA$173.81 million, and its book value per share is CA$4.54.
•
Their inventory turnover is 44.24, indicating company’s inventory management efficiency.
•
The company ended the fiscal year 2022 with a net debt of $24.8 million, down 6.8% from the end of FY2021.
•
The company's net debt decreased by 10% in Q3 2023.
The balance sheets of Roots Corp. for FY2022 and Q2 and Q3 2023 indicate that the company has been successful in reducing its net debt, which is a positive sign for its financial health.
Income Statement Insights
•
The company's revenue for the fiscal year 2022 was $272.12 million, with a 0.63% growth.
•
Roots' operating profit for the fiscal year 2022 was $11.6 million, and its pre-tax margin was $3.53 million.
•
The company's net margin for the fiscal year 2022 was $2.46 million.
•
Sales decreased by 8.1% year-over-year to $111.5 million.
•
The company reported a gross margin of 56.5%.
Cash Flow Statement Insights
Roots' cash and short-term investments for the fiscal year 2022 were $5.41 million.
The company's total debt to total capital was 42.18%
Operating Activities:
The company experienced a decrease in cash used in operating activities in Q2 2023 and YTD 2023 compared to the same periods in 2022. This decrease was primarily attributable to higher cash inflows from working capital changes as a result of reducing inventory purchases. Additionally, the company received a tax refund based on higher tax installments paid in F2022 than owed, as compared to net tax paid in Q2 2022 and YTD 2022
Financing Activities:
The company experienced an increase in cash used in financing activities in Q3 2023 and YTD 2023 compared to the same periods in 2022. This increase was primarily attributed to higher repurchases of shares for cancellation under the company's NCIB and lower net amounts drawn on the Revolving Credit Facility during Q3 2023. The increase in cash used in financing activities in YTD 2023, as compared to YTD 2022, was primarily driven by higher repurchases of shares for cancellation under the company's NCIB and a cash sweep against the Term Credit Facility, partially offset by higher amounts drawn on the Revolving Credit Facility during YTD 2023
Sales Performance
2022: Stable sales performance with a gross margin of 57.7%.
2023: Q1, Q2, and Q3 sales increased, but net losses were recorded, indicating operational challenges.
The sales coming from the Direct-to-Consumer (DTC) segment for Roots Corporation decreased in Q3 2023, as compared to Q3 2022, by $4,655,000, representing an 8.2% decrease.
The decrease in Direct-to-Consumer (DTC) sales for Roots Corp. in Q3 2023 was primarily driven by several factors:
Lower off-price sales
: Roots Corp. maintained its promotional discipline, which led to lower off-
price sales. Off-price sales typically involve selling merchandise at a significant discount, often to clear out inventory. By maintaining promotional discipline, Roots Corp. likely reduced the volume of these discounted sales, which contributed to the overall decrease in DTC sales.
Tightening of consumer discretionary spending
: The current macroeconomic environment has led to a tightening of consumer discretionary spending. This refers to a decrease in the amount of money consumers are willing or able to spend on non-essential items. Given that Roots Corp.'s products largely fall into the discretionary spending category, this tightening likely had a negative impact on their DTC sales.
Higher product costs and increased sales mix of discounted products
: The transition to sustainable materials led to higher product costs. Additionally, there was an increased sales mix of discounted products. Both of these factors contributed to a decrease in gross profit, which could have indirectly affected DTC sales by impacting the company's pricing strategy and profit margins.
However, it's important to note that these decreases were partially offset by strength in full-
price sales, which increased by 3% year-over-year. This increase reflects positive consumer sentiment towards the brand and strong product performances, including continued growth of over 50% in the Active collection.
Roots Corporation has plans to relaunch its footwear line and has made several announcements to grow its business, including partnerships with Stadium Live and NewStore, and the appointment of a Creative Director in Residence which could potentially be positive for the sales performance.
Profitability
2022: Net income of $2.46 million, indicating profitability.
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2023: Q1, Q2, and Q3 net losses, reflecting a decline in profitability.
Liquidity and Debt
2022: Debt-to-equity ratio of 32.4% and interest coverage ratio of 2.10, indicating moderate debt levels and good interest coverage.
The COVID-19 pandemic has had a significant impact on Roots' financial performance. The company has seen an increase in sales in 2023, but this has been accompanied by net losses in Q1, Q2, and Q3. This suggests that while the company has been able to generate revenue, it has struggled to maintain profitability during this challenging period.
However, some concerns can be raised from the financial statements. Roots' EBITDA (earnings before interest, taxes, depreciation, and amortization) growth was -64.88% for the fiscal year 2022.
This decline in EBITDA could be an indicator of challenges in the company's operations or supply chain. Additionally, the company's inventory turnover of 44.24 suggests that it may need to optimize its inventory management to improve its financial performance.
The company's financial health appears to be deteriorating, as evidenced by the net losses recorded in 2023. The increase in sales suggests that the company is still able to generate revenue, but the net losses indicate that it is struggling to control costs and maintain profitability.
Company's Needs and Purchasing Processes
Based on the financial data, it appears that Roots may need to focus on cost control and improving operational efficiency to return to profitability. The company may also need to reassess its purchasing processes to ensure that it is not overstocking or making unnecessary purchases that could contribute to increased costs.
The key decision makers at Roots will likely be focused on strategies to return the company to profitability. This could involve a range of measures, including cost-cutting initiatives, operational efficiencies, and potentially reassessing the company's product range and pricing strategies.
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