Roots lowers long-term estimates after weak Q3 sales

TORONTO — Roots Corp. is looking to a Canadian heartthrob to stitch up the brand’s slowing sales and dropping shares.

The Toronto-based apparel company has launched a capsule collection with singer Shawn Mendes just as it announced sales fell “well below” its own expectations in the third quarter, causing it to lower sales and earnings estimates from targets set when it went public in October 2017.

Chief financial officer Jim Rudyk attributed the performance, which caused shares to trade near all-time lows after closing down 22.5 per cent to $3.52 in Wednesday trading on the Toronto Stock Exchange, to a handful of factors.

“We entered the third quarter facing the same headwinds as Q2 — a weaker brand voice in the absence of a larger-scale marketing campaign and having to lap one-time sales related to Canada 150 although on a comparatively small scale,” said Rudyk.

“In addition we saw unseasonably warm fall weather that persisted through approximately two thirds of the quarter. As a result, we faced negative consumer traffic trends, which translated into negative sales growth.”

He revealed the company’s total sales for the three months ended Nov. 3 were $87 million, down three per cent from $89.7 million last year.

To counter the slowdown and other factors that put a damper on the earnings, Rudyk said Roots was looking towards star power. Late in the third quarter, it unveiled a collaboration with OVO, a Drake-back brand that saw the rapper and other celebrities don Roots apparel.

Roots is hoping to replicate its success with the Mendes line it launched online Wednesday and in stores the day before. The collection includes a hoodie, sweatpants, T-shirts, a toque and a custom-designed jacket retailing for nearly $600.

“The initiative has been successful so far and is the first step in an ongoing collaborative relationship with Shawn,” said Rudyk. ”As a fan of Roots from an early age, Shawn’s partnership with Roots is further proof of the diversity and power of our brand. We are excited to see where this relationship can go.”

The Mendes partnership has its work cut out for it because Roots said in its latest quarter that net income was $2.8 million or seven cents per share, down from $5 million or 12 cent per share last year.

Adjusted net income was $4.7 million or 11 cents per share, down from $9.6 million or 23 cents per share in last year’s third quarter.

Analysts had estimated $90.6 million of revenue and 16 cents per share of adjusted earnings, according to Thomson Reuters Eikon.

The company is now estimating between $358 million and $375 million of sales in fiscal 2018, compared with the estimated range of $410 million to $450 million when Roots did its initial public offering.

Roots is also revising its fiscal 2019 target range for adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) to between $46 million and $50 million, from its prior guidance of between $61 million and $68 million, along with adjusted net income of between $20 million and $24 million from its previously stated target range of between $35 million and $40 million.

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