Roots reports nearly $9.7M Q2 loss amid challenging foot traffic

Roots Corp. shares slipped more than 15% after the chief executive said lacklustre foot traffic and a challenging move to a new distribution centre weighed on its most recent quarterly results that missed expectations.

“Store traffic continues to be a challenge,” said CEO Jim 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.

Gabel also pointed to challenges moving the company into its new distribution centre, which involved implementing new warehouse management systems and integrating more than 20
information-technology platforms. The move prompted some delays in the flow of products to stores, despite testing of the new system before it went live.

“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 said.

Right now, the centre is operating is at 60% of where Roots wants its capacity to be, he said, and the company is doing taking steps that include incurring overtime costs and adding a second shift at the centre.

As the company moves into the fourth quarter, it expects to be around 80% to 85% capacity, he said, reaching close to 100% in the latter part of the quarter. However, he noted, even the beginning of the fourth quarter will be at a level beyond last year’s at those rates.

Comparable sales, a key retail metric, fell 2.9% in the company’s second quarter due to the decline in store traffic and product delays.

That was 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 company’s second-quarter loss amounted to 23 cents per share for the 13-week period ended Aug. 3 compared with a loss of nearly $4.1 million or 10 cents per share a year earlier.

On an adjusted basis, Roots lost 15 cents per share compared with an adjusted loss of six cents per share in the same quarter last year.

Analysts on average had expected a loss of 11 cents per share, according to financial markets data firm Refinitiv.

Roots expects sales for its 2019 financial year to be at the low end of, or fall slightly below, its previously disclosed target range of $358 million to $375 million.

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.

Roots shares fell 43 cents or 15.69% to $2.31 in late afternoon trading on the Toronto Stock Exchange. They hit a low of $2.28 earlier in the day.