Roots (TSE:ROOT) reported higher first-quarter sales for fiscal 2026 as growth in its direct-to-consumer business and partner channels helped offset pressure from temporary gross margin headwinds and higher project-related expenses.
President and Chief Executive Officer Meghan Roach said the company entered the year with “strong momentum,” pointing to total first-quarter sales of CAD 42.6 million, up 6.5% from CAD 40.0 million a year earlier. Direct-to-consumer sales rose 3.3% to CAD 35.8 million, while comparable sales increased 3.2%, or 16.6% on a two-year stacked basis.
Margins Pressured by Temporary Inventory Actions
Gross profit increased 3.8% to CAD 25.5 million, though total gross margin declined to 59.9% from 61.5% in the prior-year quarter. Direct-to-consumer gross margin was 61.3%, compared with 62.9% last year.
Roach said the gross margin change reflected two temporary factors: an effort to reduce aged inventory by moving more product to final sale ahead of the company’s transition to a new third-party logistics partner, and the sale of inventory purchased at a higher U.S. dollar exchange rate last year.
Chief Financial Officer Leon Wu said the final sale initiative was intended to minimize inventory that would need to be transferred to the new distribution center and reduce the potential processing of returns during the transition. He said the initiative does not reflect a change in the long-term inventory strategy tied to the company’s move to a third-party logistics model.
“Going forward, we continue to take a very disciplined approach on managing our inventory and making sure that that balance remains healthy,” Wu said during the question-and-answer portion of the call.
Losses Widen on Distribution Center and Strategic Review Costs
Roots reported a net loss of CAD 10.1 million, or CAD 0.26 per share, compared with a net loss of CAD 7.9 million, or CAD 0.20 per share, in the first quarter of fiscal 2025. Adjusted net loss was CAD 7.6 million, or CAD 0.19 per share, compared with CAD 7.4 million, or CAD 0.18 per share, a year earlier.
Adjusted EBITDA was a loss of CAD 7.4 million, compared with a loss of CAD 7.1 million in the prior-year quarter.
Wu said the company incurred CAD 2.4 million of incremental costs related to its distribution center transition with Metro Supply Chain and its ongoing strategic review process. The costs had a more pronounced impact because the first quarter is seasonally smaller and has historically represented about 14% of full-year sales.
Selling, general and administrative expenses rose 12% to CAD 37.3 million from CAD 33.3 million. The total included CAD 1.8 million of incremental costs tied to the distribution center transition, including CAD 1.7 million of accelerated non-cash depreciation on existing assets, and CAD 0.6 million of incremental consulting and legal costs related to the strategic review.
Excluding those non-recurring costs, Wu said SG&A would have increased 4.9%, driven by higher variable selling costs, store occupancy costs, personnel-related expenses, stock option expenses, severance costs and a CAD 0.2 million expense from revaluing cash-settled deferred share units linked to the company’s share price.
Product Categories and Partnerships Support Sales
Roach said Roots’ merchandising performance reflected continued strength in core franchises and newer growth categories. The company’s Cloud collection delivered another strong quarter, with demand outpacing planned supply in parts of the collection. Activewear continued to grow and now accounts for more than 10% of direct-to-consumer sales.
Midweight outerwear and the company’s spring lifestyle collection also performed ahead of expectations, which Roach said supported the company’s strategy to expand the Roots brand into year-round complementary categories.
The company also highlighted collaborations and partnerships, including the Roots Toronto Blue Jays 50th Anniversary Collection, the second drop of its official WNBA collection in March and an April limited-edition spring/summer collaboration with Loopy, a popular Korean character, alongside Roots mascot Buddy the Beaver.
Roach said marketing efforts in the quarter continued to move toward a more disciplined, data-driven model focused on return on advertising spend and incremental contribution. Paid search and paid social channels both delivered growth, and conversion-focused campaigns generated incremental revenue.
The company also completed an external assessment of its customer base, which Roach said confirmed that Roots’ customers are “sticky,” retention is consistent across cohorts and omni-channel customers generate higher lifetime value than customers shopping through one channel only.
Retail, E-Commerce and Operations Remain Key Focus Areas
Comparable store sales improved year-over-year, which management attributed to investments in selling training, visual merchandising and store operations. Roots completed renovations at several key locations during the quarter, including Sherway Gardens in Toronto.
The company also opened its first mono-brand Roots store in Vancouver International Airport in partnership with Volta. Roach said Roots sees growth opportunities in travel retail locations across Canada, citing the brand’s association with Canada, travel and comfort.
In e-commerce, online traffic and revenue both grew year-over-year. Roach said paid media generated meaningful incremental revenue and that the company expects to continue building on that progress through the rest of the year.
The company’s distribution center transition to Metro Supply Chain remains on track for completion this summer. Roach also said Roots continues to integrate artificial intelligence into its workflow, with benefits across inventory management, analytics, omni-channel experience and customer service.
Balance Sheet Improves as Strategic Review Continues
Inventory ended the quarter at CAD 45.0 million, up 11.1% from CAD 40.5 million last year. Wu said CAD 0.5 million of the increase was due to unfavorable foreign exchange impacts, while the remaining increase reflected higher in-transit inventory for upcoming selling seasons and more inventory in the partners and other segment to support custom product wholesale demand.
Free cash outflow improved to CAD 19.1 million from CAD 21.8 million a year earlier, driven by sales growth and working capital management. Net debt was CAD 23.4 million at quarter-end, down 20.7% from CAD 29.6 million a year earlier. The company’s net leverage ratio was 1.0 times, measured as net debt over trailing 12-month Adjusted EBITDA.
Roots had CAD 32.6 million outstanding under its credit facilities and total liquidity of CAD 53.7 million, including net cash and available borrowings.
During the Q&A session, Wu said the company had not seen a material impact from fuel surcharges, freight or raw materials in the first quarter. Roach said the consumer environment remains dynamic and that the company is monitoring inflation and broader conditions as it approaches its peak third and fourth quarters.
Asked about the strategic review process, Roach said the company does not intend to disclose developments unless the board approves a specific transaction or determines disclosure is required or appropriate by law. “At this point, there is no further update,” she said.
About Roots (TSE:ROOT)
Roots Corp provides a portfolio of apparel, leather goods, accessories, and footwear for men, women, and children under the Roots brand. Its merchandise includes genuine leather, such as jackets, bags, and luggage; kids & baby clothing; and leather, linens, towels, and accessories. The company operates through two segments: Direct-To-Consumer, which accounts for majority revenue, and Partners & Other. The DTC segment sells products through the company’s corporate retail stores and e-commerce. The Partners & Other segment engage in the wholesale of Roots branded products to the company’s international operating partner, and it earns royalties on the retail sales of Roots-branded products.
