Roots Corporation (TSX: ROOT) 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.

Key Investment Rationale:

• Revival in demand: For FY21, the company reported higher DTC sales, which grew 13.3% on y-o-y basis to CAD 235.8 million. The growth was supported by improved promotional activity and increased e-commerce sales. This resulted in higher full price selling and growth in-store sales. Moreover, the company’s income from the Partners and Other segment increased 17.7% on y-o-y basis to CAD 37.9 million in FY21, driven by higher volumes and strong growth in sales of custom Roots-branded products to business clients.

• New product launch: In Q4FY21, the group launched its collaborations with John Tavares of the Toronto Maple Leafs and Better Gift Shop with the iconic Beaver, which drove the company’s brand awareness and resulted in improved footfalls. Moreover, in the recent past, the company launched a premium fleece Apparel and Leather Goods Collection via the collaboration with Révolutionnaire. The above variant is available in six colorways as well as graphic tees and a weekender bag modelled after Roots' iconic Banff Bag. The above launch is expected to boost its product offering within the limited-edition segment.

• Growth from Ecommerce segment: Due to the changing consumer buying pattern, the group is witnessing solid traction from the eCommerce segment. Notably, sales volume from eCommerce segment in FY21 has surpassed the pre-pandemic sales volumes. This indicates solid buying interest from the consumer end, also we expect this trend to continue in near future.

• Opportunity from the Asia Geography: The company has a solid presence across the Asian Geography and has more than 100 stores in the continent. Notably, the company’s Asia business reported strong growth in the recent past, supported by higher demand primarily from the company’s own bands. We expect that this region would offer ample opportunities in the coming days due to rising population, growth in disposable income, preference towards branded clothes, acceptability of online shopping etc. These factors are likely to benefit the company in achieving higher same-store sales in the coming years.

• Industry beating margins: For FY21, the company reported its gross margin and EBITDA margin of 59.5% and 23.2%, respectively, as compared to the industry median of 41% and 13.1%, respectively. Net margin was recorded at 8.3% in FY21, as compared to the industry median of 6.2%. These indicates that the company has better cost management when compared to the industry median.

• Ample Liquidity: At the end of FY21, the company reported a higher cash balance of CAD 34.1 million, as compared to CAD 9.1 million in FY20. Moreover, the company reported a higher cash from operations of CAD 56.4 million in FY21, which is higher than CAD 50.9 million in FY20. These are likely to boost the company’s liquidity position, which is a key positive. Additionally, the company reported its quick ratio and a current ratio of 1.32x and 1.33x, respectively, in FY21, which is higher than the industry median of 0.87x and 1.04x, respectively. This indicates that the company has healthy working capital management.

Risks associated with the Investment:  

The operations of the company might be impacted due to change in consumer preference, adverse weather conditions, and fluctuations due to seasonality etc. The company might face restrictions and a rise in additional costs in connection with the transport of goods from the international suppliers on account of fresh international restrictions.

FY21 Financial Highlights:

FY21 Income Statement Highlights (Source: Company Report)

• Elevated Revenue: ROOT announced FY21 result, wherein the company posted sales of CAD 273.8 million, an increase from CAD 240.5 million in FY20. The growth was driven by strong traction from both direct-to-consumer (DTC) and Partners and Other segments.
• Higher Gross profit: The company reported a gross profit of CAD 162.8 million, higher than CAD 139.7 million in FY20, thanks to the elevated income as mentioned above, partially offset by a higher cost of goods sold.
• Growth in Income before income taxes: The period was marked by a higher selling, general and administrative expenses, while a lower interest expense supported the profitability. Income before income taxes stood higher at CAD 31.1 million, as compared to CAD 17.9 million in FY20.
• Rise in Net income: The company posted its net income of CAD 22.7 million, soared from a net income of CAD 13.0 million in the previous year, thanks to the higher income before income taxes, while a higher income tax expenses remained a drag.

Top-10 Shareholders:  Top ten shareholders of the company together hold approximately 55.65% stake, Searchlight Capital Partners UK, and Manges (Daniel) are the major shareholders in the company with an outstanding position of 49.14% and 4.17%, respectively.

Source: REFINITIV, Analysis by Kalkine Group

Valuation Methodology (Illustrative): EV to Sales based

 Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:

The company impressed with its FY21 results and reported margin improvement due to several cost control measures. EBITDA margin and net margin improved from 19.9% and 5.4%, respectively, in FY20 to 23.3% and 8.3% in FY21. We have valued the stock using the EV to Sales-based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Buckle Inc, Zumiez Inc etc. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock of ROOT at last the closing price of CAD 3.25 on May 03, 2022. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on May 03, 2022). Analysis by Kalkine Group

Note: The reference data in this report has been partly sourced from REFINITIV

  Technical Analysis Summary

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