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 Updates:

• Industry beating margins: For Q3FY21, the company reported its gross margin and EBITDA margin of 60.8% and 30.6%, respectively, as compared to the industry median of 41.4% and 13.1%, respectively. Net margin was recorded at 14.1% in Q3FY21, as compared to the industry median of 6.9%.

• Revival in demand: For 9MFY21, the company reported higher DTC sales of CAD 125.232 million, grew 7.5% on y-o-y basis. The growth was supported by improved promotional activity and improved response from the online segment. Moreover, the company income from the Partners and Other segment increased 10.8% on y-o-y basis to CAD 27.308 million, driven by improved wholesale order volumes across the international operating partner in Asia.

• New product launch: Recently, the company launched 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.

Q3FY21 Financial Highlights:

• ROOT announces its quarterly year result, wherein the company posted sales of CAD 76.291 million, improved from CAD 72.946 million in Q3FY20. The growth was driven by 34.1% y-o-y growth in Partners and Other sales at CAD 3.272 million. On the other hand, DTC sales increased marginally by CAD 73 million to CAD 63.434 million.
• The company reported a gross profit of CAD 46.421 million, higher than CAD 43.562 million in Q3FY20. The quarter witnessed higher selling, general and administrative expenses (CAD 29.436 million v/s CAD 26.607 million in Q3FY20), partially offset by lower interest expense (CAD 2.250 million v/s CAD 2.783 million in pcp).
• Net income stood at CAD 10.766 million, as compared to a net profit of CAD 10.341 million in the previous year.

Q3FY21 Income Statement Highlights (Source: Company Report)

Risks:  Continuation of the Government restrictions would likely impact the company’s sales and would lead to a suppressed cash flow.

Valuation Methodology (Illustrative): Price to Earnings based

Stock Recommendation:

On a daily price chart, the stock of ROOT closed above its 50-days and 100-days simple moving average (SMA), indicating a bullish momentum and room for further price appreciation. We have valued the stock using the price to earnings-based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Tillys Inc, Mav Beauty Brands Inc etc. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock of ROOT at the current market price of CAD 3.06 at 10:00 AM Toronto time on December 17, 2021. 

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

One-Year Technical Price Chart (as on December 17, 2021). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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