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 Highlights:

• Increased revenue: During FY21 the company recorded an increase of 13.9% in the overall revenue to CAD 273.83 million against the total revenue of CAD 240.50 million in FY20. The DTC (direct-to-customer) segment sales reported at CAD 235.83 million in the reported period (FY21) against the sales of CAD 208.23 million in the pcp, which were driven by price increase of the products and the growth in the store sales. Further, the revenue from partners and other segments stood at CAD 37.99 million in FY21 against the sale of CAD 32.27 million in pcp.

• Strong liquidity profile: The group’s quick ratio for Q4FY21 was reported at an elevated level of 0.66x, as compared to the quick ratio of 0.30x in Q4FY20. Further, the company’s current ratio was stated at 1.27x for the reported period (Q4FY21), against the current ratio of 0.95x in pcp. The higher quick ratio and current ratio represent the company’s ability to meet its short-term obligations falling within one year time, without any hindrance, ensuring the smooth running of the business operations.

Source: Refinitiv, Analysis by Kalkine Group

• Industry beating profitability margins: In Q4FY21, the company witnessed an increase in the revenues supported by the increased prices, which were partially offset by the increase in the cost of goods sold, still, the group managed to attain higher profit margins as compared to the industry median, which is represented below.

Source: Refinitiv, Analysis by Kalkine Group    

Risks associated with investment

The group is majorly exposed to changes in consumer behavior and preferences, a decrease in spending power which curtails discretionary spending, rising costs because of inflationary pressure, etc are the few key challenges which the business is facing 

Financial overview of FY21 (Expressed in thousands of CAD)

Source: Company Filing 

• During FY21, the group reported the total revenue of CAD 273.83 million, which is higher than the revenue of CAD 240.50 million in FY20. The Direct-to-Custome sales grew by 13.3% and the revenue for the partners and the segment rose by 17.7%, in FY21, resulting in higher overall sales in the reported period.

• The cost of goods sold increased to CAD 110.97 million in the reported period (FY21) against the cost of gold sold at CAD 100.76 million in the pcp. The higher sales were partially offset by the increase in the cost of goods sold, which resulted in a gross profit of CAD 162.85 million in FY21 as compared to the gross profit of CAD 139.73 million in FY20.

• The group reported net income of CAD 22.76 million in FY21, which is higher than the net income of CAD 13.08 million in FY20.
  

Valuation Methodology (Illustrative): EV/ Sales based

Analysis by Kalkine Group

Stock Recommendation:

The group stated an increase in its cash balance to CAD 34.16 million during FY21 against CAD 9.16 million in FY20, also the cash flow operating activities rise to CAD 56.46 million in the reported period (FY21) against CAD 50.92 million in FY20. During FY21, the company reported an increase in the adjusted EBITDA of CAD 50.13 million vs CAD 38.74 million in pcp, and the net income increased to CAD 22.76 million in the reported period (FY21) when measured against CAD 13.08 million in FY20. The strong financials and improved liquidity are key positives for the company. On the valuation front, the stock is measured on the EV/ Sales based relative valuation multiple and the stock is currently trading at 0.9x as compared to the industry (consumer cyclical) median of 1.0x, suggesting the stock is still undervalued. We have considered Sleep Country Canada Holdings Inc., and Torrid Holdings Inc. as the peer group for the comparison.

Therefore, based on the above rationale and valuation, we recommend a “Speculative Buy” rating on the stock of ROOT at the last closing price of CAD 3.26 on June 09, 2022. Additionally, the 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 of June 09, 2022). Analysis by Kalkine Group

Note- The reference data has been partly sourced from REFINITV 

Technical Analysis Summary

Disclaimer

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