Roots Corporation

Roots Corporation (TSX: ROOT) is a publicly held Canadian brand that sells apparel, leather bags, small leather goods, footwear, active athletic wear, and home furnishings.

Why should Investor’s Book Profit?

• Increase COVID-19 cases could hamper growth: The resurgence of the covid-19 cases could impact footfall in the retail stores, that could lead to a lower a demand offtake for the company’s product. Also, resurgence in the COVID-19 cases could disrupt the company’s supply chain as well, which could impact overall financial health of the company.
• Higher Balance Sheet risk: Investors in ROOT are exposed to a higher balance sheet risk, as Debt/Equity ratio of the company stood at 1.46x  as of September 30, 2021 which was higher compared to the industry median of 0.44x. Moreover, debt protection metrices are also poor, with Net Debt is approximately 16.15 times of its EBITDA as of September 30, 2021, vs industry median Net Debt/EBITDA ratio of 1.47x.
• Negative divergence in RSI: ROOT shares are largely sideways from couple of months apart from few spikes. The leading momentum indicator 14-day RSI is also not able to cross above 60 since couple of months, implies that bulls are not able to take on bears. And any adverse move in the broader market could have a significant negative on ROOT shares.

Technical price chart (as on January 04, 2022). Source: REFINITIV, Analysis by Kalkine Group 

Stock recommendation

The significantly leveraged balance sheet of the company is posing a lot of risks for its existing as well as potential investors. Moreover, lackluster debt protection metrices further expanding the balance sheet risk and reflects lack of competitive strength of the balance sheet against its peers. Further, technical sideways trend in the stock despite broader indices are able to move up reflects lack of relative strength of the stock against the broader indices. Hence, we recommend a “Sell” rating at the closing price of CAD 3.14 (as on January 04, 2022).

1-Year price chart (as on January 04, 2022). Source: REFINITIV, Analysis by Kalkine Group

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

Disclaimer

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