What started as one store in Toronto, Canada in 1973, has grown into a 2,200-plus person organization with more than 260 stores across four countries. Roots is a high-performance, omni-channel retailer with an iconic brand at our core.
We are not defined by one product, season, geography, or demographic. We are a premium lifestyle collection for those who want to enjoy the moment, embrace the spirit of the open air and express their unique personality and style. Quality, comfort and craftmanship contribute to the legendary feeling of our products and are why consumers fall in love with Roots. It is not only how our authentic products feel, but it is also how consumers feel when wearing Roots.
Since going public in October 2017, we have focused on executing our plans to unlock Roots potential. While we have seen success to date, we still have big aspirations. We are confident we have significant room to grow, and that we have the right team and strategy in place. Our impressive Fiscal 2017 results prove that we are on the right track.
COMPARABLE SALES GROWTH
basis point improvement
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1 In home market primarily through word-of-mouth advertising and decades of celebrity and professional athlete affirmation
2 Named by Canadian Business in 2016 and 2017
It is with great excitement that I write my first letter as Chairman of Roots, especially following such a successful Fiscal 2017.
When Searchlight bought Roots in December 2015, we acquired a thriving business that has a rich Canadian heritage, an iconic brand, an established omni-channel platform and a large international retail footprint. Equally importantly, it was a business with significant untapped growth potential. Fast forward two-years, and it is incredibly impressive how much the Company has accomplished. Under the guidance of a new senior management team, we saw the implementation of initiatives to increase store productivity, recognize efficiencies throughout the business, improve our approach toward product and merchandising, optimize our real estate portfolio, amplify our marketing programs, expand our international footprint, enhance our omni-channel shopping experience and evolve the already amazing Roots culture to include a greater focus on performance. The new group of deeply experienced leaders also introduced and started to execute against a strategic vision that positions Roots as an iconic global brand.
Our expectation when we bought Roots was that the Company would go public when there was a solid foundation upon which we could continue to build and deliver accelerated growth. When we went public in October 2017, it was following impressive Fiscal 2016 year-over-year results. With Fiscal 2017 Comparable Sales Growth of 12.1%, and sales and Adjusted EBITDA increasing 15.7% and 26.6% year-over-year, respectively, we set new record highs. We believe our Fiscal 2017 results are a powerful representation of the strength of the Roots brand, as well as the momentum we have achieved with key operational investments and our strategic growth initiatives.
The primary focus for the Board during our first two quarters as a public company was implementing systems of strong corporate governance, which, we believe, will serve as the foundation for enduring success and long-term shareholder confidence. The Roots Board is comprised of seven directors, the majority of whom are independent. We are committed to continually taking a proactive approach to ensure that the appropriate structures and processes are in place to facilitate independent and effective oversight of operations, capital deployment, strategic growth initiatives and risk management practices. We are confident the breadth and depth of our retail industry, capital markets, finance, governance, compensation and legal experience, positions us well to provide ongoing guidance and oversight that will support management in successfully executing the Company’s strategy.
Further, as directors of the Company, we recognize our responsibility to ensure that the Company’s organizational and compensation structure are designed to encourage long-term value creation for the benefit of all stakeholders. As such, we engaged third-party expertise to assist in the development of a compensation and performance framework for measuring and evaluating the performance of senior management.
Fiscal 2017 was an impressive start to Roots journey as a public company. The Board is committed to working closely with management to ensure that we continue to delight our consumers with our brand experience, and that we are best capitalizing on the global market opportunities in front of us. I am confident Roots has the right strategy and the right leadership, as well as an outstanding and dedicated team of more than 2,200 people who will continue driving growth and creating shareholder value. I would like to thank the founders of Roots, Michael Budman and Don Green, for their guidance, wisdom and trust. I would like to extend thanks to my fellow directors for their commitment and insight. On behalf of the Board, I would also like to thank you, our shareholders, for your support.
A customer favourite from our Cabin Collection, which celebrates our early beginnings in a little cabin in Algonquin Park, Ontario, Canada. Inspired by our heritage and love of Canada, our Cabin socks have an iconic design that has become a timeless part of Roots style. Click here to see more Roots Cabin Collection
Like many of our customers, I grew up with Roots. When I joined the Company in early 2016, I saw an amazing opportunity to become part of a business and iconic brand with significant upside potential. With the right team and strategy in place, and the support of our shareholders, we could unlock the full power of the brand and deliver accelerated growth. In Fiscal 2017, we started to do just that. As a result, we recorded the strongest year in Roots 44-year history.
FISCAL 2017 PERFORMANCE
Comparable, or same store, Sales Growth was 12.1% and 20.4% on a two-year stacked basis, which far outpaced industry averages. Reflecting our sales success in-store and online, as well as the expansion of our Canadian and international retail footprint, total sales for the year increased 15.7% year-over-year to $326.1 million. In addition, with an Adjusted Direct-to-Consumer Gross Margin of 59.4%, we delivered a 206-basis point improvement over Fiscal 2016, which is helping fuel our investments in the growth of the brand and the business.
On account of our top line improvements and expanding margins, we delivered record profitability. Adjusted EBITDA grew 26.6% to $52.6 million. Benefitting further from a decrease in our effective tax rate and reduction in interest expense, our Adjusted Net Income increased a particularly impressive 35.7% over Fiscal 2016 to $29.1 million, or $0.69 per share. We also reduced our total bank debt by approximately 20 percent, which drove our net debt ratio down to 1.57 times compared to 2.51 times at the end of Fiscal 2016.
TRANSFORMING THE BUSINESS AND MODERNIZING THE BRAND
During the year, we made meaningful progress against our three-year plan to transform the business and modernize the brand. We bolstered our senior management team, adding key new roles. We also professionalized our approach to how we analyze, set strategy and operate the business. Our senior management team shares a deep passion for Roots and brings a track record of proven experience. We are well-positioned to lead the multiple workstreams that will drive efficiencies and unlock the potential of our people and our business.
In Fiscal 2017, we saw an increase in store traffic, conversion rates and average selling price. eCommerce gained momentum, and it was the fastest growing part of our business. With our overhaul of the consumer-facing www.Roots.com, we are confident we are marching swiftly toward our stated target of eCommerce representing 20 to 22% of our Direct-to-Consumer business by the end of Fiscal 2019.
We executed many unique marketing programs throughout the year, including our Nice campaign and our first-ever digital fashion show, Northern Light. In addition, with our focus on building a consumer-focused global brand range, we delivered double-digits sales growth and margin improvements with a reduced SKU base. Editing out slow sellers and amplifying stronger performing products is proving to be the right approach to driving long-term sustainable success.
Canada remains a very important market for us, in-store and online. In fact, we believe that we can double our Canadian business over the long-term. As such, we continued to optimize our retail store portfolio during the Fiscal year. We ended the year with 116 stores in Canada. In August of 2017, we unveiled our “Enhanced Experience” Store in Yorkdale Mall. The new store design reinterprets the consumers’ experience and establishes a deeper connection with the Roots brand and our products. Consumers and the retail industry are applauding our leather customization experience, elevated visual merchandising, enhanced change rooms and proven omni-channel capabilities. In Fiscal 2018, with our plans to open four to five new corporate retail locations in Canada and further enhance our existing store portfolio, we will apply learnings from the important investments we made in this new store format.
Outside of Canada, we solidified plans to build on our portfolio of three legacy stores in the United States. We are opening two new stores in the greater Boston area in June 2018, two in the Washington D.C. area in August 2018, and we have announced plans to expand into Chicago in 2019. We are well-positioned to achieve our target of adding 10 to 14 U.S. stores by the end of Fiscal 2019. Long-term, we believe the U.S. represents a minimum 100-store opportunity for us. Through www.Roots.com, we already have reach across the entire country, as we ship to all 50 states.
Our longstanding international partner added 13 net new stores in Asia, including their first “Enhanced Experience” store in the Taiwan epicenter, Taipei 101. We expect to see strong store openings by our partner in China and Taiwan through Fiscal 2018, and we remain on-track to achieve our target of adding 20 to 25 new stores from the date of our final prospectus through to the end of Fiscal 2019. In Fiscal 2018, we will accelerate our plans to expand into new international markets, working with our existing partner, while also forging relationships with potential new partners.
STAYING TRUE TO OUR ROOTS
Throughout Fiscal 2017, Roots underwent considerable change. The key to our success was that we never lost sight of servicing our customers and building our brand’s unique and cherished culture. This speaks to the strength of the overall organization. Our ability to effectively communicate across the Company and unite together has enabled us to remain nimble and move quickly in transforming the business, delivering on our corporate goals and transitioning into a performance-driven culture.
Looking back at Fiscal 2017, we accomplished what we set out to do. We ended the year stronger than we began in every way. I am looking forward to a successful Fiscal 2018 that will progress us closer to our Fiscal 2019 targets of sales of $410 million to $450 million; Adjusted EBITDA of $61 million to $68 million; and Adjusted Net Income of $35 million to $40 million. While we expect two-thirds of our growth through to Fiscal 2019 to come from Canada, I am confident in our ability to execute on all five growth initiatives that we set out at the time of our IPO. Through these efforts, we will continue to propel Roots forward as a legendary global brand and build further shareholder value.
2017 was a milestone year for Canada as we helped Canadians coast-to-coast celebrate the sesquicentennial. 2017 was also significant in Roots history as we moved from a private company to a performance-driven public company. All that we accomplished during the year is because of our team of incredible professionals. Thanks to the passion and dedication of our more than 2,200 employees, Roots achieved record results in 2017 and laid the foundation for accelerated growth in the years to come. In addition to the unwavering support of our employees, I would also like to thank our Board of Directors and two Roots founders, Michael Budman and Don Green, for their guidance and support as we deliver on our commitments to you, our valued shareholders.
President & CEO
While Roots continues to evolve our core values, our unique culture remains as solid today, if not stronger than ever before.
Our Fiscal 2017 results speak to the power of the Roots brand, the creativity of our product and the momentum we are gaining with our operational investments and strategic growth initiatives.
We are a young public company with an iconic brand and a passionate team. We are excited by how our consumers have responded to the investments we have made and are enthusiastic about our further growth potential. With five growth drivers, there are significant opportunities in front of us. We are well-positioned to capitalize on each one, thereby delivering value to our customers and our shareholders.
A Roots exclusive, our Tribe leather comes to us from a family-operated tannery in Italy and is hand-buffed to create its distinct, vintage finish that only gets better with age.