Roots Corp Q4 2018 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Patricia A. Baker - Scotiabank Global Banking and Markets, Research Division - Analyst : My first question is just -- I want to just come back to, Jim, maybe just reiterated the guidance and saying that you had a positive start to Q1. Just want to ask a very quick question on that. And you gave us that guidance with Q3, are you more confident as we sit here in April that you'll reach that guidance (inaudible) when you initially gave it to us back in the fall? James Gabel;President, CEO & Director Patricia, you were breaking up a bit there. Is your question just about are we -- our confidence level in the guidance for 2019?

Question: Patricia A. Baker - Scotiabank Global Banking and Markets, Research Division - Analyst : Okay. And then secondly, if I just -- you indicated that you decided not to renew 8 store leases in Canada. Is there anything particular about those stores? Was it the location? Was it the size? Was it the market? Were their consistent performance across the 8 that may do you -- led you to that decision? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. APRIL 03, 2019 / 12:00PM, ROOT.TO - Q4 2018 Roots Corp Earnings Call James Gabel;President, CEO & Director I think that it's a variety of all those things that you mentioned there. Some were not strong performers for us. And in other cases, we felt that by either renovating or expanding a store that was in the region or potentially looking down the road at a new project that may open up, that it didn't make sense for us to renew that lease. So I think that's what our team does a really good job of is constantly evaluating our real estate portfolio and setting a long-term direction for the type of footprint we want to have in the marketplace. And so I think while we are expanding our square footage, it's also prudent for us to be managing every store and making sure that it's contributing.

Question: Stephen MacLeod - BMO Capital Markets Equity Research - Analyst : I just wanted to circle around on some of the new marketing campaigns that you have in the pipeline. I mean, I know one of the things you cited with Q3 was lack of impact in the (inaudible) lack of sort of broader macro Roots campaign. Can you just talk a little bit about what you have in the pipeline? I feel like -- I seem to remember you saying that the first major campaign was going to come through beginning in April with something -- with some follow-on in the year. James Gabel;President, CEO & Director So that's correct. Actually, it will be the latter part of this month, only because there is a unique opportunity in the first half of this month that we wanted to make sure that we gave appropriate airtime to. And you'll actually see us talk about that in the next couple of days. So I don't want to steal our team's thunder because we'll have an appropriate release around that. So the first half of this month, I think, is an element that will excite the consumer. It is very on brand for us, and then we move into the latter part of April with really our first phase of the brand campaign. I think that, as I said, our marketing team and our customer experience team have done a really nice job of understanding how that will come to life digitally, socially and in our stores.

Question: Stephen MacLeod - BMO Capital Markets Equity Research - Analyst : Okay. That's great. And then I just wanted to circle back on some commentary around the gross margin from JR. Did I hear correctly that you expect to see increased markdowns in Q1? James Rudyk;Chief Financial Officer Yes. So as we talked about the success that we had in benefiting from cost improvements with our suppliers over the last couple of years have been phenomenal, we're well ahead of our schedule. However, as we go into this year, Q1, probably through Q2 as well, you'll see a little bit of pressure on gross margins for 2 reasons. One is the excess inventory that we have that we'll be selling through the Q1 and Q2 time periods. And then secondly, what we're seeing is some FX headwinds. As you know, we do a rolling 12-month hedging program. And so as those hedges come online or were purchased towards -- in last year at higher rates, you'll see us versus last year have a little bit of headwind on FX. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. APRIL 03, 2019 / 12:00PM, ROOT.TO - Q4 2018 Roots Corp Earnings Call James Gabel;President, CEO & Director The other thing on that, too, is that, as you know, we are in the final stages of the largest capital project in our company's history and transitioning the distribution center. So that move is happening. It actually has started, and we'll go through the next 3 months. So as part of that, we want to make sure that we are moving through some seasonal goods. So we are not setting them up and moving them to a new facility and setting them up from a SKU perspective. So that certainly is a onetime occurrence that we want to make sure that we're smart in moving through that so that we set the efficiency of the DC appropriately.

Question: Stephen MacLeod - BMO Capital Markets Equity Research - Analyst : Right. And so you would experience lower margins on your seasonal product generally? James Gabel;President, CEO & Director Only if we are marking it down. And if I look at a product that was originally part of our seasonal range, which is the Essential Pants and Essential Jogger, we are not marking that down, that's for sure because it is a terrific product for us. So it really -- I think our merchandising team did a very good job of pinpointing those products that are appropriate for markdowns, and we will escalate that as we move through the quarter, so that we make sure the DC transition happens as planned.

Question: Stephen MacLeod - BMO Capital Markets Equity Research - Analyst : Yes. Yes. James Gabel;President, CEO & Director Okay. Yes. So we -- unlike in the third quarter, where we saw traffic patterns that were consistently down across the country, as we move into the fourth quarter and as we've progressed in this quarter, we're encouraged by some positive trends that we see in some of the markets and even within some of our stores. So we continue to have very strong traffic on web and e-commerce. So until we see across the board track improvements, we'll be a bit more muted. But we think with the compelling product that we've got forthcoming and also the brand marketing, those are going to be 2 strong drivers for improving our traffic across all stores.

Question: Stephen MacLeod - BMO Capital Markets Equity Research - Analyst : Yes. And you've seen that continue into Q1, I guess? James Gabel;President, CEO & Director We see positive trends in some markets and some stores. But overall, if you add up all the foot traffic, yes, it would be down.

Question: Sabahat Khan - RBC Capital Markets, Research Division - Analyst : Just a question sort of around the guidance. It looks like the guidance for renovations and expansions and store openings in the U.S. was taken down. I just kind of want to understand the thought process behind that. And then since you left your sales and EBITDA guidance intact, I guess, were more of those renovations and store openings expected to contribute maybe later in the year, so they won't be meaningful to your guidance. I just want to get some thoughts around that. James Rudyk;Chief Financial Officer Hi, Sabahat, it's JR here. The guidance that we issued at the end of Q3 stays the same. So -- but you are right. In that guidance, we did update for the number of renovations and relocations through the end of 2019 as well as new store openings. That was just along the approach of ensuring that we focus more on the marketing and the product areas of our business. In terms of the contribution that they have to our results, they continue to be accelerate our growth, particularly the renovations and relocations. It will be an area that we continue to invest in. Through 2019, you expect us to do between 5 and 7 renos and relos. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. APRIL 03, 2019 / 12:00PM, ROOT.TO - Q4 2018 Roots Corp Earnings Call