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Roots cuts sales forecast as business performs 'well below' expectations

Roots says its third-quarter earnings dipped from last year to come in below its own target range as it faces a number of challenges. THE CANADIAN PRESS/Chris Young

Roots (ROOT.TO) cut its full-year sales forecast on Friday as the retailer continues to grapple with weak sales and operational inefficiencies at its new distribution centre.

Net income at the Canadian clothing company fell in the three month period ending Nov. 2, from $2.8 million last year to just under $2 million. So far this year, Roots has lost $17.4 million, an increase of 153.8 per cent when compared to the same period last year. Total sales in the third quarter fell slightly, from $87 million last year to $86.4 million in 2019.

While Roots saw comparable sales – a key metric in the retail industry – increase by three per cent in the quarter, the company’s chief executive Jim Gabel said Friday that the “overall business performed below our expectations.”

“We have realized operational improvements at our new distribution centre; however, we continue to face inefficiencies there that are placing downward pressure on earnings,” Gabel said in a statement released alongside financial results on Friday.

“Our new U.S. stores are performing well-below expectations, and macro-economic headwinds continue to negatively affect our Asia business.”

As a result of the weak results, combined with a shorter holiday shopping season and operational headwinds, Roots now expects its 2019 sales to fall below its previously disclosed target range of between $358 million to $375 million.

Roots has faced numerous challenges since starting to transition to a new distribution centre (DC). In the last quarter, the company was forced to extend an agreement with a third-party DC as it dealt with issues such as the flow of product to stores. Roots fully transitioned to the new DC in the third quarter, but has had to develop “targeted improvement plan” to improve operations.

“We continue to face inefficiencies at the DC, including delays in the flow of products to our stores that are negatively affecting sales and driving increased costs,” Gabel told analysts on a conference call Friday.

At the same time, Roots saw sales at its newest U.S. stores fall “well below” the retailers expectations.

“We are seeing an overall lift in the target regions, but the stores are not scaling at the rate we had expected,” Gabel said.

“It is taking time to build community around those stores, like what we’ve enjoyed in Canada or in Taiwan, where when we talk about... Roots heritage leather, customers understand what that means and they appreciate the value. We have not built that community level yet in the marketplace and we need to spend time and effort to do that.”

RBC Capital Markets analyst Sabahat Khan wrote in a note to clients that although Roots has built strong momentum in recent years, it may be increasingly difficult for it to deliver results in a challenging retail environment.

“We would also highlight potential risks associated with the company's U.S. growth plans, and believe it could be difficult to gain meaningful traction for its brand given the highly competitive nature of the U.S. retail market,” he said.

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