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Roots stock plummets as company pulls back on U.S. expansion plans

People shop at CF Toronto Eaton Centre a few days before Christmas, Toronto Ont., Dec. 22, 2016. (THE CANADIAN PRESS IMAGES/Rachel Verbin)

Roots Corp. is pulling back on its ambitious North American expansion plans after reporting weak quarterly results just over a year following its initial public offering.

“We are planning to take a more conservative approach to our expansion plans until we see meaningful consumer response to and sustainable momentum around both our new marketing initiative and the products we tested in fiscal 2018 for larger scale rollout in fiscal 2019,” Jim Gabel, the company’s chief executive, told analysts on a conference call on Tuesday.

“We know that we are disappointing some people when we come out with results like this. We are not anxious to disappoint again.”

The lacklustre results sent shares of the iconic Canadian clothing company plummeting more than 29 per cent in early trading on Tuesday to a record low of $3.21. Roots shares have dropped more than 69 per cent since its October 2017 IPO. The company’s stock was trading at $3.55 at 1:10 p.m. ET, a decrease of more than 21 per cent.

Roots said the company had previously planned on opening between 10 to 14 new locations in the United States during its 2019 fiscal year, but will now instead open between just five and six new stores. At the same time, Roots will decrease the number of stores that will undergo renovations and expansions next year, from between 29 and 33 down to between 19 and 21. International expansion in the United States, as well as in China and Taiwan, has been a key aspect of the company’s growth strategy following its IPO.

The weak results also prompted the company to revise several of its 2019 financial targets, including sales and adjusted net income. Roots now expects its 2019 sales to come in at between $358 million and $375 million, down from a target of between $410 million and $450 million. Adjusted net income is now expected to be between $20 million and $24 million, down from a range of $35 million and $40 million.

The company pinned the weak results on the lack of a major marketing campaign, unseasonably warm fall weather, and one-time sales related to Canada 150 during the same time last year.

“When we look back at 2018, there was a lot of activity,” Gabel said. “But as we look forward to 2019, we’ll do less things but we’ll do them much better and with a louder voice. And we think that will really resonate well with the consumer.”

Roots said total sales in the third quarter fell 3 per cent to $87 million, down from from $89.7 million during the same time last year. Net earnings came in at $2.8 million million, or seven cents per share, compared to $5 million, or 12 cents per share, in 2017. On an adjusted basis, net income fell more than 52 per cent, from $9.6 million, or 23 cents per share, to $4.7 million, or 11 cents per share.

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