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Report on Business Roots quarterly loss widens on costs of new distribution centre

Roots reported its quarterly financial results on Wednesday morning.

Fred Lum/the Globe and Mail

Roots Corp.'s first quarter loss was 75 per cent bigger than last year as inventory costs associated with a new distribution centre offset gains from higher sales.

The company’s direct-to-consumer gross margin fell to 54.7 per cent in its first quarter, compared with 59.1 per cent in the same quarter of its 2018 financial year as it engaged in deeper discounting before moving to a new integrated distribution centre in the second quarter. Overall gross margin fell by 4.5 percentage points to 52.5 per cent.

“An important focus for (the first quarter) was improving our overall inventory position, using higher, deeper discounts to achieve two goals,” said chief executive officer Jim Gabel during a conference call with investors Wednesday.

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The first goal is to prepare for the transition to the new centre, he said, and the second is to move through the company’s seasonal inventory.

The company expects it’ll lower freight and fulfilment costs with the new consolidated centre.

Currently, one order that includes multiple items could result in a customer receiving several shipments, said Mr. Gabel, but the number of deliveries will be reduced once the company is fulfiling orders from the new centre.

The company also expects the profitability of its e-commerce business will improve thanks to this transition, Mr. Gabel said.

Roots had a $9.8-million net loss or 23 cents per basic share for the quarter ended May 4, which compared with last year’s first quarter loss of $5.6-million or 13 cents per share. Its adjusted net loss was equal to 17 cents per share, equal to analyst forecasts and compared with 11 cents per share a year earlier.

Sales for the Toronto-based clothing retailer were up 6.5 per cent year-over-year to $54.4-million from $51-million. The company largely attributed the jump to a 5.5-per-cent improvement in its direct-to-consumer sales. Comparable-store sales, a key retail metric, rose 1.5 per cent.

“Even with the challenges we continue to face with store traffic in certain regions, we saw more people across North America experience the brand in the quarter given our strong e-commerce traffic,” said Mr. Gabel, adding he believes the company’s brand campaign played a key role in boosting traffic.

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Roots saw growth in many of its categories thanks to product innovation, he said, highlighting a new jogger pant, several versions of its hybrid jacket and footwear.

The company says it remains on track to achieve its fiscal 2019 financial targets, which include sales of between $358-million and $375-million and adjusted net income of between $20-million and $24-million.

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