Roots Corp. investors are crossing their fingers that the iconic retailer’s summer quarter is more impressive than the spring, which could help boost the stock that’s now trading below its October initial-public-offering price. Shareholders are also betting that a bigger marketing push, new products and further foray into the United States will drive shares higher in the coming quarters.
Shares of the Toronto-based clothing and footwear chain are down about 16 per cent from its IPO price of $12. The stock hit a low of $8.55 on Nov. 1, just days after going public on Oct. 25, in what was considered one of the worst market debut performances in years from a high-profile Canadian company.
The thinly traded, tightly held stock has been volatile since then, hitting a high of $13.55 in early May, after a strong fourth-quarter holiday-season report that beat analysts’ expectations. The stock has since slipped below $12 after a first-quarter miss that the company blamed on bad weather.
Second-quarter results for the May-to-July period, scheduled for release on Sept. 12, are expected to be an improvement from a year ago. Analysts are expecting revenue of $64.1-million, up from $58.1-million a year ago, and a loss of a penny per share versus a 2-cent loss last year. The company is targeting annual sales in fiscal 2019 of about $410-million to $450-million, up from $326.1-million for the year ended Feb 3.
Analysts are mostly bullish on the stock, believing the company is making the right moves to leverage its brand in Canada as it expands south of the border.
“It’s a strong brand with largely untapped opportunities across product and geographies,” Jefferies analyst Janine Stichter said in a recent interview. She has a “buy” rating and $17 target on the stock. “We see margin expansion opportunities through better category management.”
Among the nine analysts that cover the stock, six have a “buy” and three have a “hold” rating with targets ranging between $13 and $17. The average consensus target price for the next 12 months is $15.06, according to Bloomberg, which is nearly 50 per cent above Friday’s close of $10.08.
Bank of Nova Scotia analyst Patricia Baker has a “sector outperform” rating, which is similar to “buy," and a $16 target. According to an Aug. 22 note, she is forecasting Roots will boost sales in its second quarter “as the brand momentum has never been stronger, both in North America and in Asia, and as e-commerce continues to expand the addressable market.”
Roots has an e-commerce platform as well as 117 stores across Canada, three in the United States, 112 partner-operated stores in Taiwan, and 30 partner-operated stores in China as of the end of the first quarter. In the United States, it has since added two stores in Boston and two in Washington.
“We believe investor confidence in ROOT’s growth strategy will grow as the company executes well through 2018 and beyond, and shares should follow suit,” said Ms. Baker, citing the company’s stock symbol. She believes the recent pullback in the share price after the first-quarter miss “provides a good entry level to invest in a small-cap story with high-return potential.”
Sales for the first quarter ended May 5 increased by 5.8 per cent year-over-year to $51-million, but were below expectations of around $54.6-million. The company said its first quarter was hurt by an ice storm that affected 80 per cent of its store base during a critical four-day semi-annual sale event. Other Canadian retailers also blamed the bad weather for weaker results in the period.
Comparable sales growth, a key measure in retail, grew 6.4 per cent in the first quarter, compared to 3.3 per cent a year ago. The company’s first-quarter adjusted loss was 11 cents per share, below expectations of 9 cents.
CIBC analyst Matt Bank is more cautious with a “neutral” rating on the stock and a $13 price target. “Strong growth continues to be driven by operational improvements, but targets are lofty and the higher contribution needed from the U.S. and footwear adds uncertainty,” he wrote in a June 13 note after the first-quarter results were released.
Mr. Bank said the U.S. expansion is “well thought out, but is inherently difficult to have confidence in until more stores are up and running.”
Roots declined to comment for this article, citing a “quiet period” before its upcoming earnings report.