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Go ask Alice: Why retailers and investors should take notice of brand choices of pre-teens

My nine-year-old daughter, Alice, loves clothing from Roots, particularly the grey sweatpants. She also likes anything from Lululemon and she devours non-caffeinated beverages and snacks from Starbucks. Should investors take notice?

I’m certainly not suggesting that my daughter’s modest consumption habits are enough to drive the profits at these three retailers. And I’m not implying that she is a sophisticated influencer who can drive her peers – and their parents – to these stores.

But apparently she has embraced brands that are especially popular among youngsters right now, which suggests that these companies are doing something right. And they stand out as promising long-term performers if they can maintain their allure as nine-year-olds morph into free-spending tweens and teens − and drag their parents along on their shopping excursions.

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Lululemon Athletica Inc.’s share price has surged 60 per cent this year, reflecting first-quarter comparable sales that rose 20 per cent over the same quarter last year. While Starbucks Corp.’s share price has been moving sideways for about three years, it’s coasting close to record highs along with robust profits.

Which brings us to Roots Corp., whose shares started trading in October, 2017, following an initial public offering (IPO).

The retailer, though decades old, enjoys nowhere near the size or stature of the coffee chain or yoga-wear retailer, and its shares haven’t established a convincing trend yet: Though up nearly 30 per cent from lows in November, the share price is below its $12 debut.

Nonetheless, Roots has been making encouraging headway as a public company competing in a brutally competitive retail landscape. Its financial results for the fiscal first quarter ended May 5, released on Wednesday, underscore this progress.

The company − known for its iconic beaver logo on comfy clothes that look particularly well-suited to people sitting around campfires − reported that comparable sales (from stores open for at least 52 weeks), increased 6.4 per cent year-over-year. That’s nearly double the pace of growth from the first quarter of 2017, when comparable sales increased 3.3 per cent.

Total sales increased 5.8 per cent. Gross margins expanded to 57 per cent from 53.6 per cent. And gross profit, or sales minus the cost of goods sold, increased nearly 12 per cent.

During the quarter, Roots expanded its footprint to 120 corporate-owned stores, up from 118, has set its sights on U.S. expansion and added more Roots-branded footwear to its product lineup.

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The financial results weren't all upbeat, though. Roots reported a net loss of $5.6-million or 13 cents a share, steeper than the reported loss of $5.1-million, or 12 cents, last year − missing analysts' estimates. The shares fell 5.8 per cent on Wednesday.

No doubt, investors were hoping for a narrower loss. And management’s efforts to highlight the sales drag from an unusual ice storm in April, along with rising marketing costs, had little effect on the stock.

But the first quarter tends to be a quiet one, generating just 15 per cent of annual sales. For Roots, the busy part of the year comes in the second half of the year, which generates 70 per cent of sales − and the profits.

Yes, this is a profitable retailer. In fiscal 2017, Roots reported a net profit of $17.5-million or 42 cents a share, up from $8.2-million, or 19 cents, in fiscal 2016.

According to Bloomberg, analysts expect Roots will deliver a per-share profit of 67 cents this fiscal year, or 76 cents after adjustments. Based on these estimates, the stock has a forward price-to-earnings ratio of just 15.

That’s attractive for a company that is increasing its sales and profitability – as long as nine-year-olds continue to request Roots sweatpants, ensuring that the brand remains cool. Alice, keep us posted.

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