Root, Inc. Annual Report 2017

FY2017 Annual Report · Root, Inc.

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2017 Annual Report

Building a Legendary
Global Brand.

What started as one store in Toronto, Canada in 1973, has grown into a 2,200-plus person organization with more than
260 stores across four countries. Roots is a high-performance, omni-channel retailer with an iconic brand at our core.

We are not defined by one product, season, geography, or demographic. We are a premium lifestyle collection for those
who want to enjoy the moment, embrace the spirit of the open air and express their unique personality and style. Quality,
comfort and craftmanship contribute to the legendary feeling of our products and are why consumers fall in love with
Roots. It is not only how our authentic products feel, but it is also how consumers feel when wearing Roots.

Since going public in October 2017, we have focused on executing our plans to unlock Roots potential. While we have
seen success to date, we still have big aspirations. We are confident we have significant room to grow, and that we have
the right team and strategy in place. Our impressive Fiscal 2017 results prove that we are on the right track.

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Growth Feels Good.

FISCAL 2017
SALES

+15.7%

$326.1M

$281.9M

FISCAL 2017
ADJUSTED EBITDA

+26.6%

$52.6M

$41.6M

FISCAL 2017
ADJUSTED NET INCOME
PER SHARE

+35.3%

$0.69

$0.51

Roots Fleece: All of our sweats start with high-quality yarns. A unique blended cotton
knit creates the much-loved look and feel of our exclusive fleece. Once the fabric is made, it’s
washed and brushed for added softness. Brushing the fabric loosens the underside of the knit,
leaving that lasting, cozy feeling.

FISCAL
2016

FISCAL
2017

FISCAL
2016

FISCAL
2017

FISCAL
2016

FISCAL
2017

12.1%

206

basis point improvement

FISCAL 2017
COMPARABLE SALES GROWTH

FISCAL 2017
ADJUSTED DIRECT-TO-CONSUMER
GROSS MARGIN

NOTE: A reconciliation of historical Adjusted EBITDA and historical Pro Forma Adjusted Net Income to net income appears in the MD&A.

DISCLAIMER

All figures discussed in this annual report are stated in $CAD millions, unless otherwise noted.

NON-IFRS MEASURES AND INDUSTRY METRICS

This annual report makes reference to certain non-IFRS measures including certain metrics specific to the industry in which we operate. These measures are not recognized measures under IFRS, do not have a standardized meaning
prescribed by IFRS and, therefore, may not be comparable to similar measures presented by other companies. Rather, these measures are provided as additional information to complement those IFRS measures by providing further
understanding of our results of operations from management’s perspective. Accordingly, these measures are not intended to represent, and should not be considered as alternatives to net income or other performance measures derived
in accordance with IFRS as measures of operating performance or operating cash flows or as a measure of liquidity. In addition to our results determined in accordance with IFRS, we use non-IFRS measures including EBITDA, adjusted
EBITDA, adjusted net income, adjusted net income per diluted share, and Adjusted Direct-to-Consumer Gross Margin. This annual report also refers to comparable sales growth, a commonly used metric in our industry but that may
be calculated differently compared to other companies. We believe these non-IFRS measures and industry metrics provide useful information to both management and investors in measuring our financial performance and condition
and highlight trends in our core business that may not otherwise be apparent when relying solely on IFRS measures. Definitions and reconciliations of non-IFRS measures to the relevant reported measures can be found in our MD&A
under “Cautionary Note Regarding Non-IFRS Measures and Industry Metrics”, which is available on SEDAR at www.sedar.com.

FORWARD-LOOKING INFORMATION

Certain information in this annual report contains forward-looking information. This information is based on management’s reasonable assumptions and beliefs in light of the information currently available to us and are made as of April
17, 2018. Actual results and the timing of events may differ materially from those anticipated in the forward-looking information as a result of various factors. Information regarding our expectations of future results, performance,
achievements, prospects or opportunities or the markets in which we operate is forward-looking information. Statements containing forward-looking information are not facts but instead represent management’s expectations,
estimates and projections regarding future events or circumstances. Many factors could cause our actual results, level of activity, performance or achievements or future events or developments to differ materially from those expressed
or implied by the forward-looking statements.

See “– forward-looking Cautionary Note regarding “Forward-Looking Information” and “Risks and Uncertainties” in the Company’s MD&A and “Forward-Looking Statements” and “Risk Factors” in the Company’s AIF dated April 17,
2018, which are available on SEDAR at www.sedar.com, for a discussion of the uncertainties, risks and assumptions associated with these statements. Readers are urged to consider the uncertainties, risks and assumptions carefully in
evaluating the forward-looking information and are cautioned not to place undue reliance on such information. We have no intention and undertake no obligation to update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise, except as required by applicable securities law.

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Growth Built on our
Guiding Principles.

Roots today is a high-performance and admired omni-channel retailer, and everything we do is with the best
interest of the Roots brand in mind. We will deliver continued growth without losing sight of who we are and
what we stand for.

Roots style and deep-rooted connection with the consumer are unique. Both are guided by the principles
that are foundational to our brand: Confidence, Authenticity, Quality and Integrity. These guiding principles are
why we have endured the test of time, and are strong, if not stronger, today as we expand on the global stage.

At the time of our IPO, we shared the details of our five growth strategies, and throughout Fiscal 2017,
we made meaningful progress against each of them.

LEVERAGE THE OPERATIONAL INVESTMENTS WE HAVE BEEN MAKING

Our plan isn’t about changing Roots, it is to strategically invest in the business to unlock the potential of the brand
and business. Starting in Fiscal 2016, we implemented a number of transformative initiatives designed to strengthen
and drive efficiencies across the business.

In Fiscal 2017, we continued to invest while also starting to leverage the investments we had made in the prior year, in people,
systems and platforms, to best position the company for optimal performance. In addition, our commitment to building a
consumer-focused global brand range drove further efficiencies and fueled top-line improvements. We invested in marketing
to build our brand, launch new products, and establish stronger connections with our customers and the store communities
in which we operate, while also overhauling our website, www.Roots.com in our commitment to offering a seamless omni-channel
shopping experience for our consumers.

CONTINUED GROWTH IN CANADA

With such a storied history in Canada, and aided brand awareness of 99%1 , we approach the market with a
great deal of confidence. Canadian consumers have known us and loved us for 44 years. We deeply value that
unique connection and relationship and never want to take it for granted. That is why we are committed to
making their experience with Roots even better, both in-store and online. In Fiscal 2017, we renovated
one store; relocated one store; relocated and expanded three stores; and opened two net new stores.
Further, the release of our enhanced e-commerce retail platform significantly improved functionality of our
seamless omni-channel shopping experience. Today, consumers coast-to-coast can order online, pick-up in-store,
return to store, or have an item shipped directly to their home.

99% aided brand awareness

& Top 10 Canadian brand2

The Roots Award Jacket: First created in 1979, this iconic piece of our heritage has
become an emblem of style and Canadian craftsmanship. Handcrafted in Canada, each jacket is
made with our exclusive leathers and high quality, woollen melton. No detail is overlooked: every
sleeve is cut by hand; our chenille crests are hand-trimmed; and our Roots logo is embroidered on
for a signature finish.

1 In home market primarily through word-of-mouth advertising and decades of celebrity and professional athlete affirmation

2 Named by Canadian Business in 2016 and 2017

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STRATEGICALLY EXPAND FOOTPRINT IN THE UNITED STATES

We are taking a very thoughtful, analytical and pragmatic approach to capitalizing on
an attractive long-term opportunity for us in the United States. After extensive market
research and honing of our strategy, we identified the Northeast and Midwest regions of
the U.S. as our primary go-to market targets through Fiscal 2019.

Responding to our consumers’ requests to experience Roots stores in the U.S., we are
strategically expanding our footprint and proven omni-channel solution in the U.S. We are
building on our three legacy and profitable locations in the U.S. and almost two-decades
of shipping to all 50 states. We signed four leases in Q3 Fiscal 2017. We are opening two
new stores in the Greater Boston area in June 2018 and another two new locations in the
Washington D.C. area in August 2018. In addition, we have announced plans to expand into
Chicago in Fiscal 2019.

ship to

50 states

EXPAND IN INTERNATIONAL MARKETS

The fact that we have more stores outside of North America is a strong testament to how well Roots resonates
internationally. Canada will always be at the heart and soul of our business, but our guiding principals and premium
lifestyle products transcend boarders. Our products are worn by consumers and celebrities around the world.

During Fiscal 2017, we added a total of 13 net new partner-operated stores in Taiwan and China, bringing the total
count to 110 in Taiwan and 32 in China at Fiscal year-end. We also shipped to more than 50 countries world-wide
during Fiscal 2017.

110 partner-operated stores in Taiwan

32 partner-operated stores in China

DEEPEN OFFERING IN LEATHER AND FOOTWEAR

Leather and footwear is part of our DNA. It is where we started, with our world-famous negative heel shoe in 1973.
For Fiscal 2017, our focus was to invest in our Toronto-based leather manufacturing operation and set the stage for
accelerated growth in fiscal 2019 and beyond. We built a custom application to navigate our customer through a
customization experience and piloted it in Q4 Fiscal 2017. In terms of footwear, we signed a partnership with a leading
global manufacturer of leather footwear, and we are bringing a feature-rich, highly-functional and enhanced footwear
collection to a meaningful number of our stores and online in the fall of Fiscal 2018.

Groundwork for accelerated growth

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our marketing programs, expand our international footprint,
enhance our omni-channel shopping experience and evolve the
already amazing Roots culture to include a greater focus on
performance. The new group of deeply experienced leaders also
introduced and started to execute against a strategic vision that
positions Roots as an iconic global brand.

Our expectation when we bought Roots was that the Company
would go public when there was a solid foundation upon which we
could continue to build and deliver accelerated growth. When we
went public in October 2017, it was following impressive Fiscal
2016 year-over-year results. With Fiscal 2017 Comparable Sales
Growth of 12.1%, and sales and Adjusted EBITDA increasing
15.7% and 26.6% year-over-year, respectively, we set new
record highs. We believe our Fiscal 2017 results are a powerful
representation of the strength of the Roots brand, as well as the
momentum we have achieved with key operational investments
and our strategic growth initiatives.

The primary focus for the Board during our first two quarters
as a public company was implementing systems of strong
corporate governance, which, we believe, will serve as the
foundation for enduring success and long-term shareholder
confidence. The Roots Board is comprised of seven directors,
the majority of whom are independent. We are committed
to continually taking a proactive approach to ensure that the
appropriate structures and processes are in place to facilitate
independent and effective oversight of operations, capital
deployment, strategic growth initiatives and risk management
practices. We are confident the breadth and depth of our retail
industry, capital markets, finance, governance, compensation
and legal experience, positions us well to provide ongoing
guidance and oversight that will support management in
successfully executing the Company’s strategy.

From our
Chairman

Fellow Shareholders:

It is with great excitement that I write my first letter as
Chairman of Roots, especially following such a successful
Fiscal 2017.

When Searchlight bought Roots in December 2015, we
acquired a thriving business that has a rich Canadian heritage,
an iconic brand, an established omni-channel platform and a
large international retail footprint. Equally importantly, it was
a business with significant untapped growth potential. Fast
forward two-years, and it is incredibly impressive how much
the Company has accomplished. Under the guidance of a
new senior management team, we saw the implementation of
initiatives to increase store productivity, recognize efficiencies
throughout the business, improve our approach toward product
and merchandising, optimize our real estate portfolio, amplify

Cabin Socks: A customer favourite from our Cabin Collection, which celebrates our
early beginnings in a little cabin in Algonquin Park, Ontario, Canada. Inspired by our heritage
and love of Canada, our Cabin socks have an iconic design that has become a timeless part of
Roots style.

Further, as directors of the Company, we recognize our
responsibility to ensure that the Company’s organizational and
compensation structure are designed to encourage long-term
value creation for the benefit of all stakeholders. As such, we
engaged third-party expertise to assist in the development of a
compensation and performance framework for measuring and
evaluating the performance of senior management.

Fiscal 2017 was an impressive start to Roots journey as a
public company. The Board is committed to working closely
with management to ensure that we continue to delight our
consumers with our brand experience, and that we are best
capitalizing on the global market opportunities in front of us. I am
confident Roots has the right strategy and the right leadership,
as well as an outstanding and dedicated team of more than
2,200 people who will continue driving growth and creating
shareholder value. I would like to thank the founders of Roots,
Michael Budman and Don Green, for their guidance, wisdom
and trust. I would like to extend thanks to my fellow directors for
their commitment and insight. On behalf of the Board, I would
also like to thank you, our shareholders, for your support.

Sincerely,

EROL UZUMERI

6 |

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On account of our top line improvements and expanding
margins, we delivered record profitability. Adjusted EBITDA
grew 26.6% to $52.6 million. Benefitting further from a
decrease in our effective tax rate and reduction in interest
expense, our Adjusted Net Income increased a particularly
impressive 35.7% over Fiscal 2016 to $29.1 million, or
$0.69 per share. We also reduced our total bank debt by
approximately 20 percent, which drove our net debt ratio down
to 1.57 times compared to 2.51 times at the end of Fiscal 2016.

TRANSFORMING THE BUSINESS AND
MODERNIZING THE BRAND

During the year, we made meaningful progress against our
three-year plan to transform the business and modernize the
brand. We bolstered our senior management team, adding
key new roles. We also professionalized our approach to how
we analyze, set strategy and operate the business. Our senior
management team shares a deep passion for Roots and brings
a track record of proven experience. We are well-positioned to
lead the multiple workstreams that will drive efficiencies and
unlock the potential of our people and our business.

From our President
& CEO

Fellow Shareholders:

OPERATIONS

Like many of our customers, I grew up with Roots. When
I joined the Company in early 2016, I saw an amazing
opportunity to become part of a business and iconic brand
with significant upside potential. With the right team and
strategy in place, and the support of our shareholders, we could
unlock the full power of the brand and deliver accelerated
growth. In Fiscal 2017, we started to do just that. As a result,
we recorded the strongest year in Roots 44-year history.

FISCAL 2017 PERFORMANCE

Comparable, or same store, Sales Growth was 12.1% and 20.4%
on a two-year stacked basis, which far outpaced industry
averages. Reflecting our sales success in-store and online, as
well as the expansion of our Canadian and international retail
footprint, total sales for the year increased 15.7% year-over-
year to $326.1 million. In addition, with an Adjusted Direct-to-
Consumer Gross Margin of 59.4%, we delivered a 206-basis
point improvement over Fiscal 2016, which is helping fuel our
investments in the growth of the brand and the business.

In Fiscal 2017, we saw an increase in store traffic, conversion
rates and average selling price. e-Commerce gained
momentum, and it was the fastest growing part of our business.
With our overhaul of the consumer-facing www.Roots.com,
we are confident we are marching swiftly toward our stated
target of e-commerce representing 20 to 22% of our
Direct-to-Consumer business by the end of Fiscal 2019.

We executed many unique marketing programs throughout
the year, including our Nice campaign and our first-ever digital
fashion show, Northern Light. In addition, with our focus on
building a consumer-focused global brand range, we delivered
double-digits sales growth and margin improvements with a
reduced SKU base. Editing out slow sellers and amplifying
stronger performing products is proving to be the right
approach to driving long-term sustainable success.

RETAIL FOOTPRINT

Canada remains a very important market for us, in-store and
online. In fact, we believe that we can double our Canadian
business over the long-term. As such, we continued to optimize
our retail store portfolio during the Fiscal year. We ended
the year with 116 stores in Canada. In August of 2017, we
unveiled our “Enhanced Experience” Store in Yorkdale Mall.

The new store design reinterprets the consumers’ experience
and establishes a deeper connection with the Roots brand
and our products. Consumers and the retail industry are
applauding our leather customization experience, elevated
visual merchandising, enhanced change rooms and proven
omni-channel capabilities. In Fiscal 2018, with our plans to
open four to five new corporate retail locations in Canada
and further enhance our existing store portfolio, we will apply
learnings from the important investments we made in this new
store format.

Outside of Canada, we solidified plans to build on our portfolio
of three legacy stores in the United States. We are opening two
new stores in the greater Boston area in June 2018, two in the
Washington D.C. area in August 2018, and we have announced
plans to expand into Chicago in 2019. We are well-positioned
to achieve our target of adding 10 to 14 U.S. stores by the end
of Fiscal 2019. Long-term, we believe the U.S. represents a
minimum 100-store opportunity for us. Through www.Roots.
com, we already have reach across the entire country, as we
ship to all 50 states.

Our longstanding international partner added 13 net new
stores in Asia, including their first “Enhanced Experience”
store in the Taiwan epicenter, Taipei 101. We expect to see
strong store openings by our partner in China and Taiwan
through Fiscal 2018, and we remain on-track to achieve our
target of adding 20 to 25 new stores from the date of our final
prospectus through to the end of Fiscal 2019. In Fiscal 2018,
we will accelerate our plans to expand into new international
markets, working with our existing partner, while also forging
relationships with potential new partners.

STAYING TRUE TO OUR ROOTS

Throughout Fiscal 2017, Roots underwent considerable change.
The key to our success was that we never lost sight of servicing
our customers and building our brand’s unique and cherished
culture. This speaks to the strength of the overall organization.
Our ability to effectively communicate across the Company and
unite together has enabled us to remain nimble and move quickly
in transforming the business, delivering on our corporate goals
and transitioning into a performance-driven culture.

OUTLOOK

Looking back at Fiscal 2017, we accomplished what we set
out to do. We ended the year stronger than we began in every
way. I am looking forward to a successful Fiscal 2018 that will
progress us closer to our Fiscal 2019 targets of sales of $410
million to $450 million; Adjusted EBITDA of $61 million to
$68 million; and Adjusted Net Income of $35 million to $40
million. While we expect two-thirds of our growth through
to Fiscal 2019 to come from Canada, I am confident in our
ability to execute on all five growth initiatives that we set out
at the time of our IPO. Through these efforts, we will continue
to propel Roots forward as a legendary global brand and build
further shareholder value.

IN APPRECIATION

2017 was a milestone year for Canada as we helped Canadians
coast-to-coast celebrate the sesquicentennial. 2017 was
also significant in Roots history as we moved from a private
company to a performance-driven public company. All that
we accomplished during the year is because of our team of
incredible professionals. Thanks to the passion and dedication
of our more than 2,200 employees, Roots achieved record
results in 2017 and laid the foundation for accelerated growth
in the years to come. In addition to the unwavering support of
our employees, I would also like to thank our Board of Directors
and two Roots founders, Michael Budman and Don Green, for
their guidance and support as we deliver on our commitments
to you, our valued shareholders.

Jim Gabel
PRESIDENT & CEO

The Banff Bag: Handcrafted in Canada since 1988, our Banff Bag is a
Roots classic. The perfect weekender bag, it is designed to be a versatile essential
for wherever you’re headed next.

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While Roots continues to evolve our core values, our unique
culture remains as solid today, if not stronger than ever before.

Our Fiscal 2017 results speak to the power of the Roots brand,
the creativity of our product and the momentum we are gaining
with our operational investments and strategic growth initiatives.

We are a young public company with an iconic brand and a
passionate team. We are excited by how our consumers have
responded to the investments we have made and are enthusiastic
about our further growth potential. With five growth drivers, there
are significant opportunities in front of us. We are well-positioned
to capitalize on each one, thereby delivering value to our customers
and our shareholders.

The Future Feels Great.

ROOTS CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

(Fiscal Year Ended February 3, 2018)

The following Management’s Discussion and Analysis (“MD&A”) dated April 17, 2018 is intended
to assist readers in understanding the business environment, strategies and performance and risk
factors of Roots Corporation (together with its consolidated subsidiaries, referred to herein as
“Roots”, the “Company”, “us”, “we” or “our”). This MD&A provides the reader with a view and
analysis, from the perspective of management, of the Company’s financial results for the fourth
quarter and the fiscal year ended February 3, 2018. This MD&A should be read in conjunction
with our audited consolidated financial statements for the fiscal year ended February 3, 2018,
including the related notes thereto (the “Annual Financial Statements”).

Basis of Presentation

Our Annual Financial Statements have been prepared in accordance with International Financial
Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board
(“IASB”), using the accounting policies described therein. All amounts are presented in thousands
of Canadian dollars, unless otherwise indicated.

All references in this MD&A to “Q4 2017” are to our fiscal quarter for the 14-week period ended
February 3, 2018, and all references to “Q4 2016” are to our fiscal quarter for the 13-week period
ended January 28, 2017. All references in this MD&A to “Fiscal 2017” are to the 53-week fiscal
year ended February 3, 2018, and all references to “Fiscal 2016” are to the 52-week fiscal year
ended January 28, 2017. All references in this MD&A to “Fiscal 2018” are to the 52-week fiscal
year ending February 2, 2019, and all references to “Fiscal 2019” are to the 52-week fiscal year
ending February 1, 2020.

Unless otherwise indicated, all comparisons of results for Q4 2017 (14 weeks) are against results
for Q4 2016 (13 weeks) and all comparisons of results for Fiscal 2017 (53 weeks) are against
results for Fiscal 2016 (52 weeks).

The Annual Financial Statements and this MD&A were reviewed by our Audit Committee and
approved by our Board of Directors (the “Board”) on April 17, 2018.

Certain totals, subtotals, and percentages throughout this MD&A may not reconcile due to
rounding. All information in this MD&A referring to per-share amounts, share units or option units
are presented as if the Pre-Closing Capital Changes (as defined and discussed under the heading
“Share Information – Prior to Completion of the IPO”) was implemented at the beginning of the
earliest comparable period.

Cautionary Note Regarding Non-IFRS Measures and Industry Metrics

This MD&A makes reference to certain non-IFRS measures including certain metrics specific to
the industry in which we operate. These measures are not recognized measures under IFRS, do
not have a standardized meaning prescribed by IFRS and, therefore, may not be comparable to
similar measures presented by other companies. Rather, these measures are provided as
additional information to complement those IFRS measures by providing further understanding of
our results of operations from management’s perspective. Accordingly, these measures are not
intended to represent, and should not be considered as alternatives to, net income or other
performance measures derived in accordance with IFRS as measures of operating performance
or operating cash flows or as a measure of liquidity. In addition to our results determined in
accordance with IFRS, we use non-IFRS measures including, “Adjusted DTC Gross Profit”,
“EBITDA”, “Adjusted EBITDA”, “Adjusted Net Income”, and
“Adjusted DTC Gross Margin”,
“Adjusted Net Income per Share”. This MD&A also refers to “comparable sales growth”, a
commonly used metric in our industry but that may be calculated differently compared to other
companies. We believe these non-IFRS measures and industry metrics provide useful information
to both management and investors in measuring our financial performance and condition and
highlight trends in our core business that may not otherwise be apparent when relying solely on
IFRS measures.

Management also uses non-IFRS measures to exclude the impact of certain expenses and
income that management does not believe reflect the Company’s underlying operating
performance and that make comparisons of underlying financial performance between periods
difficult. Management also uses non-IFRS measures to measure our core financial and operating
performance for business planning purposes and as a component in the determination of
incentive compensation for salaried employees. The Company may exclude additional items, from
time to time, if it believes doing so would result in a more effective analysis of our underlying
operating performance.

“Adjusted DTC Gross Profit” is defined as gross profit in our direct-to-consumer (“DTC”)
segment, adjusted for the impact of certain cost of goods sold that are non-recurring, infrequent,
or unusual in nature and would make comparisons of underlying financial performance between
periods difficult.

“Adjusted DTC Gross Margin” is defined as Adjusted DTC Gross Profit, divided by sales in our
DTC segment.

“EBITDA” is defined as net income before interest expense, income taxes expense (recovery)
and depreciation and amortization.

“Adjusted EBITDA” is defined as EBITDA, adjusted for the impact of certain income and
expenses that are non-recurring, infrequent, or unusual in nature and would make comparisons
of underlying financial performance between periods difficult. We believe that Adjusted EBITDA
is useful, to both management and investors, in assessing the underlying performance of our
ongoing operations and our ability to generate cash flows to fund our cash requirement.

“Adjusted Net Income” is defined as net income, adjusted for the impact of certain income and
expenses that are non-recurring, infrequent, or unusual in nature, and would make comparisons
of underlying financial performance between periods difficult, net of related tax effects. We believe
that Adjusted Net Income is useful, to both management and investors, in assessing the
underlying performance of our ongoing operations.

“Adjusted Net Income per Share” is defined as Adjusted Net Income, divided by the weighted
average common shares outstanding during the periods presented. We believe that Adjusted Net
Income per Share is useful, to both management and investors, in assessing the underlying
performance of our ongoing operations, on a per share basis.

“comparable sales growth” is a retail industry metric used to compare the percentage change
in sales derived from mature stores and e-commerce, in a certain period, compared to the sales
from the same stores and e-commerce, in the same period of the prior year. We believe
comparable sales growth helps explain our sales growth in established stores and e-commerce,
which may not otherwise be apparent when relying solely on year-over-year sales comparisons.
Comparable sales growth is calculated based on sales (net of a provision for returns) from stores
that have been opened for at least 52 weeks in DTC segment, including e-commerce sales (net
of a provision for returns) in our DTC segment, and excludes sales from stores during periods
where the store was undergoing renovation. Comparable sales growth also excludes the impact
of foreign currency fluctuations as it is calculated using a U.S. dollar to Canadian dollar exchange
rate of 1:1 in all reporting periods. Our comparable sales growth may be calculated differently
compared to other companies. Sales during the 53rd week of Fiscal 2017 were compared to sales
during the 52nd week of Fiscal 2016.

See “Reconciliation of Non-IFRS Measures” for a reconciliation of certain of the foregoing non-
IFRS measures to their most directly comparable measures calculated in accordance with IFRS.

Cautionary Note Regarding Forward-Looking Information

This MD&A contains “forward-looking information” within the meaning of applicable securities
laws in Canada. Forward-looking information may relate to our future financial outlook and
anticipated events or results and may include information regarding our business, financial
position, results of operations, business strategy, growth plans and strategies, budgets,
operations, financial results, taxes, plans and objectives. Particularly, information regarding our
expectations of future results, performance, achievements, prospects or opportunities or the
markets in which we operate is forward-looking information.

In some cases, forward-looking information can be identified by the use of forward-looking
terminology such as “plans”, “targets”, “expects” or “does not expect”, “is expected”, “an
opportunity exists”, “budget”, “scheduled”, “estimates”, “outlook”, “forecasts”, “projection”,
“prospects”, “strategy”, “intends”, “anticipates”, “does not anticipate”, “believes”, or variations of
such words and phrases or state that certain actions, events or results “may”, “could”, “would”,
“should”, “might”, “will”, “will be taken”, “occur” or “be achieved”. In addition, any statements that
refer to expectations, intentions, projections or other characterizations of future events or
circumstances contain forward-looking information. Statements containing forward-looking
information are not facts but instead represent management’s expectations, estimates and
projections regarding future events or circumstances.

In addition, our assessments of, and targets for, annual sales, Adjusted EBITDA and Adjusted
Net Income and certain other measures are considered forward-looking information. See
“Financial Outlook” for additional information concerning our strategies, assumptions and market
outlook in relation to these assessments.

Many factors could cause our actual results, level of activity, performance or achievements or
future events or developments to differ materially from these expressed or implied by the forward-
looking information, including, without limitation, the factors discussed in the “Risks and

Uncertainties” section of this MD&A and in the “Risk Factors” section of our annual information
form dated April 17, 2018 for the fiscal year ended February 3, 2018 (the “AIF”). A copy of the
AIF can be accessed under our profile on the System for Electronic Document Analysis and
Retrieval (“SEDAR”) at www.sedar.com and on our website at www.roots.com. These factors are
not intended to represent a complete list of the factors that could affect us; however, these factors
should be considered carefully.

The purpose of the forward-looking information is to provide the reader with a description of
management’s current expectations regarding the Company’s financial performance and may not
be appropriate for other purposes; readers should not place undue reliance on forward-looking
information contained herein. To the extent any forward-looking information in this MD&A
constitutes future-oriented financial information or financial outlook, within the meaning of
applicable securities laws, such information is being provided to demonstrate the potential of the
Company and readers are cautioned that this information may not be appropriate for any other
purpose. Future-oriented financial information and financial outlook, as with forward-looking
information generally, are based on current assumptions and subject to risks, uncertainties and
other factors. Furthermore, unless otherwise stated, the forward-looking information contained in
this MD&A are made as of the date of this MD&A, and we have no intention and undertake no
obligation to update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise, except (i) as required under applicable securities laws in
Canada and (ii) to provide updates in our annual MD&A for each fiscal year up to and including
that in respect of Fiscal 2019 on our growth targets disclosed in our final prospectus (the
“Prospectus”) dated October 18, 2017 in respect of our IPO, including to provide information on
our growth targets disclosed in such Prospectus, actual results and a discussion of material
variances from our growth targets. The forward-looking statements contained in this MD&A are
expressly qualified by this cautionary statement.

Overview

Established in 1973, Roots is an iconic lifestyle brand with a rich Canadian heritage and a portfolio
of premium apparel, leather goods, accessories and footwear. The design of our products is
driven by global consumer insights, and supported by our flexible sourcing network, proven
distribution footprint and Canadian leather manufacturing facility. Through our omni-channel
footprint of 116 corporate retail stores in Canada, three corporate retail stores in the United States,
110 partner-operated stores in Taiwan, 32 partner-operated stores in China and our e-commerce
platform, we are able to reach a broad cross-section of global consumers. Our products are worn
by young professionals, students, families, athletes and entertainment icons.

On October 14, 2015, Searchlight Capital Partners, L.P. (“Searchlight”) incorporated Roots
Corporation under the laws of Canada and its subsidiary, Roots USA Corporation, under the laws
of the State of Delaware. Pursuant to a purchase and sale agreement dated October 21, 2015,
Roots and its subsidiaries acquired substantially all of the assets of Roots Canada Ltd., Roots
U.S.A., Inc., Roots America L.P., entities controlled by our founders Michael Budman and Don
Green (the “Founders”), and all of the issued and outstanding shares of Roots International ULC,
effective December 1, 2015 (the “Acquisition”).

Initial Public Offering

On October 25, 2017, we successfully completed our initial public offering (the “IPO”) of our
common shares (the “Shares”) at a price of $12.00 per Share through a secondary sale of Shares
by our principal shareholders. Our principal shareholders sold 16,667,000 Shares under the IPO

for total gross proceeds of $200,004 for the selling shareholders. The Company did not receive
any of the proceeds from the IPO.

The Shares are listed for trading on the Toronto Stock Exchange (“TSX”) under the trading symbol
“ROOT”.

In connection with and immediately prior to closing of the IPO, all outstanding Class A Shares,
Class B Shares, options and restricted share units (“RSUs”) were effectively consolidated on a
0.214193-to-one basis into Shares or securities exercisable for Shares.

Factors Affecting our Performance

We believe that our performance and future success depend on a number of factors that present
significant opportunities for us. These factors are also subject to a number of inherent risks and
challenges, some of which we discuss below. See also the “Risks and Uncertainties” section of
this MD&A and the “Risk Factors” section of our AIF.

Our Brand

Roots is an iconic brand with a rich Canadian heritage and a portfolio of premium apparel, leather
goods, accessories and footwear products. Our brand is well known in Canada and Taiwan, with
growing customer awareness internationally. Maintaining and growing our brand awareness is
critical to our continued success. Any loss of brand appeal from factors such as changing
consumer trends and increased competition may adversely affect our business and financial
results. To address this, we intend to continue our relentless focus on the customer with insights-
driven designs, while leveraging recent operational investments, pursuing continued growth in
Canada, expanding our United States and international footprint and deepening our leather and
footwear product offerings to continue to attract customers in both existing and new markets.

Growth in our Omni-Channel Business

The success of our business is heavily dependent on our ability to continue to drive strong
comparable sales in our DTC segment and grow our omni-channel footprint. This includes
renovating and expanding our existing corporate retail stores, optimizing our e-commerce
capabilities and selectively expanding our store base in both Canada and the United States. Our
ability to successfully execute on our omni-channel strategy is an important driver of our longer-
term growth.

Growth in the Business of our International Operating Partners

The success of our business is dependent on the performance of our international operating
partner’s retail operations. Our ability to continue to recognize wholesale sales of Roots-branded
products to our partner and to generate royalty revenue from our partner’s retail sales of Roots-
branded products depends on our partner continuing to grow its business. Our partner’s ability to
successfully execute on its omni-channel strategy and our ability to support our partner in this
growth will impact the performance of our business. In addition, the success of our business is
dependent on our ability to develop successful relationships with other international operating
partners and support them in the growth of their retail and online sales of Roots-branded products.

Product Development

Summary of Financial Performance

We are not defined by one product, season, geography, or demographic. With nearly five decades
of product leadership, our product range is diversified across seasons and comprised of apparel,
leather goods, accessories and footwear. Serving as the foundation of our distinct identity, many
of our enduring icons have been in our product assortment for decades and remain favourites
among customers today. Our business will be affected by our ability to continue to develop
products that resonate with consumers. In this regard, we have made significant investments in
our merchandising team and have established a United Brand Range (“UBR”) initiative, which is
a consumer-focused merchandising strategy focused on building a more simplified and scalable
product assortment as well as a more consistent presentation that is coordinated across
collections and categories, that we expect will help us to continue supporting the growth of our
business. We also continue to introduce additional products to help mitigate the seasonal nature
of our business and expand our addressable geographic market.

Foreign Exchange

We generate the majority of our revenues in Canadian dollars, while a significant portion of our
cost of goods sold is denominated in U.S. dollars, which exposes us to fluctuations in foreign
currency exchange rates. This year, we entered into hedging arrangements to help mitigate the
risks associated with fluctuations in the U.S. dollar relative to the Canadian dollar. See “Financial
Instruments” for a further discussion of our hedging arrangements.

Seasonality

We experience seasonal fluctuations in the financial results of our retail business, as we generate
a meaningful portion of our sales and earnings in our third and fourth fiscal quarters. Our working
capital requirements generally increase in the periods preceding these peak periods, and it is not
uncommon for our EBITDA to be negative in the first two fiscal quarters. The average portion of
our annual sales generated during each quarter of a fiscal year over the last three completed
fiscal years is outlined in the following table:

First fiscal quarter . . . . . . . . . . . . . . . . . . . . . .
Second fiscal quarter . . . . . . . . . . . . . . . . . . .
Third fiscal quarter . . . . . . . . . . . . . . . . . . . . .
Fourth fiscal quarter . . . . . . . . . . . . . . . . . . . .
Annual Total. . . . . . . . . . . . . . . . . . . . . . . . . . .

15%
16%
28%
41%
100%

Segments

We report our results in two segments: (1) DTC and (2) Partners and Other. We measure each
reportable operating segment’s performance based on sales and segment gross profit. Our DTC
segment comprises sales through our corporate retail stores and e-commerce. Our Partners and
Other segment consists primarily of the wholesale of Roots-branded products to our international
operating partner and the royalties earned on the retail sales of Roots-branded products by our
partner. Our Partners and Other segment also consists of royalties earned through the licensing
of our brand to select manufacturing partners, the wholesale of Roots-branded products to select
retail partners, and the sale of custom Roots-branded products to select business clients.

Our DTC and Partners and Other segments contributed 87.1% and 12.9% of our sales,
respectively, in Fiscal 2017 (Fiscal 2016 – 86.7% and 13.3% of our sales, respectively).

We refer the reader to the sections entitled “Components of our Results of Operations and Trends
Affecting our Business” and “Cautionary Note Regarding Non-IFRS Measures and Industry
Metrics” in this MD&A for the definition of the items discussed below and, when applicable, to the
section entitled “Reconciliation of Non-IFRS Measures” for reconciliations of non-IFRS measures
with the most directly comparable IFRS measure.

The following table summarizes our results of operations for the periods indicated:

CAD $000s (except per share data)
Statement of Net Income Data:
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative expenses . . . . . . . . . .
Income (loss) before interest expense
and income taxes expense (recovery) . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings per share. . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings (loss) per share . . . . . . . . . . . . . . . . . . . .

Non-IFRS Measures and Other Performance Measures:
Corporate stores, end of period. . . . . . . . . . . . . . . . . . . . . .
Comparable sales growth(2) . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted DTC Gross Profit(2) . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted DTC Gross Margin(2). . . . . . . . . . . . . . . . . . . . . . .
Adjusted EBITDA(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted Net Income(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted Net Income per Share(2) . . . . . . . . . . . . . . . . . . . .
_______________
Note:

Q4 2017

Q4 2016

Fiscal 2017 Fiscal 2016 Fiscal 2015(1)

130,021
75,766
58.3%
45,878

29,888
20,861
$0.50
$0.49

119
15.1%
72,775
60.7%
36,706
24,646
$0.59

111,172
63,745
57.3%
37,883

25,862
17,194
$0.41
$0.41

117
9.3%
60,303
59.2%
31,602
20,203
$0.48

326,057
181,998
55.8%
151,867

30,131
17,501
$0.42
$0.41

119
12.1%
168,636
59.4%
52,634
29,137
$0.69

281,886
147,153
52.2%
129,490

17,663
8,185
$0.19
$0.19

117
8.3%
139,993
57.3%
41,578
21,477
$0.51

61,401

22,605
36.8%
25,737

(3,132)
(3,478)
$(0.02)
$(0.02)

114
16.8%
31,115
55.8%
13,835
8,438
$0.20

(1) Fiscal 2015 is attributable to the period from October 14, 2015 (date of incorporation) to January 30, 2016. While the financial statements presented
are for the period from October 14, 2015 to January 30, 2016, Roots had no financial activity prior to December 1, 2015 (date of the Acquisition).
(2) Comparable sales growth, Adjusted DTC Gross Profit, Adjusted DTC Gross Margin, Adjusted EBITDA, Adjusted Net Income, and Adjusted Net
Income per Share are non-IFRS measures. See “Cautionary Note Regarding Non-IFRS Measures and Industry Metrics” for a description of these
measures.

Selected Financial Results for Q4 2017 Compared to Q4 2016

• Total sales increased by $18,849, or 17.0%, to $130,021 in Q4 2017, from $111,172 in

Q4 2016.

• DTC sales increased by $17,941, or 17.6%, compared to Q4 2016.

• Partners and Other sales increased by $908, or 9.8%, in Q4 2017, compared to

Q4 2016.

• Comparable sales growth(1) was 15.1% for Q4 2017.

• Gross profit increased by $12,021, or 18.9%, to $75,766 in Q4 2017, from $63,745 in Q4

2016.

• DTC gross profit increased by $11,400, or 18.9%, to $71,703 in Q4 2017, and as
a percentage of sales (“gross margin”) increased to 59.9% in Q4 2017, from
59.2% in Q4 2016.

• Adjusted DTC Gross Profit(1) increased by $12,472, or 20.7%, to $72,775 in Q4
2017, and Adjusted DTC Gross Margin(1) increased to 60.7%, from 59.2% in Q4
2016.

• Selling, general, and administrative expenses (“SG&A expenses”) increased by $7,995,

or 21.1%, to $45,878 in Q4 2017, from $37,883 in Q4 2016.

• Adjusted EBITDA(1) increased by $5,104, or 16.2%, to $36,706 in Q4 2017, from $31,602

in Q4 2016.

• Net income increased by $3,667, or 21.3%, to $20,861 in Q4 2017, from $17,194 in Q4

2016.

• Adjusted Net Income(1)
$20,203 in Q4 2016.

increased by $4,443, or 22.0%, to $24,646 in Q4 2017, from

• Basic earnings per Share was $0.50 in Q4 2017, up 21.9% from $0.41 in Q4 2016.

• Adjusted Net Income per Share(1) was $0.59 in Q4 2017, up 22.9% from $0.48 in Q4 2016.

Selected Financial Results for Fiscal 2017 Compared to Fiscal 2016

• Total sales increased by $44,171, or 15.7%, to $326,057 in Fiscal 2017, from $281,886 in

Fiscal 2016.

• DTC sales increased by $39,778, or 16.3%, compared to Fiscal 2016.

• Partners and Other sales increased by $4,393, or 11.7%, compared to Fiscal 2016.

• Comparable sales growth(1) was 12.1% for Fiscal 2017.

• Gross profit increased by $34,845, or 23.7%, to $181,998 in Fiscal 2017, from $147,153

in Fiscal 2016.

• DTC gross profit increased by $33,346, or $24.8% to $167,546, and gross margin
increased to 59.0% in Fiscal 2017, from 57.3% in Fiscal 2016, excluding $5,775
from a fair value step-up of inventory from the Acquisition in Fiscal 2016 (Fiscal
2017: $nil).

• Adjusted DTC Gross Profit(1) increased by $28,643, or 20.5%, to $168,636 in Fiscal
2017, and Adjusted DTC Gross Margin(1) increased to 59.4% in Fiscal 2017, from
57.3% in Fiscal 2016.

• SG&A expenses increased by $22,377, or 17.3%, to $151,867 in Fiscal 2017, from

$129,490 in Fiscal 2016.

• Adjusted EBITDA(1)

increased by $11,056, or 26.6%, to $52,634 in Fiscal 2017, from
$41,578 in Fiscal 2016. Adjusted EBITDA was 16.1% of sales in Fiscal 2017, increasing
from 14.7% of sales in Fiscal 2016.

• Net income increased by $9,316, or 113.8%, to $17,501 in Fiscal 2017, from $8,185 in

Fiscal 2016.

• Adjusted Net Income(1) increased by $7,660, or 35.7%, to $29,137 in Fiscal 2017, from
$21,477 in Fiscal 2016. Adjusted Net Income was 8.9% of sales in Fiscal 2017, increasing
from 7.6% of sales in Fiscal 2016.

• Basic earnings per Share was $0.42 in Fiscal 2017, up 121% from $0.19 in Fiscal 2016.

• Adjusted Net Income per Share(1) was $0.69 in Fiscal 2017, up 35.3% from $0.51 in Fiscal

2016.

Key Operational Developments

Retail stores

We continue to execute on our strategy to grow our store network and optimize our existing retail
stores. During Fiscal 2017, we opened eight new stores, relocated four stores, and completed a
major renovation on one of our existing stores. In particular, during Q4 2017 we:

•

relocated and expanded our store at White Oaks Mall in London, Ontario on November 1,
2017;

opened our second enhanced experience store, which includes a selection of
customizable leather bags and awards jackets, as well as a heritage area, customer
lounge and many other features that add to the in-store shopping experience, located at
Pacific Centre Mall in Vancouver, British Columbia on November 8, 2017;

opened a new store at McAllister Place in Saint John, New Brunswick on February 1,
2018; and

closed three stores to better optimize our real estate portfolio.

The following table summarizes the change in our corporate store count for the periods indicated.

Number of stores, beginning of period . . . . . . . . . . . .
New stores . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Closed stores . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of stores, end of period . . . . . . . . . . . . . . .
Stores renovated or relocated . . . . . . . . . . . . . . . . . . .

Q4 2017

Q4 2016

Fiscal 2017

Fiscal 2016

120
2
3
119
1

116
2
1
117
1

117
8
6
119
5

114
5
2
117
8

E-commerce site

In Fiscal 2017, we rolled out our new storefront e-commerce site, introducing various new features
and functionality through scheduled phased releases. During the first phases, some of the new
features and functionality we introduced included: a new visual design, improved mobile
functionality and consumer-facing enhancements that simplify the online ordering process. We
completed our third phase rollout in March 2018, which included increased personalization
capabilities. We expect to complete our final phase by mid-Fiscal 2018.

Note:

(1) Comparable sales growth, Adjusted DTC Gross Profit, Adjusted DTC Gross Margin, Adjusted EBITDA, Adjusted Net Income,
and Adjusted Net Income per Share are non-IFRS measures. See “Cautionary Note Regarding Non-IFRS Measures and
Industry Metrics” for a description of these measures.

International Partnerships

Gross Profit

We continue to execute on our strategy to grow internationally. During Q4 2017, our international
partner opened two new partner-operated stores in Taiwan and three new partner-operated stores
in China. In total, we opened 13 net new partner-operated stores in Asia (Taiwan and China)
during Fiscal 2017.

Merchandising

We continued to execute against our broader merchandising strategy of bringing better products
to our customers, increasing productivity, improving buying and planning as well as bringing the
right products to the right stores. Our success on all of these fronts in the quarter are reflected in
our top line improvements, expanded gross margins and increased profitability.

Specifically, through our UBR initiative, we continued to build a more simplified and scalable
product assortment and consistent presentation across all channels. We reduced unproductive
SKUs in categories such as accessories and kids/toddler/baby, notably, resulting in year-over-
year sales and profitability gains. We also added SKUs in dresses, for example. As a result, we
realized accelerated sales and profitability growth in this category as well. Overall, we achieved
a 27% reduction in SKU count in the quarter compared to Q4 Fiscal 2016. We generated
increased efficiencies with the consolidation of our supplier base, reducing the number of ongoing
suppliers by over 30% since Fiscal 2016, and we decreased our sourcing costs by buying deeper
in our successful SKUs.

Components of our Results of Operations and Trends Affecting our Business

In assessing our results of operations and trends affecting our business, we consider a variety of
financial and operating measures that affect our operating results.

Sales

Sales in our DTC segment include sales through our corporate retail stores in North America and
through our e-commerce operations. Sales to customers through our corporate retail stores are
recognized at the time of purchase, net of a provision for returns. E-commerce sales are
recognized at the time of delivery, net of a provision for returns. The provision for returns is
estimated based on the last 12 months’ return rate for retail stores and e-commerce sales,
respectively.

Sales in our Partners and Other segment consist primarily of wholesale sales to our international
partner and other corporate customers, and royalty revenue earned from the retail sale of Roots-
branded products by our international partner and other third-party licensees. Wholesale sales
from the sale of goods is recognized when the significant risks and rewards of ownership of the
goods have passed to the customer which, depending on the specific contractual terms of each
customer, is either at the time of shipment or receipt. Contractually, our international partner and
wholesale partners are unable to return goods purchased from us. Royalty sales are earned and
recognized on an accrual basis in accordance with the various contractual agreements, based on
the financial results as reported by our international partner and other third-party licensees, and
when collectability is reasonably determined.

Gross profit is our sales less cost of goods sold. Cost of goods sold includes the cost of purchasing
our products from manufacturers, including direct purchase costs, freight costs, and duty and non-
refundable taxes. For select leather and footwear products manufactured by us in-house, cost of
goods sold includes the cost of manufacturing our products, including raw materials, direct labour
and overhead, plus freight costs. Cost of goods sold also includes variable distribution centre
costs incurred to prepare our inventory for sale. Gross margin measures our gross profit as a
percentage of sales.

The primary driver of our cost of goods sold is the cost of purchased products from our
manufacturers, which is predominantly sourced in U.S. dollars and Canadian dollars. In Fiscal
2017, we implemented a hedging program to manage our foreign currency risk related to U.S.
dollar inventory purchases. See “Financial Instruments”.

Selling, General and Administrative Expenses

SG&A expenses consist of selling costs to market and deliver our products to our consumers
through our DTC segment, depreciation of store and e-commerce assets, and costs incurred to
support the relationships with our retail partners and distributors through our Partners and Other
segment. SG&A expenses also include our marketing and brand investment activities, and the
corporate infrastructure required to support our ongoing business. In addition, in connection with
the IPO, we incurred transaction costs and, going forward, we anticipate an increase to
accounting, legal and professional fees associated with operating as a public company that will
be reflected in our SG&A expenses.

Selling costs as a percentage of sales is usually higher in the lower-volume first and second
quarters of a fiscal year, and lower in the higher-volume third and fourth quarters of a fiscal year
because a portion of these costs are relatively fixed. We expect our selling costs to increase as
we continue to open new stores, grow our e-commerce business and increase our marketing and
brand investment activities.

General and administrative expenses represent costs incurred in our corporate offices, primarily
related to personnel costs, including salaries, variable-incentive compensation, benefits, share-
based compensation, and marketing costs. It also includes depreciation and amortization
expenses for all office support assets and intangible assets.

We have invested heavily to support the growing volume and complexity of our business and
anticipate continuing to do so in the future. As we continue to grow, we anticipate that we will be
able to scale our investments and leverage our fixed costs.

Foreign exchange gains and losses, excluding changes in the fair value of foreign currency
forward contracts (see “Financial Instruments”) are recorded in SG&A expenses and comprise
translation of monetary assets and liabilities denominated in currencies other than the functional
currency of the entity.

Interest Expense

Interest expense relates to our Credit Facilities. See “Indebtedness”.

Income Taxes

We are subject to income taxes in the jurisdictions in which we operate and, consequently, income
taxes expense or recovery is a function of the allocation of taxable income by jurisdiction and the
various activities that impact the timing of taxable events. The primary regions that determine the
effective tax rate are Canada and the United States. Over the long-term, we expect our annual
effective income tax rate to be, on average, approximately 27%, subject to changes to income tax
rates and legislation in the jurisdictions in which we operate.

Selected Consolidated Financial Information

The following table summarizes our recent results of operations for the periods indicated. The
selected consolidated financial information set out below for Fiscal 2017 and Fiscal 2016 has
been derived from our Annual Financial Statements. The selected consolidated financial
information set out below for Q4 2017 and Q4 2016 is unaudited.

CAD $000s

Sales
Cost of goods sold

Gross Profit

Q4 2017

Q4 2016

Fiscal 2017

Fiscal 2016

130,021
54,255

75,766

111,172
47,427

63,745

326,057
144,059

181,998

281,886
134,733

147,153

Selling, general and administrative expenses

45,878

37,883

151,867

129,490

Income before interest expense and income

taxes expense

Interest expense

Income before taxes

Income taxes expense

Net income

29,888

25,862

30,131

17,663

1,197

28,691

1,597

24,265

5,728

24,403

7,830

7,071

6,902

20,861

17,194

17,501

6,112

11,551

3,366

8,185

Basic earnings per Share(1)

$0.50

$0.41

$0.42

$0.19

The following table provides selected financial information for the periods indicated:

Consolidated Statement of Financial Position Data:

CAD $000s (except per Share amounts)
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distributions declared per Share(1)
. . . . . . . . . . . . . . . . . . . . . . . .
____________
Note:

As at February
3, 2018
$49,216
293,635
35,759
108,119
$0.48

As at January
28, 2017
$64,458
292,985
31,374
124,885
-

As at January
30, 2016
$54,403
289,205
27,800
123,533
-

(1) Calculated based on the number of outstanding Shares as if the Pre-Closing Capital Changes were implemented at the start of
the period. At the time of distribution, prior to the Pre-Closing Capital Changes, the equivalent distributions per Share was $0.10.

Results of Operations

Analysis of Results for Q4 2017 to Q4 2016 and Fiscal 2017 to Fiscal 2016

The following section provides an overview of our financial performance during Q4 2017
compared to Q4 2016 and during Fiscal 2017 compared to Fiscal 2016.

Sales

The following table presents our sales by segment for each of the periods indicated:

CAD $000s
DTC . . . . . . . . . . . . . . . . . . . . . . . . . . .
Partners and Other . . . . . . . . . . . . . . .

Total Sales . . . . . . . . . . . . . . . . . . . . .

Q4 2017

Q4 2016

% Change

119,805
10,216

130,021

101,864
9,308

111,172

17.6%

9.8%

17.0%

Fiscal 2017
284,131
41,926

326,057

Fiscal 2016 % Change

244,353
37,533

281,886

16.3%

11.7%

15.7%

Total sales were $130,021 in Q4 2017 as compared to $111,172 in Q4 2016, representing an
increase of $18,849, or 17.0%.

DTC sales increased $17,941, or 17.6%, in Q4 2017 as compared to Q4 2016. The year-over-
year growth in DTC sales was primarily driven by comparable sales growth of 15.1%, the opening
of two net new stores since Q4 2016 and the benefit of the 53rd week of Fiscal 2017, which
accounted for $3,074 in DTC sales.

Sales in the Partners and Other segment increased by $908, or 9.8%, in Q4 2017 as compared
to Q4 2016, primarily driven by the opening of 13 net new stores in Asia (Taiwan and China) by
our international partner since Q4 2016. The growth in sales in the Partners and Other segment,
largely denominated in U.S. dollars, was partially offset by the weaker U.S. dollar as compared to
the Canadian dollar in Q4 2017 (average effective exchange rate of 1.26) compared to Q4 2016
(average effective exchange rate of 1.33). If the exchange rate had been 1.33 during the period,
Q4 2017 sales in the Partners and Other segment would have increased by $1,354, or 14.5%, as
compared to Q4 2016.

Total sales were $326,057 in Fiscal 2017 as compared to $281,886 in Fiscal 2016, representing
an increase of $44,171, or 15.7%.

Fiscal 2017 sales in the DTC segment increased by $39,778, or 16.3%, as compared to Fiscal
2016. The year-over-year growth in DTC sales was primarily driven by comparable sales growth
of 12.1%, the opening of two net new stores and the benefit of the 53rd week of Fiscal 2017.

Sales in the Partners and Other segment increased by $4,393, or 11.7%, during Fiscal 2017 as
compared to Fiscal 2016, primarily driven by the opening of 13 net new stores in Asia (Taiwan
and China) by our international partner during Fiscal 2017. The growth in sales in the Partners
and Other segment, largely denominated in U.S. dollars, was partially offset by the weaker U.S.
dollar as compared to the Canadian dollar during Fiscal 2017 (average effective exchange rate
of 1.28) compared to Fiscal 2016 (average effective exchange rate of 1.32). If the exchange rate
had been 1.32 during the period, Fiscal 2017 sales in the Partners and Other segment would
have increased by $5,308, or 14.1%, as compared to Fiscal 2016.

Gross Profit

Selling, General and Administrative Expenses

The following tables presents our gross profit and gross margin by segment for each of the periods
indicated:

CAD $000s
DTC . . . . . . . . . . . . . . . . . . . . . . . . . . .
Partners and Other . . . . . . . . . . . . . . .

Total Gross Profit. . . . . . . . . . . . . . . .

Q4 2017

Q4 2016

% Change

71,703
4,063

75,766

60,303
3,442

63,745

18.9%

18.0%

18.9%

Fiscal 2017
167,564
14,434

181,998

Fiscal 2016 % Change

134,218
12,935

147,153

24.8%

11.6%

23.7%

Gross profit as a percentage
of sales
DTC . . . . . . . . . . . . . . . . . . . . . . . . . . .
Partners and Other . . . . . . . . . . . . . . .

Total Gross Margin . . . . . . . . . . . . . .

Q4 2017

Q4 2016

59.9%
39.8%

58.3%

59.2%
37.0%

57.3%

Fiscal 2017
59.0%
34.4%

Fiscal 2016
54.9%
34.5%

55.8%

52.2%

Gross profit was $75,766 in Q4 2017, as compared to $63,745 in Q4 2016, representing an
increase of $12,021, or 18.9%.

Gross profit in the DTC segment increased $11,400, or 18.9%, in Q4 2017 as compared to Q4
2016. The increase in gross profit in the DTC segment was primarily driven by the sales growth
in Q4 2017, a higher gross margin and the benefit of the 53rd week. Gross margin was 59.9% in
Q4 2017, up compared to 59.2% in Q4 2016, primarily as a result of product costing, largely as a
result of our UBR initiative, favourable foreign exchange rates on goods purchased in U.S. dollars
and a more favourable product mix of higher margin items, partially offset by a $1,072 inventory
write down related to certain existing footwear raw materials that will be edited out as part of our
upcoming footwear re-launch expected in the third quarter of 2018.

Gross profit in the Partners and Other segment increased by 18.0%, or $621, in Q4 2017 as
compared to Q4 2016. The growth in gross profit in the Partners and Other segment was primarily
driven by an increase in sales to our international operating partner.

Gross profit was $181,998 in Fiscal 2017 as compared to $147,153 in Fiscal 2016, representing
an increase of $34,845, or 23.7%.

Gross profit in the DTC segment increased by $33,346, or 24.8%, during Fiscal 2017 as compared
to Fiscal 2016. Excluding $5,775 from a fair value step-up of inventory from the Acquisition in
Fiscal 2016 (Fiscal 2017: $nil), gross profit in the DTC segment increased $27,571, or 19.7%,
during Fiscal 2017 as compared to Fiscal 2016. Excluding the fair value step-up of inventory from
the Acquisition, the increase in gross profit in the DTC segment was primarily driven by sales
growth during Fiscal 2017, gross margin of 59.0% in Fiscal 2017 as compared to 57.3% in Fiscal
2016 and the impact of the 53rd week. The increase in gross margin was primarily driven by
improved product costing, largely as a result of our UBR initiative, favourable foreign exchange
rates on goods purchased in U.S. dollars and a more favourable product mix of higher margin
items, partially offset by a $1,072 inventory write down related to certain existing footwear raw
materials that will be edited out as part of our upcoming footwear re-launch expected in the third
quarter of 2018.

Gross profit in the Partners and Other segment increased by or $1,499, or 11.6%, during Fiscal
2017 as compared to Fiscal 2016, primarily driven by growth in sales to our international operating
partner.

SG&A expenses were $45,878 in Q4 2017 as compared to $37,883 in Q4 2016, representing an
increase of $7,995, or 21.1%. This increase primarily reflects selling costs increasing by $4,000,
or 14.6%, in Q4 2017 as compared to Q4 2016, driven by growth in sales, a rise in occupancy
costs, higher personnel costs relating to net new store openings, and greater shipping costs from
the growth of e-commerce sales. General and administrative costs increased by $3,995, or
38.0%, in Q4 2017 as compared to Q4 2016. Excluding $230 of costs incurred in relation to the
IPO during Q4 2017, general and administrative costs increased by $3,765, or 35.9%, primarily
driven by higher advertising investments to support branding and increased head office
headcount. The increase in SG&A expenses was also driven by the 53rd week in Fiscal 2017.

SG&A expenses were $151,867 during Fiscal 2017 as compared to $129,490 in Fiscal 2016,
representing an increase of $22,377, or 17.3%. This increase primarily reflects selling costs
increasing by $9,377, or 10.2%, in Fiscal 2017 as compared to Fiscal 2016, driven by the growth
in sales, a rise in occupancy costs, higher personnel costs relating to net new store openings,
and greater shipping costs from the growth of e-commerce sales. General and administrative
costs increased by $13,000, or 34.3%, in Fiscal 2017 as compared to Fiscal 2016. Excluding
$3,733 of costs incurred in relation to the IPO in Fiscal 2017, general and administrative costs
increased by $9,267, or 24.5%, driven by higher advertising investments to support branding and
increased head office headcount. The increase in SG&A expenses was also driven by the 53rd
week in Fiscal 2017.

Interest Expense

Interest expense was $1,197 in Q4 2017 as compared to $1,597 in Q4 2016, representing a
decrease of $400, or 25.0%. During Fiscal 2017, interest expense was $5,728 as compared to
$6,112 in Fiscal 2016, representing a decrease of $384, or 6.3%. The decrease in interest
expense related primarily to lower debt from repayment of the Term Credit Facility, and lower
effective interest rates charged on the Credit Facilities as a result of the amendments made to
the Credit Agreement and lowering our Trailing Leverage Multiple since Fiscal 2016. See
“Indebtedness”.

Income Taxes Expense

Income taxes expense was $7,830 in Q4 2017 as compared to $7,071 in Q4 2016, representing
an increase of $759, or 10.7%. The effective tax rate for Q4 2017 was 27.3% as compared to
29.1% in Q4 2016. During Fiscal 2017, income taxes expense was $6,902 as compared to $3,366
in Fiscal 2016, representing an increase of $3,536, or 105.1%. The effective income tax rate
during Fiscal 2017 was 28.3% as compared to 29.1% in Fiscal 2016. The decrease in the effective
income tax rate is primarily attributable to fewer non-deductible expenses incurred in Q4 2017
and Fiscal 2017, as compared to Q4 2016 and Fiscal 2016, respectively.

Net Income

Net income was $20,861 in Q4 2017 as compared to $17,194 in Q4 2016, representing an
increase of $3,667, or 21.3%. During Fiscal 2017, net income was $17,501 as compared to $8,185
in Fiscal 2016, representing an increase of $9,316, or 113.8%. The increase in net income results
from the factors described above.

Quarterly Financial Information

Reconciliation of Non-IFRS Measures

The following table summarizes the results of our operations for the eight most recently completed
fiscal quarters. This unaudited quarterly information, other than comparable sales growth, has
been prepared in accordance with IFRS. Due to seasonality, the results of operations for any
quarter are not necessarily indicative of the results of operations for the fiscal year.

CAD $000s (except per Share data) Q4 2017 Q3 2017 Q2 2017 Q1 2017 Q4 2016 Q3 2016 Q2 2016 Q1 2016
(Unaudited)
Sales
Net Income (Loss) . . . . . . . . . . . . . .
Net Earnings (Loss) per Share:

130,021
20,861

111,172
17,194

58,115
(3,226)

46,588
(4,962)

48,231
(5,113)

79,384
5,903

89,690
4,979

44,742
(9,950)

Basic earnings per Share(1) . . . . . .
Diluted earnings per Share(1) . . . . .

$ 0.50
$ 0.49

$ 0.12
$ 0.12

$ (0.08)
$ (0.08)

$ (0.12)
$ (0.12)

$ 0.41
$ 0.41

$ 0.14
$ 0.14

$ (0.12)
$ (0.12)

$ (0.24)
$ (0.24)

Other Performance Measures

Comparable sales growth. . . . . . . .
Corporate stores, end of period . . .

15.1%
119

10.1%
120

16.3%
120

3.3%
118

9.3%
117

2.7%
116

11.9%
114

13.3%
114

____________
Note:

(1)

Basic and diluted earnings per Share are presented as if the Pre-Closing Capital Changes had been effected during all periods presented. See
“Share Information – Prior to Completion of IPO”.

Summary of Non-IFRS Measures

The table below illustrates our Adjusted DTC Gross Profit, Adjusted DTC Gross Margin, EBITDA,
Adjusted EBITDA, Adjusted Net Income and Adjusted Net Income per Share for the periods
presented:

CAD $000s (except per Share data)
Adjusted DTC Gross Profit . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted DTC Gross Margin . . . . . . . . . . . . . . . . . . . . . . . .
EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted Net Income per Share(1) . . . . . . . . . . . . . . . . . . . .
____________
Note:

Q4 2017

Q4 2016

Fiscal 2017

Fiscal 2016

72,775
60.7%
32,731
36,706
24,646
$0.59

60,303
59.2%
28,580
31,602
20,203
$0.48

168,636
59.4%
41,017
52,634
29,137
$0.69

139,993
57.3%
27,466
41,578
21,477
$0.51

(1)

Adjusted Net Income per Share is presented as if the Pre-Closing Capital Changes was effected in all periods presented. See “Share Information
– Prior to Completion of IPO”.

See “Cautionary Note Regarding Non-IFRS Measures and Industry Metrics”.

The tables below provide a reconciliation of DTC gross profit to Adjusted DTC Gross Profit, and
net income to EBITDA, Adjusted EBITDA, and Adjusted Net Income for the periods presented:

CAD $000s
DTC Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add the impact of:

COGS: Purchase accounting adjustments (a) . . . . . . . .
COGS: Write-off of footwear raw materials (b) . . . . . . . . .

DTC Adjusted Gross Profit. . . . . . . . . . . . . . . . . . . . . . . . .

Q4 2017

Q4 2016

Fiscal 2017

Fiscal 2016

71,703

-
1,072

72,775

60,303

167,564

134,218

-
-

-
1,072

5,775
-

60,303

168,636

139,993

CAD $000s
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add the impact of:
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . .

EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add the impact of:

Q4 2017

Q4 2016

Fiscal 2017

Fiscal 2016

20,861

1,197
7,830
2,843

32,731

206
1,072
230
6
108
1,281
443
373
256

17,194

1,597
7,071
2,718

28,580

358
-
-
695
10
987
127
453
392

17,501

5,728
6,902
10,886

41,017

907
1,072
3,733
1,223
137
1,281
1,026
1,391
847

8,185

6,112
3,366
9,803

27,466

7,096
-
-
1,775
315
987
474
1,843
1,622

Adjusted EBITDA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

36,706

31,602

52,634

41,578

CAD $000s
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q4 2017

Q4 2016

Fiscal 2017

Fiscal 2016

20,861

17,194

17,501

8,185

Add the impact of:

COGS/SG&A: Purchase accounting adjustments (a) . . .
COGS: Write-off of footwear raw materials (b) . . . . . . . .
SG&A: IPO transaction costs (c) . . . . . . . . . . . . . . . . . . .
SG&A: Shareholder fees and related costs (d) . . . . . . . .
SG&A: Acquisition transaction costs (e) . . . . . . . . . . . . .
SG&A: Fixed asset impairments (f) . . . . . . . . . . . . . . . . .
SG&A: Stock option expense (g) . . . . . . . . . . . . . . . . . . .
SG&A: Other non-recurring items (h) . . . . . . . . . . . . . . .
SG&A: Non-cash rent adjustments (i) . . . . . . . . . . . . . . .
SG&A: Amortization of intangible assets acquired by
Searchlight (j) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect of adjustments . . . . . . . . . . . . . . . . . . . . . . . . .

Adjusted Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

_______________
Notes:

206
1,072
230
6
108
1,281
443
373
256

1,024

4,999
(1,214)

24,646

358
-
-
695
10
987
127
453
392

1,033

4,055
(1,046)

20,203

907
1,072
3,733
1,223
137
1,281
1,026
1,391
847

3,871

15,488
(3,852)

29,137

7,096
-
-
1,775
315
987
474
1,843
1,622

3,808

17,920
(4,628)

21,477

(a)

In connection with the Acquisition, we recognized acquired inventory at fair value in accordance with IFRS 3, business
combinations (“IFRS 3”), which included a mark-up for profit. Recording inventory at fair value in purchase accounting had the
effect of increasing inventory and therefore will increase cost of goods sold in subsequent periods as compared to the amounts

we would have recognized if inventory was sold through at cost. This inventory was sold in the period from October 14, 2015 to
January 30, 2016, and Fiscal 2016, and has impacted net income and EBITDA during those periods. As a result of the Acquisition,
we also recognized an intangible asset for lease arrangements in the amount of $6,310, which is amortized over the life of the
leases and included in SG&A expenses. In our view, these costs do not reflect the underlying profitability of the business and
would reduce the ability to compare such underlying results to historical periods prior to the Acquisition.

(b) As part of our upcoming footwear re-launch expected in the third quarter of 2018, we are shifting our in-house production to a
leading manufacturer of quality footwear products worldwide. As a result, we incurred a one-time write-off against raw material
inventory related to certain existing footwear styles that will be edited out of our line as part of the upcoming footwear re-launch.
Management is of the view that this write-off is infrequent in nature, and does not reflect the underlying profitability of the business
and the inclusion would, therefore, reduce the ability to compare such underlying results to historical periods.

(c)

In connection with the IPO, we incurred expenses related to professional fees, legal, consulting, accounting, and travel that would
otherwise not have been incurred and are not recurring.

(d) Represents the amount paid pursuant to the management agreement with Searchlight and consulting agreements with the
Founders and certain of their family members for ongoing consulting and other services. Subsequent to the IPO, the management
agreement and Founder consulting services were terminated, and neither Searchlight nor the Founders and their family members
will receive these fees from us in relation thereto going forward. See “Related Party Transactions”.

(e)

In connection with the Acquisition, we incurred expenses related to professional fees, legal, consulting, and accounting that
would otherwise not have been incurred and are not recurring.

(f) Represents an impairment charge taken against certain leasehold improvements for stores where the forecast cash flows were

deemed to be below the carrying value.

(g) Represents non-cash share-based compensation expense in respect of our Legacy Equity Incentive Plan and Legacy Employee
Option Plan. The options granted under the Legacy Equity Incentive Plan and the Legacy Employee Option Plan were one-time
events as part of putting in place and incentivizing our management team following the Acquisition. No additional options will be
granted under the Legacy Equity Incentive Plan and the Legacy Employee Option Plan following the IPO.

(h) Predominately represents expenses incurred in respect of the following matters: (i) one-time recruitment costs incurred as part
of the Company’s initial efforts to put in place its current senior management team, namely the Chief Executive Officer (“CEO”),
the Chief Financial Officer (“CFO”) and the Chief Merchandising Officer; (ii) consulting costs in respect of the Company’s UBR
initiative relating to a non-recurring project to focus the Roots brand and streamline our product offering; and (iii) consulting fees
in respect of the Company’s distribution center capacity and expansion study relating to a project that began in late-2016 and is
expected to be completed by 2019. These costs have been identified as one-time costs incurred in conjunction with the
Acquisition and the implementation of a new senior management team. Management has determined that each of the above
projects are non-recurring or infrequent in nature and, accordingly, such matters do not reflect the underlying profitability of the
business and their inclusion would, therefore, reduce the ability to compare such underlying results to historical periods.

(i) Under IFRS, we are required to recognize rent expense on a straight-line basis over the life of the lease. This adjustment removes

the portion of the straight-line rent adjustment that is non-cash expense in the applicable financial period.

(j)

As a result of the Acquisition, intangibles relating to customer relationships of $7,766 with a useful life of 10 years and licensing
arrangements of $25,910 with useful lives ranging from four to 13 years were recognized in accordance with IFRS 3. The
amortization expense resulting from the recognition of these intangible assets are non-cash in nature and are a direct result of
the Acquisition. If the Acquisition had not occurred, such intangibles would not have been recognized and, consequently, the
associated expenses would not have been incurred. Management is of the view that these costs do not reflect the underlying
profitability of the business and would, therefore, reduce the ability to compare such underlying results to historical periods prior
to the Acquisition.

Financial Condition, Liquidity and Capital Resources

Overview

We principally use our funds for operating expenses, capital expenditures and debt service
requirements. We believe that cash generated from operations, together with amounts available
under our Credit Facilities, will be sufficient to meet our future operating expenses, capital
expenditures and future debt service requirements. In addition, we believe that our capital
structure provides us with significant financial flexibility to pursue our future growth strategies.
However, our ability to fund operating expenses, capital expenditures and future debt service
requirements will depend on, among other things, our future operating performance, which will be
affected by general economic, financial and other factors, including factors beyond our control.
See “Risks and Uncertainties” and “Factors Affecting our Performance” for additional information.
26

Cash Flows

The following table presents our cash flows for each of the periods presented:

CAD$000s
Net cash generated from operating activities . . . . . . . . . .

Net cash generated used in financing activities . . . . . . . .

Net cash used in investing activities . . . . . . . . . . . . . . . . .

Change in cash and bank indebtedness . . . . . . . . . . .

Q4 2017

Q4 2016

Fiscal 2017

Fiscal 2016

43,790

(33,577)

(3,842)

6,371

40,926

(12,388)

(4,390)

24,148

29,652

(40,856)

(12,244)

(23,448)

30,068

(3,913)

(12,049)

14,106

Analysis of Cash Flows for Q4 2017 and Fiscal 2017 compared to Q4 2016 and Fiscal 2016

Cash Flows from Operating Activities

For Q4 2017 and Fiscal 2017, cash flows from operating activities totalled $43,790 and $29,652,
respectively, compared to $40,926 and $30,068 in Q4 2016 and Fiscal 2016, respectively. The
increase in cash flows from operating activities in Q4 2017, compared to Q4 2016, is attributable
to higher income levels, partially offset by greater investments in working capital and taxes paid.
The decrease in cash flows from operating activities in Fiscal 2017, compared to Fiscal 2016, is
attributable to greater investments in working capital and taxes paid, partially offset by higher
income levels.

Cash Flows used in Financing Activities

For Q4 2017 and Fiscal 2017, cash flows used in financing activities amounted to $33,577 and
$40,856, respectively, compared to $12,388 and $3,913 in Q4 2016 and Fiscal 2016, respectively.
This change is driven by the one-time shareholder distribution in the amount of $20,000 in the
second quarter of 2017, scheduled repayments on our Term Credit Facility of $9,654 (Fiscal 2016
- $4,163), timing of drawings from our Revolving Credit Facility and subsequent repayments within
each period, and voluntary early repayments on our Term Credit Facility in the amount of $10,000
in the fourth quarter of 2017 (Fiscal 2016 - $nil).

Cash Flows used in Investing Activities

For Q4 2017 and Fiscal 2017, cash flows used in investing activities amounted to $3,842 and
$12,244, respectively, compared to $4,390 and $12,049 in Q4 2016 and Fiscal 2016, respectively.
The changes reflect our continued investment in our DTC segment, primarily through new store
openings and renovations and relocations of existing stores.

Indebtedness

On December 1, 2015, the Company entered into a secured credit agreement (the “Credit
Agreement”) with a syndicate of lenders to obtain an initial term loan (the “Term Credit Facility”)
for an aggregate principal amount not exceeding $111,000 and a revolving credit loan (the
“Revolving Credit Facility”) not exceeding $25,000, less the aggregate swing line loan of $5,000
(together, the “Credit Facilities”).

On April 19, 2017, the Company amended the Credit Agreement to increase the availability under
the Revolving Credit Facility to an amount not exceeding $50,000, less the aggregate swing line
loan of $10,000.

On September 6, 2017, the Company further amended and extended the Credit Facilities. The
Credit Facilities, as amended, are comprised of (i) the Revolving Credit Facility in the amount of
$50,000 and (ii) an approximately $100,000 Term Credit Facility, both bearing interest in
accordance with the Trailing Leverage Multiple and maturing on September 6, 2022.

The Credit Facilities include an accordion feature in the amount of $25,000 and bear interest
according to the type of borrowing advanced, which may be based on a reference rate of the U.S.
base rate or the Canadian prime rate, plus a margin that ranges from 100 to 225 basis points
(bps) or the LIBOR rate or bankers’ acceptances rate, plus a margin that ranges from 200 to 325
bps. The applicable margins are derived from our senior leverage ratio, as follows: (i) where the
U.S. base rate or a Canadian prime rate is used, the margins range from 100 bps at less than
2.0x senior leverage ratio, to 225 bps at greater than or equal to 3.5x senior leverage ratio; and
(ii) where the LIBOR rate or bankers’ acceptances rate is used, the margins range from 200 bps
at less than 2.0x senior leverage ratio, to 325 bps at greater than or equal to 3.5x senior leverage
ratio (the “Trailing Leverage Multiple”).

The Company has financial and non-financial covenants under the Credit Facilities. The key
financial covenants include covenants for consolidated debt to Adjusted EBITDA ratio, total debt
to Adjusted EBITDA ratio, and fixed charge coverage ratio. As at the end of Fiscal 2017, the
Company was in compliance with such covenants.

The following table sets out the mandatory repayment of the Credit Facilities over the next five
years:

CAD $000s
Within 1 year. . . . . . . . . . . . . . . . .
Within 1 - 2 years. . . . . . . . . . . . .
Within 2 - 3 years. . . . . . . . . . . . .
Within 3 - 4 years. . . . . . . . . . . . .
Within 4 - 5 years. . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . .

Term
Credit Facility

4,984
4,984
4,984
4,984
67,247
87,183

Revolving
Credit Facility
-
-
-
-
-
-

Contractual Obligations and Off-Balance Sheet Arrangements

The following table summarizes our significant contractual obligations and other obligations as
well as our off-balance sheet arrangements as at February 3, 2018:

CAD$000s
Term Credit Facility (1) . . . . . . . .
Interest commitments relating
to long-term debt (2) . . . . . . . . . .
Net settlement of foreign
currency forward contracts (3). .
Operating leases (4) . . . . . . . . . .
Finance leases . . . . . . . . . . . . .
Inventory purchase
commitments (5) . . . . . . . . . . . . .
Total commitments and
obligations. . . . . . . . . . . . . . . . .
__________
Notes:

FY 2018

4,984

FY 2019 FY 2020 FY 2021 FY 2022 Thereafter
-

67,247

4,984

Total
87,183

3,088

2,908

2,728

2,547

1,401

12,672

1,241
24,312
338

63,798

-
23,866
338

-
21,231
153

-
18,299
25

-
16,094
9

-
52,470
-

1,241
156,272
863

63,798

97,761

32,096

29,095

25,856

84,751

52,470

322,029

(1)

The repayment of the Term Credit Facility may occur prior to the mandatory repayment time if certain events occur and/or at the discretion of the
Company.

(2)

Based on the interest rate in effect as at February 3, 2018, and assuming no prepayments are made to the Term Credit Facility.

(3) Obligation arising from the settlement of outstanding foreign currency forward contracts based on the U.S. dollar-Canadian dollar foreign exchange

rate on February 3, 2018 of 1.24.

(4) Operating leases for certain of our premises include renewal options, rent escalation clauses, variable rent, and rent-free periods. The operating
lease commitment reflects minimum annual commitments for our operating leases on those premises, excluding renewal options and variable rent.

(5)

Inventory purchase commitments reflect the cost of outstanding inventory purchases ordered from our vendors and expected to be received within
the period. Inventory purchases are part of the normal course of our business and will be primarily funded through sales in our DTC segment.

Due to the seasonal fluctuations of our retail business (see “Seasonality”), our cash position may
be lower during the first two fiscal quarters when working capital requirements peak and will
generally increase in the third and fourth quarters. Historically, contractual obligations and
commitments during the first two fiscal quarters were funded primarily through draws on our
Revolving Credit Facility (see “Indebtedness”), and, to a lesser extent, sales generated from our
operations and our management of working capital. In the third and fourth fiscal quarters, we have
historically generated sufficient cash flow from operations to fund our remaining contractual
obligations and commitments and to repay any draws on our Revolving Credit Facility during the
first two fiscal quarters. We will continue to fund our upcoming commitments and obligations
through the use of our Revolving Credit Facility and cash flow from operations. We believe that
we will continue to generate sufficient cash flow from operations over the course of a fiscal year
to fund our contractual obligations and commitments and the cost of our growth and development
activities incurred during such fiscal year.

Financial Instruments

Commencing in Fiscal 2017, we have designated foreign currency forward contracts in a cash
flow hedge to manage our exposure to certain U.S. dollar denominated purchases. At the
inception of a hedging relationship, the Company designates and formally documents the
relationship between the hedging instrument and the hedged item, the risk management
objective, and the strategy in undertaking the hedge transaction. At inception and each fiscal
quarter-end thereafter, the Company formally assesses effectiveness of the cash flow hedges.

To the extent the hedging relationship is assessed as effective, the change in the fair value of the
foreign currency forward contracts, net of taxes, is recognized in other comprehensive income
(loss) and presented in accumulated other comprehensive income (loss). Any ineffective portion

of changes in the fair value of the foreign currency forward contracts are recognized immediately
in net income.

Related Party Transactions

The fair value of foreign currency forward contracts is determined using a valuation technique that
employs the use of market observable inputs and based on the differences between the contract
rate and the market rates as at the period-end date, taking into consideration discounting to reflect
the time value of money.

As of February 3, 2018, the Company has recorded a derivative liability of $1,233, representing
foreign currency forward contracts to buy U.S. $52,315 at an average rate of 1.26. As at February
3, 2018, the exchange rate was 1.24.

All other financial assets and financial liabilities are measured at amortized cost using the effective
interest method.

Share Information - Prior to Completion of the IPO

Prior to the completion of the IPO, we were authorized to issue an unlimited number of Class A,
B and C Shares, with no par value. The Class A, B and C Shares were identical, except that the
aggregate number of votes attached to the Class B Shares, as a class, could at no times exceed
15% of the votes cast at a meeting of shareholders (allocated proportionately among all holders
of Class B Shares) and the Class C Shares did not contain voting rights. The Class A, B and C
Shares ranked pari passu in all respects, including the right to receive dividends and with respect
to any distribution of our assets.

Prior to completion of the IPO, there were 156,845,150 Class A Shares, 39,148,787 Class B
Shares, and no Class C Shares issued and outstanding. In addition there were 14,069,635
options and 74,627 RSUs, each representing a right to acquire one Class C Share, issued and
outstanding.

Pre-Closing Capital Changes

In connection with and immediately prior to closing of the IPO, all outstanding Class A Shares,
Class B Shares, options and RSUs were effectively consolidated on a 0.214193-to-one basis into
Shares or securities exercisable for Shares.

Current Share Information

Following the closing of the IPO, the Company granted 260,649 options under its Omnibus
Incentive Plan (the “Omnibus Plan”), comprised of both time-based options and performance-
based options. The options have a contractual life of 10 years. During Q4 2017, the Company
granted 40,000 time-based options under the Omnibus Plan.

As of February 3, 2018 and April 17, 2018, there were 41,980,500 Shares issued and outstanding
and no preferred shares issued and outstanding. In addition, there were 3,314,250 options and
15,985 RSUs outstanding under the Company’s Legacy Equity Incentive Plan, Legacy Employee
Option Plan, and Omnibus Plan. 212,791 options and 15,985 RSUs were vested as of such date.
Each option and RSU is, or will become, exercisable for one Share.

The Company’s related parties include key management personnel and key shareholders of the
Company, including other entities under common control. Investment funds managed by
Searchlight beneficially own approximately 47.7% of the total outstanding Shares and the
Founders beneficially own approximately 12.0% of the total outstanding Shares. All transactions
as described below are in the normal course of business and have been accounted for at their
exchange value.

As of February 3, 2018, we have incurred the following costs in connection with transactions
entered into with related parties:

CAD $000s

Q4 2017

Q4 2016

Fiscal 2017 Fiscal 2016

. . . . . . . . . . . . . . . . . . . .

Rent(1)
Consulting Fees(2)
Reimbursements(2)
Monitoring Fees(3)

. . . . . . . . .

197
-
6
-

195
117
18
560

786
267
35
921

796
567
148
1,060

____________
Notes:

(1) Our distribution facility and leather factory are each owned by entities controlled by the Founders and certain of their family
members. We have entered into lease arrangements in respect of these premises. The leather factory lease terminates on
November 30, 2018, with a right to extend the term for two further periods of five years each, and has an annual rent of $250.
The distribution facility lease terminates on November 30, 2018, with a right to extend the term for one further period of one year.
Annual rent in respect of the distribution facility is $535.

(2) Pursuant to consulting agreements dated December 1, 2015 between the Company and the Founders and certain of the
Founders’ family members (the “Consulting Agreements”), the Founders and certain of their family members are provided with
consulting fees, clothing allowances and reimbursement for certain travel, meals and phone expenses. The Consulting
Agreements terminated upon completion of the IPO. Accordingly, the Company is no longer required to pay consulting fees or
reimbursements of expenses as previously incurred.

(3)

In accordance with the Unanimous Shareholder Agreement, the Company paid Searchlight a monitoring fee and reimburses
Searchlight for certain out-of-pocket expenses incurred during the year in connection with matters regarding the Company. The
Unanimous Shareholder Agreement and, therefore, the monitoring fee and expense reimbursement payable thereunder,
terminated upon completion of the IPO.

In April 2016, the Company issued and sold the equivalent of 53,548 Shares to a member of the
Company’s executive team.

In February 2016, a member of the Company’s executive team purchased the equivalent of
214,193 Shares from Searchlight at a price of $4.67 per Share. The purchase was paid for using
$500 in cash and a $500 loan from the Company. The $500 loan from the Company is to be
repaid at the earlier of six years from the loan date and upon a liquidity sale of the Company.
Interest accrues at a rate of 4% per annum and will be payable at the start of each calendar year
following the date of the loan. Unpaid interest may be deemed paid by increasing the principal
amount outstanding. As at February 3, 2018, the outstanding balance on the loan and accrued
interest was $541 (January 28, 2017 – $520).

Financial Outlook

Foreign Currency Exchange Risk

We believe we remain on-track to achieve our previously stated financial targets for Fiscal 2019.
We believe we will achieve:

•

annual sales between $410,000 and $450,000;

annual Adjusted EBITDA between $61,000 to $68,000; and

annual Adjusted Net Income between $35,000 and $40,000.

The aforementioned description of growth expectations is based on management’s current
strategies, our assumptions and expectations concerning our growth outlook and opportunities,
and our assessment of the outlook and opportunities for the business and the retail industry as a
whole and may be considered to be forward-looking information for purposes of applicable
securities laws in Canada. Readers are cautioned that actual results may vary from those
described above. See below and “Forward-Looking Information” and “Risks and Uncertainties” in
this MD&A and “Risk Factors” in our AIF for a description of the assumptions underlying the
forward-looking information and of the risks and uncertainties that impact our business and that
could cause actual results to vary.

Implicit in such forward-looking information is certain current assumptions, relating to, among
others: achieving average annual comparable sales growth in line with or above Fiscal 2016,
notwithstanding quarterly variations; growing our e-commerce business; the opening of new
corporate stores in Canada and the United States; the renovation or expansion of existing
corporate stores; the opening of new international partner-operated stores; establishing a
presence in new international markets with new international operating partners; increasing
investment in marketing initiatives; strategic expansion of our existing product offering in leather
and footwear; inflation rates remaining consistent with historical levels; taxation rates remaining
consistent with historical levels; and debt repayments remaining consistent with the terms set out
in this MD&A. These current assumptions, although considered reasonable by us at the time of
preparation, may prove to be incorrect. Readers are cautioned that actual future operating results
and economic performance of the Company, including with respect to our anticipated annual
sales, annual Adjusted EBITDA and annual Adjusted Net Income, are subject to a number of risks
and uncertainties, including among others those set forth under “Risks and Uncertainties” in this
MD&A and “Risk Factors” in our AIF.

Risks and Uncertainties

For a detailed description of risk factors relating to the Company, please refer to the “Risk Factors”
section of our AIF, which is available on SEDAR at www.sedar.com.

In addition, we are exposed to a variety of financial risks in the normal course of our business,
including foreign currency exchange, interest rate, credit and liquidity risk, as summarized below.
Our overall risk management program and business practices seek to minimize any potential
adverse effects on our consolidated financial performance.

Financial risk management is carried out under practices approved by our Board. This includes
identifying, evaluating and hedging financial risks based on the requirements of our organization.
Our Board provides guidance for overall risk management, covering many areas of risk including
foreign currency exchange risk, interest rate risk, credit risk, and liquidity risk.

Our consolidated financial statements are expressed in Canadian dollars. However, a portion of
our operations are denominated in U.S. dollars. Sales and expenses of all foreign operations are
translated into Canadian dollars at the foreign currency exchange rates that approximate the rates
in effect at the dates which such items are recognized. Appreciating foreign currencies relative to
the Canadian dollar in respect of sales will positively impact operating income and net income
associated with our foreign operations by increasing our sales and vice versa.

We are also exposed to fluctuations in the prices of U.S. dollar denominated purchases resulting
from changes in U.S. dollar exchange rates. A depreciating Canadian dollar relative to the U.S.
dollar will have a negative impact on year-over-year changes in reported operating income and
net income by increasing the cost of finished goods and raw materials and vice versa. As
described above, we enter into certain qualifying foreign currency forward contracts that are
designated as cash flow hedges.

Interest Rate Risk

We are exposed to changes in interest rates on our cash and long-term debt. Debt issued at
variable rates exposes us to cash flow interest rate risk. Debt issued at fixed rates exposes us to
fair value interest rate risk. As of February 3, 2018, we only have variable interest rate debt. Based
on the outstanding borrowings as discussed under “Indebtedness”, a one percentage point
change in the average interest rate on our borrowings would have changed interest expense by
$276 in Q4 2017 and $1,130 in Fiscal 2017. The impact of future interest rate expense resulting
from future changes in interest rates will depend largely on the gross amount of our borrowings
at such time.

Credit Risk

Credit risk is the risk of an unexpected loss if a customer or counterparty to a financial instrument
fails to meet its contractual obligations. The Company’s financial instruments that are exposed to
concentrations of credit risk are primarily cash, loan receivable, and accounts receivable. The
Company limits its exposure to credit risk with respect to cash by dealing with Canadian financial
institutions. The Company’s accounts receivable consist primarily of receivables from our
business partners from the Partners and Other segment, which are settled in the following fiscal
quarter.

Liquidity Risk

Liquidity risk is the risk that we cannot meet a demand for cash or fund our obligations as they
come due. We manage liquidity risk by continuously monitoring actual and projected cash flows,
taking into account the seasonality of our sales, income and working capital needs. The Revolving
Credit Facility is also used to maintain liquidity.

Disclosure Controls and Procedures

Disclosure controls and procedures are designed to provide reasonable assurance that
information required to be disclosed by the Company in its annual filings, interim filings or other
reports filed or submitted by it under securities legislation is recorded, processed, summarized
and reported within the time periods specified in the securities legislation and include controls and
procedures designed to ensure that information required to be disclosed by the Company in its

annual filings, interim filings or other reports filed or submitted under securities legislation is
accumulated and communicated to the Company’s management, including its certifying officers,
namely the CEO and CFO, as appropriate to allow timely decisions regarding public disclosure.

An evaluation of the design of the Company’s disclosure controls and procedures, as defined
under National Instrument 52-109 – Certification of Disclosure in Issuers' Annual and Interim
Filings (“NI 52-109”), was carried out under the supervision of the CEO and CFO and with the
participation of the Company’s management. Based on that evaluation, the CEO and CFO have
concluded that the design and operation of these controls were effective as of February 3, 2018.

Although the Company’s disclosure controls and procedures were operating effectively as of
February 3, 2018, there can be no assurance that the Company’s disclosure controls and
procedures will detect or uncover all failures of persons within the Company to disclose material
information otherwise required to be set forth in the Company’s regulatory filings.

Internal Control over Financial Reporting

Internal control over financial reporting is designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements in accordance with
IFRS. Management is responsible for establishing adequate internal control over financial
reporting for the Company.

As required by NI 52-109, the CEO and the CFO have caused the effectiveness of the internal
controls over financial reporting to be evaluated using the framework and criteria established in
“Internal Control – Integrated Framework’ published by The Committee of Sponsoring
Organizations of the Treadway Commission, 2013”. Based on that evaluation, the CEO and the
CFO have concluded that the design and operation of the Company’s internal controls over
financial reporting, as defined by NI 52-109, were effective as at February 3, 2018.

In designing such controls, it should be recognized that due to inherent limitations, any controls,
no matter how well designed and operated, can provide only reasonable assurance of achieving
the desired control objectives and may not prevent or detect misstatements. Additionally,
management is required to use judgment in evaluating controls and procedures. Therefore, even
when determined to be designed effectively, disclosure controls and internal control over financial
reporting can provide only reasonable assurance with respect to disclosure, reporting and
financial statement preparation.

Critical Accounting Estimates and Judgments

The Annual Financial Statements have been prepared in accordance with IFRS. The preparation
of our financial statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, sales and expenses. We base our estimates on historical experience
and on various other assumptions that we believe are reasonable under the circumstances. Actual
results may differ from these estimates under different assumptions or conditions. While our
significant accounting policies are more fully described in our Annual Financial Statements, we
believe that the following accounting policies and estimates are critical to our business operations
and understanding our financial results.

The following are the key judgments and sources of estimation uncertainty that we believe could
have the most significant impact on the amounts recognized in our consolidated financial
statements.

Inventory valuation

Merchandise inventories are valued at the lower of average cost, using the retail method, and net
realizable value, which requires the Company to utilize estimates related to fluctuations in
shrinkage, future retail prices, future sell-through of units, seasonality and costs necessary to sell
the inventory. The Company records a write-down to reflect management’s best estimate of the
net realizable value of inventory based on the above factors.

Impairment of non-financial assets

The Company is required to use judgment in determining the grouping of assets to identify their
cash generating units (“CGUs”) for the purpose of testing store related fixed assets. Judgment is
further required to determine appropriate groupings of CGUs for the level at which non-store
related assets are tested for impairment including intangible assets and goodwill. The Company
has determined each store location is a separate CGU for the purpose of fixed assets impairment
testing. For purposes of non-store related non-financial assets, CGUs are grouped at the lowest
level that these assets are monitored for internal management purposes or the lowest level where
cash inflows are generated. In addition, judgment is used to determine whether a triggering event
has occurred requiring an impairment test to be completed.

In determining the recoverable amount, defined as the higher of the value-in-use and the fair value
less costs to sell, of a CGU or a group of CGUs, various estimates are used. Value-in-use is
determined based on management’s best estimate of projected future sales, gross profit margin
and earnings which is discounted by using an estimate of industry pre-tax weighted average cost
of capital adjusted for the Company’s estimated risk profile.

Share-based compensation

The Company measures the value of equity-settled transactions with employees by reference to
the fair value of the equity instruments at the date on which they are granted. Estimating fair value
for share-based compensation requires determining the most appropriate valuation model for a
grant of equity instruments, which is dependent on the terms and conditions of the grant. The
Company is also required to determine the most appropriate inputs to the valuation model,
including estimates and assumptions with respect to expected life, risk-free interest rate, volatility,
distribution yield, and forfeiture rate.

Gift card breakage

The Company recognizes revenue from unredeemed gift cards (“gift card breakage”) if the
likelihood of gift card redemption by the customer is considered to be remote. The Company
estimates its average gift card breakage rate based on historical redemption rates. The resulting
revenue is recognized over the estimated period of redemption based on historical redemption
patterns commencing when the gift card is issued.

Income taxes

The calculation of current and deferred income taxes requires management to make certain
judgements regarding the tax rules in jurisdictions where the Company performs activities.
Application of judgements is required regarding classification of transactions and in assessing
probable outcomes of claimed deductions including expectations of future operating results, the

rate to use on initial recognition of the related asset, expense or income (or part of it) is
the date on which an entity initially recognizes the non-monetary asset or non-monetary
liability arising from the payment or receipt of advance consideration. For transactions
involving multiple payments or receipts, each payment or receipt gives rise to a separate
transaction date. Interpretation 22 is applicable for annual periods beginning on or after
January 1, 2018. Earlier application is permitted. The Company is currently assessing the
impact of the new standard on its consolidated financial statements.

•

In June 2017, the IASB issued IFRIC Interpretation 23, Uncertainty over Income Tax
Treatments (“Interpretation 23”) in response to diversity in practice for various issues in
circumstances in which there is uncertainty in the application of the tax law.

Interpretation 23 requires an entity to reflect an uncertainty in the amount of income tax
payable (recoverable) if it is probable that it will pay (or recover) an amount for the
uncertainty, measure a tax uncertainty based on the most likely amount or expected value
depending on whichever method better predicts the amount payable (recoverable),
reassess the judgments and estimates applied if facts and circumstances change (e.g. as
a result of examination or action by tax authorities, following changes in tax rules or when
a tax authority's right to challenge a treatment expires), and consider whether uncertain
tax treatments should be considered separately, or together as a group, based on which
approach provides better predictions of the resolution.

Interpretation 23 is applicable for annual periods beginning on or after January 1, 2019
and may be applied on a fully retrospective basis, if this is possible without the use of
hindsight, or on a modified retrospective basis, with an adjustment to equity on initial
application. Earlier application is permitted. The Company is currently assessing the
impact of the new standard on its consolidated financial statements.

Additional Information

Additional information relating to the Company, including the AIF, is available on SEDAR at
www.sedar.com. The Company’s Shares are listed for trading on the TSX under the symbol
“ROOT”.

timing and reversal of temporary differences, and possible audits of income tax and other tax
filings by the tax authorities.

New Accounting Standards Adopted in the Year

•

In January 2016, the IASB issued amendments to IAS 7, Statements of Cash Flows, which
requires specific disclosures for movements in certain liabilities on the statement of cash
flows. These amendments are applicable for annual periods beginning on or after January
1, 2017. The Company adopted these amendments and included additional disclosures
in Note 9 of its consolidated financial statements.

In January 2016, the IASB issued “Recognition of Deferred Tax Assets for Unrealized
Losses (Amendments to IAS 12, Income Taxes (“IAS 12”))”. The amendments clarify that
the existence of a deductible temporary difference depends solely on a comparison of the
carrying amount of an asset and its tax base at the end of the reporting period, and is not
affected by possible future changes in the carrying amount or expected manner of
recovery of the asset. The Company adopted the amendments to IAS 12 in its
consolidated financial statements with no material impacts.

New Accounting Standards and Interpretations Not Yet Adopted

Certain new standards, amendments, and interpretations to existing IFRS standards have been
published but are not yet effective and have not been adopted early by the Company.
Management anticipates that all of the pronouncements will be adopted in the Company’s
accounting policy for the first period beginning after the effective date of the pronouncement.
Information on new standards, amendments, and interpretations are provided below.

•

In 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers (“IFRS 15”),
replacing IAS 18, Revenue; IAS 11, Construction Contracts; and related interpretations.
The new standard provides a comprehensive framework for the recognition, measurement
and disclosure of revenue from contracts with customers, excluding contracts within the
scope of the accounting standards on leases, insurance contracts and financial
instruments. IFRS 15 becomes effective for annual periods beginning on or after January
1, 2018 and is to be applied retrospectively. Early adoption is permitted. Based on its
preliminary assessment, the Company does not believe the new standard will have a
significant impact on the annual revenue recognized.

In 2016, the IASB issued IFRS 16, Leases (“IFRS 16”), replacing IAS 17, Leases, and
related interpretations. The standard introduces a single on-balance sheet recognition and
measurement model for lessees, eliminating the distinction between operating and finance
leases. Lessors continue to classify leases as finance and operating leases. IFRS 16
becomes effective for annual periods beginning on or after January 1, 2019. Early
adoption is permitted if IFRS 15 has been adopted. The Company is currently assessing
the impact of the new standard on its consolidated financial statements.

ROOTS CORPORATION

Consolidated Financial Statements

For the 53 week period ended February 3, 2018 and
for the 52 week period ended January 28, 2017
(In Canadian dollars)

KPMG LLP
100 New Park Place, Suite 1400
Vaughan, ON L4K 0J3
Tel 905-265 5900
Fax 905-265 6390
www.kpmg.ca

INDEPENDENT AUDITORS' REPORT

To the Shareholders of Roots Corporation

We have audited the accompanying consolidated financial statements of Roots Corporation,
which comprise the consolidated statement of financial position as at February 3, 2018 and
January 28, 2017, the consolidated statements of net income, comprehensive income,
changes in shareholders' equity and statement of cash flows for the 53 week period ended
February 3, 2018 and for the 52 week period ended January 28, 2017 and notes, comprising
a summary of significant accounting policies and other explanatory information.

Management's Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated
financial statements in accordance with International Financial Reporting Standards, and
for such internal control as management determines is necessary to enable the preparation
of the consolidated financial statements that are free from material misstatement, whether
due to fraud or error.

Auditors' Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based
on our audits. We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we comply with ethical requirements and
plan and perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the consolidated financial statements. The procedures selected depend on
our judgment, including the assessment of the risks of material misstatement of the
consolidated financial statements, whether due to fraud or error. In making those risk
assessments, we consider internal control relevant to the entity's preparation and fair
presentation of the consolidated financial statements in order to design audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the entity's internal control. An audit also includes evaluating the
appropriateness of accounting policies used and the reasonableness of accounting
estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements.

We believe that the audit evidence we have obtained in our audits is sufficient and
appropriate to provide a basis for our audit opinion.

Page 2

Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects,
the consolidated financial position of Roots Corporation as at February 3, 2018 and January
28, 2017, and its consolidated financial performance and its consolidated statement of cash
flows for the 53 week period ended February 3, 2018 and for the 52 week period ended
January 28, 2017, in accordance with International Financial Reporting Standards.

Chartered Professional Accountants, Licensed Public Accountants

April 17, 2018
Vaughan, Canada

ROOTS CORPORATION
Consolidated Statement of Financial Position
(In thousands of Canadian dollars)

As at February 3, 2018 and January 28, 2017

Assets
Current assets:
Cash
Accounts receivable
Inventories
Prepaid expenses
Total current assets

Non-current assets:
Loan receivable
Fixed assets
Intangible assets
Goodwill
Total non-current assets

Total assets

Liabilities and Shareholders’ Equity
Current liabilities:

Accounts payable and accrued liabilities
Deferred revenue
Income taxes payable
Current portion of long-term debt
Derivative Obligations
Total current liabilities

Non-current liabilities:

Deferred tax liabilities
Deferred lease costs
Finance lease obligation
Long-term debt
Other non-current liabilities
Total non-current liabilities

Total liabilities

Shareholders’ equity:
Common shares
Contributed surplus
Accumulated other comprehensive loss
Retained earnings

Total shareholders’ equity

Total liabilities and shareholders’ equity

Commitments and contingencies
Subsequent events

Note

February 3,
2018

January 28,
2017

1,809
6,420
35,407
5,580
49,216

541
36,981
203,408
52,705
293,635

25,257
4,946
32,682
1,573
64,458

520
31,219
208,541
52,705
292,985

342,851

357,443

18,306
4,647
6,589
4,984
1,233
35,759

21,166
4,815
894
79,481
1,763
108,119
143,878

195,994
1,675
(904)
2,208
198,973

16,448
3,840
5,536
5,550
–
31,374

21,248
2,154
456
98,909
2,118
124,885
156,259

195,994
483
–
4,707
201,184

342,851

357,443

17
5
6
7

14
9

9
6

10
12

15
18

On behalf of the Board of Directors:

“Erol Uzumeri”

“Richard P. Mavrinac”

Director

See accompanying notes to consolidated financial statements.

ROOTS CORPORATION
Consolidated Statement of Net Income
(In thousands of Canadian dollars, except per share amounts)

ROOTS CORPORATION
Consolidated Statement of Comprehensive Income
(In thousands of Canadian dollars)

For the 53 week period ended February 3, 2018 and for the 52 week period ended January 28, 2017

Sales

Cost of goods sold

Gross profit

Selling, general and administrative expenses

Income before interest expense and

income taxes expense

Interest expense

Income before income taxes

Income taxes expense

Net income

Basic earnings per share
Diluted earnings per share

Note

February 3,
2018

January 28,
2017

$ 326,057

$ 281,886

144,059

134,733

181,998

151,867

147,153

129,490

30,131

5,728

24,403

6,902

17,501

0.42
0.41

$
$

17,663

6,112

11,551

3,366

8,185

0.19
0.19

$
$

11
11

See accompanying notes to consolidated financial statements.

Note

Net income

Other comprehensive income (loss),

net of taxes:

Items that may be subsequently
reclassified to profit or loss:

Effective portion of changes in fair

value of cash flow hedges

8, 13

Cost of hedging excluded from

cash flow hedges

Tax impact of cash flow hedges
Total other comprehensive income (loss)

8, 13

February 3,
2018

January 28,
2017

$ 17,501

8,185

(2,320)

604
(1,664)

–

–
–

Total comprehensive income

$ 15,837

8,185

See accompanying notes to consolidated financial statements.

ROOTS CORPORATION
Consolidated Statement of Changes in Shareholders’ Equity
(In thousands of Canadian dollars)

ROOTS CORPORATION
Consolidated Statement of Cash Flows
(In thousands of Canadian dollars)

For the 53 week period ended February 3, 2018 and for the 52 week period ended January 28, 2017

February 3, 2018

Note

Share
capital

Contributed
surplus

Balance, January 29, 2017

Net income

Net gain (loss) from change in fair

value of cash flow hedges,
net of income taxes,

Transfer of realized loss on cash
flow hedges to inventories, net
of income taxes

Distributions declared

Share-based compensation

195,994

–

483

–

Accumulated
other
Retained comprehensive
loss
earnings

Total

4,707

17,501

–

$ 201,184

17,501

–

(20,000)

(1,664)

760

–

(20,000)

1,192

–

Balance, February 3, 2018

195,994

1,675

2,208

(904)

$ 198,973

January 28, 2017

Note

Share
capital

Contributed
surplus

Accumulated
Retained
other
earnings comprehensive
loss

(deficit)

Balance, January 31, 2016

Net income

Issuance of shares

Share-based compensation

195,744

–

250

–

474

(3,478)

8,185

–

Balance, January 28, 2017

195,994

483

4,707

–

Total

$ 192,275

8,185

250

474

$ 201,184

See accompanying notes to consolidated financial statements.

Cash provided by (used in):

Operating activities:
Net income
Items not involving cash:

Depreciation and amortization
Share-based compensation expense (Note 12)
Impairment of fixed assets (Note 4)
Deferred lease costs
Amortization of lease intangibles
Interest expense
Income taxes expense
Interest paid
Taxes paid

Change in non-cash operating working capital:

Accounts receivable
Inventories
Prepaid expenses
Accounts payable and accrued liabilities
Deferred revenue

Financing activities:

Long-term debt financing costs (Note 9)
Repayment of long-term debt (Note 9)
Finance lease payments
Distributions paid (Note 10)
Issuance of common shares (Note 10)

Investing activities:

Additions to fixed assets
Tenant allowance received

Increase in cash

Cash, beginning of period

Cash, end of period

See accompanying notes to consolidated financial statements.

February 3,
2018

January 28,
2017

$ 17,501

8,185

10,886
1,192
1,281
847
907
5,728
6,902
(5,105)
(5,602)

(1,474)
(2,725)
(4,007)
2,514
807
29,652

(999)
(19,654)
(203)
(20,000)
–
(40,856)

(14,058)
1,814
(12,244)

(23,448)

25,257

9,803
474
987
1,622
1,321
6,112
3,366
(5,528)
(513)

564
5,736
(81)
(2,404)
424
30,068

–
(4,163)
–
–
250
(3,913)

(12,813)
764
(12,049)

14,106

11,151

1,809

25,257

ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 53 week period ended February 3, 2018 and for the 52 week period ended January 28, 2017

ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 53 week period ended February 3, 2018 and the 52 week period ended January 28, 2017

(In thousands of Canadian dollars, except per share amounts)

1. Nature of operations and basis of presentation

Nature of operations

Established in 1973, Roots is an iconic lifestyle brand with a rich Canadian heritage and a portfolio of
premium apparel, leather goods, accessories and footwear. The design of Roots products is driven by
global consumer insights, and supported by the Company’s flexible sourcing network, proven
distribution footprint and Canadian leather manufacturing facility. Through its omni-channel footprint of
116 corporate retail stores in Canada, three corporate retail stores in the United States, 110 partner-
operated stores in Taiwan, 32 partner-operated stores in China and its e-commerce platform, Roots
Corporation is able to reach a broad cross-section of global consumers. Roots products are worn by
young professionals, students, families, athletes and entertainment icons.

Roots Corporation was incorporated under the Canada Business Corporations Act on October 14,
2015. Its head office and registered office is located at 1400 Castlefield Avenue, Toronto, Ontario M6B
4C4. Roots Corporation and its subsidiaries are collectively referred to in these consolidated financial
statements as the “Company” or “Roots Corporation.”

On October 25, 2017, the Company completed an initial public offering (the “IPO”) of its common shares
(“Shares”) through a secondary offering of Shares by its principal shareholders. The IPO of 16,667,000
Shares at a price of $12.00 per Share raised gross proceeds of $200,004 for the selling shareholders.

The Company’s Shares are listed on the Toronto Stock Exchange under the trading symbol “ROOT”.

Basis of preparation

(a) Fiscal period

The fiscal year of the Company consists of a 52 or 53 week period ending near the last Saturday
in January of each year. The current fiscal period for the consolidated financial statements
contains 53 weeks and the comparative fiscal year contains 52 weeks.

(b) Statement of compliance

The consolidated financial statements have been prepared in accordance with International
Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards
Board (“IASB”) and using the accounting policies described herein.

The consolidated financial statements were authorized for issuance by the Company’s Board of
Directors (“Board”) on April 17, 2018.

The consolidated financial statements were prepared on a historical cost basis, and share-
based compensation stated at fair value at the grant date.

The significant accounting policies set out below have been applied consistently in the
preparation of the consolidated financial statements for the periods presented.

(d) Functional currency

The consolidated financial statements are presented in Canadian dollars, the Company’s
functional currency. All financial information presented in Canadian dollars has been rounded
to the nearest thousand, unless otherwise stated.

(e) Basis of consolidation

The consolidated financial statements include the accounts of Roots Corporation and its wholly-
owned subsidiaries, Roots USA Corporation, Roots International ULC and Roots Leasing
Corporation. An entity is controlled when the Company has the ability to direct the relevant
activities of the entity, has exposure or rights to variable returns from its involvement with the
entity, and is able to use its power over the entity to affect its returns from the entity.

Transactions and balances between the Company and its consolidated entities have been
eliminated on consolidation.

(f) Share Information

All information related to Shares presented in the consolidated financial statements are
presented as if the Pre-Closing Capital Changes (see Note 10) took effect at the start of the
comparative period.

(g) Use of estimates and judgments

The preparation of the consolidated financial statements in conformity with IFRS requires
management to make judgments, estimates and assumptions that affect the application of
accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual
results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to
accounting estimates are recognized in the period in which the estimates are revised and in any
future periods affected.

ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 53 week period ended February 3, 2018 and the 52 week period ended January 28, 2017

(In thousands of Canadian dollars, except per share amounts)

(i)

Inventory valuation

Merchandise inventories are valued at the lower of average cost, using the retail method,
and net realizable value, which requires the Company to utilize estimates related to
fluctuations in shrinkage, future retail prices, future sell-through of units, seasonality and
costs necessary to sell the inventory. The Company records a write-down to reflect
management’s best estimate of the net realizable value of inventory based on the above
factors.

(ii)

Impairment of non-financial assets

The Company is required to use judgment in determining the grouping of assets to identify
their cash generating units (“CGUs”) for the purpose of testing store related fixed assets.
Judgment is further required to determine appropriate groupings of CGUs for the level at
which non-store related assets are tested for impairment including intangible assets and
goodwill. The Company has determined each store location is a separate CGU for the
purpose of fixed assets impairment testing. For purposes of non-store related non-
financial assets, CGUs are grouped at the lowest level that these assets are monitored
for internal management purposes or the lowest level where cash inflows are generated.
In addition, judgment is used to determine whether a triggering event has occurred
requiring an impairment test to be completed.

In determining the recoverable amount, defined as the higher of the value in use and the
fair value less costs to sell, of a CGU or a group of CGUs, various estimates are used.
Value-in-use is determined based on management’s best estimate of projected future
sales, gross profit margin and earnings which is discounted by using an estimate of
industry pre-tax weighted average cost of capital adjusted for the Company’s estimated
risk profile.

rates. The resulting revenue is recognized over the estimated period of redemption based
on historical redemption patterns commencing when the gift card is issued.

(v)

Income taxes

The calculation of current and deferred income taxes requires management to make
certain judgements regarding the tax rules in jurisdictions where the Company performs
activities. Application of judgements is required regarding classification of transactions
and in assessing probable outcomes of claimed deductions including expectations of
future operating results, the timing and reversal of temporary differences, and possible
audits of income tax and other tax filings by the tax authorities.

2. Significant accounting policies

The accounting policies described below have been applied consistently to the periods presented in
the consolidated financial statements:

(a) Foreign currency

Monetary assets and liabilities denominated in foreign currencies at the reporting date are
translated into the functional currency at the exchange rate at that date. Other non-monetary
consolidated statement of financial position items denominated in foreign currencies are
translated into Canadian dollars at the exchange rates prevailing at the respective transaction
dates. Revenue and expenses denominated in foreign currencies are translated into Canadian
dollars at average rates of exchange prevailing during the period. The resulting gains or losses
on translation are included in the determination of net income for the period and comprehensive
income.

(iii)

Share-based compensation

(b) Revenue recognition

The Company measures the value of equity-settled transactions with employees by
reference to the fair value of the equity instruments at the date on which they are granted.
Estimating fair value for share-based compensation requires determining the most
appropriate valuation model for a grant of equity instruments, which is dependent on the
terms and conditions of the grant. The Company is also required to determine the most
appropriate inputs to the valuation model, including estimates and assumptions with
respect to expected life, risk-free interest rate, volatility, distribution yield, and forfeiture
rate.

(iv)

Gift card breakage

Revenue includes sales to customers through retail stores operated by the Company and
through e-commerce. Sales to customers through retail stores are recognized at the time of
purchase, net of a provision for returns. E-commerce sales to customers are recognized at the
time of delivery, net of a provision for returns. The provision for returns is estimated based on
the last 12 months’ return rate for retail stores and e-commerce sales, respectively.

Revenue also includes sales to the Company’s international partner and other corporate
customers, which are recognized at the time of shipment or receipt, depending on the specific
contractual terms of each customer. Contractually, the Company’s international partner and
wholesale partners are unable to return goods purchased from the Company.

Royalty revenue is included in sales and is recognized on an accrual basis in accordance with
the various contractual agreements, based on the financial results as reported by the

ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 53 week period ended February 3, 2018 and the 52 week period ended January 28, 2017

(In thousands of Canadian dollars, except per share amounts)

Company’s international partner and other third-party licensees, and when collectability is
reasonably determined.

for use. Depreciation methods, useful lives and residual values are reviewed at each annual
reporting date and adjusted, prospectively, if appropriate.

The Company sells gift cards to customers and recognizes revenue as gift cards are redeemed.
The Company also recognizes gift card breakage if the likelihood of gift card redemption by the
customer is considered to be remote.

The liability associated to gift cards is recorded as deferred revenue on the consolidated
statement of financial position.

Finished goods are comprised of merchandise inventories which are valued at the lower of
average cost using the retail method and net realizable value. For inventories purchased from
third party vendors, cost includes the cost of purchase, freight, import taxes and duties that are
directly incurred to bring inventories to their present location and condition.

For inventories manufactured by the Company, cost includes direct labour, raw materials,
manufacturing and overhead costs. Raw materials inventories are recorded at the lower of cost
and net realizable value. Cost of raw materials is determined on a first-in, first-out basis.

Work in progress is recorded at the lower of average cost and net realizable value.

The Company estimates the net realizable value as the amount at which inventories are
expected to be sold, taking into account fluctuations in retail prices due to seasonality, age,
excess quantities, condition of the inventory, nature of the inventory and the estimated variable
costs necessary to make the sale.

Inventories are written down to net realizable value when the cost of inventories is not
estimated to be recoverable due to obsolescence, damage or declining selling prices. When
circumstances that previously caused inventories to be written down below cost no longer exist,
the amount of the write-down previously recorded is reversed.

(d) Fixed assets

Fixed assets are recorded at cost less accumulated depreciation and accumulated impairment
losses. Cost includes expenditures that are directly attributable to the acquisition of the asset.
When parts of an item of fixed assets have different useful lives, they are accounted for as
separate items (major components) of fixed assets.

Depreciation is primarily recognized in selling, general and administrative expenses in the
consolidated statement of net income, on a diminishing-balance basis, over the estimated
useful lives of each component of an item of fixed assets from the date that they are available

Fixed assets are depreciated over the estimated useful lives of the assets using the following
bases and annual rates:

Asset

Computer hardware
Furniture and fixtures
Manufacturing equipment
Computer software
Leasehold improvements

(e) Intangible assets

Basis

Diminishing-balance
Diminishing-balance
Diminishing-balance
Straight line
Straight line

Rate

20%
20%
10%
3 - 5 years
Term of lease to a
maximum of 10 years

Intangible assets that have a definite useful life are measured at cost less any accumulated
amortization and accumulated impairment losses. Intangible assets with definite lives are
amortized over their useful economic life on a straight-line basis from the date that they are
available for use. Amortization relating to licence agreements, customer relationships, and
favourable/unfavourable lease agreements is recognized in selling, general and administrative
expenses in the consolidated statement of net income. The estimated useful lives for the
current period is as follows:

Licence agreements
Customer relationships
Leases
Trade names
Goodwill

4 - 13 years
10 years
Life of the lease
Indefinite life
Indefinite life

Amortization methods, useful lives and residual values are reviewed at each annual reporting
date and adjusted, prospectively, if appropriate.

Intangible assets with indefinite lives, comprising of trade names, are not amortized but are
tested annually for impairment, or more frequently, if events or changes in circumstances
indicate that the asset might be impaired, as detailed in the accounting policy note on
impairment.

(f)

Impairment of non-financial assets

Assets with finite lives are tested for impairment at each reporting date whenever events or
changes in circumstances indicate that the carrying amount may not be recoverable. Goodwill
and indefinite life intangibles are tested for impairment at least annually at the year-end
reporting date, and whenever there is an indication that the asset may be impaired.

ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 53 week period ended February 3, 2018 and the 52 week period ended January 28, 2017

(In thousands of Canadian dollars, except per share amounts)

Events or changes in circumstances which may indicate impairment include a significant
change to the Company’s operations, a significant decline in performance or a change in
market conditions which adversely affect the Company.

An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds
its recoverable amount. The recoverable amount was based on the greater of the CGU’s fair
value less costs to sell and its value-in-use. For purposes of measuring recoverable amounts,
store assets are grouped at the lowest levels for which there are largely independent cash
flows, which is referred to as a CGU, being at the individual store level for the Company.

The Company’s corporate assets do not generate separate cash inflows.
If there is an
indication that a corporate asset may be impaired, then the recoverable amount is determined
for the CGU or group of CGUs to which the corporate asset belongs.

An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment
losses recognized in prior periods are assessed at each reporting date for any indication that
the loss has decreased or no longer exists. An impairment loss is reversed if there has been a
change in the estimates used to determine the recoverable amount. An impairment loss is
reversed only to the extent that the asset’s carrying amount does not exceed the carrying
amount that would have been determined, net of depreciation or amortization, if no impairment
loss had been recognized.

(g) Leased assets

Leases are classified as either operating or finance, based on the substance of the transaction
at inception of the lease. Classification is reassessed if the terms of the lease are changed.

Leases in which a significant portion of the risks and rewards of ownership are not assumed
by the Company are classified as operating leases. Payments under an operating lease are
recognized in selling, general and administrative expenses on a straight-line basis over the
term of the lease. When a lease contains a predetermined fixed escalation of the minimum
rent, the Company recognizes the related rent expense on a straight-line basis and,
consequently, records the difference between the recognized rental expense and the amounts
payable under the lease as deferred rent, which is included in deferred lease costs on the
consolidated statement of financial position.

Tenant allowances are recorded as deferred lease costs and amortized as a reduction of rent
expense over the term of the related leases. As at February 3, 2018, all of the Company’s
leases on premises were accounted for as operating leases.

(h) Income taxes

Income taxes expense comprises current and deferred taxes. Current income taxes and
deferred income taxes are recognized in net income for the period, except for items recognized
directly in equity or in other comprehensive income.

Current income tax is the expected tax payable on the taxable income or net income for the
period, using tax rates enacted or substantively enacted at the reporting date.

Deferred income tax is recognized in respect of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for
taxation purposes. Deferred income tax is not recognized for the following temporary
differences: the initial recognition of assets or liabilities in a transaction that is not a business
combination and that affects neither accounting nor taxable profit or loss, and differences
relating to investments in subsidiaries and jointly-controlled entities to the extent that it is
probable that they will not reverse in the foreseeable future. In addition, deferred tax is not
recognized for taxable temporary differences arising on the initial recognition of goodwill.
Deferred income tax is measured at the tax rates that are expected to be applied to temporary
differences when they reverse, based on the laws that have been enacted or substantively
enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally
enforceable right to offset current tax liabilities and assets, and they relate to income taxes
levied by the same tax authority on the same taxable entity.

A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary
differences, to the extent that it is probable that future taxable profits will be available against
which they can be utilized. Deferred tax assets are reviewed at each reporting date and are
reduced to the extent that it is no longer probable that the related tax benefit will be realized.

(i) Share-based compensation

The grant date fair value of share-based compensation awards granted to employees is
recognized as an employee expense, with a corresponding increase in contributed surplus,
over the period that the employees unconditionally become entitled to the awards. The amount
recognized as an expense is adjusted to reflect the number of awards for which the related
service and non-market vesting conditions are expected to be met, such that the amount
ultimately recognized as an expense is based on the number of awards that meet the related
service and non-market performance conditions at the vesting date.

(j) Earnings per share

Basic earnings per share is calculated by dividing the profit or loss attributable to common
shareholders of the Company by the weighted average number of common shares outstanding
during the period.

ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 53 week period ended February 3, 2018 and the 52 week period ended January 28, 2017

(In thousands of Canadian dollars, except per share amounts)

Diluted earnings per share is calculated by dividing the profit or loss attributable to common
shareholders of the Company and the weighted average number of common shares
outstanding, plus the weighted average number of common shares that would be issued on
exercise of dilutive options granted to employees, as calculated under the treasury stock
method.

(k) Financial instruments

The Company early adopted all of the requirements of IFRS 9 (2014), Financial Instruments
(“IFRS 9 (2014)”), with a date of initial application of October 14, 2015. This standard
establishes principles for the financial reporting classification and measurement of financial
assets and financial liabilities. This standard also incorporates a new hedging model, which
increases the scope of hedged items eligible for hedge accounting and aligns hedge
accounting more closely with risk management. This standard also amends the impairment
model by introducing a new “expected credit loss” model for calculating impairment. This new
standard also increases required disclosures about an entity’s risk management strategy, cash
flows from hedging activities and the impact of hedge accounting on the consolidated financial
statements.

IFRS 9 (2014) uses a single approach to determine whether a financial asset is measured at
amortized cost or fair value, replacing the multiple rules in International Accounting Standard
(“IAS”) 39, Financial instruments - Recognition and Measurement. The approach in IFRS 9
(2014) is based on how an entity manages its financial instruments and the contractual cash
flow characteristics of the financial assets.

Financial assets are initially measured at fair value and subsequently measured at amortized
cost using the effective interest method, net of any impairment losses.

The Company uses the “expected credit loss” model for calculating impairment and recognizes
expected credit losses as a loss allowance in the consolidated statement of financial position
if they relate to a financial asset measured at amortized cost. The Company’s accounts
receivable are typically short-term receivables with payments received within a 12-month
period and do not have a significant financing component. Therefore, the Company recognizes
impairment and measures expected credit losses as lifetime expected credit losses. The
carrying amount of these assets in the consolidated statement of financial position is stated net
of any loss allowance.

Financial liabilities, excluding derivative liabilities, are initially recognized at fair value less any
directly attributable transaction costs. Subsequent to initial recognition, these liabilities are
measured at amortized cost using the effective interest method.

The Company enters into foreign currency forward contracts (“forward contracts”) under a cash
flow hedge for its foreign currency exposures on a portion of its U.S. dollar denominated

purchases. On initial designation of the hedge, the Company formally documents the
relationship between the hedging instruments and hedged items, including the risk
management objectives and strategy in undertaking the hedge transaction, together with the
methods that will be used to assess the effectiveness of the hedging relationship. At inception
and each quarter-end thereafter, the Company formally assesses the effectiveness of its cash
flow hedges.

For a cash flow hedge in respect of a forecasted transaction, the transaction should be highly
probable to occur and should present an exposure to variations in cash flows that could
ultimately affect reported net income. The time value component of forward contracts
designated as cash flow hedges is excluded from the hedging relationship and recorded in
other comprehensive income as a cost of hedging and presented separately.

The forward contracts used for hedging are recognized at fair value. Subsequent to initial
recognition, the forward contracts are measured at fair value and changes therein are
accounted for as described below.

When a derivative is designated as the hedging instrument in a hedge of the variability in cash
flows attributable to a particular risk associated with a recognized asset or liability or a highly
probable forecasted transaction that could affect net income, the effective portion of change in
the fair value of the derivative is recognized in other comprehensive income and presented in
accumulated other comprehensive income, net of deferred taxes. When the Company
purchases the hedged inventories, the amounts are reclassified from accumulated other
comprehensive income to cost of purchases. Any ineffective portion of changes in the fair value
of the forward contracts is recognized immediately in net income.

If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold,
terminated or exercised, then hedge accounting is discontinued prospectively. If the forecasted
transaction is no longer expected to occur, then the balance in accumulated other
comprehensive income is recognized immediately in net income.

The Company has classified its financial assets and financial liabilities as follows:

Financial assets:
Cash
Accounts receivable
Loan receivable

Financial liabilities

Accounts payable and
accrued liabilities
Derivative obligations
Long-term debt
Finance lease obligation

Classification

Measurement

Fair value through profit or loss
Loans and receivables
Loans and receivables

Other liabilities
Fair value through OCI
Other liabilities
Other liabilities

Fair value
Amortized cost
Amortized cost

Amortized cost
Fair value
Amortized cost
Amortized cost

ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 53 week period ended February 3, 2018 and the 52 week period ended January 28, 2017

(In thousands of Canadian dollars, except per share amounts)

The Company measures fair values using the following fair value hierarchy, which reflects the
significance of the inputs used in making the measurements:

•

Level 1 – inputs that are quoted market prices (unadjusted) in active markets for
identical instruments;

Level 2 – inputs other than quoted market prices included within Level 1 that are
observable either directly (i.e., as prices) or indirectly (i.e., derived from prices). This
category includes instruments valued using: quoted market prices in active markets for
similar instruments; quoted prices for identical or similar instruments in markets that
are considered less than active; or other valuation techniques in which all significant
inputs are directly or indirectly observable from market data; and

Level 3 – inputs that are unobservable. This category includes all instruments for which
the valuation technique includes inputs that are not observable and the unobservable
inputs have a significant effect on the instrument’s valuation. This category includes
instruments that are valued based on quoted prices for similar instruments for which
significant unobservable adjustments or assumptions are required to reflect the
difference between the instruments.

(l) New standards adopted in the year

In January 2016, the IASB issued amendments to IAS 7, Statements of Cash Flows, which
requires specific disclosures for movements in certain liabilities on the statement of cash flows.
These amendments are applicable for annual periods beginning on or after January 1, 2017.
The Company adopted these amendments and included additional disclosures in Note 9 of its
consolidated financial statements.

In January 2016, the IASB issued “Recognition of Deferred Tax Assets for Unrealized Losses
(Amendments to IAS 12, Income Taxes (“IAS 12”))”. The amendments clarify that the existence
of a deductible temporary difference depends solely on a comparison of the carrying amount
of an asset and its tax base at the end of the reporting period, and is not affected by possible
future changes in the carrying amount or expected manner of recovery of the asset. The
Company adopted the amendments to IAS 12 in its consolidated financial statements with no
material impacts.

(m) New standards and interpretations not yet adopted

becomes effective for annual periods beginning on or after January 1, 2018, and is to be applied
retrospectively. Early adoption is permitted. Based on its preliminary assessment, the
Company does not believe the new standard will have a significant impact on the annual
revenue recognized.

In 2016, the IASB issued IFRS 16, Leases (“IFRS 16”), replacing IAS 17, Leases, and related
interpretations. The standard introduces a single on-balance sheet recognition and
measurement model for lessees, eliminating the distinction between operating and finance
leases. Lessors continue to classify leases as finance and operating leases. IFRS 16 becomes
effective for annual periods beginning on or after January 1, 2019. Early adoption is permitted
if IFRS 15 has been adopted. The Company is currently assessing the impact of the new
standard on its consolidated financial statements.

In 2016, the IASB issued International Financial Reporting Interpretations Committee (“IFRIC”)
Interpretation 22, Foreign Currency Transactions and Advance Consideration (“Interpretation
22”) in response to diversity in practice in determining the appropriate exchange rate to use
when translating assets, expenses or income, when foreign currency consideration is paid or
received in advance of the item to which it relates. Interpretation 22 clarifies that the date of the
transaction for the purpose of determining the exchange rate to use on initial recognition of the
related asset, expense or income (or part of it) is the date on which an entity initially recognizes
the non-monetary asset or non-monetary liability arising from the payment or receipt of advance
consideration. For transactions involving multiple payments or receipts, each payment or
receipt gives rise to a separate transaction date. Interpretation 22 is applicable for annual
periods beginning on or after January 1, 2018. Earlier application is permitted. The Company
is currently assessing the impact of the new standard on its consolidated financial statements.

Interpretation 23 requires an entity to reflect an uncertainty in the amount of income tax payable
(recoverable) if it is probable that it will pay (or recover) an amount for the uncertainty, measure
a tax uncertainty based on the most likely amount or expected value depending on whichever
method better predicts the amount payable (recoverable), reassess the judgments and
estimates applied if facts and circumstances change (e.g. as a result of examination or action
by tax authorities, following changes in tax rules or when a tax authority’s right to challenge a
treatment expires), and consider whether uncertain tax treatments should be considered
separately, or together as a group, based on which approach provides better predictions of the
resolution.

ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 53 week period ended February 3, 2018 and the 52 week period ended January 28, 2017

(In thousands of Canadian dollars, except per share amounts)

application is permitted. The Company is currently assessing the impact of the new standard
on its consolidated financial statements.

Inventories

Raw materials
Work in progress
Finished goods

February 3,
2018

4,161
1,988
29,258

January 28,
2017

4,648
3,068
24,966

35,407

32,682

In connection with the acquisition by the Company of certain assets and the assumption of certain
liabilities of Roots Canada Ltd.
in October 2015, the acquired inventories included a fair value
adjustment of $16,819, representing the difference between the cost of inventory and its fair value. Of
this amount, $nil was recognized in cost of goods sold for the 53 week period ended February 3, 2018
(52 week period ended January 28, 2017 – $5,775).

The cost of merchandise inventories recognized as an expense and included in cost of goods sold for
the 53 week period ended February 3, 2018 was $139,691 (52 week period ended January 28, 2017 –
$130,490, including the fair value impact described above). Cost includes cost to purchase inventory
plus freight, import taxes and duties.

During the 53 week period ended February 3, 2018, the Company recorded a write down of $1,072 (52
week period ended January 28, 2017 – $nil) for certain on-hand raw materials with net realizable values
below cost.

3. Operating Segments

The Company has two reportable operating segments:

(a) The “Direct-to-Consumer” segment comprises sales through corporate retail stores and

e-commerce; and

(b) The “Partners and Other” segment consists primarily of the wholesale of Roots-branded
products to our international operating partner and the royalties earned on the retail sales of
Roots-branded products by our partner. The Partners and Other segment also consists of
royalties earned through the licensing of our brand to select manufacturing partners, the
wholesale of Roots-branded products to select retail partners, and the sale of custom Roots-
branded products to select business clients.

The Company defines an operating segment on the same basis that the Chief Operating Decision
Maker (the “CODM”) uses to evaluate performance internally and to allocate resources. The Company
has determined that the President and Chief Executive Officer is its CODM. The accounting policies of
the reportable segments are the same as those described in the Company’s summary of significant
accounting policies (see Note 2). The Company measures each reportable operating segment’s
performance based on sales and gross profit, which is the profit metric used by the CODM for assessing
performance of each segment. The Company does not report total assets or total liabilities based on
its operating segments.

Information for each reportable operating segment, as presented to the CODM, is included below:

Direct-to-
Consumer

February 3, 2018
Partners
and Other

January 28, 2017

Total

Direct-to-
Consumer

Partners
and Other

Total

Sales
Cost of goods sold

$ 284,131
116,567

$ 41,926
27,492

$ 326,057
144,059

$ 244,353
110,135

$ 37,533
24,598

$ 281,886
134,733

Gross profit
Selling, general and administrative expenses1

167,564
–

14,434
–

181,998
151,867

134,218
–

12,935
–

147,153
129,490

Income before interest expense and

income taxes expense

Interest expense1

Income before income taxes

–
–

–

–
–

–

30,131
5,728

24,403

–
–

–

–
–

–

17,663
6,112

11,551

1 These unallocated items represent income and expenses which management does not report when analyzing segment
underlying performance.

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ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 53 week period ended February 3, 2018 and the 52 week period ended January 28, 2017

(In thousands of Canadian dollars, except per share amounts)

For the 53 week period ended February 3, 2018, the Company recorded $1,281 (52 week period ended
January 28, 2017 – $987) of impairment losses on fixed assets in respect of five CGUs (52 week period
ended January 28, 2017 – nine CGUs) in the Direct-to-Consumer operating segment as part of selling,
general and administrative expenses.

For the 53 week period ended February 3, 2018, the Company had no impairment reversals on fixed
assets (52 week period ended January 28, 2017 – nil).

When determining the value-in-use of a retail location, the Company develops a discounted cash flow
model for each CGU. The duration of the cash flow projections for individual CGUs varies based on the
remaining useful life of the significant assets within the CGU or the remaining lease term. Sales
forecasts for cash flows are based on actual operating results, operating budgets, and long-term growth
rates consistent with the Company’s strategic plan approved by the Board. The estimate of the value-
in-use of the relevant CGUs was determined using a pre-tax discount rate of 14% at February 3, 2018
(January 28, 2017 – 15%).

0
6

Intangible assets, other non-current liabilities and goodwill

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Intangible assets:

Cost

Indefinite
life trade
names

Licensing
arrangements

Customer
relationships

Favourable
lease
agreements

Total

Balance, January 30, 2016

175,044

25,910

7,766

Balance, January 28, 2017

175,044

25,910

7,766

Balance, February 3, 2018

175,044

25,910

7,766

Accumulated amortization
and impairment losses

Balance, January 30, 2016
Amortization

Balance, January 28, 2017
Amortization

Balance, February 3, 2018

Carrying amount

January 28, 2017
February 3, 2018

–
–

–

498
3,032

3,530
3,081

128
776

904
790

6,611

1,694

175,044
175,044

22,380
19,299

6,862
6,072

6,310

215,030

6,310

215,030

6,310

215,030

297
1,758

2,055
1,262

923
5,566

6,489
5,133

3,317

11,622

4,255
2,993

208,541
203,408

N
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ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 53 week period ended February 3, 2018 and the 52 week period ended January 28, 2017

(In thousands of Canadian dollars, except per share amounts)

Other non-current liabilities:

7. Goodwill

Unfavourable lease
agreements

The Company performs an annual impairment assessment on goodwill by comparing the carrying value
of assets within each CGU group to the recoverable amount of the CGU group.

Cost

Balance, January 30, 2016

Balance, January 28, 2017

Balance, February 3, 2018

Accumulated amortization and impairment losses

Balance, January 30, 2016
Amortization

Balance, January 28, 2017
Amortization

Balance, February 3, 2018

Carrying amount

January 28, 2017
February 3, 2018

2,636

81
437

518
355

873

2,118
1,763

Amortization expenses, impairment losses and reversals are recorded as part of selling, general and
administrative expenses in the consolidated statement of net income in the period in which they occur.
No impairment losses or reversals were recognized on intangible assets for the 53 week period ended
February 3, 2018 (52 week period ended January 28, 2017 – $nil).

Amortization expense on definite life intangibles of $4,778 (52 week period ended January 28, 2017 –
$5,129) has been recognized in the consolidated statement of net income. Indefinite life intangibles
consisting of trade names are not amortized and instead tested for impairment annually or when such
changes in events or circumstances indicate a trigger for impairment or a change in its future economic
benefits that would result in assessing the appropriateness of its useful life.

The Company has determined trade names, primarily consisting of the Roots brand, have an indefinite
life based on the brand’s long history and the continued investment to be made to support the brand,
which is the key value contributor to the on-going success of the business.

For the purpose of impairment testing, goodwill is allocated to the grouping of CGUs, which represent
the lowest level within the Company at which these assets are monitored for internal management
purposes. Management has determined this grouping to be as follows:

Direct-to-Consumer
Partners and Other

Total carrying amount of goodwill

44,799
7,906

52,705

The Company completed its annual impairment tests for goodwill and concluded that the recoverable
amount exceeded the carrying amount for both CGUs.

The key assumptions used to calculate the recoverable amount are those regarding discount rates,
growth rates, and expected improvement in margins.

The after-tax discount rate was determined to be 12% (January 28, 2017 – 13%) and is based on a
risk-free rate, an equity risk premium adjusted for betas of comparable publicly traded companies, an
unsystematic risk premium, an after-tax cost of debt based on corporate bond yields and the capital
structure of the Company. The pre-tax discount rate was 16% (January 28, 2017 – 17%).

The Company included a minimum of five years of cash flows in its discounted cash flow model. The
cash flow forecasts were extrapolated beyond the five-year period using an estimated terminal growth
rate of 2%. The budgeted earnings before depreciation and amortization, interest expense and income
taxes (“EBITDA”) growth is based on the Company’s strategic plan approved by the Board.

8. Financial instruments

The Company has determined that the carrying amount of its short-term financial assets and financial
liabilities approximates its fair value due to the short-term maturity of these financial instruments.

The fair value of long-term debt approximates its carrying value, as determined based on Level 2 of the
fair value hierarchy (see Note 2).

The fair value of derivative obligations consisting of forward contracts is determined using a valuation
technique that employs the use of market observable inputs and is based on the differences between
the contract rate and the market rates as at the period-end date, taking into consideration discounting
to reflect the time value of money. This has been determined using Level 2 of the fair value hierarchy.

ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 53 week period ended February 3, 2018 and the 52 week period ended January 28, 2017

(In thousands of Canadian dollars, except per share amounts)

There were no transfers between levels of the fair value hierarchy for the 53 week period ended
February 3, 2018 or 52 week period ended January 28, 2017.

The following table reconciles the changes in cash flows from financing activities for long-term debt for
the 53 week period ended February 3, 2018:

In 2017, the Company entered into forward contracts to hedge its exposure for a portion of U.S. dollar
denominated purchases. As at February 3, 2018, the Company had outstanding forward contracts to
buy US$52,315 at an average forward rate of 1.26.

For the 53 week period ended February 3, 2018, the effective portion of changes in the fair value of all
matured forward contracts and outstanding forward contracts resulted in a loss of $2,320 (net of tax –
$1,702), which was recorded in other comprehensive income.

9. Long-term debt

On December 1, 2015, the Company entered into a secured credit agreement (the “Credit Agreement”)
with a syndicate of lenders to obtain an initial term loan (the “Term Credit Facility”) for an aggregate
principal amount not exceeding $111,000 and a revolving credit loan (the “Revolving Credit Facility”)
not exceeding $25,000, less the aggregate swing line loan of $5,000 (together, the “Credit Facilities”).

On April 19, 2017, the Company amended the Credit Agreement to increase the availability under the
Revolving Credit Facility to an amount not exceeding $50,000, less the aggregate swing line loan of
$10,000.

On September 6, 2017, the Company further amended and extended the Credit Facilities. The Credit
Facilities, as amended, are comprised of (i) the Revolving Credit Facility in the amount of $50,000 and
(ii) an approximately $100,000 Term Credit Facility, both bearing interest in accordance with the Trailing
Leverage Multiple (as defined below) and maturing on September 6, 2022.

The Credit Facilities include an accordion feature in the amount of $25,000 and bear interest according
to the type of borrowing advanced, which may be based on a reference rate of the U.S. base rate or
the Canadian prime rate, plus a margin that ranges from 100 to 225 basis points (“bps”) or the LIBOR
rate or bankers’ acceptances rate, plus a margin that ranges from 200 to 325 bps. The applicable
margins are derived from the Company’s senior leverage ratio, as follows: (i) where the U.S. base rate
or a Canadian prime rate is used, the margins range from 100 bps at less than 2.0x senior leverage
ratio, to 225 bps at greater than or equal to 3.5x senior leverage ratio, and (ii) where the LIBOR rate or
bankers’ acceptances rate is used, the margins range from 200 bps at less than 2.0x senior leverage
ratio, to 325 bps at greater than or equal to 3.5x senior leverage ratio (the “Trailing Leverage Multiple”).

The Company incurred $467 and $532 of costs associated with the first and second amendment,
respectively, which have been recorded as debt financing costs against long-term debt and will be
recognized in interest expense over the term of the loan.

February 3,
2018

January 28,
2017

Long-term debt, beginning of period

$ 104,459

$ 108,019

Long-term debt repayments of term loan
Long-term debt financing costs
Total cash flow from long-term debt financing activities

Amortization of long-term debt financing costs
Total non-cash long-term debt activity

(19,654)
(999)
83,806

659
659

(4,163)
–
103,856

603
603

Total long-term debt, end of period

84,465

$ 104,459

Recorded in the consolidated balance sheet as follows:

Current portion of long-term debt
Long-term portion of long-term debt

4,984
79,481

5,550
98,909

84,465

$ 104,459

As at February 3, 2018, principal repayments due on long-term debt were as follows:

Within 1 year
Within 1 - 2 years
Within 2 - 3 years
Within 3 - 4 years
Within 4 - 5 years

Total1

1 Total long-term debt of $84,465 is net of $2,718 of unamortized long-term debt financing costs.

Term loan

4,984
4,984
4,984
4,984
67,247

87,183

ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 53 week period ended February 3, 2018 and the 52 week period ended January 28, 2017

(In thousands of Canadian dollars, except per share amounts)

Total interest expense for the 53 week period ended February 3, 2018 was $5,728 (52 week period
ended January 28, 2017 - $6,112), comprised of:

consolidation exercise price such that the in-the-money value of such stock options remained
unchanged.

Interest paid on long-term debt
Amortization of long-term debt financing costs
Other

Interest Expense

February 3,
2018

January 28,
2017

4,915
659
154

5,381
603
128

5,728

6,112

As at February 3, 2018, the Company had outstanding letters of credit of (i) US$nil (January 28, 2017 –
US$27); and (ii) $nil (January 28, 2017 – $36) relating to purchases from foreign suppliers.

10. Share Capital

On October 25, 2017, the Company successfully completed the IPO at a price of $12.00 per Share
through a secondary sale of Shares by its principal shareholders. The Company’s principal
shareholders sold an aggregate of 16,667,000 Shares for total gross proceeds of $200,004. The
Company did not receive any of the proceeds from the IPO. Costs relating to the IPO (excluding the
underwriters’ fees payable by the selling shareholders), amounted to $3,733 for the 53 week period
ended February 3, 2018, and were expensed in selling, general and administrative expenses as
incurred.

Immediately prior to the closing of the IPO, the following capital changes were implemented by the
Company (the “Pre-Closing Capital Changes”):

• all of the outstanding Class B Shares of the Company (“Class B Shares”) were converted into Class

A Shares of the Company (“Class A Shares”) on a one-for-one basis;

• immediately following the foregoing conversion, the Company’s share capital was amended to be
comprised of an unlimited number of common shares and an unlimited number of preferred shares,
issuable in series;

• each Class A Share was exchanged for one Share;

following the foregoing share exchanges:

• all of the Company’s issued and outstanding Shares were consolidated on a 0.214193-to-one

basis; and

• each stock option to acquire, and restricted share unit (“RSU”) exercisable to acquire Class C
Shares of the Company, outstanding immediately prior to the closing of the IPO, were exchanged
on a 0.214193-to-one basis for stock options and RSUs exercisable to acquire Shares at a post-

The Company’s authorized share capital consists of an unlimited number of Shares and an unlimited
number of preferred shares, issuable in series. The holders of Shares are entitled to receive
distributions as declared from time to time by the Board. Shareholders are entitled to one vote per
Share at shareholder meetings of the Company.

Preferred shares of each series, if and when issued, will, with respect to the payment of dividends, be
entitled to preference over Shares. Except as provided in any special rights or restrictions attaching to
any series of preferred shares issued from time to time, the holders of preferred shares will not be
entitled to vote at any shareholder meetings of the Company.

During the 53 week period ended February 3, 2018, the Company paid a one-time distribution of
$20,000 to Shareholders (52 week period ended January 28, 2017 – $nil), equivalent to $0.48 per
Share.

As at February 3, 2018, there were 41,980,500 Shares and no preferred shares issued and outstanding.
All issued Shares are fully paid.

The following table provides a summary of changes to the Company’s share capital:

February 3, 2018

January 28, 2017

Number of
Shares

Share
capital

Number of
Shares

Share
capital

Outstanding Shares,
beginning of period

Issuance of Shares

Outstanding Shares,

end of period

41,980,500
–

$ 195,994
–

41,926,952
53,548

$ 195,744
250

41,980,500

$ 195,994

41,980,500

$ 195,994

ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 53 week period ended February 3, 2018 and the 52 week period ended January 28, 2017

(In thousands of Canadian dollars, except per share amounts)

11. Earnings per Share

12. Share-based compensation

The Company presents basic and diluted earnings per Share (“EPS”) data for its Shares. Basic EPS is
calculated by dividing net income by the weighted average number of Shares outstanding during the
period. Diluted EPS is determined by adjusting net income and the weighted average number of Shares
outstanding, for the effects of all dilutive potential Shares, which comprise share-based compensation
granted to employees.

Under the various share-based compensation plans, the Company may grant stock options or other
security-based instruments to buy approximately 4.7 million shares. As at February 3, 2018,
approximately 3.3 million stock options and 15,985 RSUs were granted and outstanding.

The following is a summary of the Company’s stock option activity:

Weighted average Shares outstanding
Stock options

February 3,
2018

41,980,500
580,259

January 28,
2017

41,970,967
55,190

Dilutive weighted average Shares outstanding

42,560,759

42,026,157

Net income

February 3,
2018

January 28,
2017

$ 17,501

8,185

Basic earnings per Share
Diluted earnings per Share

0.42
0.41

0.19
0.19

For the 53 week period ended February 3, 2018, 1,850,841 performance-based stock options were not
included in the calculation of basic or diluted EPS (January 28, 2017 – 1,677,079) as the conditions
required to convert these options to Shares were not met. See Note 12 for more information regarding
these stock options.

For the 53 week period
ended February 3, 2018

Legacy Equity
Incentive Plan

Legacy Employee
Option Plan

Omnibus
Plan

Weighted
average
exercise
price

Number of
options

Weighted
average
exercise
price

Number of
options

Weighted
average
exercise
price

Number of
options

Total

Weighted
average
exercise
price

Number of
options

Outstanding options,
beginning of period

Granted

Outstanding options,
end of period

Exercisable options,
end of period

2,515,615
–

$ 4.77
–

–
497,986

–
6.26

–
300,649

–
11.87

2,515,615
798,635

$ 4.77
8.37

2,515,615

$ 4.77

497,986

$ 6.26

300,649

$ 11.87

3,314,250

$ 5.64

212,791

$ 4.75

–

212,791

$ 4.75

For the 52 week period
ended January 28, 2017

Legacy Equity
Incentive Plan

Legacy Employee
Option Plan

Omnibus
Plan

Weighted
average
exercise
price

Number of
options

Weighted
average
exercise
price

Number of
options

Outstanding options,
beginning of period

Granted

Outstanding options,
end of period

Exercisable options,
end of period

676,241
1,839,374

$ 4.67
4.81

2,515,615

$ 4.77

45,083

$ 4.67

–
–

–

–
–

–

–
–

–

–
–

–

Total

Weighted
average
exercise
price

Number of
options

676,241
1,839,374

$ 4.67
4.81

2,515,615

$ 4.77

45,083

$ 4.67

Legacy Equity Incentive Plan

On June 7, 2017, the Company amended and restated its Legacy Equity Incentive Plan (the “Legacy
Equity Incentive Plan”), adopted on December 1, 2015. The Legacy Equity Incentive Plan is a part of a
legacy compensation program pursuant to which four executive officers and one director of the
Company were granted time-based stock options and performance-based stock options to purchase
Shares in the capital of the Company and/or RSUs that provide rights to acquire Shares in the capital
of the Company. The time-based stock options vest over a five year period from the applicable grant
date. The performance-based stock options vest and are exercisable upon the majority shareholders'
achievement of certain internal rates of return. The stock options have a contractual life of 10 years.

ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 53 week period ended February 3, 2018 and the 52 week period ended January 28, 2017

(In thousands of Canadian dollars, except per share amounts)

For the 53 week period ended February 3, 2018, the Company granted 15,985 RSUs under the Legacy
Equity Incentive Plan (52 week period ended January 28, 2017 – nil), which were all vested as of
February 3, 2018. The Legacy Equity Incentive Plan was further amended at the closing of the IPO so
that no additional awards could be made under the plan, but stock options and RSUs previously granted
under the plan continue to remain outstanding in accordance with their terms and will continue to be
governed by the provisions of the plan.

For the 53 week period ended February 3, 2018, the Company recognized share-based compensation
expense of $713 (52 week period ended January 28, 2017 - $474) related to the Legacy Equity
Incentive Plan, recorded in selling, general and administrative expenses with a corresponding increase
to contributed surplus.

Legacy Employee Option Plan

On June 7, 2017, the Company adopted a new employee option plan (the “Legacy Employee Option
Plan”). The Legacy Employee Option Plan is a part of a legacy compensation program pursuant to
which certain employees and consultants of the Company or its subsidiaries were granted stock options
to purchase Shares in the capital of the Company. The Legacy Employee Option Plan entitles eligible
personnel to time-based stock options which commenced vesting on October 25, 2017 (date of IPO)
and vest over a three-year period. The stock options have a contractual life of 11 years.

For the 53 week period ended February 3, 2018, the Company granted 497,986 options under the
Legacy Employee Option Plan (52 week period ended January 28, 2017 – nil). The Legacy Employee
Option Plan was further amended at the closing of the IPO so that no additional awards could be made
under the plan, but stock options previously granted under the plan continue to remain outstanding in
accordance with their terms and will continue to be governed by the provisions of the plan.

For the 53 week period ended February 3, 2018, the Company recognized share-based compensation
expense of $313 (52 week period ended January 28, 2017 - $nil) related to the Legacy Employee
Option Plan, recorded in selling, general and administrative expenses with a corresponding increase
to contributed surplus.

Omnibus Plan

On October 25, 2017, in connection with the IPO, the Company established a new omnibus equity
incentive plan (the “Omnibus Plan”). The Omnibus Plan provides eligible participants with
compensation opportunities that will encourage ownership of the Shares, through the grants of stock
options, RSUs and performance share units (“PSUs”). Time-based options vest over a period of up to
five years. The performance-based options vest and are exercisable upon the majority shareholders'
achievement of certain internal rates of return. The options have a contractual life of 10 years. Stock
options, PSUs and RSUs issued by the Company under the Omnibus Plan are settled in Shares and
are accounted for as equity-settled awards. The maximum number of Shares that are available for

issuance under the Omnibus Plan is 1,679,220, which represents approximately 4% of the issued and
outstanding Shares.

The exercise price for stock options will be determined by the Board, which may not be less than the
fair market value of a Share (being the closing price of a Share on the TSX on the last trading day
immediately prior to the applicable date (the “Market Value”) on the date the stock option is granted.
Stock options will vest in accordance with the vesting schedule established on the grant date. Stock
options must be exercised within a period fixed by the Board that may not exceed 10 years from the
date of grant. The Omnibus Plan also provides for earlier expiration of stock options upon the
occurrence of certain events, including the termination of a participant’s employment.

A RSU is a right to acquire a Share following a period of continuous employment. PSUs are similar to
RSUs, but their vesting is, in whole or in part, conditioned on the attainment of specified performance
metrics as may be determined by the Board. The terms and conditions of grants of stock options, RSUs
or PSUs, including the quantity, type of award, grant date, vesting conditions, vesting periods,
settlement date and other terms and conditions with respect to the awards, will be set out in the
participant’s grant agreement. In the case of PSUs, the performance-related vesting conditions may
include financial or operational performance of the Company, total shareholder return, individual
performance criteria or other criteria as determined by the Board, which will be measured over a
specified period.

For the 53 week period ended February 3, 2018, the Company granted 126,884 time-based stock
options and 173,765 performance-based stock options under the Omnibus Plan (52 week period ended
January 28, 2017 – nil). The time-based stock options vest over a three year period from the applicable
grant date.

For the 53 week period ended February 3, 2018, the Company recognized share-based compensation
expense of $166 (52 week period ended January 28, 2017 - $nil) related to the Omnibus Plan, recorded
in selling, general and administrative expenses with a corresponding increase to contributed surplus.

Director Deferred Share Unit Plan

On October 25, 2017, the Company established a director deferred share unit plan (the “DSU Plan”).
The DSU Plan encourages Company directors to increase their ownership in the Company by allowing
them to elect to take all or a portion of their annual cash retainer in the form of deferred share units
(“DSUs”). A DSU is a unit, equivalent to the value of a Share, credited to a director. Following the end
of an eligible director’s tenure as a member of the Board, the director will receive a payment in cash
equal to the fair market value of the Shares represented by his or her DSUs. DSUs issued by the
Company under the DSU Plan are settled in cash and are accounted for as cash-settled awards. No
Shares are required to be reserved under the DSU Plan.

ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 53 week period ended February 3, 2018 and the 52 week period ended January 28, 2017

(In thousands of Canadian dollars, except per share amounts)

The fair value of the stock options issued in the year are estimated at the date of grant using the Black
Scholes model and using the following assumptions:

The contractual maturities of the Company’s current and long-term financial liabilities as at
February 3, 2018, excluding interest payments, are as follows:

Expected volatility
Share price at grant date
Exercise price
Risk-free interest rate
Expected term
Fair value per option

February 3, 2018

January 28, 2017

31% - 40%
$6.26 - $12.00
$6.26 - $12.00
1.36% - 2.08%
4.5 years – 10.5 years
$3.08 - $4.30

32% - 35%
$4.67 - $5.37
$4.67 - $5.37
0.60% - 1.30%
5.5 years
$0.76 - $1.71

The computation of expected volatility was based on the historical volatility of comparable companies
from a representative peer group selected based on industry. The risk-free interest rate is based on
Government of Canada bond yields with maturities that coincide with the exercise period and terms of
the grant. The expected life estimate was determined by management based on a number of factors
including vesting terms, exercise behaviour and the contractual term of the options.

13. Financial risk management

The Company has exposure to the following risks from its use of financial instruments:

(a) Liquidity risk

Liquidity risk is the risk that the Company will encounter difficulty in meeting obligations
associated with its financial liabilities. The Company prepares cash flow forecasts to ensure it
has sufficient funds through operations and access to debt facilities to meet its financial
obligations.

The Company maintains Credit Facilities, as described in Note 9, allowing it to access funds
for operations.

Carrying
amount

Contractual
cash flows

Under
1 year

1 - 3
years

3 - 5
years

More than
5 years

Remaining to maturity

18,306
84,465
894

18,306
87,183
863

18,306
4,984
338

–
9,968
491

–
72,231
34

103,665

106,352

23,628

10,459

72,265

–
–
–

–

Non-derivative financial

liabilities

Accounts payable and
accrued liabilities

Long-term debt
Finance lease obligation

(b) Currency risk

The Company is exposed to foreign exchange risk on foreign currency denominated financial
assets and liabilities. A five percentage point change in the Canadian dollar against the U.S.
dollar, assuming that all other variables are constant, would have changed pre-tax net income
for the 53 week period ended February 3, 2018 by $361 (52 week period ended January 28,
2017 – $544), as a result of the revaluation on these financial assets and liabilities.

The Company purchases a significant amount of its merchandise in U.S. dollars and enters
into forward contracts to reduce the foreign exchange risk with respect to these U.S. dollar
denominated purchases. The Company has performed a sensitivity analysis on its forward
contracts (designated as cash flow hedges), to determine how a change in the U.S. dollar
exchange rate would impact other comprehensive income. A five percentage point change in
the Canadian dollar against the U.S. dollar, assuming that all other variables are constant,
would have changed other comprehensive income for the 53 week period ended February 3,
2018 by $3,212 (52 week period ended January 28, 2017 – $nil), as a result of the revaluation
on the Company’s forward contracts.

The following table indicates the periods in which the cash flows associated with cash flow
hedges are expected to occur and the carrying amounts of the related hedging instruments:

Carrying
amount

Contractual
cash flows

Under
1 year

1 - 3
years

3 - 5
years

More than
5 years

Remaining to maturity

Derivative financial

liabilities

Derivative obligations

1,233

1,241

–

ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 53 week period ended February 3, 2018 and the 52 week period ended January 28, 2017

(In thousands of Canadian dollars, except per share amounts)

The following table indicates the periods in which the cash flows associated with cash flow
hedges are expected to impact earnings and the carrying amounts of the related hedging
instruments:

Carrying
amount

Contractual
cash flows

Under
1 year

1 - 3
years

3 - 5
years

More than
5 years

Remaining to maturity

Derivative financial

liabilities

Derivative obligations

1,233

1,241

1,134

107

–

Market fluctuations in interest rates impact the Company’s earnings with respect to cash
borrowings under the Credit Facilities. A one percentage point change in the applicable interest
rate would have changed pre-tax net income for the 53 week period ended February 3, 2018
by $1,130 (52 week period ended January 28, 2017 – $1,068).

(d) Credit risk

Credit risk is the risk of an unexpected loss if a customer or counterparty to a financial
instrument fails to meet its contractual obligations. The Company’s financial instruments that
are exposed to concentrations of credit risk are primarily cash, loans receivable, and accounts
receivable. The Company limits its exposure to credit risk with respect to cash by dealing
primarily with large Canadian and U.S. financial institutions. The Company’s accounts
receivable consist primarily of receivables from business partners in the Partners and Other
operating segment, which are settled in the following fiscal quarter.

As at February 3, 2018, the Company’s maximum exposure to credit risk for these financial
instruments was as follows:

Loans receivable
Accounts receivable, excluding allowance for doubtful accounts

541
6,467

7,008

(e) Capital management

The Company manages its capital and capital structure with the objective of ensuring that
sufficient liquidity is available to support its financial obligations and to execute its strategic
plans. The Company considers EBITDA as a measure of its ability to service its debt and meet
other financial obligations as they become due.

EBITDA is defined as follows:

Net income
Add back:

Interest expense
Income taxes expense
Depreciation and amortization

EBITDA

February 3,
2018

January 28,
2017

$ 17,501

8,185

5,728
6,902
10,886

6,112
3,366
9,803

$ 41,017

$ 27,466

The Company has financial and non-financial covenants under the Credit Facilities which allow
for certain adjustments to EBITDA (“Adjusted EBITDA”) for purposes of compliance with those
covenants. The key financial covenant includes a consolidated debt to Adjusted EBITDA ratio,
total debt to Adjusted EBITDA ratio, and fixed charge coverage ratio. As at February 3, 2018,
the Company was in compliance with its covenants.

Adjusted EBITDA is determined as follows:

EBITDA
Add:

February 3,
2018

January 28,
2017

$ 41,017

$ 27,466

Transaction costs from business acquisition
Transaction costs from the Offering
Amortization of non-cash items from

business acquisition

Legacy stock option expense
Non-cash rent expense from deferred lease costs
Impairment of fixed assets
Other

137
3,733

907
1,026
847
1,281
3,686

315
–

6,912
474
1,622
987
3,802

Adjusted EBITDA

$ 52,634

$ 41,578

ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 53 week period ended February 3, 2018 and the 52 week period ended January 28, 2017

(In thousands of Canadian dollars, except per share amounts)

14. Income taxes expense

The Company’s income taxes expense comprises the following:

February 3,
2018

January 28,
2017

Current income taxes expense

$ 6,655

4,143

Deferred income taxes expense (recovery):

Origination and reversal of temporary differences

247

(777)

Total income taxes expense

$ 6,902

3,366

The effective income tax rate in the consolidated statement of net income and statement of
comprehensive income was reported at rates different than the combined basic Canadian federal
and provincial average statutory income tax rates for the following reasons:

February 3,
2018

January 28,
2017

Combined basic federal and provincial average

statutory rate

26.7%

Non-deductible eligible capital balances
Effective tax rate

1.6%
28.3%

2.4%
29.1%

Movement in deferred tax liabilities (assets) balance:

As at
January 28,
2017

Other
Expense comprehensive
loss (income)

(recovery)

As at
February 3,
2018

Acquisition costs
Deferred lease costs
Fixed assets
Intangible assets and goodwill
Derivative obligations

$ (73)
(375)
1,583
20,113
–

$ 42
(262)
(945)
1,412
–

–
–
–
–
(329)

(31)
(637)
638
21,525
(329)

21,248

$ 247

$ (329)

$ 21,166

Measurement
adjustment
for provisional
January 31, purchase price
adjustment

As at

2016

Inventory
Acquisition costs
Deferred lease costs
Fixed assets
Intangible assets and goodwill

1,539
(16)
62
45
15,492

–
–
–
2,279
2,624

Expense
(recovery)

(1,539)
(57)
(437)
(741)
1,997

As at
January 28,
2017

–
(73)
(375)
1,583
20,113

17,122

4,903

(777)

$ 21,248

ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 53 week period ended February 3, 2018 and the 52 week period ended January 28, 2017

(In thousands of Canadian dollars, except per share amounts)

15. Commitments and contingencies

(a) Commitments

The Company leases various store locations, a head office, a distribution warehouse, a
manufacturing facility and equipment under non-cancellable operating lease agreements. The
leases are classified as operating leases since there is no transfer of risks and rewards
inherent to ownership.

The leases have varying terms, escalation clauses and renewal rights. Minimum lease
payments are recognized on a straight-line basis. Leases run for varying terms that generally
do not exceed 10 years, with options to renew (if any) that do not exceed 5 years. The majority
of real estate leases are net leases, which require additional payments for the cost of
insurance, taxes, common area maintenance and utilities. Non-cancellable operating lease
base rent payments are payable on a fiscal year end as follows:

2018
2019
2020
2021
2022
Thereafter

(b) Contingencies

24,312
23,866
21,231
18,299
16,094
52,470

$ 156,272

In the course of its business, the Company, from time to time, becomes involved in various
claims and legal proceedings. In the opinion of management, all such claims and suits are
adequately covered by insurance, or if not so covered, the results are not expected to materially
affect the Company’s financial position.

16. Personnel expenses

Wages and salaries
Benefits and other incentives

February 3,
2018

January 28,
2017

52,102
11,431

45,776
9,686

63,533

55,462

17. Related party transactions

The Company’s related parties include key management personnel and key shareholders of the
Company, including other entities under common control. Investment funds managed by Searchlight
Capital Partners, L.P. (“Searchlight”) beneficially own approximately 47.7% of the total outstanding
Shares and shareholders of a company formerly known as Roots Canada Ltd. through their wholly-
owned entities (the “Founders”) beneficially own approximately 12.0%. All transactions as described
below are in the normal course of business and have been accounted for at their exchange value.

(a)

Transactions with shareholders

The Company incurred the following costs in connection with transactions entered into with its
principal shareholders:

Rent(1)
Consulting fees(2)
Reimbursements(2)
Monitoring fees(3)

February 3,
2018

January 28,
2017

786
267
35
921

796
567
148
1,060

(1) The Company leases the building for their distribution centre and their manufacturing facility from companies that

are under common control of the Founders. Figures include rent expenses as they relate to the lease of these
properties. At the end of the period, the Company had outstanding letters of credit of $286 (January 28, 2017 –

$410) for companies that are under common control of the Founders.

(2) Under a consulting agreement between the Company and the Founders, the Founders and their spouses were

entitled to consulting fees, clothing allowances and reimbursement for certain travel, meals and phone expenses.

(3) Consists of monitoring fees and out-of-pocket expenses payable to Searchlight.

In connection with the IPO, the Company terminated certain agreements with related parties
whereby, subsequent to the closing of the IPO, the Company is no longer required to pay
consulting fees, monitoring fees, or reimbursements of expenses as previously incurred, as
referred to above.

ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 53 week period ended February 3, 2018 and the 52 week period ended January 28, 2017

(In thousands of Canadian dollars, except per share amounts)

Corporate Information

BOARD OF DIRECTORS

CORPORATE HEADQUARTERS

(b) Transactions with key management personnel

Key management of the Company includes members of the Board, as well as members of the
Company’s executive team. Key management personnel remuneration includes the following:

February 3,
2018

January 28,
2017

Salaries, benefits and incentives, and consulting fees
Management share-based compensation
Director fees

4,794
885
186

4,393
474
–

5,865

4,867

In April 2016, the Company issued and sold 53,548 Shares to a member of the Company’s
executive team.

In February 2016, a member of the Company’s executive team purchased 214,193 Shares
from Searchlight at a price of $4.67 per Share. The purchase was paid for using $500 in cash
and a $500 loan from the Company. The $500 loan from the Company is to be repaid at the
earlier of six years from the loan date and upon a liquidity sale of the Company. Interest accrues
at a rate of 4% per annum and will be payable at the start of each calendar year following the
date of the loan. Unpaid interest may be deemed paid by increasing the principal amount
outstanding. As at February 3, 2018, the outstanding balance on the loan was $541 (January
28, 2017 – $520).

Gregory David

Jim Gabel

Dale H. Lastman, C.M.

Richard P. Mavrinac

Joel Teitelbaum

Erol Uzumeri – Chairman

Eric Zinterhofer

EXECUTIVE OFFICERS

Jim Gabel
President & Chief Executive Officer

Jim Rudyk
Chief Financial Officer

Priscilla Schum
Chief Merchandising Officer

James Connell
Vice President, e-Commerce
& Customer Experience

Almira Cuizon
Vice President, Retail Operations

NON-EXECUTIVE SENIOR MANAGEMENT TEAM

Anne Hodkin
Vice President, Information Strategy & Systems

Kaleb Honsberger
Vice President, General Counsel

Alex Jones
Vice President, Real Estate

Karl Kowaleski
Vice President, Leather Factory

Michelle Lettner
Vice President, Human Resources

Melinda McDonald
Vice President, Wholesale & Business Development

Mangala Rao-D’sa
Vice President, Marketing

1400 Castlefield Avenue
Toronto, ON
M6B 4C4
Canada

SHARE INFORMATION

Shares in Roots Corporation are traded
on the Toronto Stock Exchange (TSX)
under the trading symbol “ROOT”

ANNUAL GENERAL MEETING

Friday, June 15, 2018, 10:00 a.m. eastern time
TMX Broadcast Centre
130 King Street West
Toronto, ON
Canada

AUDITOR

KPMG
Toronto, ON

TRANSFER AGENT

Computershare
Toronto, ON

LEGAL COUNSEL

Kaleb Honsberger
General Counsel
Roots

INVESTOR RELATIONS

Kristen Davies
Roots
investors@roots.com
1-844-762-2343

Salt & Pepper Sweats: First designed in 1979, this ultra-soft fleece is made with a
special knit that’s exclusively ours. Often imitated but never replicated, our Salt & Pepper has a
one-of-a-kind look that cannot be recreated.

The Roots Award Jacket: First created in 1979, this iconic piece of our heritage
has become an emblem of style and Canadian craftsmanship. Handcrafted in Canada, each
jacket is made with our exclusive leathers and high quality, woollen melton. No detail is
overlooked: every sleeve is cut by hand; our chenille crests are hand-trimmed; and our Roots
logo is embroidered on for a signature finish.

The Banff Bag: Handcrafted in Canada since 1988, our Banff Bag is a Roots classic.
The perfect weekender bag, it is designed to be a versatile essential for wherever you’re
headed next.

investors.roots.com

Printed in Canada on recycled material