Annual Report
F I S C A L 2 0 1 9
O U R V I S I O N
To inspire the world to
experience everyday adventures
with comfort and style
ROOTS CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Fiscal Year Ended February 1, 2020)
The following Management’s Discussion and Analysis (“MD&A”) dated April 28, 2020 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 1, 2020. This MD&A should be read in conjunction
with our audited consolidated financial statements for the fiscal year ended February 1, 2020,
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 2019” are to our fiscal quarter for the 13-week period ended
February 1, 2020, and all references to “Q4 2018” are to our fiscal quarter for the 13-week period
ended February 2, 2019. All references in this MD&A to “F2019” are to the 52-week fiscal year
ended February 1, 2020, all references to “F2018” are to the 52-week fiscal year ended February
2, 2019, and all references to “F2017” are to the 53-week fiscal year ended February 3, 2018.
On February 3, 2019, the Company adopted IFRS 16, Leases (“IFRS 16”) using the modified
retrospective approach. As a result of this approach, the comparative period has not been
restated. See “New Accounting Standards Adopted in the Year”.
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 28, 2020.
Certain totals, subtotals, and percentages throughout this MD&A may not reconcile due to
rounding.
1
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 (loss) 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”,
“Adjusted DTC Gross Margin”, “EBITDA”, “Adjusted EBITDA”, “Adjusted Net Income (Loss)”, and
“Adjusted Net Income (Loss) per Share”. This MD&A also refers to “Comparable Sales Growth
(Decline)”, 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 (loss) 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. Beginning in the first quarter of
F2019 (“Q1 2019”), the Company adopted IFRS 16 using the modified retrospective approach.
As a result of this approach, the comparative period has not been restated. To improve the
comparability of underlying performance with periods prior to our adoption of IFRS 16, Adjusted
EBITDA for Q4 2019 and F2019 has been adjusted to exclude, in addition to certain other
adjustments, the impact of IFRS 16. For additional information relating to the adoption of IFRS
16, see “New Accounting Standards Adopted in the Year”. 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.
2
“Adjusted Net Income (Loss)” is defined as net income (loss), 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. Beginning in Q1 2019, the Company adopted IFRS 16 using the modified retrospective
approach. As a result of this approach, the comparative period has not been restated. To improve
the comparability of underlying performance with periods prior to our adoption of IFRS 16,
Adjusted Net Income (Loss) for Q4 2019 and F2019 has been adjusted to exclude, in addition to
certain other adjustments, the impact of IFRS 16. For additional information relating to the
implementation of IFRS 16, see “New Accounting Standards Adopted in the Year”. We believe
that Adjusted Net Income (Loss) is useful, to both management and investors, in assessing the
underlying performance of our ongoing operations.
“Adjusted Net Income (Loss) per Share” is defined as Adjusted Net Income (Loss), divided by
the weighted average common shares outstanding during the periods presented. Beginning in Q1
2019, the Company adopted IFRS 16 using the modified retrospective approach. As a result of
this approach, the comparative period has not been restated. To improve the comparability of
underlying performance with periods prior to our adoption of IFRS 16, Adjusted Net Income (Loss)
per Share for Q4 2019 and F2019 has been adjusted to exclude, in addition to certain other
adjustments, the impact of IFRS 16. For additional information relating to the implementation of
IFRS 16, see “New Accounting Standards Adopted in the Year”. We believe that Adjusted Net
Income (Loss) 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 (Decline)” is a retail industry metric used to compare the percentage
change in sales derived from mature stores and eCommerce, in a certain period, compared to
the prior year sales from the same stores and eCommerce, over the same time period of the prior
fiscal year. We believe Comparable Sales Growth (Decline) helps explain our sales growth (or
decline) in established stores and eCommerce, which may not otherwise be apparent when
relying solely on year-over-year sales comparisons. Comparable Sales Growth (Decline) is
calculated based on sales (net of a provision for returns) from stores that have been opened for
at least 52 weeks in our DTC segment, including eCommerce 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 (Decline) also excludes the impact of foreign currency fluctuations.
Beginning in the second quarter of F2018 (“Q2 2018”), we changed our calculation methodology
in order to be more consistent with other retailers by applying the prior year’s U.S. dollar to
Canadian dollar exchange rates to both current year and prior year comparable sales to achieve
a consistent basis for comparison. Prior to Q2 2018, Comparable Sales Growth (Decline) was
calculated and presented using a U.S. dollar to Canadian dollar exchange rate of 1:1. The prior
fiscal quarters presented in this MD&A have been recalculated and presented using this new
constant currency calculation. Our Comparable Sales Growth (Decline) may be calculated
differently compared to other companies.
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.
3
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 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.
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 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 (“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, 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, 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 as
required under applicable securities laws in Canada. The forward-looking statements contained
in this MD&A are expressly qualified by this cautionary statement.
4
Overview
Established in 1973, Roots is a premium outdoor lifestyle brand. We unite the best of cabin and
city through unmistakable style built with uncompromising comfort and quality. We offer a broad
range of products that embody a comfortable cabin-meets-city style including women’s and men’s
apparel, leather goods, footwear, accessories and kids, toddler and baby apparel. Starting from
a little cabin in Algonquin Park, Canada, Roots has grown to become a global brand. As at
February 1, 2020, we had 114 corporate retail stores in Canada, eight corporate retail stores in
the United States, 114 partner-operated stores in Taiwan, 36 partner-operated stores in China,
one partner-operated store in Hong Kong, and a global eCommerce platform, Roots.com. Roots
Corporation is a Canadian corporation doing business as “Roots” and “Roots Canada”.
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”).
The Company’s common shares (the “Shares”) are listed on the Toronto Stock Exchange (“TSX”)
under the trading symbol “ROOT”.
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.
Brand Awareness
The Roots brand is well-known in Canada and Taiwan, with locations also in the United States,
mainland China and Hong Kong, as well as a growing awareness internationally. 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 focus on building our
brand and strengthening our brand voice through innovative, impactful brand initiatives as well as
delivering customer insight-driven product designs. In addition, we work to best position our brand
and business globally by leveraging the operational investments that we have made and growing
our omni-channel footprint.
5
Our Omni-Channel Business
Our corporate retail stores and eCommerce platform are integrated, providing our customers with
a seamless omni-channel shopping experience whether they are shopping online from a desktop
or mobile device, or in one of our retail stores. This includes the ability to:
• order online and collect in-store;
• order in-store for home delivery;
• order online for home delivery;
•
• shop anytime, anywhere at roots.com;
• obtain in-store inventory display on roots.com; and
•
return goods seamlessly via any channel.
locate your desired store online;
The success of our business is heavily dependent on our ability to continue to drive strong
comparable sales in our DTC segment and to grow our omni-channel footprint. This includes
renovating and expanding our existing corporate retail stores, optimizing our eCommerce
capabilities and selectively expanding our store base. Our ability to successfully execute our
omni-channel strategy is an important driver of our longer-term growth.
As eCommerce continues to become a larger component to the growth of our omni-channel
footprint, we depend on third-party logistics partners, such as Canada Post, to fulfill sales
transactions with our customers in a dependable and timely manner. Changes in geographic
coverage, service levels, capacity levels, and labour disruptions at our logistics partners may
adversely affect our business and financial results. While Roots has a primary service relationship
with Canada Post, we also work with other mail delivery services, providing alternative options as
to mitigate the impact of a disruption to delivery services.
During F2019, we relocated from our legacy retail-only distribution centre and, separately, our
third-party online order fulfillment and distribution facility to a single Roots-operated distribution
centre (the “DC Relocation Project”). As of the third quarter of F2019 (“Q3 2019”), we completed
the transition such that all retail store distribution and eCommerce fulfillment is now completed at
this single Roots-operated facility. Being able to fulfill centrally will enable us to more effectively
scale and execute our omni-channel strategy. Conversely, any failure of our distribution centre to
meet the demands of the Company or keep pace with our growth could have a material adverse
effect on our business and financial results.
Our International Operating Partner
Much of the success of our international 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 multi-channel strategy and our ability to support
our partner in this growth will impact the performance of our business. Our partner’s sales are
also impacted by shifts in economic conditions in the regions in which it operates that are beyond
our and our partner’s control, including: employment rates; consumer confidence levels;
consumer debt; and interest rates, all of which could limit the disposable income and discretionary
spending levels of consumers.
6
Product Development and Merchandising
Our sales are driven primarily from major Canadian markets in fall and winter months. However,
we are not defined by one product, season, geography, or demographic. With nearly five decades
of product leadership, our product range is diversified 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.
We continue to execute our broader merchandising strategy of bringing better products and
assortments to our diverse and global consumer base. Through our more formalized and analysis-
driven approach to product line development and our distribution channel upgrades, we are better
able to deliver coordinated collections across all lines of products, bringing the right products
through the right channels to our broadening base of customers.
Our business is affected by our ability to continue to develop products that resonate with
consumers, and we are working to accelerate our product development as we continue to
introduce products to mitigate the seasonal nature of our business (as further described below)
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. Commencing in F2017, 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%
17%
26%
42%
100%
7
Weather
Our corporate retail stores could be adversely impacted by extreme weather conditions in regions
in which they operate. For example, severe or abnormal snowfall, rainstorms, ice storms, or other
adverse weather conditions could decrease customer traffic in our stores and could adversely
impact our results. Our omni-channel presence helps to mitigate the impact of extreme weather
conditions as customers are able to order products through our eCommerce platform.
Furthermore, we are subject to risks relating to unseasonable weather patterns, such as warmer
temperatures in the fall and winter seasons and cooler temperatures in the spring and summer
seasons, which could cause our inventory to be incompatible with prevailing weather conditions
and could diminish demand for seasonal merchandise.
Novel Coronavirus
In December 2019, the novel coronavirus (“COVID-19”) surfaced in Wuhan, China, spreading
quickly to create what was then characterized as a global emergency. The World Health
Organization declared a global emergency on January 30, 2020 with respect to the outbreak,
which was subsequently characterized as a pandemic on March 11, 2020, leading many countries
to take drastic measures to manage the spread of the virus. The Company has since temporarily
closed all its stores in Canada and the United States and has temporarily closed or greatly
reduced capacity at other facilities in its supply chain and distribution channels (see “Subsequent
Events”). These are unprecedented times, and the impacts of the outbreak are unknown and
rapidly evolving. While most of these effects are expected to be temporary, the duration of the
business disruption and the related financial impact cannot be reasonably estimated at this time.
It is possible that our consolidated financial results in fiscal 2020 will be materially negatively
impacted by this event. Based on events and circumstances known to us to date, we believe that:
• Customer demand will be the most significant issue amidst the uncertainty in the global
economy, negatively impacting our corporate retail stores, as well as the businesses of
our international operating partner and our North American wholesale and retail partners;
• While eCommerce sales should fare better than retail, we may nevertheless suffer
significant sales losses as overall customer demand and consumer spending is expected
to decline significantly in response to COVID-19 and the related global economic impacts;
and
• We may also face challenges through our supply chain network if there are disruptions in
service at our distribution centre, third-party logistics fulfillment partners, suppliers,
manufacturing facilities or logistics providers.
While the full-extent that the impact that COVID-19 will have on the Company’s business plans
remain unclear, we believe that there are cost reductions and liquidity management strategies
that we can implement to mitigate these risks. At this point, we also expect to have access to
borrowing and other forms of relief support that may be made available to businesses impacted
by this pandemic. However, as the future impact of the outbreak is highly uncertain and cannot
be predicted, there can be no assurance that the outbreak will not have a material adverse impact
on the future financial results of the Company. The extent of the impact will depend on future
developments, including actions taken to contain COVID-19.
8
Consumer Trends
Our success largely depends on our ability to anticipate and respond to shifts in consumer trends,
demands and preferences in a timely manner. All of our products are subject to changing
consumer preferences that cannot be predicted with certainty. If we are unable to adequately
respond to changing consumer trends, our sales could be adversely impacted, or we could
experience higher inventory markdowns which could decrease our profitability. This is mitigated
by our focus on continuous product development to create products that resonate with our
consumers, our diverse product range across multiple categories, and the fact that our enduring
icons have remained favourites of our customers for decades and continue to be customer
favourites today. Our sales are also impacted by shifts in economic conditions that are beyond
our control, such as: employment rates; consumer confidence levels; consumer debt; and interest
rates, all of which could limit the disposable income and discretionary spending levels of
consumers.
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 eCommerce. 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 includes royalties earned through the licensing of
our brand to select manufacturing and wholesale distribution 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 87.2% and 12.8% of our sales,
respectively, in F2019 (F2018 – 86.3% and 13.7% of our sales, respectively).
9
Summary of Financial Performance
We refer the reader to the sections entitled “Components of our Results of Operations”, “Factors
Affecting our Performance” 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. Unless otherwise indicated, financial
information includes the impact of the implementation of IFRS 16.
The following table summarizes our results of operations for the periods indicated:
CAD $000s (except per share data)
Statement of Net Income (Loss) Data:
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative expenses (1) . . . . . . . .
Goodwill impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings (loss) per share . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings (loss) per share . . . . . . . . . . . . . . . . . . . .
Non-IFRS Measures and Other Performance
Measures:
Corporate retail stores, end of period . . . . . . . . . . . . . . . . .
Comparable Sales Growth (Decline) (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 2019
Q4 2018
F2019
F2018
F2017
127,453
69,290
54.4%
69,445
44,799
(44,577)
$(1.06)
$(1.06)
122
(1.8)%
65,957
55.4%
26,053
13,269
$0.31
130,823
78,345
59.9%
51,776
–
18,276
$0.43
$0.43
121
3.1%
74,574
61.8%
34,784
22,345
$0.53
329,865
176,189
53.4%
188,308
44,799
(62,029)
$(1.47)
$(1.47)
122
(0.3)%
162,630
56.5%
26,068
4,018
$0.10
329,028
188,490
57.3%
166,790
–
11,400
$0.27
$0.27
121
(1.3)%
173,816
61.2%
41,903
20,179
$0.48
326,057
181,998
55.8%
151,867
–
17,501
$0.42
$0.41
119
12.2%
168,636
59.4%
52,634
29,137
$0.69
(1) Excluding the impacts of IFRS 16 and non-cash fixed asset and ROU asset impairments, selling, general and administrative expenses were: $48,245
in Q4 2019, $50,401 in Q4 2018, $170,536 in F2019, $165,415 in F2018, and $150,586 in F2017.See “Results of Operations” for further discussion
on year-over-year variances on selling, general and administrative expenses.
(2) Comparable Sales Growth (Decline), 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.
10
Selected Financial Results for Q4 2019 Compared to Q4 2018
• Total sales decreased by $3,370, or 2.6%, to $127,453 in Q4 2019, from $130,823 in Q4
2018.
• DTC sales decreased by $1,628, or 1.3%, in Q4 2019, compared to Q4 2018.
• Partners and Other sales decreased by $1,742, or 17.2%, in Q4 2019, compared
to Q4 2018.
• Comparable Sales Decline(1) was (1.8)% for Q4 2019 as compared to Comparable Sales
Growth(1) of 3.1% for Q4 2018.
• Gross profit decreased by $9,055, or 11.6%, to $69,290 in Q4 2019, from $78,345 in Q4
2018.
• DTC gross profit decreased by $8,914, or 12.0%, to $65,660 in Q4 2019, and as
a percentage of sales (“DTC gross margin”) decreased to 55.2% in Q4 2019, from
61.8% in Q4 2018.
• Adjusted DTC Gross Profit(1) decreased by $8,617, or 11.6%, to $65,957 in Q4
2019, and Adjusted DTC Gross Margin(1) decreased to 55.4% in Q4 2019, from
61.8% in Q4 2018.
• Recorded fixed asset impairment of $19,183 and goodwill impairment of $44,799,
compared to fixed asset impairment of $1,375 and goodwill impairment of $nil in Q4 2018.
• Selling, general and administrative expenses (“SG&A expenses”) increased by $17,669,
or 34.1%, to $69,445 in Q4 2019, from $51,776 in Q4 2018.
• Adjusted EBITDA(1) decreased by $8,731, or 25.1%, to $26,053 in Q4 2019, from $34,784
in Q4 2018.
• Net income (loss) decreased by $62,853, or 343.9%, to a net loss of $(44,577) in Q4 2019,
from net income of $18,276 in Q4 2018.
• Adjusted Net Income(1) decreased by $9,076, or 40.6%, to $13,269 in Q4 2019, from
$22,345 in Q4 2018.
• Basic earnings (loss) per Share decreased to $(1.06) in Q4 2019, from $0.43 in Q4 2018.
• Adjusted Net Income per Share(1) decreased to $0.31 in Q4 2019, from $0.53 in Q4 2018.
Selected Financial Results for F2019 Compared to F2018
• Total sales increased by $837, or 0.3%, to $329,865 in F2019, from $329,028 in F2018.
• DTC sales increased by $3,906, or 1.4%, compared to F2018.
• Partners and Other sales decreased by $3,069, or 6.8%, compared to F2018.
• Comparable Sales Growth (Decline)(1) was (0.3)% for F2019 as compared to (1.3)% for
F2018.
11
• Gross profit decreased by $12,301, or 6.5%, to $176,189 in F2019, from $188,490 in
F2018.
• DTC gross profit decreased by $12,026, or 6.9%, to $161,790, and DTC gross
margin decreased to 56.2% in F2019, from 61.2% in F2018.
• Adjusted DTC Gross Profit(1) decreased by $11,186, or 6.4%, to $162,630 in
F2019, and Adjusted DTC Gross Margin(1) decreased to 56.5% in F2019, from
61.2% in F2018.
• SG&A expenses increased by $21,518, or 12.9%, to $188,308 in F2019, from $166,790
in F2018.
• Adjusted EBITDA(1) decreased by $15,835, or 37.8%, to $26,068 in F2019, from $41,903
in F2018. Adjusted EBITDA was 7.9% of sales in F2019, decreasing from 12.7% of sales
in F2018.
• Net income (loss) decreased by $73,429, or 644.1%, to a net loss of $(62,029) in F2019,
from net income of $11,400 in F2018.
• Adjusted Net Income(1) decreased by $16,161, or 80.1%, to $4,018 in F2019, from $20,179
in F2018. Adjusted Net Income was 1.2% of sales in F2019, decreasing from 6.1% of
sales in F2018.
• Basic earnings (loss) per Share decreased to $(1.47) in F2019 from $0.27 in F2018.
• Adjusted Net Income per Share(1) decreased to $0.10 in F2019 from $0.48 in F2018.
Key Operational Developments
Real Estate
During F2019, in North America, we opened three new corporate retail stores, converted two pop-
up locations into permanent corporate retail stores, relocated four corporate retail stores,
completed major renovations of two of our existing corporate retail stores, and closed four
corporate retail stores as we continue to optimize our real estate portfolio.
In particular, during Q4 2019, we:
• opened a new corporate retail store in Tyson’s Corner in Tysons, Virginia, on November
7, 2019;
• closed our Milton store in Milton, Ontario; and
• closed our Bower Place pop-up location in Red Deer, Alberta.
Note:
(1) Comparable Sales Growth (Decline), Adjusted DTC Gross Profit, Adjusted DTC Gross Margin, Adjusted EBITDA, Adjusted Net
Income (Loss), and Adjusted Net Income (Loss) per Share are non-IFRS measures. See “Cautionary Note Regarding Non-
IFRS Measures and Industry Metrics” for a description of these measures.
12
The following table summarizes the change in our corporate retail store count for the periods
indicated, excluding various pop-up locations.
Number of stores, beginning of period . . . . . . . . . . . .
New stores . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Closed stores . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of stores, end of period . . . . . . . . . . . . . . .
Stores renovated or relocated . . . . . . . . . . . . . . . . . . .
Q4 2019
Q4 2018
F2019
F2018
122
1
1
122
–
125
–
4
121
1
121
5
4
122
6
119
10
8
121
10
The seven U.S. stores opened in the last three years include two stores in the Greater Boston
Area, three in the Washington D.C. area, one in Chicago and a pop-up location in Woodbury
Commons, New York (together, the “New U.S. stores”). In aggregate, the Company incurred an
Adjusted EBITDA loss of six million dollars in F2019 pertaining to the New U.S. stores, primarily
driven by below-expectation sales. During F2019, the Company also recorded a non-cash fixed
asset impairment charge of $12,738 pertaining to the New U.S. stores.
In part, due to the magnitude of the Adjusted EBITDA loss and the discretionary retail environment
having become increasingly challenging as a result of COVID-19, following year-end the Board
determined to liquidate its U.S. subsidiary, Roots USA Corporation through a Chapter 7
bankruptcy filing. The filing will result in the permanent closure of the New U.S. stores. See also
“Subsequent Events”.
International Partnership
During F2019, our international partner opened 11 partner-operated stores in China, four of which
opened in Q4 2019. In addition, our international partner opened one partner-operated store in
Hong Kong in Q1 2019. Through continued efforts to optimize its overall store portfolio, our partner
chose not to renew the lease for three stores in Taiwan and 12 stores in China during F2019. At
the end of Q4 2019, we had 114 partner-operated stores in Taiwan, 36 partner-operated stores
in China, and one partner-operated store in Hong Kong.
Components of our Results of Operations
In assessing our results of operations, 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 eCommerce operations. Sales to customers through our corporate retail stores are
recognized at the time of purchase, net of a provision for returns. eCommerce 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 eCommerce sales,
respectively.
13
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 are recognized when the performance obligations of goods delivery have
been 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, at the
later of (i) sales of licensed goods as reported by our international partner and other third-party
licensees, and (ii) when all performance obligations pertaining to the royalty have been satisfied.
Gross Profit
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 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. As a result of our transition to a single Roots-operated
distribution centre, in connection with the DC Relocation Project, commencing in Q3 2019 cost of
goods sold also includes variable distribution centre costs incurred to fulfill our eCommerce
orders. Previously, eCommerce order fulfillment costs, incurred through our third-party online
order fulfillment and distribution facility, was recorded in SG&A.
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. In F2017, 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, depreciation of store
and eCommerce assets, and costs incurred to support the relationships with our retail partners,
wholesale distributors, and licensees. SG&A expenses also include our marketing and brand
investment activities, and the corporate infrastructure required to support our ongoing business.
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 substantial portion of these costs are relatively fixed.
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 rent and depreciation and amortization
expenses for all office support assets and intangible assets.
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.
14
Interest Expense
Interest expense relates to interest accrued on our lease liabilities and our Credit Facilities (as
defined below). 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 27-28%, 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 F2019 and F2018 has been derived
from our Annual Financial Statements. Unless otherwise indicated, financial information includes
the impact of the implementation of IFRS 16. The selected consolidated financial information set
out below for Q4 2019 and Q4 2018 is unaudited.
CAD $000s
Sales
Cost of goods sold
Gross Profit
Selling, general and administrative expenses
Goodwill impairment
Income (loss) before interest expense and income
Q4 2019
Q4 2018
F2019
F2018
127,453
58,163
69,290
69,445
44,799
130,823
52,478
78,345
51,776
–
329,865
153,676
176,189
188,308
44,799
329,028
140,538
188,490
166,790
–
taxes expense (recovery)
(44,954)
26,569
(56,918)
21,700
Interest expense
Income (loss) before taxes
3,962
(48,916)
1,435
25,134
15,567
(72,485)
5,171
16,529
Income taxes expense (recovery)
(4,339)
6,858
(10,456)
5,129
Net income (loss)
(44,577)
18,276
(62,029)
11,400
Basic earnings (loss) per Share
$(1.06)
$0.43
$(1.47)
$0.27
15
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(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-current assets(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current liabilities(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-current liabilities(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
____________
Note:
As at February 1, 2020 As at February 2, 2019
$64,960
316,514
51,627
114,783
$53,677
387,097
67,208
223,060
(1) The impact of IFRS 16 on F2019 balance sheet figures was a decrease to current assets of $3,182 resulting from a
reclassification of lease inducements receivable from accounts receivable into lease liability, an increase to non-current assets
of $128,342 resulting from right-of-use (“ROU”) assets recognized, as well as an increase to current liabilities of $26,568, and
an increase to non-current liabilities of $106,081 resulting from lease liabilities recognized.
Results of Operations
Analysis of Results for Q4 2019 to Q4 2018 and F2019 to F2018
The following section provides an overview of our financial performance during Q4 2019
compared to Q4 2018 and during F2019 compared to F2018.
Sales
The following table presents our sales by segment for each of the periods indicated:
CAD $000s
DTC . . . . . . . . . . . . . . . . . . . . . . . . . . .
Partners and Other . . . . . . . . . . . . . . .
Total Sales . . . . . . . . . . . . . . . . . . . . .
Q4 2019
Q4 2018
% Change
F2019
F2018
% Change
119,050
8,403
127,453
120,678
10,145
130,823
(1.3)%
(17.2)%
(2.6)%
287,762
42,103
329,865
283,856
45,172
329,028
1.4%
(6.8)%
0.3%
Total sales were $127,453 in Q4 2019 as compared to $130,823 in Q4 2018, representing a
decrease of $3,370, or 2.6%.
DTC sales decreased $1,628, or 1.3%, in Q4 2019 as compared to Q4 2018. The year-over-year
decline in Q4 2019 DTC sales was primarily driven by a Comparable Sales Decline of (1.8)%,
partially offset by the opening of one net new store. The Comparable Sales Decline for Q4 2019
was predominantly a result of lower in-store traffic, partially offset, by growth in eCommerce sales.
Sales in the Partners and Other segment decreased by $1,742, or 17.2%, in Q4 2019 as
compared to Q4 2018, primarily driven by the impact of macroeconomic and geopolitical
headwinds affecting the Asian markets where our international partner operates.
Total sales were $329,865 in F2019 as compared to $329,028 in F2018, representing an increase
of $837, or 0.3%.
F2019 sales in the DTC segment increased by $3,906, or 1.4%, as compared to F2018. The year-
over-year growth in F2019 DTC sales was driven by the opening of one net new store in F2019
as well as the full-year sales benefit from stores opened in the middle of F2018, partially offset by
a Comparable Sales Decline of (0.3)%. The Comparable Sales Decline for F2019 was
predominantly a result of lower in-store traffic and a delay in the flow of product as we transitioned
to our new integrated distribution centre, partially offset, by growth in eCommerce sales.
16
Sales in the Partners and Other segment decreased by $3,069, or 6.8%, during F2019 as
compared to F2018, primarily driven by the impact of macroeconomic and geopolitical headwinds
affecting the Asian markets where our international partner operates. The decrease in sales in
the Partners and Other segment, largely denominated in U.S. dollars, also includes the impact of
a $400 foreign exchange benefit relative to the previous fiscal year. Excluding foreign exchange
impacts, F2019 sales in the Partners and Other segment would have decreased by $3,469, or
7.7%, as compared to F2018.
Gross Profit
The following tables present our gross profit and gross margin by segment for each of the periods
indicated:
CAD $000s
DTC . . . . . . . . . . . . . . . . . . . . . . . . . . .
Partners and Other . . . . . . . . . . . . . . .
Total Gross Profit . . . . . . . . . . . . . . . .
Q4 2019
Q4 2018
% Change
F2019
F2018
% Change
65,660
3,630
69,290
74,574
3,771
78,345
(12.0)%
(3.7)%
(11.6)%
161,790
14,399
176,189
173,816
14,674
188,490
(6.9)%
(1.9)%
(6.5)%
Gross profit as a percentage
of sales
DTC . . . . . . . . . . . . . . . . . . . . . . . . . . .
Partners and Other . . . . . . . . . . . . . . .
Total Gross Margin . . . . . . . . . . . . . .
Q4 2019
Q4 2018
F2019
F2018
55.2%
43.2%
54.4%
61.8%
37.2%
59.9%
56.2%
34.2%
53.4%
61.2%
32.5%
57.3%
Gross profit was $69,290 in Q4 2019, as compared to $78,345 in Q4 2018, representing a
decrease of $9,055, or 11.6%. In F2019, gross profit was $176,189 as compared to $188,490 in
F2018, representing a decrease of $12,301, or 6.5%.
Gross profit in the DTC segment decreased $8,914, or 12.0%, in Q4 2019 as compared to Q4
2018. During F2019, gross profit in the DTC segment decreased by $12,026, or 6.9%, as
compared to F2018. The decrease in gross profit in the DTC segment was primarily driven by a
lower gross margin. Gross margin was 55.2% in Q4 2019, as compared to 61.8% in Q4 2018. In
F2019, gross margin was 56.2% as compared to 61.2% in F2018. During Q4 2019, the Company
recorded an inventory write-off of $1,607, compared to $nil in Q4 2018. Excluding the non-cash
inventory write-off, gross margin was 56.5% and 56.8% in Q4 2019 and F2019, respectively. The
decrease in gross margin primarily reflects additional costs related to the Company’s move to its
new integrated distribution centre, the negative impact on full-price selling as a result of
distribution centre delays, the Company’s decision to extend its holiday promotional sales period,
as well as foreign exchange headwinds. In addition, the Company reclassified certain costs (into
cost of goods sold from selling, general and administrative expenses) with the transition to in-
house fulfillment of all eCommerce orders.
Gross profit in the Partners and Other segment decreased by $141, or 3.7%, in Q4 2019 as
compared to Q4 2018. During F2019, gross profit in the Partners and Other segment decreased
by $275, or 1.9%, as compared to F2018. The decrease in gross profit in the Partners and Other
segment was primarily driven by reduced purchases by our international operating partner due to
a decrease in sales in Asia, partially offset by a higher segment gross margin. The increase in
gross margin in the Partners and Other segment was attributable to a lower mix of wholesale
sales to our international operating partner, which generated a lower margin than our earned
royalties when the products sell through to their retail customers.
17
Selling, General and Administrative Expenses
SG&A expenses were $69,445 in Q4 2019 as compared to $51,776 in Q4 2018, representing an
increase of $17,669, or 34.1%. In Q4 2019, the Company recorded a $19,183 non-cash fixed
asset impairment, of which $12,738 was related to its New U.S. stores, compared to $1.4 million
in Q4 2018. Excluding the impact of IFRS 16 and non-cash fixed asset and ROU asset
impairments, SG&A expenses were $48,245 in Q4 2019 as compared to $50,401 in Q4 2018,
representing a decrease of $2,156, or 4.3%. This reduction in SG&A was a result of temporary
vacancies in certain senior leadership roles, the shift of certain eCommerce costs from SG&A
expenses to gross margin in connection with the transition to in-house fulfillment at our new
integrated distribution centre, and store wage optimization. These decreases were partially offset
by incremental costs to support a larger total store fleet square footage and a larger distribution
centre, one-time distribution centre transition costs and one-time severance costs.
SG&A expenses were $188,308 during F2019 as compared to $166,790 in F2018, representing
an increase of $21,528, or 12.9%. Excluding the impact of IFRS 16 and non-cash fixed asset and
ROU asset impairments, SG&A expenses were $170,536 during F2019 as compared to $165,416
in F2018, representing an increase of $5,120, or 3.1%. SG&A expenses in F2019 include
incremental costs to support a larger total store fleet square footage and a larger distribution
centre, one-time distribution centre transition costs, one-time severance costs and costs to
support higher overall omni-channel sales. These areas of increased expense were partially offset
by savings related to temporary vacancies in certain senior leadership roles, the shift of certain
eCommerce costs from SG&A expenses to gross margin in connection with the transition to in-
house fulfillment at our new integrated distribution centre, and store wage optimization.
Goodwill Impairment
During Q4 2019 and F2019, the Company recorded a goodwill impairment of $44,799, as
compared to $nil in Q4 2018 and F2018. The goodwill balance was previously recognized as a
result of the Company’s acquisition of assets from Roots Canada Ltd., Roots U.S.A., Inc., Roots
America L.P., entities controlled by our founders Michael Budman and Don Green, and all of the
issued and outstanding shares of Roots International ULC, finalized on December 1, 2015. The
Company performs an annual impairment assessment of goodwill by comparing the carrying
value of each cash generating unit (“CGU”) group to the recoverable amount of the CGU group.
The recoverable amount is based on the higher of the fair value less cost to sell (“FVLCS”) and
the value-in-use (“VIU”). The goodwill impairment pertains to the DTC CGU and is driven by more
conservative forward-looking growth assumptions, as a result of recent trends and shortfalls
against past projections.
Interest Expense
Interest expense was $3,962 in Q4 2019 as compared to $1,435 in Q4 2018, representing an
increase of $2,527, or 176.1%. The increase in interest expense includes $2,261 of interest
recognized in Q4 2019 on the lease liabilities under IFRS 16. Excluding the impact of IFRS 16,
interest expense would have increased by $266, or 18.5%, as compared to Q4 2018.
During F2019, interest expense was $15,567 as compared to $5,171 in F2018, representing an
increase of $10,396, or 201.0%. The increase in interest expense includes $9,048 of interest
recognized in F2019 on the lease liabilities under IFRS 16. Excluding the impact of IFRS 16,
interest expense would have increased by $1,348, or 26.1%, as compared to F2018.
18
The increase in interest expense in Q4 2019 and F2019, excluding the impact of IFRS 16, related
primarily to higher year-over-year drawings on our Revolving Credit Facility (as defined below),
partially offset by lower debt from the repayment of the Term Credit Facility (as defined below).
See “Indebtedness”.
Income Taxes Expense (Recovery)
Income taxes expense (recovery) was $(4,339) in Q4 2019 as compared to $6,858 in Q4 2018,
representing a decrease of $11,197, or 163.3%. The effective tax expense (recovery) rate for Q4
2019 and Q4 2018 was (8.9)% and 27.3%, respectively. During F2019, income taxes expense
(recovery) was $(10,456) as compared to $5,129 in F2018, representing a decrease of $15,585,
or 303.9%. The effective income taxes expense (recovery) rate during F2019 was (14.4)% as
compared to the effective tax rate of 31.0% in F2018.
The effective income taxes recovery rate in Q4 2019 and F2019 was driven by the unrecognized
deferred tax assets on deductible temporary differences and tax losses, expenses related to
goodwill impairment and meals and entertainment, partially offset by non-taxable income
associated with the cancellation of stock options and restricted share units (“RSUs”) granted to
employees and executive officers of the Company who departed during F2019.
Net Income (Loss)
Net loss was $(44,577) in Q4 2019 as compared to net income of $18,276 in Q4 2018,
representing a decrease of $62,853. During F2019, net loss was $(62,029) as compared to net
income of $11,400 in F2018, representing a decrease of $73,429. The decrease in net income
(loss) results from the factors described above.
Quarterly Financial Information
The following table summarizes the results of our operations for the eight most recently completed
fiscal quarters. Unless otherwise indicated, financial information includes the impact of the
implementation of IFRS 16. This unaudited quarterly information, other than Comparable Sales
Growth (Decline), 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 2019 Q3 2019 Q2 2019 Q1 2019 Q4 2018 Q3 2018 Q2 2018 Q1 2018
(Unaudited)
Sales
Net Income (Loss) . . . . . . . . . . . . . . .
Net Earnings (Loss) per Share:
127,453
(44,577)
130,823
18,276
61,683
(9,653)
60,197
(4,081)
54,352
(9,768)
86,979
2,795
86,377
1,969
51,029
(5,590)
Basic earnings (loss) per Share . . . .
Diluted earnings (loss) per Share . .
$ (1.06)
$ (1.06)
$0.05
$0.05
$(0.23)
$(0.23)
$(0.23)
$(0.23)
$ 0.43
$ 0.43
$ 0.07
$ 0.07
$(0.10) $ (0.13)
$(0.10) $ (0.13)
Other Performance Measures
Comparable Sales Growth
(Decline)(1) . . . . . . . . . . . . . . . . . . . . .
Corporate retail stores, end of period
____________
Note:
(1.8)%
3.0%
(2.9)%
1.5%
3.1%
(13.4)%
1.1%
6.8%
122
122
124
121
121
125
122
120
(1) Prior to Q2 2018, Comparable Sales Growth (Decline) was calculated and presented using a U.S. dollar to Canadian dollar
exchange rate of 1:1. These prior fiscal quarters have been recalculated and presented using the new constant currency
calculation. See “Cautionary Note Regarding Non-IFRS Measures and Industry Metrics”.
19
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(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted Net Income per Share . . . . . . . . . . . . . . . . . . . . .
____________
Note:
Q4 2019
Q4 2018
F2019
F2018
65,957
55.4%
(34,448)
26,053
13,269
$0.31
74,574
61.8%
30,374
34,784
22,345
$0.53
162,630
56.5%
(17,312)
26,068
4,018
$0.10
173,816
61.2%
34,635
41,903
20,179
$0.48
(1) The impact of IFRS 16 on EBITDA in Q4 2019 and F2019 represented an increase of $4,226 and $26,132, respectively, as a
result of rent payments no longer being recorded through SG&A expense, net of impairments on ROU assets.
See “Cautionary Note Regarding Non-IFRS Measures and Industry Metrics”.
Reconciliation of Non-IFRS Measures
The tables below reconciles DTC gross profit to Adjusted DTC Gross Profit, and net income (loss)
to EBITDA, Adjusted EBITDA, and Adjusted Net Income for the periods presented:
CAD $000s
DTC gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add the impact of:
COGS: DC Relocation Project (a) . . . . . . . . . . . . . . . . . .
DTC Adjusted Gross Profit . . . . . . . . . . . . . . . . . . . . . . . .
Q4 2019
Q4 2018
F2019
F2018
65,660
74,574
161,790
173,816
297
65,957
–
74,574
840
162,630
–
173,816
CAD $000s
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add the impact of:
Interest expense (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes expense (recovery) (b) . . . . . . . . . . . . . . . .
Depreciation and amortization (b) . . . . . . . . . . . . . . . . . . .
EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjust for the impact of:
COGS: DC Relocation Project (a) . . . . . . . . . . . . . . . . .
COGS: P&O Duty Reimbursement (c) . . . . . . . . . . . . . .
SG&A: IFRS 16: Rental expense excluded from net
income (loss) as a result of IFRS 16 (b) . . . . . . . . . . . .
SG&A: IFRS 16: Impairment of ROU assets (b) . . . . .
SG&A: Purchase accounting adjustments (d) . . . . . . . .
SG&A: IPO transaction costs (e) . . . . . . . . . . . . . . . . . .
SG&A: Fixed asset impairment (f) . . . . . . . . . . . . . . . . .
SG&A: Goodwill impairment (g) . . . . . . . . . . . . . . . . . .
SG&A: Stock option expense (h) . . . . . . . . . . . . . . . . . .
SG&A: DC Relocation Project (a) . . . . . . . . . . . . . . . . . .
SG&A: Shipping costs related to Canada Post strike (i)
SG&A: Changes in key personnel (j) . . . . . . . . . . . . . . .
SG&A: Other non-recurring items (k) . . . . . . . . . . . . . . .
SG&A: Non-cash rent adjustments (l) . . . . . . . . . . . . . .
Adjusted EBITDA(n) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Q4 2019
Q4 2018
F2019
F2018
(44,577)
18,276
(62,029)
11,400
1,435
6,858
3,805
30,374
–
–
–
–
141
–
1,375
–
522
623
553
–
1,248
(52)
34,784
15,567
(10,456)
39,606
(17,312)
840
175
(29,347)
3,215
582
–
19,183
44,799
(518)
1,648
–
2,339
464
–
26,068
5,171
5,129
12,935
34,635
–
–
–
–
548
160
1,375
–
2,507
1,270
553
–
1,472
(617)
41,903
3,962
(4,339)
10,506
(34,448)
297
–
(7,441)
3,215
58
–
19,183
44,799
(1,045)
–
–
1,165
270
–
26,053
20
CAD $000s
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Q4 2019
Q4 2018
F2019
F2018
(44,577)
18,276
(62,029)
11,400
Reverse the impact of IFRS 16:
Rent expense excluded from net loss (b) . . . . . . . . . . . .
Depreciation on ROU assets (b) . . . . . . . . . . . . . . . . . . .
Impairment on ROU assets (b) . . . . . . . . . . . . . . . . . . . .
Interest on lease liabilities (b) . . . . . . . . . . . . . . . . . . . . . .
Deferred tax impact (b) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total IFRS 16 impacts reversed . . . . . . . . . . . . . . . . . . . .
Add the impact of:
COGS: DC Relocation Project (a) . . . . . . . . . . . . . . . . . .
COGS: P&O Duty Reimbursement (c) . . . . . . . . . . . . . . .
SG&A: Purchase accounting adjustments (d) . . . . . . . . .
SG&A: IPO transaction costs (e) . . . . . . . . . . . . . . . . . . .
SG&A: Fixed asset impairment (f) . . . . . . . . . . . . . . . . . .
SG&A: Goodwill impairment (g) . . . . . . . . . . . . . . . . . . .
SG&A: Stock option expense (h) . . . . . . . . . . . . . . . . . . .
SG&A: DC Relocation Project (a) . . . . . . . . . . . . . . . . . .
SG&A: Shipping costs related to Canada Post strike (i) .
SG&A: Changes in key personnel (j) . . . . . . . . . . . . . . . .
SG&A: Other non-recurring items (k) . . . . . . . . . . . . . . . .
SG&A: Non-cash rent adjustments (l) . . . . . . . . . . . . . . .
SG&A: Amortization of intangible assets acquired by
Searchlight (m) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect of adjustments . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted Net Income(o) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
_______________
Notes:
(7,441)
6,244
3,215
2,261
(519)
3,760
297
–
58
–
19,183
44,799
(1,045)
–
–
1,165
270
–
692
65,419
(11,333)
13,269
–
–
–
–
–
–
–
–
141
–
1,375
–
522
623
553
566
682
(52)
949
5,359
(1,291)
22,344
(29,347)
24,721
3,215
9,048
(1,414)
6,223
840
175
582
–
19,183
44,799
(518)
1,648
–
2,339
464
–
3,539
73,051
(13,227)
4,018
–
–
–
–
–
–
–
–
548
160
1,375
–
2,507
1,270
553
573
899
(617)
3,797
11,065
(2,286)
20,179
(a)
In F2018, we commenced preparations for the DC Relocation Project. During the period of transition, we incurred expenses
related to, among other things, training, testing and administrative costs, along with rent and other operating costs in connection
with the need to operate two distribution centres simultaneously. These expenses would not be incurred as part of our normal
business operations and are not recurring.
(b) The impact of IFRS 16 in Q4 2019 and F2019 was: (i) an increase to SG&A expenses of $2,018 and an decrease to SG&A
expenses of $1,411, respectively, which comprised the impact of depreciation and impairment on the ROU assets, net of the
exclusion of rent payments from SG&A expenses, (ii) an increase in interest expense of $2,261 and $9,048, respectively, arising
from interest expense recorded on the lease liabilities in the period, and (iii) a deferred tax recovery impact of $519 and $1,414,
respectively, based on tax attributes on the ROU assets and lease liabilities balances recorded. See “New Accounting Standards
Adopted in the Year”.
(c) Represents a one-time reimbursement paid by Roots to our international operating partner related to import taxes in Taiwan
incurred by our partner in respect of certain footwear categories shipped from China.
(d) As a result of the Acquisition, we recognized an intangible asset for lease arrangements in the amount of $6,310, which when
excluding the impacts of IFRS 16, is amortized over the life of the leases and included in SG&A expenses. In our view, this cost
does 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.
(e)
In connection with our initial public offering (“IPO”), we incurred expenses related to professional fees, legal, consulting,
accounting, and travel that would otherwise not have been incurred and are not recurring.
(f) Represents a non-cash impairment charge taken against certain leasehold improvements for stores where the recoverable
amount is deemed to be below the carrying value. Of the total non-cash impairment charge taken, $12,738 pertains to impairment
of leasehold improvements at the New U.S. stores.
(g) Represents a non-cash impairment charge taken against goodwill of the DTC CGU (as defined below) as the recoverable amount
is deemed to be below the carrying value.
(h) Represents non-cash share-based compensation expense in respect of our Legacy Equity Incentive Plan, Legacy Employee
Option Plan, and Omnibus Incentive Plan.
21
(i) As a result of the Canada Post labour disruption in Q4 2018, we incurred incremental shipping costs relating to the use of an
alternative shipping partner to fulfill orders. Management is of the view that these labour disruptions are infrequent in nature, and
do not reflect the underlying costs to fulfill orders as part of our normal business operations.
(j) Represents expenses incurred in respect of the Company’s efforts to recruit for vacancies in key management positions and
severance costs associated with such employee separations.
(k) Predominately represents expenses incurred in respect of the following matters: (i) consulting costs relating to a non-recurring
brand positioning project, (ii) costs incurred related to rationalizing our store portfolio, and (iii) contract cancellation costs incurred
as the Company continues to review and optimize its operating costs. Management has determined that these projects are
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.
(l) Under IFRS, prior to the adoption of IFRS 16, we were 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 prior year
comparative period.
(m) 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, Business
Combinations. 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.
(n) Adjusted EBITDA excludes the impact of IFRS 16 in Q4 2019 and F2019. If the impact of IFRS 16, net of impairments on the
ROU assets, was included for Q4 2019 and F2019, Adjusted EBITDA would have been $30,221 and $51,618, respectively.
(o) Adjusted Net Income excludes the impact of IFRS 16 in Q4 2019 and F2019. If the impact of IFRS 16, net of impairments on the
ROU assets, was included for Q4 2019 and F2019, Adjusted Net Income (Loss) would have been $9,466 and $(2,632),
respectively.
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 debt service requirements, and also comply with our financial covenants (see
“Indebtedness”). In addition, we believe that our capital structure provides us with sufficient
financial flexibility to pursue our future growth strategies. However, our ability to fund future
operating expenses, capital expenditures and debt service requirements, and to comply with
financial covenants, 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.
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 from (used in) financing activities. . .
Net cash used in investing activities . . . . . . . . . . . . . . . . .
Change in cash and bank indebtedness . . . . . . . . . . .
Q4 2019
Q4 2018
F2019
F2018
44,834
(46,908)
(2,847)
(4,921)
46,832
(36,327)
(8,869)
1,636
40,044
(13,583)
(22,320)
4,141
19,364
241
(31,832)
(12,227)
22
Analysis of Cash Flows for Q4 2019 and F2019 compared to Q4 2018 and F2018
Cash Flows from Operating Activities
For Q4 2019 and F2019, cash flows from operating activities totalled $44,834 and $40,044,
respectively, compared to $46,832 and $19,364 in Q4 2018 and F2018, respectively. The
variances are primarily attributable to presentation changes due to the implementation of IFRS
16 with an offsetting impact in cash flows used in financing and investing activities. Excluding the
presentation impact of IFRS 16, Q4 2019 and F2019 cash flows from operating activities would
have been $40,006 and $16,417, respectively, or a decrease of $6,826 and $2,947 as compared
to Q4 2018 and F2018, respectively. The decrease in cash flows from operating activities in Q4
2019 and F2019, compared to Q4 2018 and F2018, respectively, is attributable to the decrease
in net income (loss), as analyzed above.
Cash Flows from (used in) Financing Activities
For Q4 2019 and F2019, cash flows from (used in) financing activities amounted to $(46,908) and
$(13,583), respectively, compared to $(36,327) and $241 in Q4 2018 and F2018, respectively.
The changes are partially attributable to presentation changes due to the implementation of IFRS
16 with an offsetting impact in cash flows from (used in) operating activities and investing
activities. Excluding the presentation impact of IFRS 16, Q4 2019 and F2019 cash flows from
(used in) financing activities would have been $(42,333) and $3,514, respectively, or an increase
in cash outflows of $6,006 as compared to Q4 2018, and an increase in cash inflows of $3,273
as compared to F2018.
The year-over-year decrease in cash flows from (used in) financing activities in Q4 2019 was
largely driven by greater repayments on our Revolving Credit Facility during Q4 2019 as a result
of greater drawings on our Revolving Credit Facility during the first three quarters of F2019.
The year-over-year increase in cash flows from (used in) financing activities in F2019 is largely
driven by greater drawings on our Revolving Credit Facility to fund our capital investments and
operations, offset by scheduled repayments on our Term Credit Facility. In F2019, we made
$4,984 of repayments on our Term Credit Facility (F2018 - $4,984) and $9,000 of net draws on
our Revolving Credit Facility during the year (F2018 - $5,000).
Cash Flows used in Investing Activities
For Q4 2019 and F2019, cash flows used in investing activities amounted to $2,847 and $22,320,
respectively, compared to $8,869 and $31,832 in Q4 2018 and F2018, respectively. The changes
are partially attributable to presentation changes due to the implementation of IFRS 16 with an
offsetting impact in cash flows from (used in) operating activities and financing activities.
Excluding the presentation impact of IFRS 16, Q4 2019 and F2019 cash flows used in investing
activities would have been $2,593 and $15,789, respectively, or a decrease of $6,276 and
$16,043 as compared to Q4 2018 and F2018, respectively. The decrease is primarily due to fewer
capital projects undertaken as compared to F2018, including the substantial completion of capital
expenditures related to our DC Relocation Project for which more cash was deployed in F2018.
23
Indebtedness
The Company has a secured credit agreement (“Credit Agreement”) with a syndicate of lenders
consisting of a term loan (the “Term Credit Facility”) and a revolving credit loan (the “Revolving
Credit Facility” and, together with the Term Credit Facility, the “Credit Facilities”).
On April 23, 2019, the Company amended the Credit Facilities to increase the availability under
the Revolving Credit Facility to an amount not exceeding $75,000, less the aggregate swing line
loan of $10,000. The amendment also adjusted certain definitions and limits of certain financial
covenants to better reflect the initiatives and seasonality of the business. The Company incurred
$163 of costs associated with the amendment, which have been recorded as debt financing costs
within long-term debt and will be recognized in interest expense over the remaining term of the
loan. The Credit Facilities mature on September 6, 2022.
As at the end of F2019, the Company had unused borrowing capacity available under the
Revolving Credit Facility of $61,000 (F2018 - $55,000 unused borrowing capacity on an available
Revolver Credit Facility of $60,000, prior to the increase that occurred on April 23, 2019).
The Credit Facilities 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 Company has financial and non-financial covenants under the Credit Facilities. The key
financial covenants include covenants for senior secured debt to Adjusted EBITDA ratio, total
debt to Adjusted EBITDA ratio, and fixed charge coverage ratio. As at the end of F2019, the
Company was in compliance with such covenants.
See also “Subsequent Events”.
The following table sets out the mandatory repayment of the Credit Facilities:
CAD $000s
Within 1 year . . . . . . . . . . . . . . . . .
Within 1 - 2 years . . . . . . . . . . . . .
Within 2 - 3 years . . . . . . . . . . . . .
Within 3 - 4 years . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . .
Term
Credit Facility
4,984
4,984
67,247
–
77,215
Revolving
Credit Facility
–
–
14,000
–
14,000
24
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 1, 2020:
CAD$000s
Term Credit Facility (1) . . . . . . . .
Revolving Credit Facility . . . . . .
Interest commitments relating
to long-term debt (2) . . . . . . . . . .
Payments on lease liabilities . .
Remaining lease obligations (3)
Inventory purchase
commitments (4) . . . . . . . . . . . . .
Total commitments and
obligations . . . . . . . . . . . . . . . . .
__________
Notes:
FY 2020
4,984
–
3,084
30,787
–
60,072
FY 2021 FY 2022 FY 2023 FY 2024 Thereafter
–
–
67,247
14,000
4,984
–
–
–
–
–
Total
77,215
14,000
2,880
28,185
144
2,026
26,174
157
–
24,893
166
–
20,458
178
–
7,990
59,913 190,410
1,703
1,058
–
–
–
–
–
60,072
98,927
36,193 109,604
25,059
20,636
60,971 351,390
(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 1, 2020, and assuming no prepayments are made to the Term Credit Facility.
(3) Remaining lease obligations include obligations on leases that have been excluded from lease liabilities under IFRS 16 either due to recognition
exemptions for leases with less than one year remaining as of the date of adoption or due to contractual commitments for leases with future
commencement dates. Remaining lease obligations reflect minimum annual commitments for our operating leases on those premises, excluding
renewal options and variable rent.
(4)
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 “Factors Affecting our Performance –
Seasonality”), our net debt position may be higher during the first three fiscal quarters when
working capital requirements peak and will generally decrease in the fourth fiscal quarter.
Historically, contractual obligations and commitments during the first three 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 fourth fiscal quarter, we have historically generated positive cash flow from operations to fund
our remaining contractual obligations and commitments and would make repayments against
draws on our Revolving Credit Facility during the first three 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 (see also “Factors Affecting our Performance – Novel
Coronavirus”).
25
Financial Instruments
Commencing in F2017, we have designated foreign currency forward contracts as 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 the 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 (loss).
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 1, 2020, the Company has recorded a derivative liability of $158, representing
foreign currency forward contracts to buy U.S. $44,885 at an average rate of 1.33. As at February
1, 2020, the exchange rate was 1.32.
All other financial assets and financial liabilities are measured at amortized cost using the effective
interest method, with the exception of cash which is measured at fair value through profit and
loss.
Current Share Information
As of April 28, 2020, there were 42,124,451 Shares issued and outstanding (April 2, 2019 –
42,120,231) and nil preferred shares issued and outstanding (April 2, 2019 – nil).
During F2019, the Company granted 808,105 time-based options and 243,313 RSUs under the
Omnibus Plan. In addition, 4,220 Shares were issued from treasury, as a result of the exercise of
4,220 RSUs granted under the Omnibus Plan. During F2019, 2,872,633 options and 114,385
RSUs were forfeited and cancelled. As at February 1, 2020, approximately 1.2 million stock
options and 0.2 million RSUs were granted and outstanding and 471,541 options and 15,985
RSUs were vested as of such date. Each option and RSU is, or will become, exercisable for one
Share.
During F2019, the Company also granted 141,916 deferred share units (“DSUs”) under the
Company’s deferred share unit plan (the “DSU Plan”). As of February 1, 2020, all of the DSUs
were outstanding under the DSU Plan. No Shares will be issued upon the settlement of DSUs.
26
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 48.7% of the total
issued and 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%
of the total issued and outstanding Shares. All transactions as described in the table below are in
the normal course of business and have been accounted for at their exchange value
As of February 1, 2020, we have incurred the following costs in connection with transactions
entered into with related parties:
CAD $000s
Rent(1) . . . . . . . . . . . . . . . . . . .
Q4 2019 Q4 2018
F2019
F2018
71
199
616
794
____________
Notes:
(1) The Company leases the building for its manufacturing facility and, until August 2019, leased the building for its former distribution
centre, from companies that are under common control of the Founders. Figures include rent expenses as they relate to the
lease of these properties.
In addition to the transactions noted above, on August 6, 2019, Meghan Roach, a managing
director of Searchlight, was appointed as Interim Chief Financial Officer on a temporary
secondment basis. Subsequent to the appointment of a new CFO, on January 6, 2020, Ms.
Roach was appointed to the role of Interim Chief Executive Officer on a temporary secondment
basis, while the Company conducts a formal executive search to identify a permanent Chief
Executive Officer. Ms. Roach has provided her services at no cost to the Company.
In February 2016, a former 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 4.0% 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 1, 2020, the outstanding balance on the loan and
accrued interest was $585 (February 2, 2019 – $562). The officer resigned from the Company
effective August 9, 2019.
F2019 Financial Outlook Results
In connection with our IPO in 2017, we provided certain financial growth targets and expectations
that were based, at the time, on management’s strategies, assumptions and expectations
concerning the Company’s growth outlook and opportunities, and its assessment of the outlook
and opportunities for the business and the retail industry as a whole. As a result of various factors
as further described below, between F2017 and F2019, we revised our previously-disclosed
growth targets, most recently in Q3 2019, to the following:
• Sales below the previously-disclosed range of $358 to $375 million by the end of F2019;
• Adjusted EBITDA below the previously-disclosed range of $46 to $50 million by the end
of F2019; and
27
• Adjusted Net Income below the previously-disclosed range of $20 to $24 million by the
end of F2019.
Implicit in our growth targets were certain assumptions, relating to, among others: growing our
eCommerce business, which exceeded 20% of total DTC sales in F2019; the opening of new
corporate retail stores in Canada and the United States; the renovation or expansion of existing
corporate retail stores; the opening of new international partner-operated stores; 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. These assumptions were considered reasonable by
management at the time of preparation. However, the existence of various factors (see “Summary
of Financial Performance”), many of which were unforeseeable and beyond our control, resulted
in the Company achieving Sales of $329.9 million, Adjusted EBITDA of $26.1 million and Adjusted
Net Income of $4.0 million as at the end of F2019.
See “Non-IFRS Measures and Industry Metrics”, “Summary of Non-IFRS Measures” and
“Reconciliation of Non-IFRS Measures”.
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.
Foreign Currency Exchange 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.
28
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 1, 2020, 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
$290 in Q4 2019 and $1,152 in F2019. 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 primarily with large
Canadian and U.S. 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 the Company will be unable to fulfill its obligations on a timely basis
or at a reasonable cost. 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. See “Factors Affecting our
Performance” and “Indebtedness”.
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 1, 2020.
Although the Company’s disclosure controls and procedures were operating effectively as of
February 1, 2020, 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.
29
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 1, 2020.
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.
30
Impairment of non-financial assets
The Company is required to use judgment in determining the grouping of assets to identify their
CGUs for the purpose of testing store related fixed assets, including ROU 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 that each store location is a separate CGU for the purpose of fixed assets and
ROU 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 FVLCS and the VIU of a CGU
or a group of CGUs, various estimates are used. VIU 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 from gift card breakage 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
judgments regarding the tax rules in jurisdictions where the Company performs activities.
Application of judgments 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
Leases
The Company has applied judgment to determine the lease term for lease contracts that include
renewal or termination options. The assessment of whether the Company is reasonably certain
to exercise such options impacts the lease term, which significantly affects the amount of lease
liabilities and ROU assets recognized.
31
The Company is required to estimate the incremental borrowing rates used to discount lease
liabilities if the interest rate implicit in the lease is not readily determined. In determining the
incremental borrowing rates, management considers the Company’s creditworthiness, the
security, the term, the value of the underlying leased asset, and the economic operational
environment of the leased asset. The incremental borrowing rates are subject to change mainly
due to macroeconomic factors.
New Accounting Standards Adopted in the Year
•
In 2016, the IASB issued IFRS 16, replacing IAS 17, Leases (“IAS 17”), 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. The lessee recognizes a ROU asset representing its control of and right to use the
underlying asset and a lease liability representing its obligation to make future lease
payments. Lessors continue to classify leases as finance and operating leases.
IFRS 16 became effective for annual periods beginning on or after January 1, 2019. The
Company adopted the standard on February 3, 2019 under the modified retrospective
approach, with no restatement of the prior comparative period.
Substantially all of the Company’s existing leases are real estate leases for retail stores,
its distribution centres, leather factory, and corporate head office, and all were classified
as operating leases prior to our adoption of IFRS 16. Other operating leases include IT
equipment and certain machinery. On February 3, 2019, the Company recognized ROU
assets and lease liabilities for its leases previously classified as operating leases under
IAS 17, except for certain classes of underlying assets for which the lease terms are 12
months or less. The depreciation expense on ROU assets and interest expense on lease
liabilities replaced rent expense, which was previously recognized on a straight-line basis
under IAS 17 over the term of a lease. There are no significant impacts to the Company’s
existing finance leases under IAS 17.
The lessee’s weighted average incremental borrowing rate applied to lease liabilities
recognized in the consolidated statement of financial position on February 3, 2019 was
5.8%. The average lease term remaining as at February 3, 2019 was 4.8 years.
IFRS 16 permits the use of recognition exemptions and practical expedients. The
Company applied the following recognition exemptions and practical expedients:
•
•
contracts that were identified as leases under IAS 17 were not reassessed under
IFRS 16;
a single discount rate was applied to a portfolio of leases with reasonably similar
underlying characteristics;
•
certain short-term leases were excluded from IFRS 16 lease accounting;
32
•
•
initial direct costs were excluded in the measurement of the ROU asset on
transition; and
hindsight was used in determining the lease term at the end of initial application.
The following table provides the year-over-year impacts of the implementation of IFRS 16 on the
consolidated results of the Company in Q4 2019 and F2019:
CAD $000s
Favourable (Unfavourable)
SG&A expenses . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . .
Income taxes recovery . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . .
Q4 2019
F2019
(2,018)
(2,261)
519
(3,760)
1,411
(9,048)
1,414
(6,223)
Subsequent Events
In March 2020, in response to the COVID-19 global emergency, the Company temporarily closed
all its corporate retail stores in Canada and the United States, and temporarily closed or reduced
capacity at other facilities in its supply chain and distribution channels, prioritizing the health and
safety of its customers and employees and to help manage the spread of the virus. As a result,
the Company made the very difficult decision to temporarily lay off its store and leather factory
employees. The Company will continue to comply with the laws of each of the regions in which it
operates, and to evaluate the appropriate time to reopen its stores as the situation evolves.
Our consolidated financial results in fiscal 2020 will be materially negatively impacted by this
event. The Company has substantially reduced costs and capital expenditures across all areas
of the business and is actively managing liquidity. The Board of Directors and Roots senior
leadership team have temporarily reduced their compensation and salaries, respectively, by a
minimum of 25%, and all other head office salaries have been reduced as well. The Company
has also reduced forward inventory purchases, minimized discretionary expenditures and
effectively stopped capital spend. Additionally, the Company continues to work closely with its
landlords, partners, suppliers, as well as service and logistics providers to identify further areas
of cost reduction. The Company is evaluating all applicable government relief programs and will
work with its lenders to manage covenant requirements during this pandemic period.
On March 27, 2020, the Company amended its Credit Agreement to adjust certain definitions and
limits of certain financial covenants to better reflect the initiatives and seasonality of the business.
The Company incurred $123 of costs associated with the amendment, which will be recorded as
debt financing costs within long-term debt and will be recognized in interest expense over the
remaining term of the loan. The $75,000 Revolver Credit Facility limit less the aggregate swing
line loan of $10,000, and the September 6, 2022 maturity remains unchanged.
In March 2020, the Board made the decision to liquidate Roots USA Corporation, its U.S.
subsidiary, through a Chapter 7 bankruptcy filing. The filing is expected to be made on April 29,
2020 and will result in the permanent closure of the Company’s stores in Boston, Washington and
Chicago, as well as its pop-up location in Woodbury Common, New York. Roots will maintain a
33
presence in the U.S. market by continuing to operate two longstanding corporate retail stores in
Michigan and Utah as well as its global eCommerce platform.
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”.
34
35
ROOTS CORPORATION
Consolidated Financial Statements
For the 52-week periods ended February 1, 2020 and
February 2, 2019
(In Canadian dollars)
Table of Contents
Table of Contents ................................................................................................................................. 37
Independent Auditor’s Report ............................................................................................................... 38
Consolidated Statement of Financial Position ...................................................................................... 43
Consolidated Statement of Net Income (Loss) ..................................................................................... 44
Consolidated Statement of Comprehensive Income (Loss) ................................................................. 45
Consolidated Statement of Changes in Shareholders’ Equity ............................................................. 46
Consolidated Statement of Cash Flows ............................................................................................... 47
Notes to Consolidated Financial Statements ....................................................................................... 48
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
Nature of operations and basis of presentation ..................................................................... 48
Significant accounting policies ............................................................................................... 53
Operating segments ............................................................................................................... 63
Accounts receivable ............................................................................................................... 64
Inventories ............................................................................................................................. 64
Fixed assets ........................................................................................................................... 65
Intangible assets and other non-current liabilities ................................................................. 67
Goodwill ................................................................................................................................. 69
Financial instruments ............................................................................................................. 70
Leases.................................................................................................................................... 71
Long-term debt ....................................................................................................................... 73
12. Share capital .......................................................................................................................... 75
13. Earnings (loss) per Share ...................................................................................................... 76
14. Share-based compensation ................................................................................................... 77
15. Financial risk management .................................................................................................... 79
16.
Income taxes expense (recovery) .......................................................................................... 82
17. Contingencies ........................................................................................................................ 84
18. Personnel expenses .............................................................................................................. 84
19. Related party transactions ..................................................................................................... 84
20. Subsequent events ................................................................................................................ 86
37
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
Opinion
We have audited the consolidated financial statements of Roots Corporation (the Entity),
which comprise:
•
•
•
•
•
the consolidated statement of financial position as at February 1, 2020 and February
2, 2019
the consolidated statement of net income (loss) for the 52 week periods then ended
the consolidated statement of comprehensive income (loss) for the 52 week periods
then ended
the consolidated statement of changes in shareholders’ equity for the 52 week
periods then ended
the consolidated statement of cash flows for the 52 week periods then ended
• and notes to the consolidated financial statements, including a summary of
significant accounting policies (Hereinafter referred to as the “financial statements”).
In our opinion, the accompanying financial statements present fairly, in all material
respects, the consolidated financial position of the Entity as at February 1, 2020 and
February 2, 2019, and its consolidated financial performance and its consolidated cash
flows for the 52 week periods then ended in accordance with International Financial
Reporting Standards (IFRS).
Basis for Opinion
We conducted our audit in accordance with Canadian generally accepted auditing
standards. Our responsibilities under those standards are further described in the
“Auditors’ Responsibilities for the Audit of the Financial Statements” section of our
auditors’ report.
KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (“KPMG International”), a Swiss entity. KPMG Canada provides services to KPMG LLP.
We are independent of the Entity in accordance with the ethical requirements that are
relevant to our audit of the financial statements in Canada and we have fulfilled our other
ethical responsibilities in accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to
provide a basis for our opinion.
Material Uncertainty Related to Going Concern
We draw attention to Note 1(f) in the financial statements, which indicates that the Entity
has prepared the financial statements on a going concern basis. The Entity has
temporarily closed all of its stores in both Canada and the United States and temporarily
decreased capacity at other supply chain and distribution channels due to the COVID-
19 pandemic. While most of these effects are expected to be temporary, the duration of
the business disruptions and impacts on the Entity’s liquidity cannot be reasonably
estimated at this time. As such the Entity’s ability to continue its operations is dependent
on access to borrowings and other forms of relief support.
These events or conditions, along with other matters as set forth in Note 1(f) in the
financial statements, indicate that a material uncertainty exists that may cast significant
doubt on the Entity's ability to continue as a going concern.
Our opinion is not modified in respect of this matter.
Emphasis of Matter – Change in Accounting Policy
We draw attention to Note 2 to the financial statements which indicates that the Entity
has changed its accounting policy for leases as of February 3, 2019 due to the adoption
of IFRS 16 Leases and has applied that change using a modified retrospective approach.
Our opinion is not modified in respect of this matter.
Other Information
Management is responsible for the other information. Other information comprises:
•
•
the information included in Management’s Discussion and Analysis filed with the
relevant Canadian Securities Commissions.
the information, other than the financial statements and the auditors’ report thereon,
included in a document likely to be entitled “2019 Online Annual Report” and/or
“2019 Annual Report”.
Our opinion on the financial statements does not cover the other information and we do
not and will not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the
other information identified above and, in doing so, consider whether the other
information is materially inconsistent with the financial statements or our knowledge
obtained in the audit, and remain alert for indications that the other information appears
to be materially misstated.
We obtained the information included in Management’s Discussion and Analysis filed
with the relevant Canadian Securities Commissions as at the date of this auditors’ report.
If, based on the work we have performed on this other information, we conclude that
there is a material misstatement of this other information, we are required to report that
fact in the auditors’ report.
We have nothing to report in this regard.
The information, other than the financial statements and the auditors’ report thereon,
included in a document likely to be entitled “2019 Online Annual Report” and/or “2019
Annual Report” is expected to be made available to us after the date of this auditors’
report. If, based on the work we will perform on this other information, we conclude that
there is a material misstatement of this other information, we are required to report that
fact to those charged with governance.
Responsibilities of Management and Those Charged with
Governance for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial
statements in accordance with IFRS, and for such internal control as management
determines is necessary to enable the preparation of financial statements that are free
from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible for assessing the
Entity’s ability to continue as a going concern, disclosing as applicable, matters related
to going concern and using the going concern basis of accounting unless management
either intends to liquidate the Entity or to cease operations, or has no realistic alternative
but to do so.
Those charged with governance are responsible for overseeing the Entity’s financial
reporting process.
Auditors’ Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether due to fraud or
error, and to issue an auditors’ report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit
conducted in accordance with Canadian generally accepted auditing standards will
always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually
or in the aggregate, they could reasonably be expected to influence the economic
decisions of users taken on the basis of the financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards,
we exercise professional judgment and maintain professional skepticism throughout the
audit.
We also:
•
Identify and assess the risks of material misstatement of the financial statements,
whether due to fraud or error, design and perform audit procedures responsive to
those risks, and obtain audit evidence that is sufficient and appropriate to provide a
basis for our opinion.
The risk of not detecting a material misstatement resulting from fraud is higher than
for one resulting from error, as fraud may involve collusion, forgery, intentional
omissions, misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit 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.
• Evaluate the appropriateness of accounting policies used and the reasonableness
of accounting estimates and related disclosures made by management.
• Conclude on the appropriateness of management's use of the going concern basis
of accounting and, based on the audit evidence obtained, whether a material
uncertainty exists related to events or conditions that may cast significant doubt on
the Entity's ability to continue as a going concern. If we conclude that a material
uncertainty exists, we are required to draw attention in our auditors’ report to the
related disclosures in the financial statements or, if such disclosures are inadequate,
to modify our opinion. Our conclusions are based on the audit evidence obtained up
to the date of our auditors’ report. However, future events or conditions may cause
the Entity to cease to continue as a going concern.
• Evaluate the overall presentation, structure and content of the financial statements,
including the disclosures, and whether the financial statements represent the
underlying transactions and events in a manner that achieves fair presentation.
• Communicate with those charged with governance regarding, among other matters,
the planned scope and timing of the audit and significant audit findings, including
any significant deficiencies in internal control that we identify during our audit.
• Provide those charged with governance with a statement that we have complied with
relevant ethical requirements regarding independence, and communicate with them
all relationships and other matters that may reasonably be thought to bear on our
independence, and where applicable, related safeguards.
Chartered Professional Accountants, Licensed Public Accountants
The engagement partner on the audit resulting in this auditors’ report is Farah Bundeali.
Vaughan, Canada
April 28, 2020
ROOTS CORPORATION
Consolidated Statement of Financial Position
(In thousands of Canadian dollars)
As at February 1, 2020 and February 2, 2019
Assets
Current assets:
Cash
Accounts receivable
Inventories
Prepaid expenses
Derivative assets
Total current assets
Non-current assets:
Loan receivable
Lease receivable
Fixed assets
Right-of-use assets
Intangible assets
Goodwill
Total non-current assets
Note
February 1,
2020
February 2,
2019
4, 15
5
15
15, 19
10, 15
6
10
7
8
$
949
7,158
40,152
5,418
–
53,677
585
1,511
55,694
128,322
193,079
7,906
387,097
$
1,991
6,627
49,533
6,443
366
64,960
562
–
64,163
–
198,724
52,705
316,154
Total assets
$
440,774
$
381,114
$
7,226
20,252
6,011
2,008
26,569
4,984
158
67,208
13,942
–
–
124,590
84,528
–
223,060
290,268
196,903
3,407
(116)
(49,688)
150,506
$
12,409
22,291
5,498
6,445
–
4,984
–
51,627
22,761
10,063
504
–
80,031
1,424
114,783
166,410
196,853
3,975
268
13,608
214,704
$
440,774
$
381,114
Liabilities and Shareholders’ Equity
Current liabilities:
Bank indebtedness
Accounts payable and accrued liabilities
Deferred revenue
Income taxes payable
Current portion of lease liabilities
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 portion of lease liabilities
Long-term debt
Other non-current liabilities
Total non-current liabilities
Total liabilities
Shareholders’ equity:
Share capital
Contributed surplus
Accumulated other comprehensive income (loss)
Retained earnings (deficit)
Total shareholders’ equity
Total liabilities and shareholders’ equity
Contingencies
Subsequent events
On behalf of the Board of Directors:
“Erol Uzumeri”
“Richard P. Mavrinac”
Director
Director
See accompanying notes to consolidated financial statements.
43
16
10
11
15
16
10
11
7
12
14
17
20
ROOTS CORPORATION
Consolidated Statement of Net Income (Loss)
(In thousands of Canadian dollars, except per share amounts)
For the 52-week periods ended February 1, 2020 and February 2, 2019
Sales
Cost of goods sold
Gross profit
Selling, general and administrative expenses
Goodwill impairment
Income (loss) before interest expense and
income taxes expense (recovery)
Interest expense
Income (loss) before income taxes
Income taxes expense (recovery)
Net income (loss)
Basic earnings (loss) per share
Diluted earnings (loss) per share
Note
February 1,
2020
February 2,
2019
$ 329,865
$ 329,028
153,676
140,538
176,189
188,490
188,308
166,790
44,799
–
(56,918)
21,700
15,567
5,171
(72,485)
16,529
(10,456)
5,129
$
(62,029)
$ 11,400
$
$
(1.47)
(1.47)
$
$
0.27
0.27
5
8
11
16
13
13
See accompanying notes to consolidated financial statements.
44
ROOTS CORPORATION
Consolidated Statement of Comprehensive Income (Loss)
(In thousands of Canadian dollars)
For the 52-week periods ended February 1, 2020 and February 2, 2019
Note
February 1,
2020
February 2,
2019
Net income (loss)
$ (62,029)
$ 11,400
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
Cost of hedging excluded from
cash flow hedges
Tax impact of cash flow hedges
Total other comprehensive income
9, 15
9, 15
9, 15
425
3,538
362
(210)
577
218
(1,001)
2,755
Total comprehensive income (loss)
$ (61,452)
$ 14,155
See accompanying notes to consolidated financial statements.
45
ROOTS CORPORATION
Consolidated Statement of Changes in Shareholders’ Equity
(In thousands of Canadian dollars)
For the 52-week periods ended February 1, 2020 and February 2, 2019
February 1, 2020
Note
Share Contributed
surplus
capital
Accumulated
Retained
other
earnings comprehensive
income
(deficit)
Total
Balance, February 2, 2019
$ 196,853
$
3,975
$
13,608
$
268
$ 214,704
Adjustment on adoption of IFRS 16
2
–
–
(1,267)
–
(1,267)
Balance, February 3, 2019
$ 196,853
$
3,975
$
12,341
$
268
$ 213,437
Net loss
Net gain 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
Share-based compensation
14
–
–
–
–
Issuance of shares
12, 14
50
–
–
–
(518)
(50)
(62,029)
–
(62,029)
–
–
–
–
577
577
(961)
–
–
(961)
(518)
–
Balance, February 1, 2020
$ 196,903
$
3,407
$
(49,688)
$
(116) $ 150,506
February 2, 2019
Note
Share Contributed
surplus
capital
Accumulated
other
Retained comprehensive
income
earnings
Total
Balance, February 4, 2018
$ 195,994
$
1,675
$
2,208
$
(904) $ 198,973
Net income
Net gain 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
Share-based compensation
14
–
–
–
–
–
–
–
2,507
Issuance of shares
12, 14
859
(207)
11,400
–
11,400
–
–
–
–
2,755
2,755
(1,583)
(1,583)
–
–
2,507
652
Balance, February 2, 2019
$ 196,853
$
3,975
$
13,608
$
268
$ 214,704
See accompanying notes to consolidated financial statements.
46
ROOTS CORPORATION
Consolidated Statement of Cash Flows
(In thousands of Canadian dollars)
For the 52-week periods ended February 1, 2020 and February 2, 2019
Cash provided by (used in):
Operating activities:
Net income (loss)
Items not involving cash:
February 1,
2020
Note
February 2,
2019
$
(62,029)
$ 11,400
Depreciation and amortization
Share-based compensation expense (recovery)
Impairment of fixed assets and right-of-use assets
Impairment of goodwill
Deferred lease costs (recovery)
Amortization of lease intangibles
Interest expense
Income taxes expense (recovery)
Gain on lease modification
Interest paid
Payment of interest on lease liabilities
Taxes paid
Change in non-cash operating working capital:
Accounts receivable
Inventories
Prepaid expenses
Accounts payable and accrued liabilities
Deferred revenue
6, 7, 10
14
6, 10
8
7
11
16
10
10, 11
4
5
Financing activities:
Issuance of long-term debt
Long-term debt financing costs
Repayment of long-term debt
Finance lease payments
Payment of principal on lease liabilities, net of tenant allowance 10
12
Proceeds from issuance of shares
11
11
11
Investing activities:
Additions to fixed assets
Tenant allowance received
Increase (decrease) in cash
Cash, beginning of period
6
39,606
(518)
22,398
44,799
–
–
15,567
(10,456)
(520)
(5,904)
(9,048)
(2,200)
(531)
9,381
1,025
(2,039)
513
40,044
9,000
(163)
(4,984)
–
(17,436)
–
(13,583)
(22,320)
–
(22,320)
12,935
2,507
1,375
–
(617)
548
5,171
5,129
–
(4,620)
–
(4,104)
(207)
(14,126)
(863)
3,985
851
19,364
5,000
(66)
(4,984)
(361)
–
652
241
(37,695)
5,863
(31,832)
4,141
(12,227)
(10,418)
1,809
Cash and bank indebtedness, end of period
$
(6,277)
$ (10,418)
See accompanying notes to consolidated financial statements.
47
ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 52-week periods ended February 1, 2020 and February 2, 2019
(In thousands of Canadian dollars, except share and per share amounts)
Notes to C onsoli dated Fi nanci al Statements
1. Nature of operations and basis of presentation
Established in 1973, Roots is a premium outdoor lifestyle brand. We unite the best of cabin and city
through unmistakable style built with uncompromising comfort and quality. We offer a broad range of
products that embody a comfortable cabin-meets-city style including: women’s and men’s apparel,
leather goods, footwear, accessories, and kids, toddler and baby apparel. Starting from a little cabin in
Algonquin Park, Canada, Roots has grown to become a global brand. As at February 1, 2020, we had
114 corporate retail stores in Canada, eight corporate retail stores in the United States, 114 partner-
operated stores in Taiwan, 36 partner-operated stores in China, one partner-operated store in Hong
Kong, and a global eCommerce platform. Roots Corporation is a Canadian corporation doing business
as “Roots” and “Roots Canada”.
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”.
The Company’s common shares (“Shares”) are listed on the Toronto Stock Exchange (“TSX”) 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 the closest Saturday
to January 31 of each year. The current and comparative fiscal periods for the consolidated
financial statements contain 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 28, 2020.
48
ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 52-week periods ended February 1, 2020 and February 2, 2019
(In thousands of Canadian dollars, except share and per share amounts)
(c) Basis of measurement
The consolidated financial statements were prepared on a historical cost basis, except for
derivative financial instruments consisting of forward hedging contracts, and share-based
compensation, which are measured at fair value.
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, unless otherwise stated. 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 subsidiaries have been
eliminated on consolidation.
(f) Going concern due to COVID-19
These consolidated financial statements have been prepared on a going concern basis, which
assumes the Company will be able to realize its assets and discharge its liabilities, including the
current portion of debt, in the normal course of business into the foreseeable future.
In December 2019, a novel coronavirus (“COVID-19”) surfaced in Wuhan, China. The World
Health Organization declared a global emergency on January 30, 2020 with respect to the
outbreak, which was subsequently characterized as a pandemic on March 11, 2020, leading
many countries to take drastic measures to manage the spread of the virus. As a result of the
(a) spread of the coronavirus in all relevant jurisdictions to the Company’s supply chain and
consumer base; (b) impact of government measures imposed to help manage the spread of the
virus; (c) actions undertaken by the Company to ensure the well-being and safety of our
customers and employees; and (d) uncertainty over the duration of business disruptions as a
result of COVID-19, management has concluded that there exists material uncertainties which
may cast significant doubt regarding the Company’s ability to meet its obligations as they come
due.
49
ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 52-week periods ended February 1, 2020 and February 2, 2019
(In thousands of Canadian dollars, except share and per share amounts)
The Company has established a cross-functional task force to evaluate its business operations
in the context of COVID-19, with a focus on health and safety of the Roots team and customers,
current company operations, business continuity and managing liquidity. The Company has
since temporarily closed all its stores in Canada and the United States and has temporarily
closed or reduced capacity at other facilities in its supply chain and distribution channels (see
also Note 20 – Subsequent Events). As permitted by current government regulations, the
Company continues to operate its eCommerce business and its distribution centre, with strict
cleaning protocols and social distancing measures in place. The Company also continues to
operate its Partners and Others business under its work-from-home model. In addition, the
Company is reducing forward inventory purchases and substantially reducing operating costs
and capital expenditures across all areas of the business, including working closely with
suppliers and partners including all key service and logistics providers, to control costs, manage
liquidity, and best position the business in the current retail climate and going forward.
Management recognizes that while it has implemented an action plan to best navigate the
impacts of COVID-19 on the business, this situation continues to evolve quickly and there is
significant uncertainty regarding the outcome of this pandemic. At this point, we expect to have
access to borrowings and other forms of relief support to be made available to businesses
impacted by this pandemic. However, to the extent the situation, particularly in Canada,
continues to worsen, the degree to which aspects of the Company’s operations could be affected
may increase, and it is possible that the Company’s consolidated financial results in fiscal 2020,
including its financial performance, liquidity, and compliance with certain financial covenants,
will be negatively impacted by this event. If the going concern assumption was not appropriate
as of February 1, 2020, adjustments to the carrying values of assets and liabilities would be
necessary and such adjustments could be material.
(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.
50
ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 52-week periods ended February 1, 2020 and February 2, 2019
(In thousands of Canadian dollars, except share and 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,
including right-of-use 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 that
each store location is a separate CGU for the purpose of fixed assets and right-of-use
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 fair value less cost to
sell (“FVLCS”) and the value-in-use (“VIU”) of a CGU or a group of CGUs, various
estimates are used. VIU 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.
(iii)
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.
51
ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 52-week periods ended February 1, 2020 and February 2, 2019
(In thousands of Canadian dollars, except share and per share amounts)
(iv) 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 from breakage is recognized over the estimated period of
redemption based on historical redemption patterns commencing when the gift card is
issued.
(v)
Leases
The Company has applied judgment to determine the lease term for lease contracts that
include renewal or termination options. The assessment of whether the Company is
reasonably certain to exercise such options impacts the lease term, which significantly
affects the amount of lease liabilities and right-of-use assets recognized.
The Company is required to estimate the incremental borrowing rates used to discount
lease liabilities if the interest rate implicit in the lease is not readily determined. In
determining the incremental borrowing rates, management considers the Company’s
creditworthiness, the security, the term, the value of the underlying leased asset, and the
economic operational environment of the leased asset. The incremental borrowing rates
are subject to change mainly due to macroeconomic factors.
(vi)
Income taxes
The calculation of current and deferred income taxes requires management to make
certain judgments regarding the tax rules in jurisdictions where the Company performs
activities. Application of judgments 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 tax authorities.
52
ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 52-week periods ended February 1, 2020 and February 2, 2019
(In thousands of Canadian dollars, except share and per share amounts)
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. Non-monetary assets
and liabilities 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 exchange
rates prevailing during the period. The resulting gains or losses on translation are included in
the determination of net income (loss) for the period and comprehensive income (loss).
(b) Revenue recognition
Revenue includes sales to customers through retail stores operated by the Company and
through eCommerce. Sales to customers through retail stores are recognized at the time of
purchase, net of a provision for returns. eCommerce 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 eCommerce 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
Company’s international partner and other third-party licensees, and when collectability is
reasonably determined.
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.
53
ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 52-week periods ended February 1, 2020 and February 2, 2019
(In thousands of Canadian dollars, except share and per share amounts)
(c) Inventories
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.
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 (loss), on a diminishing-balance or straight-line basis,
over the estimated useful lives of each component of an item of fixed assets from the date that
they are available for use. Depreciation methods, useful lives and residual values are reviewed
at each annual reporting date and adjusted, prospectively, if appropriate.
54
ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 52-week periods ended February 1, 2020 and February 2, 2019
(In thousands of Canadian dollars, except share and per share amounts)
Fixed assets are depreciated over the estimated useful lives of the assets, from the date they
are available for use, based on the following annual rates:
Asset
Computer hardware
Furniture and fixtures
Equipment
Computer software
Leasehold improvements
Basis
Diminishing-balance
Diminishing-balance
Diminishing-balance
Straight-line
Straight-line
Assets held under finance leases
Straight-line
Rate
20%
20%
10%
3 - 5 years
Term of lease to a
maximum of 10 years
Term of lease
(e) Intangible assets
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 and customer relationships is
recognized in selling, general and administrative expenses in the consolidated statement of net
income (loss). The estimated useful lives for the current period are 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 of non-financial assets.
(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.
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.
55
ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 52-week periods ended February 1, 2020 and February 2, 2019
(In thousands of Canadian dollars, except share and per share amounts)
An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds
its recoverable amount. The recoverable amount is based on the greater of the CGU’s FVLCS
and its VIU. 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
The Company recognizes a right-of-use asset and a lease liability as the present value of future
lease payments when the lessor makes the leased asset available for use by the Company.
Lease liabilities include the net present value of fixed payments, variable lease payments that
are based on an index or a rate, amounts expected to be payable by the Company under
residual value guarantees, and the exercise price of a purchase option or penalties for
terminating the lease, if the Company is reasonably certain to exercise those purchase or
termination options. Lease liabilities are recognized net of lease incentives receivable. The
lease payments are discounted using the interest rate implicit in the lease, or, if that rate cannot
be readily determined, the lessee’s incremental borrowing rate. Subsequent to initial
measurement, the Company measures lease liabilities at amortized cost using the effective
interest rate method.
Lease terms applied are the contractual non-cancellable periods of the lease, plus periods
covered by renewal options or termination options, if the Company is reasonably certain to
exercise those options. Lease liabilities are remeasured when there is a change in lease term,
a change in the assessment of an option to purchase the leased asset, a change in expected
residual value guarantee, or a change in future lease payments resulting from a change in an
index or a rate used to determine those payments.
56
ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 52-week periods ended February 1, 2020 and February 2, 2019
(In thousands of Canadian dollars, except share and per share amounts)
Right-of-use assets are measured at cost less accumulated depreciation and accumulated
impairment losses. Cost includes the amount of the initial measurement of the related lease
liability, plus any lease payments made at or before the commencement date and any initial
direct costs and future restoration costs, less any lease incentives received. Right-of-use
assets are depreciated on a straight-line basis from the date that the underlying asset is
available for use. Depreciation is recorded over the shorter of the lease term and the useful life
of the underlying asset, unless the lease transfers ownership of the underlying asset to the
lessee by the end of the lease term, in which case depreciation is recorded over the useful life
of the underlying asset.
Lease payments for assets that are exempt through the short-term exemption and variable
payments not based on an index or rate continue to be recognized in selling, general and
administrative expenses.
Subleases
When the Company enters into sublease arrangements as an intermediate lessor, it assesses
whether the sublease is classified as a finance sublease or an operating sublease by reference
to the corresponding right-of-use asset arising from the head lease, rather than by reference
to the underlying asset. A sublease is a finance sublease if substantially all the risks and
rewards incidental to ownership of the related right-of-use asset on the head lease have been
transferred to the sub-lessee.
(h) Income taxes
Income taxes expense (recovery) comprises current and deferred income taxes. Current
income taxes and deferred income taxes are recognized in net income (loss) for the period,
except for items recognized directly in equity or in other comprehensive income (loss).
Current income tax is the expected tax payable on the taxable income or net income (loss) 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 income 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
57
ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 52-week periods ended February 1, 2020 and February 2, 2019
(In thousands of Canadian dollars, except share and per share amounts)
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 (loss) per share (“EPS”)
Basic EPS 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.
Diluted EPS is calculated by dividing the profit or loss attributable to common shareholders of
the Company by the weighted average number of common shares outstanding, plus the
weighted average number of common shares that would be issued on exercise of dilutive
securities granted to employees, as calculated under the treasury stock method, so long as the
result would not reduce the loss per share.
(k) Financial instruments
Non-derivative 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.
58
ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 52-week periods ended February 1, 2020 and February 2, 2019
(In thousands of Canadian dollars, except share and per share amounts)
Non-derivative financial 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 designates 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 (loss). The time value component of forward contracts
designated as cash flow hedges is excluded from the hedging relationship and recorded in
other comprehensive income (“OCI”) 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 (loss), 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 (loss).
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 (loss).
59
ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 52-week periods ended February 1, 2020 and February 2, 2019
(In thousands of Canadian dollars, except share and per share amounts)
The Company has classified its financial assets and financial liabilities as follows:
Financial assets:
Cash
Accounts receivable
Loan receivable
Lease receivable
Derivative assets
Financial liabilities
Accounts payable and
accrued liabilities
Derivative obligations
Long-term debt
Finance lease obligation
Classification
Fair value through profit or loss
Amortized cost
Amortized cost
Amortized cost
Fair value through OCI
Amortized cost
Fair value through OCI
Amortized cost
Amortized cost
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 2016, the IASB issued IFRS 16, Leases (“IFRS 16”), replacing IAS 17, Leases (“IAS 17”),
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. The lessee recognizes a right-of-use asset representing its control of and right to use
the underlying asset and a lease liability representing its obligation to make future lease
payments. Lessors continue to classify leases as finance and operating leases.
60
ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 52-week periods ended February 1, 2020 and February 2, 2019
(In thousands of Canadian dollars, except share and per share amounts)
IFRS 16 became effective for annual periods beginning on or after January 1, 2019. The
Company adopted the standard on February 3, 2019 under the modified retrospective
approach, with no restatement of the prior comparative period.
Substantially all of the Company’s existing leases are real estate leases for its retail stores,
distribution centres, leather factory, and corporate head office, and all were classified as
operating leases prior to adoption of IFRS 16. Other operating leases include IT equipment and
certain machinery. On February 3, 2019, the Company recognized right-of-use assets and
lease liabilities for its leases previously classified as operating leases under IAS 17, except for
certain classes of underlying assets for which the lease terms are 12 months or less. The
depreciation expense on right-of-use assets and interest expense on lease liabilities replaced
rent expense, which was previously recognized on a straight-line basis under IAS 17 over the
term of a lease. There are no significant impacts to the Company’s existing finance leases
under IAS 17.
The lessee’s weighted average incremental borrowing rate applied to lease liabilities
recognized in the consolidated statement of financial position on February 3, 2019 was 5.8%.
The average lease term remaining as at February 3, 2019 was 4.8 years.
IFRS 16 permits the use of recognition exemptions and practical expedients. The Company
applied the following recognition exemptions and practical expedients:
•
contracts that were identified as leases under IAS 17 were not reassessed under IFRS
16;
• a single discount rate was applied to a portfolio of leases with reasonably similar
underlying characteristics;
•
•
certain short-term leases were excluded from IFRS 16 lease accounting;
initial direct costs were excluded in the measurement of the right-of-use assets on
transition; and
• hindsight was used in determining lease term at the date of initial application.
On the date of initial application, the Company applied the requirements of IAS 36, Impairment
of Assets, and recorded a post-tax impairment of $1,267 on right-of-use assets on February 3,
2019.
61
ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 52-week periods ended February 1, 2020 and February 2, 2019
(In thousands of Canadian dollars, except share and per share amounts)
The following table summarizes the adjustments to opening balances resulting from the initial
adoption of IFRS 16:
As previously reported
under IAS 17,
February 2, 2019
IFRS 16
transition
adjustments
Balances as at
February 3, 2019
Assets:
Lease receivable
Fixed assets
Right-of-use assets
Intangible assets
Total impact to assets
Liabilities and shareholders’ equity:
Deferred tax liabilities
Current portion of lease liabilities
Deferred lease costs
Finance lease obligation
Long-term portion of lease liabilities
Other non-current liabilities
Retained earnings
Total impact to liabilities and shareholders’ equity
$
–
64,163
–
198,724
$ 22,761
–
10,063
504
–
1,424
13,608
$
$
1,808
(794)
137,294
(2,106)
136,202
(460)
28,273
(10,063)
(504)
121,647
(1,424)
(1,267)
136,202
$
$
$
1,808
63,369
137,294
196,618
22,301
28,273
–
–
121,647
–
12,341
The following table provides a reconciliation between operating lease commitments disclosed
under IAS 17 as at February 2, 2019 and lease liabilities recognized on February 3, 2019 as a
result of the adoption of IFRS 16:
Operating lease commitments disclosed as at February 2, 2019
Leases excluded from lease liability due to recognition exemptions
Discounted using the weighted average incremental borrowing rate as at
February 3, 2019
Finance lease obligations recognized as at February 2, 2019
Leases with a commencement date after February 3, 2019
Opening balance of lease liabilities, February 3, 2019
Recorded in the consolidated statement of financial position as follows:
Current portion of lease liabilities
Long-term portion of lease liabilities
$ 197,588
(20)
157,404
504
(7,968)
$ 149,920
$ 28,273
121,647
$ 149,920
62
ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 52-week periods ended February 1, 2020 and February 2, 2019
(In thousands of Canadian dollars, except share and per share amounts)
3. Operating segments
The Company has two reportable operating segments:
(a) The “Direct-to-Consumer” segment comprises sales through corporate retail stores and
eCommerce; 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 includes
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 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 1, 2020
Partners
and Other
February 2, 2019
Total
Direct-to-
Partners
Consumer and Other
Total
Sales
Cost of goods sold
Gross profit
Selling, general and administrative expenses(1)
Goodwill impairment
Income (loss) before interest expense and
income taxes expense (recovery)
Interest expense(1)
$ 287,762
125,972
$ 42,103
27,704
161,790
14,399
$ 329,865 $ 283,856 $ 45,172 $ 329,028
140,538
153,676
110,040
30,498
173,816
14,674
176,189
188,308
44,799
(56,918)
15,567
188,490
166,790
–
21,700
5,171
Income (loss) before income taxes
$
(72,485)
$
16,529
(1) These unallocated items represent income and expenses which management does not report when analyzing
segment underlying performance.
63
ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 52-week periods ended February 1, 2020 and February 2, 2019
(In thousands of Canadian dollars, except share and per share amounts)
4. Accounts receivable
February 1,
2020
February 2,
2019
0-90 91-120
days
days
> 120
days
Total
0-90 91-120
days
days
> 120
days
Accounts receivable
$ 6,652 $ 121 $ 385
$
7,158
5,460
1,026
141 $
The following are continuities of the Company’s allowance for doubtful accounts receivable:
Total
6,627
Allowance for doubtful accounts receivable, beginning of period
Increase in allowance for doubtful accounts receivable
Allowance for doubtful accounts receivables, end of period
5.
Inventories
Raw materials
Work in progress
Finished goods – On hand
Finished goods – In-transit
February 1,
2020
February 2,
2019
$
$
(83)
(43)
(126)
$
$
(47)
(36)
(83)
February 1,
2020
$
4,942
742
29,035
5,433
February 2,
2019
$
4,667
2,193
31,616
11,057
$
40,152
$
49,533
The cost of merchandise inventories recognized as an expense and included in cost of goods sold for
the period ended February 1, 2020 was $144,214 (period ended February 2, 2019 – $135,882). Cost
of inventories includes the cost of merchandise and all costs incurred to deliver inventory to the
Company’s distribution centre including freight, import taxes and duties.
During the period ended February 1, 2020, the Company recorded a $1,607 provision for inventories
with net realizable values below cost (period ended February 2, 2019 – $nil).
64
ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 52-week periods ended February 1, 2020 and February 2, 2019
(In thousands of Canadian dollars, except share and per share amounts)
6. Fixed assets
Computer
hardware
Furniture
and fixtures
Equipment
Computer
software
Leasehold
improvements
Finance
leases
Cost
Balance, February 3, 2018
Additions
Disposals/adjustments
Balance, February 2, 2019
IFRS 16 transition adjustments (Note 2)
$
1,114
527
(30)
1,611
–
$
4,230
1,464
(428)
5,266
–
$
1,122
7,987
–
9,109
–
$
8,969
4,947
–
13,916
–
$
32,871
22,770
(3,208)
52,433
$
$ 1,112
–
–
1,112
(1,112)
Total
49,418
37,695
(3,666)
83,447
(1,112)
Balance, February 3, 2019
$
1,611
$
5,266
$
9,109
$ 13,916
$
52,433
Additions
Disposals/adjustments
101
(10)
601
(56)
1,873
–
4,094
–
15,651
(1,320)
Balance, February 1, 2020
$
1,702
$
5,811
$ 10,982
$ 18,010
$
66,764
Accumulated depreciation and
impairment losses
Balance, February 3, 2018
Depreciation
Disposals/adjustments
Fixed asset impairment
Balance, February 2, 2019
IFRS 16 transition adjustments (Note 2)
$
291
230
(30)
–
491
–
$
712
835
(428)
–
1,119
–
$
161
126
–
–
287
–
$
2,585
1,295
–
–
3,880
–
$
8,476
6,546
(3,208)
1,375
13,189
–
Balance, February 3, 2019
$
491
$
1,119
$
287
$
3,880
$
13,189
Depreciation
Disposals/adjustments
Fixed asset impairment
195
(10)
–
846
(56)
–
673
–
–
1,841
–
–
7,257
(1,320)
19,183
Balance, February 1, 2020
$
676
$
1,909
$
960
$
5,721
$
38,309
Carrying amount
February 2, 2019
February 1, 2020
$
1,120
1,026
$
4,147
3,902
$
8,822
10,022
$ 10,036
12,289
$
39,244
28,455
$
$
$
$
$
$
–
–
–
–
$
82,335
22,320
(1,386)
$
103,269
212
106
–
–
318
(318)
–
–
–
–
–
$
12,437
9,138
(3,666)
1,375
19,284
(318)
$
18,966
10,812
(1,386)
19,183
$
47,575
794
–
$
64,163
55,694
65
ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 52-week periods ended February 1, 2020 and February 2, 2019
(In thousands of Canadian dollars, except share and per share amounts)
For the period ended February 1, 2020, the Company recorded $19,183 (period ended February 2,
2019 – $1,375) of impairment losses on fixed assets and $3,215 (period ended February 2, 2019 – $nil)
of impairment losses on right-of-use assets as disclosed in Note 10, in respect of 21 CGUs (period
ended February 2, 2019 – six CGUs) using a VIU test in the Direct-to-Consumer operating segment as
part of selling, general and administrative expenses.
For the period ended February 1, 2020, the Company had no impairment reversals on fixed assets and
right-of-use assets (period ended February 2, 2019 – $nil).
The recoverable amount for a retail location is based on the VIU of the related CGU. When determining
the VIU 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 lease term.
Sales forecasts for cash flows are based on actual operating results, operating budgets, and long-term
growth rates. The estimate of the VIU of the relevant CGUs was determined using a pre-tax discount
rate of 12.5% at February 1, 2020 (February 2, 2019 – 12.5%).
66
ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 52-week periods ended February 1, 2020 and February 2, 2019
(In thousands of Canadian dollars, except share and per share amounts)
7.
Intangible assets and other non-current liabilities
Intangible assets:
Cost
Trade
names
License
arrangements
Customer
relationships
Favourable
lease
agreements
Total
Balance, February 3, 2018
$
175,044
$
25,910
$
7,766
$
6,310 $
215,030
Balance, February 2, 2019
IFRS 16 transition adjustments (Note 2)
175,044
–
Balance, February 3, 2019
175,044
25,910
–
25,910
7,766
–
7,766
6,310
(6,310)
215,030
(6,310)
–
208,720
Balance, February 1, 2020
$
175,044
$
25,910
$
7,766
$
– $
208,720
Accumulated amortization
and impairment losses
Balance, February 3, 2018
Amortization
$
Balance, February 2, 2019
IFRS 16 transition adjustments (Note 2)
Balance, February 3, 2019
Amortization
Balance, February 1, 2020
$
–
–
–
–
–
–
–
$
$
6,611
3,023
9,634
–
9,634
2,764
1,694
774
2,468
–
2,468
775
$
3,317 $
887
11,622
4,684
4,204
(4,204)
–
–
16,306
(4,204)
12,102
3,539
$
12,398
$
3,243
$
– $
15,641
Carrying amount
February 2, 2019
February 1, 2020
$
175,044
175,044
$
16,276
13,512
$
5,298
4,523
$
2,106 $
–
198,724
193,079
67
ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 52-week periods ended February 1, 2020 and February 2, 2019
(In thousands of Canadian dollars, except share and per share amounts)
Other non-current liabilities:
Cost
Balance, February 3, 2018
Balance, February 2, 2019
IFRS 16 transition adjustments (Note 2)
Balance, February 1, 2020
Accumulated amortization
and impairment losses
Balance, February 3, 2018
Amortization
Balance, February 2, 2019
IFRS 16 transition adjustments (Note 2)
Balance, February 1, 2020
Carrying amount
February 2, 2019
February 1, 2020
Unfavourable lease
agreements
$
$
$
$
$
$
2,636
2,636
(2,636)
–
873
339
1,212
(1,212)
–
1,424
–
Amortization expenses, impairment losses and reversals are recorded in selling, general and
administrative expenses in the consolidated statement of net income (loss) in the period in which they
occur. No impairment losses or reversals were recognized on intangible assets for the period ended
February 1, 2020 (period ended February 2, 2019 – $nil).
Amortization expense on definite life intangibles of $3,539 for the period ended February 1, 2020
(period ended February 2, 2019 – $4,345) has been recognized in the consolidated statement of net
income (loss).
The Company has determined that 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. 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.
68
ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 52-week periods ended February 1, 2020 and February 2, 2019
(In thousands of Canadian dollars, except share and per share amounts)
For the purpose of impairment testing, indefinite life trade names are 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:
Balance, February 2, 2019
and February 1, 2020
$
161,040
$
14,004
$
175,044
Direct-to-
Consumer
Partners
& Other
Total
8. Goodwill
The Company performs an annual impairment assessment of goodwill by comparing the carrying value
of each CGU group to the recoverable amount of the CGU group. The recoverable amount is based on
the higher of the FVLCS and VIU.
The goodwill balance was previously recognized as a result of the Company’s acquisition of assets
from Roots Canada Ltd., Roots U.S.A., Inc., Roots America L.P., entities controlled by our founders
Michael Budman and Don Green, and all of the issued and outstanding shares of Roots International
ULC, finalized on December 1, 2015.
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
& Other
Total
Balance, February 3, 2018
$
44,799
$
7,906
$
52,705
Balance, February 2, 2019
Goodwill impairment
44,799
(44,799)
7,906
–
52,705
(44,799)
Balance, February 1, 2020
$
–
$
7,906
$
7,906
As at February 1, 2020, the recoverable amount of each CGU group was based on FVLCS and was
determined by discounting the future cash flows generated from the CGU group.
The Company included five years of cash flows in its discounted cash flow model. Cash flows for the
five years were based on past experiences, actual operating results and management’s budget
projections. The cash flow forecasts were extrapolated beyond the five-year period using an estimated
terminal growth rate.
69
ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 52-week periods ended February 1, 2020 and February 2, 2019
(In thousands of Canadian dollars, except share and per share amounts)
Key assumptions used in the Company’s annual impairment assessment as at February 1, 2020
include:
• Annual sales growth rates up to 4% (February 2, 2019 – up to 6%)
• Terminal growth rate of 2.0% (February 2, 2019 – 2.0%)
• After-tax discount rate of 14.0% (February 2, 2019 – 13.5%)
• Pre-tax discount rate of 18.5% (February 2, 2019 – 17.0%)
Segment sales growth rates are based on management’s best estimates considering past experiences,
actual operating results, budget projections and the general outlook for the industry and markets in
which the CGU operates. The projections are prepared separately for each of the Company’s CGU
groups to which the individual assets are allocated and are based on the Company’s most recent
projections. The after-tax discount rate is based on a risk-free rate, an equity risk premium adjusted for
betas of comparable publicly traded companies, an entity-specific risk premium, an after-tax cost of
debt based on corporate bond yields and the capital structure of the Company.
As a result of the test, the Company recorded a goodwill impairment loss of $44,799 for the period
ended February 1, 2020 (period ended February 2, 2019 – $nil), pertaining to the Direct-to-Consumer
CGU.
The Company has performed a sensitivity test with respect to the Direct-to-Consumer CGU group over
key assumptions for the period ended February 1, 2020, assuming all other variables remained
constant. The Company noted a 50 basis point change in the after-tax discount rate would impact the
impairment charge by approximately $9,000, or a 50 basis point change in annual store sales growth
would impact the impairment charge by approximately $8,000.
9. 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 assets and 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.
There were no transfers between levels of the fair value hierarchy for the periods ended February 1,
2020 and ended February 2, 2019.
70
ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 52-week periods ended February 1, 2020 and February 2, 2019
(In thousands of Canadian dollars, except share and per share amounts)
The Company enters into forward contracts from time to time to hedge its exposure for a portion of
purchases denominated in U.S. dollars. As at February 1, 2020, the Company had outstanding forward
contracts to buy US$44,885 (February 2, 2019 – US$42,460) at an average forward rate of 1.33
(February 2, 2019 – 1.30).
For the periods ended February 1, 2020 and February 2, 2019, the effective portion of changes in the
fair value of all matured forward contracts and outstanding forward contracts resulted in a gain of $425
(net of tax - $312) and a gain of $3,538 (net of tax – $2,595), respectively, which were recorded in other
comprehensive income (loss).
10. Leases
The Company leases various store locations, a head office, a distribution warehouse, a manufacturing
facility and equipment under non-cancellable operating lease agreements. Retail stores typically have
a contractual period of 5 to 10 years with additional renewal terms available thereafter.
(a) Right-of-use assets
The following table reconciles the changes in right-of-use assets for the year ended February 1,
2020:
Cost
Balance, February 3, 2019
Additions
Adjustments
Tenant allowances
Balance, February 1, 2020
Accumulated amortization
and impairment losses
Balance, February 3, 2019
Depreciation
Impairment losses (Note 6)
Balance, February 1, 2020
Carrying amount
February 1, 2020
Right-of-use
assets
$ 137,294
16,902
8,832
(6,530)
$ 156,498
$
–
24,961
3,215
$ 28,176
$ 128,322
Under IAS 17, as at February 2, 2019, the carrying amount of finance lease assets of $794 were
presented in fixed assets in Note 6.
71
ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 52-week periods ended February 1, 2020 and February 2, 2019
(In thousands of Canadian dollars, except share and per share amounts)
(b) Lease liabilities
The following table reconciles the changes in lease liabilities for the period ended February 1,
2020:
Balance, February 3, 2019
Additions
Adjustments
Tenant allowances
Interest expense on lease liabilities (Note 11)
Repayment of interest and principal on lease liabilities, net of tenant allowance
Balance, February 1, 2020
Recorded in the consolidated statement of financial position as follows:
Current portion of lease liabilities
Long-term portion of lease liabilities
Lease
liabilities
$ 149,920
16,902
8,312
(6,530)
9,048
(26,493)
$ 151,159
$ 26,569
124,590
$ 151,159
Under IAS 17, as at February 2, 2019, finance lease obligations of $504 were presented in
finance lease obligations within the consolidated statement of financial position.
(c) Commitments
The following is summary of the Company’s future undiscounted contractual lease payments:
2020
2021
2022
2023
2024
Thereafter
Total
$ 30,787
28,185
26,174
24,893
20,458
59,913
$ 191,410
The Company also has a future undiscounted cash flow of $1,703 related to leases not yet
commenced but committed to.
Under IAS 17, as at February 2, 2019, the undiscounted future minimum lease payments were
$197,588. During the period ended February 2, 2019, the Company recognized $26,340 of
operating lease rent expense in selling, general and administrative expenses.
72
ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 52-week periods ended February 1, 2020 and February 2, 2019
(In thousands of Canadian dollars, except share and per share amounts)
(d) Variable Lease Payments
The Company makes variable lease payments for property tax and insurance charges on leased
properties. The Company has certain retail store leases where portions of the lease payments
are contingent on a percentage of sales earned in the retail store. During the period ended
February 1, 2020, $10,758 was recognized in selling, general and administrative expenses
related to these variable lease arrangements.
(e) Sublease
Finance lease receivable is included in lease receivable on the Company’s consolidated
statement of financial position. During the period ended February 1, 2020, the Company
recognized sublease income of $501.
Under IAS 17, as at February 2, 2019, the Company did not classify any subleases as finance
leases.
11. Long-term debt
The Company has a secured credit agreement (“Credit Agreement”) with a syndicate of lenders
consisting of a term loan (“Term Credit Facility”) and a revolving credit loan (“Revolving Credit Facility”,
and, together with the Term Credit Facility, the “Credit Facilities”).
On April 23, 2019, the Company amended the Credit Facilities to increase the availability under the
Revolving Credit Facility to an amount not exceeding $75,000, less the aggregate swing line loan of
$10,000. The amendment also adjusted certain definitions and limits of certain financial covenants to
better reflect the initiatives and seasonality of the business. The Company incurred $163 of costs
associated with the amendment, which have been recorded as debt financing costs within long-term
debt and will be recognized in interest expense over the remaining term of the loan. The Credit Facilities
mature on September 6, 2022. See also Note 20 – Subsequent events.
73
ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 52-week periods ended February 1, 2020 and February 2, 2019
(In thousands of Canadian dollars, except share and per share amounts)
The following table reconciles the changes in cash flows from financing activities for long-term debt for
the periods ended February 1, 2020 and February 2, 2019:
February 1,
2020
February 2,
2019
Long-term debt, beginning of period
$ 85,015
$ 84,465
Long-term debt repayments of Term Credit Facility
Long-term debt financing costs
Long-term debt proceeds from Revolving Credit Facility
Total cash flow from long-term debt financing activities
Amortization of long-term debt financing costs
Total non-cash long-term debt activity
(4,984)
(163)
9,000
88,868
644
644
(4,984)
(66)
5,000
84,415
600
600
Total long-term debt, end of period
$ 89,512
$ 85,015
Recorded in the consolidated statement of financial position as follows:
Current portion of long-term debt
Long-term portion of long-term debt
$
4,984
84,528
$
4,984
80,031
$ 89,512
$ 85,015
As at February 1, 2020, 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
Total(1)
Term Credit Revolving Credit
Facility
Facility
$
4,984
4,984
67,247
–
$
–
–
14,000
–
$ 77,215
$ 14,000
(1) Total long-term debt of $89,512 is net of $1,703 unamortized long-term debt financing costs.
74
ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 52-week periods ended February 1, 2020 and February 2, 2019
(In thousands of Canadian dollars, except share and per share amounts)
Total interest expense for the period ended February 1, 2020 was $15,567 (period ended February 2,
2019 – $5,171) and was comprised of:
Interest paid on long-term debt
Interest paid on lease liabilities (Note 10)
Amortization of long-term debt financing costs
Other
Interest Expense
12. Share capital
February 1,
2020
February 2,
2019
$
5,688
9,048
644
187
$
4,468
–
600
103
$ 15,567
$
5,171
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.
There were no dividends or distributions declared during the periods ended February 1, 2020 and
February 2, 2019.
During the period ended February 1, 2020, 4,220 Shares were issued from treasury, as a result of the
exercise of 4,220 restricted share units (“RSUs”) granted under the Omnibus Plan (see Note 14). During
the period ended February 2, 2019, 139,731 Shares were issued from treasury, as a result of the
exercise of 139,731 stock options granted under the Legacy Equity Incentive Plan (see Note 14).
As at February 1, 2020, there were 42,124,451 Shares (February 2, 2019 – 42,120,231 Shares) and
nil preferred shares (February 2, 2019 – nil preferred shares) issued and outstanding. All issued Shares
are fully paid.
75
ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 52-week periods ended February 1, 2020 and February 2, 2019
(In thousands of Canadian dollars, except share and per share amounts)
The following table provides a summary of changes to the Company’s share capital:
February 1, 2020
February 2, 2019
Number of
Shares
Share
capital
Number of
Shares
Share
capital
42,120,231
4,220
$ 196,853
50
41,980,500
139,731
$ 195,994
859
42,124,451
$ 196,903
42,120,231
$ 196,853
Outstanding Shares,
beginning of period
Issuance of Shares
Outstanding Shares,
end of period
13. Earnings (loss) per Share
The Company presents basic and diluted EPS data for its Shares. Basic EPS is calculated by dividing
net income (loss) by the weighted average number of Shares outstanding during the period. Diluted
EPS is determined by adjusting net income (loss) and the weighted average number of Shares
outstanding, for the effects of all dilutive potential Shares, which comprise share-based compensation
granted to employees.
Weighted average Shares outstanding
Stock options
February 1,
2020
February 2,
2019
42,122,962
–
42,057,881
496,275
Dilutive weighted average Shares outstanding
42,122,962
42,554,156
Net income (loss)
February 1,
2020
February 2,
2019
$ (62,029)
$ 11,400
Basic earnings (loss) per Share
Diluted earnings (loss) per Share
$
(1.47)
(1.47)
$
0.27
0.27
For the periods ended February 1, 2020 and February 2, 2019, nil and 1,850,841 performance-based
stock options, respectively, were not included in the calculation of basic or diluted EPS as the conditions
required to convert these stock options to Shares were not met. See Note 14 for more information
regarding these stock options.
76
ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 52-week periods ended February 1, 2020 and February 2, 2019
(In thousands of Canadian dollars, except share and per share amounts)
For the periods ended February 1, 2020 and February 2, 2019, 1,198,737 and 250,538 time-based
stock options, respectively, were not included in the calculation of basic or diluted EPS as they were
anti-dilutive or not ‘in-the-money’.
For the periods ended February 1, 2020 and February 2, 2019, 183,780 and nil RSUs, respectively,
were not included in the calculation of basic or diluted EPS as they were anti-dilutive.
14. Share-based compensation
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 1, 2020,
approximately 1.2 million stock options and 0.2 million RSUs were granted and outstanding.
The following is a summary of the Company’s stock option activity:
For the period
ended February 1, 2020
Legacy Equity
Incentive Plan
Legacy Employee
Option Plan
Omnibus
Plan
Weighted
average
exercise
price
Number of
options
Weighted
average
exercise
price
Weighted
average
exercise
price
Number of
options
Number of
options
Total
Weighted
average
exercise
price
Number of
options
Outstanding options,
beginning of period
Granted
Forfeited
Outstanding options,
end of period
Exercisable options,
end of period
2,375,884
–
(2,154,953)
$ 4.78
–
4.79
465,858
–
(21,419)
$ 6.26
–
6.26
421,523
808,105
(696,261)
$ 12.01
4.30
7.53
3,263,265
808,105
(2,872,633)
$ 5.93
4.30
5.47
220,931
$ 4.67
444,439
$ 6.26
533,367
$ 6.16
1,198,737
$ 5.92
130,765
$ 4.67
296,300
$ 6.26
44,476
$ 11.87
471,541
$ 6.35
For the period
ended February 2, 2019
Legacy Equity
Incentive Plan
Legacy Employee
Option Plan
Omnibus
Plan
Weighted
average
exercise
price
Number of
options
Weighted
average
exercise
price
Weighted
average
exercise
price
Number of
options
Number of
options
Total
Weighted
average
exercise
price
Number of
options
Outstanding options,
beginning of period
Granted
Exercised
Forfeited
Outstanding options,
end of period
Exercisable options,
end of period
2,515,615
–
(139,731)
–
$ 4.77
–
4.67
–
497,986
–
–
(32,128)
$ 6.26
–
–
6.26
300,649
131,282
–
(10,408)
$ 11.87
12.39
–
12.93
3,314,250
131,282
(139,731)
(42,536)
$ 5.64
12.39
4.67
7.89
2,375,884
$ 4.78
465,858
$ 6.26
421,523
$ 12.01
3,263,265
$ 5.93
240,768
$ 4.82
155,288
$ 6.26
42,296
$ 11.69
438,352
$ 5.99
The fair value of stock options granted during the period ended February 1, 2020 was $1,211 (period
ended February 2, 2019 – $517).
77
ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 52-week periods ended February 1, 2020 and February 2, 2019
(In thousands of Canadian dollars, except share and 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:
Expected volatility
Share price at grant date
Exercise price
Risk-free interest rate
Expected term
Fair value per option
February 1, 2020
February 2, 2019
33.0% - 34.1%
$3.28 - $4.51
$3.28 - $4.51
1.34% - 1.60%
5.5 years - 6.5 years
$1.10 - $1.63
27.0% - 32.5%
$7.06 - $13.07
$7.06 - $13.07
2.21% - 2.27%
6 years – 6.5 years
$2.52 - $4.38
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.
The following is a summary of the Company’s RSU and deferred share unit (“DSU”) activity:
For the period
ended February 1, 2020
Units, beginning of period
Granted
Exercised
Forfeited
Units, end of period
For the period
ended February 2, 2019
Units, beginning of period
Granted
Forfeited
Units, end of period
Legacy Equity
Incentive Plan
Number of
RSUs
15,985
–
–
–
15,985
Legacy Equity
Incentive Plan
Number of
RSUs
15,985
–
–
15,985
Omnibus
Plan
Number of
RSUs
43,087
243,313
(4,220)
(114,385)
167,795
Omnibus
Plan
Number of
RSUs
–
47,296
(4,209)
43,087
DSU
Plan
Number of
DSUs
34,237
141,916
–
–
176,153
DSU
Plan
Number of
DSUs
–
34,237
–
34,237
Total
Number of
RSUs
Number of
DSUs
59,072
243,313
(4,220)
(114,385)
34,237
141,916
–
–
183,780
176,153
Total
Number of
RSUs
Number of
DSUs
15,985
47,296
(4,209)
–
34,237
–
59,072
34,237
The fair value of RSUs granted during the period ended February 1, 2020 was $1,068 (period ended
February 2, 2019 – $581). There were 15,985 RSUs vested as at February 1, 2020 (February 2, 2019
– 15,985). The fair value of DSUs granted during the period ended February 1, 2020 was $469 (period
ended February 2, 2019 – $291).
The fair values of RSUs and DSUs granted are calculated based on the closing price of a Share on the
TSX on the last trading date immediately prior to the date of grant.
78
ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 52-week periods ended February 1, 2020 and February 2, 2019
(In thousands of Canadian dollars, except share and per share amounts)
The grant date fair value of share-based compensation awards granted to employees is recognized as
share-based compensation expense, recorded in selling, general and administrative expenses with a
corresponding increase to contributed surplus, over the period that the employees unconditionally
become entitled to the awards. The following is a summary of the Company’s share-based
compensation expense:
Legacy Equity Incentive Plan
Legacy Employee Option Plan
Omnibus Plan
February 1,
2020
February 2,
2019
$
(1,136)
259
359
$
850
765
892
Total share-based compensation expense
$
(518)
$
2,507
The share-based compensation recovery recorded for the period ended February 1, 2020 was driven
by cancellation of unvested stock options and RSUs, primarily as result of the departure of certain key
management personnel, including the Company’s former Chief Executive Officer, Chief Financial
Officer, and Chief Merchants.
15. 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 the Credit Facilities, as described in Note 11, allowing it
to access funds for operations. Please also see Note 1 (f) for discussion on liquidity risk
surrounding the business uncertainties related to COVID-19.
79
ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 52-week periods ended February 1, 2020 and February 2, 2019
(In thousands of Canadian dollars, except share and per share amounts)
The contractual maturities of the Company’s current and long-term financial liabilities as at
February 1, 2020, excluding interest payments, are as follows:
Carrying
amount
Contractual
cash flows
Under
1 year
1 - 3
years
3 - 5
years
More than
5 years
Remaining to maturity
Non-derivative financial
liabilities
Bank indebtedness
Accounts payable and
accrued liabilities
Long-term debt
Lease liabilities
(b) Currency risk
$
7,226
$
7,226
$
–
$
–
$
7,226
$
–
20,252
89,512
151,159
20,252
91,215
190,410
20,252
4,984
30,787
–
86,231
54,359
–
45,351
–
–
59,913
$ 268,149
$ 309,103
$ 56,023
$ 140,590
$ 52,577
$ 59,913
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 period ended February 1, 2020 by $256 (period ended February 2, 2019 – $308), 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 remain constant,
would have changed other comprehensive income for the period ended February 1, 2020 by
$2,949 (period ended February 2, 2019 – $2,748), as a result of the revaluation on the
Company’s forward contracts.
(c) Interest rate risk
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 period ended February 1, 2020 by $1,152
(period ended February 2, 2019 – $1,072).
80
ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 52-week periods ended February 1, 2020 and February 2, 2019
(In thousands of Canadian dollars, except share and per share amounts)
(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, lease
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 consists primarily of receivables from business partners in the Partners
and Other operating segment, which are settled in the following fiscal quarter.
As at February 1, 2020, the Company’s maximum exposure to credit risk for these financial
instruments was as follows:
Loans receivable
Lease receivable
Accounts receivable, excluding allowance for doubtful accounts
$
585
1,511
7,284
$
9,380
(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 net income (loss) before interest expense, income taxes
expense (recovery) and depreciation and amortization (“EBITDA”) as a measure of its ability
to service its debt and meet other financial obligations as they become due.
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 1, 2020,
the Company was in compliance with its covenants under the Credit Facilities. Also see Note
20 – Subsequent events.
81
ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 52-week periods ended February 1, 2020 and February 2, 2019
(In thousands of Canadian dollars, except share and per share amounts)
16. Income taxes expense (recovery)
The Company’s income taxes expense (recovery) comprises the following:
February 1,
2020
February 2,
2019
Current income taxes expense (recovery)
$
(2,237)
$
3,960
Deferred income taxes expense (recovery):
Origination and reversal of temporary differences
(8,219)
1,169
Total income taxes expense (recovery)
$
(10,456)
$
5,129
The effective income tax (recovery) rate in the consolidated statement of net income (loss) and
statement of comprehensive income (loss) was reported at rates different than the combined basic
Canadian federal and provincial average statutory income tax rates, as follows:
February 1,
2020
February 2,
2019
Combined basic federal and provincial average
statutory tax (recovery) rate
(26.7)%
26.7%
Non-deductible expenses
Non-taxable income
Change in unrecognized deferred tax assets
4.2%
(0.2)%
8.3%
4.3%
–
–
Effective tax (recovery) rate
(14.4)%
31.0%
The non-deductible expenses for income tax purposes primarily relate to meals and entertainment
and share-based compensation expense.
The non-taxable income for income tax recovery purposes primarily relate to reversal of share-
based compensation expense on the cancellation of stock options and RSUs (see Note 14).
82
ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 52-week periods ended February 1, 2020 and February 2, 2019
(In thousands of Canadian dollars, except share and per share amounts)
Deferred tax assets have not been recognized in respect of the following items:
Deductible temporary differences
Tax losses
February 1,
2020
February 2,
2019
$ 15,594
6,838
$ 22,432
$
$
–
–
–
Deferred tax assets have not been recognized in respect of these items, pertaining to Roots USA
Corporation, as it is not probable that sufficient taxable profit will be available in the future to utilize
the benefits. The tax losses begin to expire in 2030.
The following tables outline the movements in deferred tax liabilities balance associated with:
As at
February 2,
2019
IFRS 16
Transition
Adjustments
Other
Expense Comprehensive
Loss
(Recovery)
As at
February 1,
2020
Deferred financing costs
Deferred lease costs
Fixed assets
Right-of-use assets and lease liabilities
Intangible assets and goodwill
Derivative obligations
$
37
(629)
(85)
–
23,341
97
$
–
629
–
(1,089)
–
–
$
64
–
381
(1,414)
(7,250)
–
$
–
–
–
–
–
(140)
$
101
–
296
(2,503)
16,091
(43)
$
22,761
$
(460)
$ (8,219)
$
(140)
$
13,942
Deferred financing costs
Deferred lease costs
Fixed assets
Intangible assets and goodwill
Derivative obligations
As at
February 4,
2018
$
(31)
(637)
638
21,525
(329)
Expense
(Recovery)
$
68
8
(723)
1,816
–
Other
Comprehensive
Loss
As at
February 2,
2019
$
–
–
–
–
426
$
37
(629)
(85)
23,341
97
$ 21,166
$
1,169
$
426
$ 22,761
83
ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 52-week periods ended February 1, 2020 and February 2, 2019
(In thousands of Canadian dollars, except share and per share amounts)
17. Contingencies
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, accrued for based on management’s best estimate of economic outflows required to settle
the claims and suits, or are not expected to materially affect the Company’s financial position.
In addition, the Company is subject to tax audits from various tax authorities on an ongoing basis. As
a result, from time to time, tax authorities may disagree with the positions and conclusions taken by the
Company in its tax filings or legislation could be amended or interpretations of current legislation could
change, any of which events could lead to reassessments. The Company is not aware of any potential
liabilities from any reassessments, nor any other liabilities that may arise from the tax positions taken.
18. Personnel expenses
Wages and salaries
Benefits and other incentives
19. Related party transactions
February 1,
2020
February 2,
2019
$ 56,115
9,129
$ 56,699
10,400
$ 65,244
$ 67,099
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 48.7% of the total issued and
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% of the total issued
and outstanding Shares. All transactions as described in the table below are in the normal course of
business and have been accounted for at their exchange value.
84
ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 52-week periods ended February 1, 2020 and February 2, 2019
(In thousands of Canadian dollars, except share and per share amounts)
(a) Transactions with shareholders
The Company incurred the following costs in connection with transactions entered into with one
of its principal shareholders:
Rent(1)
February 1,
2020
February 2,
2019
$
616
$
794
(1) The Company leases the building for its manufacturing facility and, until August 2019, leased the building for its
former distribution centre, from companies that are under common control of the Founders. Figures include rent
expenses as they relate to the lease of these properties.
(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 1,
2020
February 2,
2019
Salaries, benefits and incentives, and consulting fees
Management share-based compensation
Director fees
$
3,875
(1,003)
548
$
4,614
1,871
512
$
3,420
$
6,997
In addition to the transactions noted above, on August 6, 2019, Meghan Roach, a managing
director of Searchlight, was appointed as Interim Chief Financial Officer on a temporary
secondment basis. Subsequent to the appointment of a new CFO, on January 6, 2020, Ms.
Roach was appointed to the role of Interim Chief Executive Officer on a temporary secondment
basis, while the Company conducts a formal executive search to identify a permanent Chief
Executive Officer. Ms. Roach has provided her services at no cost to the Company.
In February 2016, a former 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 4.0% 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 1, 2020, the outstanding balance on the loan was $585
(February 2, 2019 – $562). The officer resigned from the Company effective August 9, 2019.
85
ROOTS CORPORATION
Notes to Consolidated Financial Statements
For the 52-week periods ended February 1, 2020 and February 2, 2019
(In thousands of Canadian dollars, except share and per share amounts)
20. Subsequent events
In March 2020, in response to the COVID-19 global emergency, the Company temporarily closed all its
corporate retail stores in Canada and the United States, and temporarily closed or reduced capacity at
other facilities in its supply chain and distribution channels, prioritizing the health and safety of its
customers and employees and to help manage the spread of the virus. As a result, the Company made
the very difficult decision to temporarily lay off its store and leather factory employees. The Company
will continue to comply with the laws of each of the regions in which it operates, and to evaluate the
appropriate time to reopen its stores as the situation evolves.
Our consolidated financial results in fiscal 2020 will be materially negatively impacted by this event.
The Company has substantially reduced costs and capital expenditures across all areas of the business
and is actively managing liquidity. The Board of Directors and Roots senior leadership team have
temporarily reduced their compensation and salaries, respectively, by a minimum of 25%, and all other
head office salaries have been reduced as well. The Company has also reduced forward inventory
purchases, minimized discretionary expenditures and effectively stopped capital spend. Additionally,
the Company continues to work closely with its landlords, partners, suppliers, as well as service and
logistics providers to identify further areas of cost reduction. The Company is evaluating all applicable
government relief programs and will work with its lenders to manage covenant requirements during this
pandemic period.
On March 27, 2020, the Company amended its Credit Agreement to adjust certain definitions and limits
of certain financial covenants to better reflect the initiatives and seasonality of the business. The
Company incurred $123 of costs associated with the amendment, which will be recorded as debt
financing costs within long-term debt and will be recognized in interest expense over the remaining
term of the loan. The $75,000 Revolver Credit Facility limit less the aggregate swing line loan of
$10,000, and the September 6, 2022 maturity remains unchanged.
In March 2020, the Board made the decision to liquidate Roots USA Corporation, its U.S. subsidiary,
through a Chapter 7 bankruptcy filing. The filing is expected to be made on April 29, 2020 and will result
in the permanent closure of the Company’s stores in Boston, Washington and Chicago, as well as its
pop-up location in Woodbury Common, New York. Roots will maintain a presence in the U.S. market
by continuing to operate two longstanding corporate retail stores in Michigan and Utah as well as its
global eCommerce platform.
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O U R V I S I O N
To inspire the world to
experience everyday adventures
with comfort and style
Corporate Information
Board of Directors
Mary Ann Curran
Gregory David
Dale H. Lastman, C.M.
Richard P. Mavrinac
Joel Teitelbaum
Erol Uzumeri – Chairman
Eric Zinterhofer
Executive Officers
Meghan Roach
Interim Chief Executive Officer
Mona Kennedy
Chief Financial Officer
James Connell
Chief eCommerce and Customer Experience Officer
Non-Executive Senior Management
Anne Hodkin
Vice President, Information Strategy & Systems
Kaleb Honsberger
Vice President, General Counsel
Karl Kowalewski
Vice President, Leather Factory
Michelle Lettner
Vice President, Human Resources
Melinda McDonald
Vice President, Wholesale & Business Development
Corporate Head Office
1400 Castlefield Avenue
Toronto, ON M6B 4C4
Canada
roots.com
Share Information
Shares in Roots Corporation are traded on
the Toronto Stock Exchange (TSX) under the
trading symbol “ROOT”
Auditor
KPMG
Toronto, ON
Transfer Agent
Computershare
Toronto, ON
Legal Counsel
Kaleb Honsberger
Roots
legal@roots.com
Investor Relations Contact
Kristen Davies
Roots
investors@roots.com
1-844-762-2343
investors.roots.com
P R I N T E D I N C A N A D A O N R E C Y C L E D M A T E R I A L