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Roots Stock Reports First-Quarter Results; Analysts Expect Strong Upside
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Roots Stock Reports First-Quarter Results; Analysts Expect Strong Upside

Story Highlights

Roots had a solid quarter in terms of revenue growth and gross margin expansion. In addition, it has consistently met or beat earnings expectations in the past nine quarters, suggesting that management is doing a good job. However, if the economy slips into a recession, it may not be the best stock to own.

Roots (TSE: ROOT) provides a portfolio of apparel, leather goods, accessories, and footwear for men, women, and children under the Roots brand. Its merchandise includes genuine leather, such as jackets, bags, and luggage; kids and baby clothing; and leather, linens, towels, and accessories.

The company operates through two segments, Direct-To-Consumer (DTC) and Partners and Other.

Earnings Results

Roots recently reported earnings for its first quarter. Earnings per share came in at -C$0.13, which was in line with estimates. Roots has either met or beat expectations in each of the past nine quarters.

In addition, the company posted revenue of C$43.1 million, equating to a year-over-year increase of 15.3%. Interestingly, gross profit increased by 22.1% as the gross margin expanded by 3.4% to 60.9%. The increase in gross profit margin can be attributed to lower markdowns and favorable foreign exchange benefits.

In addition, the company has significantly improved its financial position, as it has cut its net debt almost in half from C$76.4 million to C$39.4 million. Furthermore, the company has up to C$80 million in liquidity when combining cash with its unused revolving credit facility. This should provide the company with some comfort should the economy slip into recession.

However, selling, general, and administrative expenses increased 21% year-over-year, essentially erasing most of the benefit from the higher gross profit margin. The increase was primarily due to higher wage costs.

Analyst Recommendations

Roots has a Hold consensus rating based on one Buy and four Holds assigned in the past three months. The average Roots price target of C$4.80 implies 50% upside potential.

Final Thoughts

Roots had a solid quarter in terms of revenue growth and gross margin expansion. In addition, it has consistently met or beat earnings expectations in the past nine quarters, suggesting that management is performing well. However, if the economy slips into a recession, it may not be the best stock to own.

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