2023-09-20 17:12:55
The retailer Roots achieves 70% of its annual turnover in the second half of the year. (Photo: 123RF)
What to do with the titles of Roots, Apple and Cascades? Here are some analyst recommendations likely to move prices soon. Note: the author may have an opinion completely different from that expressed.
Roots Corporation (ROOT, $2.94): RBC analyst keeps an eye on inventories
Clothing retailer Roots on September 12 revealed adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) below the expectations of analyst Sabahat Khan of RBC Capital Markets for the second quarter of fiscal 2023.
His focus now shifts to the second half of the year, where the company generates regarding 70% of its annual sales.
“In the second quarter, Roots reported sales of $49.4 million, up 3.4% year-over-year, which was relatively in line with our and consensus forecasts of respectively $48.3M and $48.1M,” notes the analyst.
This performance, however, was undermined by a lower-than-expected profit margin and higher-than-expected selling, general and administrative expenses as a percentage of sales.
“All this meant that adjusted EBITDA amounted to -$3M, while we anticipated -$1.2M,” writes the analyst. The consensus was much more optimistic, forecasting a positive result of $2M.
The analyst adds that inventories at the end of the quarter were up 2% year-over-year to $55.9M. The reasons behind this slight increase are the growing use of sustainable materials which are driving up clothing production costs and the increase in the number of common products in stores.
“Roots management says it is in the process of reducing its inventories by the end of the year, which we believe is achievable, while it remains disciplined in terms of promotions even if some competitors are more aggressive,” writes- he.
He adds that management expects a tailwind to direct-to-consumer profit margins in the second half of the fiscal year as transportation costs were higher last year. “That said, an increase in the minimum wage of 6.8% in Ontario in October will increase Roots’ expenses by $300,000 in the second half of the year (and by $700,000 per year),” specifies he.
Sabahat Khan reiterates his “sector-match performance” recommendation for Roots and his one-year target price of $3.
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