Roots Corporation (TSX: ROOT) Q2 2021 earnings call dated Sep. 10, 2021
Corporate Participants:
Kristen Davies — Head of Investor Relations
Meghan Roach — Chief Executive Officer
Mona Kennedy — Chief Financial Officer
Analysts:
Brian Morrison — TD Securities — Analyst
Patricia Baker — Scotiabank — Analyst
Stephen MacLeod — Analyst
Matthew Lee — Canaccord — Analyst
Presentation:
Operator
Good morning, my name is Sylvie and I will be your conference operator today. At this time, I would like to welcome everyone to the Roots Fiscal 2021 Second Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] On the call today, we have Meghan Roach, Chief Executive Officer; Mona Kennedy, Chief Financial Officer; and Kristen Davies, Head of Investor Relations for Roots.
Before the call begins, the company would like to remind listeners that the call, including the Q&A portion, may include forward-looking statements about current and future plans, expectations, and intentions, results, levels of activities, performance, goals or achievements or any other future events or developments. This information is based on management’s reasonable assumption and beliefs in light of information currently available to Roots and its listeners are cautioned not to place undue reliance on such information.
Each forward-looking statement is subject to risks and uncertainties that could cause actual results to differ materially from those projected. The company refers listeners to its fiscal 2021 second quarter Management’s Discussion and Analysis and/or its Annual Information Form dated April 7th, 2021 for a summary of the significant assumptions underlying forward-looking statements and certain risks and factors that could affect the company’s future performance and ability to deliver on these statements.
Roots undertakes no obligation to update or revise any forward-looking statements made on this call. The fiscal 2021 second quarter earnings release, the related financial statements, and the Management’s Discussion and Analysis are available on SEDAR as well as on the Roots Investor Relations website at www.investors.roots.com. Finally, please also note that all figures discussed on this conference call are in Canadian dollars, unless otherwise stated. Thank you, Ms. Davies, you may begin your conference.
Kristen Davies — Head of Investor Relations
Thank you, operator. Good morning everyone and thank you for joining us. Meghan Roach, our Chief Executive Officer, will discuss our fiscal 2021 second quarter operational performance as well as our strategic outlook for the fiscal year. Then, she will turn the call over to Mona Kennedy, our Chief Financial Officer, who will discuss our financials in greater detail. After that, we will open up the call for questions. Megan?
Meghan Roach — Chief Executive Officer
Thank you, Kristen. Good morning everyone and thank you for joining us. We are very pleased with our second quarter results. Our profitable growth demonstrates the desirability of our brands, our loyal customer base, strong fundamentals, and the work of an incredible team. Throughout the quarter, we continued to successfully adapt to the ongoing disruptions in our industry caused by COVID-19. Driven by DTC sales gains, we delivered overall sales growth despite our stores in Ontario, our largest market, being closed for approximately 15% longer than in Q2 last year.
In addition, our ongoing efforts to drive operational cost efficiencies, specifically as it relates to gross margin, SG&A generating improvements year-over-year and relative to Q2 2019 when all of our stores were open. During the quarter, we continued to benefit from our omnichannel capabilities. With more stores reopening as we moved throughout the quarter, we achieved healthy year-over-year store sales gains. In Ontario specifically when stores reopened, we saw significant year-over-year improvements that more than offset the temporary increase from store closures in that region.
As stores continue to be an important connection point with our loyal customers, we also opened five pop-ups in the quarter, bringing the total number to 11. These capital-light stores have proven to be low-risk, high-reward approaches to showcasing key products and collections, capturing event-driven and female traffic and testing new markets and store formats. Consistent with our expectations, the increase store activity resulted in moderated demand online. However, eCommerce remains above pre-pandemic levels and online continues to be an important channel for attracting new customers into the brand.
Turning briefly to our international channel. While we continue to see volatility in Taiwan as they work through the impacts of multiple waves of COVID-19, we remain confident in the brand’s strength in that region. In China, we have relaunched our digital platform and in the U.S., we continue to be pleased with the progress of our digital platform. We remain confident in the long-term growth potential of that market. From a product perspective, we continue to generate excitement with new and existing customers through collaboration.
In July, we came together with a fellow iconic Canadian brand Tim Hortons. We created a limited edition leather key fob, which resembled Tim Hortons coffee cup. It was made at our Toronto leather factory. We also collaborated with Canadian artist, Jason Logan and The Toronto Ink Company in a limited edition collection of one of a kind natural ink, hand-dyed premium sweat shirt. These programs sold [Indecipherable] website within days of launching and the Jason Logan sweat shirt was priced at a meaningful premium to other collections in our site.
Our product excitement has continued beyond the quarter. We recently released an award jacket collaboration with The Weeknd and Japanese artist Mr. and our capsule collection in celebration of the relaunch of MuchMusic on TikTok dropped exclusively online at roots.com earlier this week. However, one of the most exciting launches this year was officially announced this morning, the One Collection.
With a focus on removing boundaries and encouraging individual expression, One is a fleece collection which advises our journey towards the future of Roots. One has a gender-free fit, offered in extended sizing and contains sustainable materials. It reflects an ongoing brand commitment that extends across all aspects of our business and there are changes to come as we continue to evolve our product range and in-store experience.
One is about creating pieces that inspire inner confidence and individuality and it is designed for customers to focus on a fit that expresses their personal style, not size. We worked with real people, not only models, to develop an entirely new size chart. The new size chart runs from 1 to 8, which is a more conventional sizing would align to women’s extra small to 4XL and men’s double extra small to 3XL.
We invited [Phonetic] over 50 people from both inside and outside the company, trying multiple sizes to ensure we perfected our new sizing chart at every step. The One marketing campaign features a vibrant and diverse cast of all sizes, ethnicities, and gender identity. We’ve also worked to create a fit-focused and size-integrated shopping experience in our stores and online.
One is about our commitment to investing sustainable materials also. We’ve curated the entire fleece lines from adults to the kids from 80% organic cotton and 20% recycled fibers. I applaud everyone who’s been involved in bringing this vision to life. It has been a significant undertaking and it’s an important step forward in making the Roots shopping experience more inclusive. We also see many long-term growth opportunities for us in these areas.
As I discussed in previous quarters, to having a positive impact within our communities is an important focus for the entire team at Roots. It’s an integral part of who we are as a brand today and is fundamental to where we’re going. I’m incredibly proud of the direct support we continue to provide many well-deserving organizations.
In the second quarter, we donated a portion of sales to made-in-Canada fabric masks and select collaboration items to Youthline, a Youthline organization that affirms and supports the experiences of the LGBTQ2S+ views across Ontario. We also donated 13,000 of our made-in-Canada masks to First Nations in Manitoba and Ontario in partnership with Save the Children’s National Reconciliation Program.
In addition, we continue to make progress in our diversity, equality, equity and inclusion initiatives across the organization with our efforts informed by responses and feedback from Roots team members across North America. The newest developments in this area include the launch of our DEI platform, Together at Roots and the creation of a new role appointing the company’s first ever diversity, equality, equity, inclusion specialists.
We’ve also become an important partner with Canada’s leading diversity and inclusion organization, the Canadian Center for Diversity and Inclusion. These are all meaningful steps in our diversity, equality, equity, and inclusion journey and one we believe will further accelerate our progress.
As we look to the remainder of the fiscal year, our near-term operating environment remains fluid. We are navigating the recent surge in the Delta variant, industry-wide supply chain headwinds, including closures in countries [Indecipherable] and delays due to port congestion and demand for transportation. However, we continue to run the business in a manner needed to successfully adapt and mitigate these impacts when possible.
In early 2020, we outlined the major strategic pillars in the areas of brand, channel, product and operational excellence that we deemed important to running the business and returning it to profitable growth. We’ve made significant progress against these pillars over the last 18 months and we are happy with the strong foundation we built.
As we look to the future of Roots in ways we can drive lasting growth, our focus will remain on the following: establishing Roots as a brand beloved by customers globally, which means continuing to invest in building beautiful products, creating brand level exciting partnerships, limited edition drops, and brand additive collaboration, further investing in sustainable materials, programs and processes, taking a customer-centric and a customer-informed approach to all that we do and continue to extend our geographic reach, first and foremost, by establishing a more meaningful presence in the U.S. and China through a digital-led expansion.
Our second area of focus is maintaining our strong position as an omnichannel brand. Over the last 1.5 years, we have proven our ability to support additional penetration that has far exceeded our historical levels. While we expect e-commerce to continue to normalize at somewhat lower levels once we’ve exited the pandemic, we still expect it to be elevated and remain a more meaningful portion of our business going forward. As such, we have dedicated more investments to enhancing our omnichannel capabilities in areas such as enhancements [Phonetic] to our website, extending our shipping options, and improving customer order management.
Our third area of focus is continued operational excellence. We will continue to focus on operational efficiency, repositioning our price value occasion with a reduction in promotional depth and breadth, and managing costs to further strengthen profitability and free cash flow generation. We will also continue to pursue profitable growth opportunities by making investment decisions anchored on the return on investment in each initiative.
We’ve made significant progress over the last 18 months and while we continue to navigate through some uncertainties, our focus remains on maximizing the success of the business over the long-term. With the high-quality, comfort and versatility of our products, we also continue to be well positioned to capitalize on the ongoing casualization of the North American wardrobe. With that, I will turn the call to Mona to discuss our financial results in greater detail. Mona?
Mona Kennedy — Chief Financial Officer
Thanks, Meghan, and good morning, everyone. During the second quarter, despite continued headwinds and uncertainty as a result of mandated store closures and operating limitations, we delivered sales growth, gross margin expansion, and improved profitability. Our Q2 results continue to demonstrate excitement for our brand, the loyalty of our customer base, the benefits of our omnichannel capabilities, and our continued success in driving operational and cost efficiencies.
Looking at our financial results in greater detail. Total sales in the second quarter were CAD38.9 million, up 1.8% from $38.2 million last year, driven by DTC sales growth. For the quarter, DTC sales were CAD30.4 million, a 6.6% improvement over CAD28.5 million last year, which, as Meghan noted, we achieved despite being closed for longer in Ontario, our largest market. Ontario stores were closed for approximately 60% of the quarter compared to approximately 45% of Q2 2020. ECommerce sales continued to play an important role in the quarter and while they moderated with an increase in store activity, we still delivered significant growth over pre-pandemic levels.
On the Partners and Other front, sales were CAD8.5 million, down from CAD9.7 million last year. This was primarily the result of two factors: an unfavorable foreign exchange impact on wholesale sales to our operating partner in Taiwan and a shift in the timing of Taiwan wholesale orders in Q1 2021, which I had mentioned on our last call.
We had another quarter of strong gross margin improvement as a result of our continued promotional discipline as well as in-quarter decisions to further adjust our planned promotions given the positive customer response and strong full price selling we were seeing. At 63.4%, our DTC gross margin for the second quarter improved 120 basis points over the 62.2% we recorded last year and 710 basis points over the 56.3% we recorded in Q2 2019.
As we have discussed with you in previous quarters, we have quite intentionally walked away from the frequency of promotional activity as well as the breadth and depth the brand has seen in the past. While the strategy likely places some downward pressure on sales over the short-term, we’re confident it is the right approach.
If you go back to 2019, there was a tremendous amount of promotional discounting to drive the top line while margins were slowly eroding. We will continue to refine and fine-tune our current strategy especially in light of uncertain operating environment. However, we strongly believe this approach is a better way for us to continue to build our brand and maintain brand equity over the long-term.
We continue to manage our expenses tightly while closely monitoring our top line performance. We recorded CAD21.8 million in selling, general and administrative expenses for Q2 2021 compared to CAD21.4 million last year. We recorded higher costs related to investments in talent and marketing in the quarter.
However, they were effectively offset by rent savings. Our Q2 SG&A also reflects a decrease in government subsidies year-over-year as expected. We recorded CAD3.6 million in government rents and wage subsidies, down from CAD4.4 million in Q2 2020. Reflecting our sales growth, gross margin expansion, cost management, and the benefit of government subsidies that helped offset the impact of store closures in the quarter, we recorded an adjusted EBITDA of CAD2.9 million, a CAD1.8 million improvement over the CAD1.1 million we recorded in Q2 2020.
Now turning to inventory. We’re happy with our inventory balance, which was CAD47.5 million at the end of the quarter. This is down from CAD58.6 million a year ago primarily as a result of delivery delays and the fact that we are now starting to sell through some of our pack and hold inventory from last year. As Meghan mentioned earlier and we discussed last quarter, we like our peers continue to face supply chain disruption.
However since last quarter, the situation has worsened industry-wide. As a result, we have taken further actions to mitigate the impact on our business. We continue to strategically manage our inventory and promotions and will make in-quarter decisions as necessary around planned promotional activity. We are also using air freight for key seasonal programs.
While we will likely see an impact on margins, largely in the fourth quarter, we believe bringing the inventory in as quickly as we can is the most prudent course of action right now. We’re also leveraging our pack and hold inventory to bridge delays as needed. The situation is dynamic and we continue to monitor it closely. We’re working diligently to manage the business for the best possible outcomes, especially as we move into our busy holiday season. At quarter-end, we had outstanding revolver credit facility borrowings of CAD17.5 million and had net cash of CAD8.4 million with net debt of CAD77.1 million, down from CAD101.3 million in Q2 2020.
Overall, we’re pleased with our Q2 results. While we continue to face COVID-19 driven challenges in Q3, primarily on the supply chain side, we remain confident in our ability to deliver on the areas of the business within our control. We are a stronger business and an even more resilient and agile team than we were 18 months ago. Even more importantly, through all of the work we have done, we are well positioned to keep building on nearly 50 years of brand strength and maximize the long-term success of the business. With that, operator, please open the line to questions.
Questions and Answers:
Operator
[Operator Instructions] And your first question will be from Brian Morrison at TD Securities. Please go ahead.
Brian Morrison — TD Securities — Analyst
Thanks very much, operator. Good morning, everyone. Mona, I want to go back to your question on inventory heading into the holiday season. Pretty standard question, but maybe if you just elaborate on the supply chain challenges. Will you have the desired product in place and will you have the ability to chase sales with the shift to air freight?
Mona Kennedy — Chief Financial Officer
Good morning, Brian. The situation is pretty dynamic and we’re monitoring it closely and we have a dedicated team working on it. As I discussed on the call, we’re taking the best steps to mitigate it. We are continuing to strategically manage promotions. We are air freighting some products in for the holiday season to arrive on time and we’re leveraging our pack and hold strategy that we put in place last year that is going to allow us to fill in some holes if they exist. So we are working diligently on it and we’re managing the business for the best possible outcomes and we believe we will be in a good position, but you know what, it changes every day and we’re basically making the right decisions every day to ensure that we have the best holiday.
Brian Morrison — TD Securities — Analyst
So can you maybe just elaborate on the pack and hold strategy. I assume this is not seasonal merchandise from spring, but it will be current winter/fall merchandise will be in the stores during the holiday season.
Mona Kennedy — Chief Financial Officer
Yeah, absolutely, so if you remember last year in Q3 and Q4, we implemented a pack and hold strategy where we basically packed up some product that was meant for that season that we couldn’t actually sell because the stores were closed, it’s products that have never seen the floor and also its product that is core inventory. So that is a product that we’re going to reintroduce back into the stores and it’s going to look new and it’s going to feel new and it’s really going to kind of fill the holes where we need them.
Brian Morrison — TD Securities — Analyst
Okay and then turning to Ontario stores, can you maybe just touch on the traffic with the stores reopening in June and July and maybe back to school relative to last year?
Mona Kennedy — Chief Financial Officer
Oh yeah, go ahead, sorry, go ahead, Meghan.
Meghan Roach — Chief Executive Officer
Sorry, the joys of being on phone. So I think, Brian, we saw some really healthy traffic and some really healthy sales in our stores when they reopened, particularly in Ontario. I think we were positively surprised by the number of people that we had coming back in stores and they intend to purchase. So I think that was great and I think from a back-to-school perspective, we don’t specifically comment on that time period, but the one thing I would say is that we are continuing to really trade the business in a manner that we think is best for the longer-term growth.
And so, one of the things you will see is that we did reduce the discounting that we do during the back-to-school period and more this year than we had last year. We usually have a sweat sale around this time and we decided to do more of a targeted sale on specific products. We were seeing good sell-throughs in some of the products we hadn’t before.
Brian Morrison — TD Securities — Analyst
Okay and then last question, and I’ll turn it over. Just in terms of — you touched on the geographic reach and your progress on the U.S. and China digital presence. What’s your strategy going forward here? Do you look to mature these markets prior to further opening new markets? Or are there additional regions to target in the near-term?
Meghan Roach — Chief Executive Officer
Yeah, I think what we’ll focus on, first and foremost is a digitally-led strategy. So I think that we have a lot of potential in the U.S. and China and those are both for us longer-term markets where we’re seeing the bigger growth. And obviously, from an apparel perspective, the U.S. and China are obviously largest markets globally. So obviously, we do see a lot of big potential in those regions specifically.
We do see other markets where we do have some interesting traction on our online presence and so we’re really opportunistic in terms of leveraging those markets to drive further growth, but definitely the focus in the near-term is on the U.S. and China and then we’re going to look at the other markets just based on how we see near-term [Phonetic] trending.
Brian Morrison — TD Securities — Analyst
Okay, thank you very much.
Meghan Roach — Chief Executive Officer
Thank you.
Operator
Thank you. Next question will be from Patricia Baker at Scotiabank.
Patricia Baker — Scotiabank — Analyst
Good morning everyone. Just the promotional discipline, which has been pretty impressive. You guys have been engaged in that for a period of time now. Do you have any sense of whether — how your customer is feeling about that and how close they are to getting used to routes being different from a promotional perspective and sort of recognizing just the kind of the new approach at Roots?
Mona Kennedy — Chief Financial Officer
Good morning, Patricia, it seems like — as you kind of see in our margin performance, it seems that the customers are responding to it well. We’re selling a lot more product at full price and the depth of our promotions has gone down and they still performed similarly as they did before. So I think historically, if you look at 2019, we just went too deep and too frequent with promotions and now with having removed that, it seems like the customers are still responding to the product.
So we feel like it’s performing well. We’re going to continue to go ahead with the same strategy in the future. As you’ve seen, we’ve seen a 710 basis point improvement in our margin compared to 2019, which has been fantastic. So all in all, I think it’s going well. We have sacrificed some top line growth, but we believe that’s the right decision for the business and it is elevating the brand in general.
Meghan Roach — Chief Executive Officer
And just a quick anecdote — just to add on that, I was in a store last week and I saw a customer who was looking at our Salt & Pepper collection and indicated they owned them for quite a long period of time and asked me when they were going on sale because they’re quite interested in buying them. When I told her that they weren’t going on sale, she immediately went to the cash and bought them, right?
So it takes a little while to train the customers again that we are not going on sale and it’s been 1.5 years, but obviously, 1.5 years during the pandemic period. So I think we still have a little bit of retraining to do for the customers to understand the benefit and the fact that we’re not going on sale, but as Mona mentioned, we are seeing some great traction with it so far.
Patricia Baker — Scotiabank — Analyst
Well, thank you very much for that anecdote and that’s kind of what I was getting at because I kind of anecdotally myself have the feeling that the customer has been almost fully trained to recognize that the Roots of the past with respect to promotions is not the Roots of today. And I guess the point I would make is that it’s probably the combination of that promotional discipline change, but also all the interesting partnerships we’ve got and limited items and the newness that you’re putting in there, which is also the two things combined are probably having a really positive impact on elevating the brand, I would assume.
Meghan Roach — Chief Executive Officer
Absolutely, we’re seeing some great traction with our collaborations and I think as we’ve seen in previous quarter and in this quarter, I mean, we did a variety of unique collaborations. So we did something with Tim Hortons, we did something with The Weeknd and the Japanese artist Mr. We just launched MuchMusic. So we’ve done a variety of different collaborations that have attracted, I think, different consumer bases and what’s interesting about those things is we’re seeing people who are part of our existing consumer base for example are also attracting a new consumer to the brand and so we’re continuing down that pathway of release [Phonetic] promotions as well as interesting collaborations to drive demand.
Patricia Baker — Scotiabank — Analyst
Excellent. Thank you so much.
Operator
[Operator Instructions] Your next question is from Stephen MacLeod at BMO. Please go ahead.
Stephen MacLeod — Analyst
Thank you. Good morning, everyone. I just wanted to ask a couple of questions about the in-store performance, I guess, particularly in Ontario, but also as you’ve opened other regions as well, can you just comment a little bit about what you’ve seen in terms of foot traffic and basket sizes, conversion trends or conversion rates or anything like that, that gives us a sense of how consumers are coming back to the store?
Meghan Roach — Chief Executive Officer
Yes, absolutely. So we don’t specifically disclose kind of each of those specific metrics. I think that — from a high level what I can tell you is we continue to see really strong AURs. The promotional discount is obviously helping us — the lack of promotional equation is continuing to really help us in that specific area. Traffic, again, is obviously an area that we saw rebound given that our stores were closed in Ontario, specifically. Once they were reopened, obviously, big uplift in traffic overall from that perspective. So, continuing to see healthy traffic, continuing to see a strong intensive purchase when our customers are in stores. And overall, just healthy sales growth from a store-base perspective, which is really positive.
Stephen MacLeod — Analyst
Great, thank you. And then eCommerce, I know you didn’t disclose or you sort of mentioned that eCommerce moderated a little bit from stores reopen, which would make sense, but still remains above pre-pandemic levels. In the past, you’ve given sort of percent of sales or percent growth, can you talk about or give some specifics around how e-commerce performed in the quarter?
Meghan Roach — Chief Executive Officer
Yeah, so I think we talked about in previous calls how we really view ourselves as an omnichannel retailer, right? And I think I was pretty transparent and upfront in previous calls about the fact that we expected to see some moderation in the eCommerce business when stores reopened just given the massive store base we do have across Canada and how we’re really trying to build ourselves into a seamless omnichannel retailer and brand where people can shop with us whichever way they want.
So on a go-forward basis, we’re really not going to be disclosing eCommerce specifically because we think they really feed each other and so from that perspective, we’re focused on the overall DTC growth and that’s what we think what we saw. When our stores reopened, we saw shifting between the two channels. We saw customers continue to shop both channels, but we did see some customers who shifted back into that physical retail channel.
And I think as we mentioned in previous calls, one of the things we did last year was do a survey of our consumers to ask them about their in-store expectations experiences. And the thing they consistently came back was a significant portion of our customers wanted to go into our stores to touch and feel our products and also a number of customers in and around 30%, 35% only really shopped in the physical store environment.
So, again, we think that’s one of the reasons we’re seeing the healthy return to store growth and eCommerce continues to bring new customers and as we had mentioned, it continues to be a higher percentage of overall sales compared to pre-pandemic levels and us versus pre-pandemic levels, but definitely saw some moderation in the quarter as we saw our stores open.
Stephen MacLeod — Analyst
Right, okay. That makes sense. And then maybe just finally, in terms of SG&A, the SG&A was sort of held tight in the quarter, just given the stores being closed, continue to be closed. Can you talk about how you expect that to trend sort of in the back end of the year as you see more stores reopen where you sit today with all stores open, but one?
Mona Kennedy — Chief Financial Officer
We’re managing our SG&A tightly. We’re focusing on areas where we need to invest for the returns that we expect. As you would have seen in our commentary, our SG&A was higher in marketing and then more investment in the areas that we need to. So, as you think about kind of Q3 and Q4, I think what you need to keep in mind is that, yes, stores are going to be opened. So obviously, labor is going to be higher, particularly in Q4. In Q3, all the stores last year were open. So you didn’t see too much of an impact there, but in Q4, you will have to see labor going up.
I think the other thing that you need to keep in mind is rent. So, rent expense was down this quarter, but as we go into Q3, you’ll remember that last year, we had really big abatements that hit us in Q3. So we won’t be experiencing those at the same level in Q3 and then I guess, lastly, I should say the subsidies. So the subsidies, as you know, are ending on October 23rd. So, obviously, the rate is going down and it’s also based on revenue decline. So, I would expect that to be a lot lower in Q3 and then non-existent in Q4. And then the rent subsidy, I would expect to be lower in Q3 as well given that our stores are now open and the biggest portion of that subsidy is related to store closures.
Stephen MacLeod — Analyst
Okay, that’s very helpful. Okay, great. Thank you so much.
Operator
Thank you. Next question will be from Matthew Lee at Canaccord. Please go ahead.
Matthew Lee — Canaccord — Analyst
Hey, good morning. Most of my questions have already been asked, but just in terms of the stores, given that [Technical Issues], do you foresee any type of significant renovations required, especially given the transition of the brand?
Mona Kennedy — Chief Financial Officer
I think we’ve commented on this previously. From a renovation perspective, our stores are well invested. They’re in good shape, but we continue to look at them and ensure that they’re in the shape of the customers need them to be, right? So our business is omnichannel. We need to make sure that the stores are fulfilling the needs of the customer.
From an investment perspective, as you see over the past 1.5 years, we’ve been doing pop-ups that are very low in capital and allow us to test different models. And then based on these different models, we may make different decisions next year and in future years in terms of the format of the stores, but in general, I wouldn’t expect substantial investments in that area that are not coming with the appropriate bottom line returns.
Matthew Lee — Canaccord — Analyst
Right, and then can you maybe elaborate a little bit on the modifications you’ve made with the deal with your Taiwanese partner?
Meghan Roach — Chief Executive Officer
Yes, absolutely. We have a long-term partner in Taiwan who have been there for over 15 years and we’re continuing to partner with them going forward. They’ve been fantastic partners for us. It’s a great relationship and through this modifications to financial terms to kind of just reflect the way we’re operating with them. So more specifically focused on wholesale margins as opposed to our royalty plus [Indecipherable]. So you should continue to expect to see that going forward. All right. Thanks.
Operator
Thank you. And at this time, ladies, we have no other questions. Please proceed.
Meghan Roach — Chief Executive Officer
Thank you, operator. Well, that concludes our call for today. We appreciate all of you coming to the call and we look forward to speaking to you in the third quarter. Stay safe and stay healthy.
Operator
[Operator Closing Remarks]