Aritzia Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
September 28, 2023

There are 13 speakers on the call.

Operator

Welcome to Aritzia's Second Quarter 2024 Earnings Conference Call. As a reminder, all participants are in listen only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. I will now turn the conference over to Beth Reed, Vice President, Investor Relations. Please go ahead.

Speaker 1

Good afternoon, and thanks for joining Aritzia's Q2 fiscal 2024 earnings call. On the call today, I'm joined by Jennifer Wong, our Chief Executive Officer and Todd Ingledew, our Chief Financial Officer. Following prepared remarks, there will be an opportunity to ask questions. Please note that remarks on this call may include our expectations, future assumptions made by management regarding, among other things, general economic and geopolitical conditions as well as the competitive environment. Actual results may differ materially from the conclusions, forecasts or projections expressed by the forward looking information.

Speaker 1

We would refer you to our most recently filed management's discussion and analysis and our annual information form, which include a summary of the material assumptions as well as risks and factors that could affect our future performance and our ability to deliver on the forward looking information. Our earnings release, the related financial statements and the MD and A are available on SEDAR as well as the Investor Relations section of our website. I'll now turn the call over to Jennifer.

Speaker 2

Thanks, Beth. Good afternoon, everyone, and thank you for joining us today. In the face of a challenging retail environment And following unprecedented growth year over year, for the Q2 of fiscal 2024, we delivered net revenue of $534,000,000 an increase of approximately 2%. This is on top of delivering outstanding revenue growth of 50% in the Q2 last fiscal year and 75% in the Q2 of fiscal 2022. We remain confident that the level of overall sales Achieved in the last 2 years, including this recent quarter, is a strong base from which our future sales and operational efficiencies will meaningfully scale in the quarters and years ahead.

Speaker 2

Comparable sales growth decreased 4.3% in Q2 as we lapped a remarkable 28% comparison last year. In the U. S, our net revenue increased 6% on top of 80% growth in the Q2 last year, while in our Canadian market, sales declined 3% as we lapped 29% growth in the Q2 of fiscal 2023. In addition to cycling 2 years of outstanding sales results, we believe our 2nd quarter top line trend was impacted by the level of new styles in our product assortment as well as a mixed consumer environment. Now before I discuss the results of our sales channels, I want to first provide some color on our levels of new styles.

Speaker 2

Over the past 2 fiscal years, our primary focus was on maximizing sales growth by fueling the unprecedented demand for our product. While navigating a challenging supply chain environment, We focused our efforts on ensuring sufficient supply of the products that were most in demand, our client favorites and on developing newness to variations of these items. These actions are what drove sales growth of 74% in fiscal 2022 and 47% in fiscal 2023. The trade off was that as we faced bandwidth constraints, Our level of new style development was not optimal. Our proven strategy, which has served our client base exceedingly well for many years, With a normalized supply chain and operating environment, we've now returned to our proven product development cadence.

Speaker 2

Our team is laser focused on our product pipeline. So far, we are encouraged that even for this fall, New seasonal styles are resonating extremely well with our clients, and we continue to expect to be in a strong position for springsummer 2024, which begins to launch in February. Shifting back to our Q2 performance. Net revenue in our retail channel increased 3% in the 2nd quarter, driven by the progress we've made on our real estate expansion strategy. We opened 1 new boutique during the quarter, our 3rd boutique in the state of Florida at International Plaza in Tampa, which is a new market for us.

Speaker 2

We also recently opened 2 expanded boutiques, Short Hills, New Jersey in July and Prudential in Boston at the end of August. In Q3, we plan to open 2 new boutiques, South Park in Charlotte and Fashion Mall at Keystone in Indianapolis. Both are new markets for Aritzia. The performance of our new and expanded boutiques remains strong and continues to result in better than expected payback periods. The new boutiques that we have opened in the past 12 months are all tracking to payback 1 year or less ahead of our expectations for 12 to 18 months.

Speaker 2

As an example, Our newest store in Tampa is generating better than planned sales results and currently tracking to pay back in approximately 10 months. Overall, our retail stores are supported by a world class team of people that exemplify our core values. To ensure that we supported our employees during a period of unprecedented growth and heightened economic uncertainties as well as to attract and retain We made significant investments in retail labor over the last couple of years. Having passionate, dedicated people in our boutiques is critical to delivering an exceptional client experience. After a sustained period of exceeding our own expectations, e commerce net revenue decreased 1% in Q2, driven by softer traffic trends in line with a weaker retail environment.

Speaker 2

Conversion remains strong As we continue to execute our e Commerce 2.0 vision across our three value propositions: tailored product discovery, intuitive experiences and creative innovation. After launching multiple personalized recommendation experiences across our site in Q1 and Q2, We have continued to test, learn and refine our algorithms to provide the most curated recommendations for our clients. In Q2, we launched personalized product recommendations in the search panel and quick grab recommendations in bag. Additionally, we have made enhancements to our online checkout experience, which have improved checkout conversion. Now that our point of sale upgrade is complete, we have launched our pilot of additional omnichannel services, buy online, pickup in store and Ship from Store earlier this month in Canada.

Speaker 2

We are pleased with the preliminary results with revenue in the initial weeks exceeding our expectations. In addition, our forecasted cost of implementation is tracking below budget. Next up is our rollout in the U. S, which is planned to begin after the holidays with completion in Q4. We believe one of our biggest opportunities arises from these additional services is to convert more single channel clients to omnichannel.

Speaker 2

The strength of our current omni clients highlights the magnitude of this opportunity. Our omni clients spend approximately 3 times more than clients who shop exclusively in either our retail or our e commerce channel. In addition, the retention rate for omni clients is substantially higher And for single channel clients, we also expect to benefit from inventory optimization. And from an inventory perspective, Our position has continued to normalize. At the end of Q2, inventory was up 10% over last year, and we expect the year over year comparison to further moderate for the remainder of fiscal 2024.

Speaker 2

As expected, the overall markdown rate during our springsummer sale period remained below pre pandemic levels with no change to our promotional calendar in the quarter. Shifting to supply chain, I'm absolutely thrilled To announce that our new distribution center in the Toronto area went live at the end of August as scheduled, We seamlessly completed the transition out of our prior third party operated facility without any disruption to the business. We've had a successful ramp up period with productivity KPIs at roughly 90% of our corporate targets by week 5 And our fill rate is already in line with that of our existing distribution center on the West Coast and in line with top of industry metrics. We have already exited 3 of the 6 additional temporary off-site warehouse facilities and are working towards subleasing the remainder by the end of the year. We also continue to make these strides in finding efficiencies to optimize for our increase in scale over the last two years and better allow us to scale in the future.

Speaker 2

Some of the areas in which we've already begun

Speaker 3

Thanks, Jennifer, and good afternoon, everyone. In the Q2 of fiscal 2024, we generated net revenue of $534,000,000 representing an increase of approximately 2% from last year. This increase is on top of 2 years of Extraordinary growth in the 2nd quarter, 50% in fiscal 2023 75% in fiscal 2022, resulting in a 3 year CAGR of 39%. Comparable sales growth decreased 4.3% following a remarkable increase of 28% last year. Net revenue in the United States was $279,000,000 in the 2nd quarter, an increase of 6% on top of a second quarter increase of 80% in fiscal 2023 and 152 percent in fiscal 2022.

Speaker 3

In Canada, net revenue decreased 3% to $255,000,000 on top of an increase of 29% in fiscal 2023 and 43% in fiscal 2022. Net revenue in our retail channel was $362,000,000 an increase of 3% from the Q2 last year. This was driven by the performance of our new and repositioned boutiques, which continue to generate better than expected payback periods, partially offset by softer comparable sales. In e commerce, net revenue was $172,000,000 a decrease of 1%. The deceleration was driven by softer traffic trends in both countries following 3 years of unprecedented growth.

Speaker 3

While year over year revenue growth has been modest, Up against exceedingly high comparables, we remain confident that we have achieved a sustainable sales base from which we will continue to scale our operations. We delivered gross profit of $187,000,000 compared to $220,000,000 in the Q2 last year. Gross profit margin was 35%, declining 6.90 basis points from 41.9% last year and marking the peak of our anticipated margin pressure for fiscal 2024. The decline was primarily due to the following headwinds: Higher product costs, normalized markdowns, temporary warehousing costs and pre opening lease amortization for flagship boutiques and our new distribution center. These pressures were partially offset by lower expedited freight costs.

Speaker 3

SG and A expenses were $171,000,000 up 16% from last year. SG and A as a percent of net revenue was 32%, representing an increase of 400 basis points compared to 28% last year. The increase in SG and A expenses was primarily driven by the annualization of investments in retail and support office labor from the back half of last year as well as distribution center project costs. Adjusted EBITDA in the second quarter was $21,000,000 a decrease of 74% from last year. Adjusted EBITDA was 4% of net revenue compared to 15.7% last year.

Speaker 3

This margin decrease primarily reflects three things ongoing inflationary pressure, multiple transitory costs and the run rate from investments made in talent in the back half of last year. The second quarter reflects peak margin in fiscal 2024 and we continue to expect sequential margin improvement in the second half of the year compared to the first half. At the end of the Q2, inventory was $501,000,000 up 10% from the end of the Q2 last year. Our inventory balance continues to normalize and we expect the year over year comparison to further moderate for the remainder of fiscal 2024. With a normalized supply chain environment, we have now returned to our proven inventory management methodologies.

Speaker 3

We had $77,000,000 in cash at the end of the 2nd quarter and $75,000,000 available on our $175,000,000 revolving credit facility. We expect the majority of the $100,000,000 drawn on our facility to be repaid by the end of the 3rd quarter. We remain focused on maintaining a strong balance sheet, which has served us well through time. Shifting to our outlook. Based on quarter to date trends, net revenue in the Q3 is expected to be flat to slightly down from the prior year, again on top of 2 years of exceptional growth, 50% in the Q3 last year and 75% 2 years ago.

Speaker 3

Following peak pressure in the Q2, we expect gross profit margin in the Q3 to decline 200 basis points compared to the prior year, A meaningful sequential improvement and we expect SG and A as a percent of net revenue to also improve sequentially in the 3rd quarter, increasing by approximately 300 basis points compared to the prior year. Turning to the full year, For fiscal 2024, we continue to expect net revenue in the range of $2,250,000,000 to $2,350,000,000 representing growth of 2% to 7% from fiscal 2023, including the 53rd week. This growth is on top of a 47% increase last year and 74% increase 2 years ago. We continue to expect gross profit margin for the year to decline by approximately 300 basis points compared to fiscal 2023. We expect sequential improvement in the back half of the year compared to the first half driven by improved IMUs due to selective pricing actions and Cost improvements.

Speaker 3

In addition, temporary warehousing costs that are already beginning to subside with the opening of our new distribution center. And lastly, we will also be lapping the period in the back half of last year when markdowns began to normalize off of low levels from fiscal 2022. We continue to expect SG and A as a percent of net revenue for the year to increase by approximately 300 basis points compared to fiscal 2023. We expect sequential improvement in the back half of the year compared to the first half, which will be driven by the elimination of distribution center project costs as our new distribution center opened last month and the lapping of investments in support office and retail labor. In addition to factors I already discussed, We continue to expect that the margin improvement in the second half and into fiscal 2025 will be partially driven by one of our key priorities for this year, Smart Spending.

Speaker 3

This cross functional priority is driving meaningful results with approximately 150 opportunities identified across the business with over half already complete. The estimated annualized run rate savings totaled over $60,000,000 with approximately 50% of the benefits expected to be realized this fiscal year. We continue to expect capital expenditures for fiscal 2024 of approximately $220,000,000 This includes $120,000,000 related to our new and expanded boutiques, which continue to pay back in approximately 12 months or less, as well as $100,000,000 primarily related to the expansion of our distribution center network and support office space. Looking ahead to fiscal 2025, We expect top line momentum to accelerate with the majority of the square footage growth for fiscal 2024 anticipated to occur in the 4th quarter, along with accelerated square footage growth of approximately 20% planned for fiscal 2025. Importantly, our new stores are our most consistent growth driver, delivering predictable revenue growth and propelling our brand.

Speaker 3

With continued investment in the client digital experience, we remain confident that both our e commerce and retail channels Adjusted EBITDA margin improvement in fiscal 2025 with 500 basis points of expansion driven by IMU improvements, Cost efficiencies, subsiding transitory cost pressures as well as leverage on fixed costs. In closing, I want to reiterate that the investments we've made are to support our tremendous growth over the last 2 years and to help drive our future growth. We expect sales to accelerate next year, driven by meaningful square footage expansion over the next 18 months as well as our improved product position and the execution of our ecommerce 2.0 strategy. We also expect that peak margin pressure is behind us and that the steps we're taking will ensure that our margins begin to normalize in the second half of this year with further improvement in fiscal 2025. We anticipate that our expected revenue acceleration and margin expansion will drive significant earnings growth next fiscal year and beyond.

Speaker 3

With that, I'll now turn the call back to Jennifer.

Operator

Thanks, Todd.

Speaker 2

As we look towards fiscal 2025, We are extremely optimistic about our prospects for renewed growth. First, as I said earlier, our new styles for fall are resonating extremely well with our clients and we continue to expect the mix of our assortment to be at a strong position for springsummer 2024, which begins to launch in less than 5 months. 2nd, we have an extraordinary pipeline of boutiques opening over the next 18 months. Our pace of store expansion is planned to accelerate to 6 new boutiques in the back half of this year, followed by roughly 20% square footage growth in fiscal 2025, including repositions of our 3 Manhattan flagships. This is compared to 4 new boutiques opened in the trailing 12 months.

Speaker 2

3rd, we're continuing to execute against our eCommerce 2.0 roadmap, making significant strides on our personalized experience and investing in upgrading the technology stack that underpins our E Commerce 2.0 vision. Lastly, as Todd discussed, we believe our peak margin pressure is behind us. We expect to see substantial improvement in the back half of this year, followed by a meaningful reacceleration in our adjusted EBITDA margin next year. For almost 40 years, our distinctive everyday luxury offerings have been thoughtfully and meticulously refined. Aritzia continues to prioritize design, quality, fit and construction and delivering an exceptional level of execution that's uniquely us.

Speaker 2

We remain extremely confident in our long runway for growth as we seek to deliver our unique value proposition,

Speaker 1

Operator, we're ready to now please open up the line for questions.

Operator

Thank you. We will now begin the question and answer session. Please limit yourself to one question and a related follow-up before getting back in the queue. The first question comes from Stephen MacLeod with BMO Capital Markets. Please go ahead.

Speaker 4

Thank you. Good evening, everybody. Just a couple of questions. Can you just talk a little bit maybe about what you're seeing in terms of Q3 to date traffic trends, Considering

Speaker 5

you had

Speaker 4

a lot of positive commentary around customers' response to your fall FallWinter Collection. And I'm just curious if you can give a little bit of color around what you're seeing both in store and online?

Speaker 2

Hi, Stephen. Yes, traffic is softer. We are seeing softer traffic patterns. That said, what that tells us because it's broad based, because it's across both channels, it's across both geographies, That does tell us that there is a macro environment impact for us. Certainly, as it relates To our digital traffic, we do see an opportunity in our digital traffic, where we our stores are like our stores are busy, Our stores are busy and our sales per square foot productivity is at $1600 a square foot.

Speaker 2

The new stores are paying back in less than 12 months, but where we do see an opportunity is in our digital channel. And what I've noticed after the last few months is that We have an opportunity in digital marketing. So our brand is resonating, our new styles are resonating, yes, I did say that, but we do see that there is an opportunity to drive to our stores through incorporating digital marketing into our overall business strategy in addition to the new store openings, which It has been up until now our number one client acquisition tool and a primary driver to our e commerce.

Speaker 4

Okay. That's helpful. Thanks, Jennifer. And then I just wondering, I just wanted to clarify or just ask about the margin progression in the back half of the year and into fiscal 2025. Has anything evolved differently from how you thought it would when you think about your margin Trajectory and progression in Q2 and then beyond into Q3 and into next year.

Speaker 4

And I'm wondering if you could also just provide like the buckets of 'twenty five fiscal 'twenty five margin improvements?

Speaker 3

Sure. Thanks. So a lot to cover in that question, but maybe I'll just take a piece of it and then we can come back if there's other components. So as I said, we were slightly better than we had anticipated, both from a gross profit and an SG and A perspective. But we have maintained our annual guidance of 300 basis points of pressure in both gross profit and SG and A.

Speaker 3

And the benefits that we saw in the second quarter Within gross profit, we're primarily related to improved freight costs. And then from an SG and A perspective, it was just Benefits from retail wages and NSO labor that helped us exceed our initial expectations for the quarter. But if as I look forward, there's no real change in what we're expecting as we roll through Q3 and Q4. And as we've said all along that we thought it would be a tale of 2 halves with meaningful pressure in the first half of the year and that Pressure is subsiding in the back half. And the benefits that we're expecting in Q3 from a gross profit perspective would be from the Product cost improvements that we've talked about with select pricing actions and then the lapping of Cost pressures from the back half of last year and then subsiding temporary warehousing costs.

Speaker 3

So obviously, and Jen mentioned it, but the new DC opening is critical to our margin improvement, both from a gross profit perspective and SG and A because The project costs are now done, which we're hitting SG and A. And within gross profit, we're seeing the benefit, Obviously, from just the improved handling costs and the closing of all of the auxiliary facilities. So again, a lot to unpack in your question there. I haven't even hit the FY 'twenty five part yet. But Does that answer your question on this fiscal year before I move on to FY 2025?

Speaker 4

Yes, it does. Yes. Yes. Thanks, Todd.

Speaker 3

Okay, great. Yes. So from an FY 'twenty five perspective, no change there as well. We expect approximately 150 basis points of improvement from And that's from the select pricing actions and also product cost savings. We Expect another 150 basis points to 200 basis points from our smart spending initiative, which we've outlined and then 125 basis points From transitory costs subsiding, so obviously the distribution center and some of the Pre opening lease amortization, etcetera.

Speaker 4

Okay. That's really helpful. Thanks, Todd. Thanks, Jennifer. Appreciate it.

Speaker 3

Thanks, Stephen.

Operator

The next question comes from Martin Landry with Stifel. Please go ahead.

Speaker 6

Hi, good afternoon. As you've mentioned, you're entering into a period of rapid And I was wondering if you could give us a bit of visibility into that How that square footage growth is going to come about, maybe a breakdown of square footage growth Quarter would be super helpful to help us better model your revenue growth on a quarterly basis.

Speaker 3

Well, maybe I'll approach it from a store count perspective. So as Jennifer said, we have 6 stores For the remainder of this year, 2 are planned for the 2nd or the 3rd quarter and 4 in the 4th quarter. And then the bulk of our stores next year are coming in both the second and the third quarter. And so we have 4 new stores planned for the Q2 of next year and then 7 planned for the Q3. Obviously, from a square footage perspective, The flagships are going to be key component to that square footage growth and a number of those Save the Chicago one are actually repositions and those will be happening in the back half of next year.

Speaker 3

So I don't know if that helps, but that gives you a bit of an idea of the cadence that we're expecting.

Speaker 6

Okay. Okay, that's helpful. And switching gears, you're mentioning that you're in good Position from a product standpoint for your springsummer collection. And as you know, we like numbers. So I was wondering If you could give us maybe a proportion of your lineup next summer, spring summer, that's going to be New products that you're introducing and how does that compare to historical levels?

Speaker 2

Well, it kind of depends. It depends based on store size. It depends on Region, geography, we have stores that range from 4,000 square feet to about 20,000 square feet and it'll be bigger with the flagship stores. It depends if it's a suburban versus urban. So it depends.

Speaker 2

What I would say is if you were to walk into a store at

Operator

At the beginning

Speaker 2

of the season and have a look at our assortment, when you walk in, You'll see that it's merchandise in a very balanced way between new styles and our clients' favorites. And in particular, it's merchandise in a way that when you first walk into the store, the assortment is Engaging and inspirational for the client. And that's essentially what we do. So it depends on the situation.

Speaker 6

Okay. Is it is 2020 the springsummer 2024, is that going to be a Baker year in terms of new styles or an average year in terms of new styles?

Speaker 2

We have targets that we hit. And as I said, And returning to normalized sort of a more normalized operating environment, we're just going back to our proven strategy And it's essentially we've talked about our test and react strategy in the past. It's essentially what it is. We're returning to normalized operations. We're returning to our normalized product development, lifecycle cadence.

Speaker 2

And so what you'll see, obviously, our assortment, Over the last few years, part of our growth strategy has been about product expansion. And I think we've done that very, very successfully. And so it's just a matter of making sure that we have the right product at the right price in the right place at the right time. And if we just stick back to our fundamentals, which is what has made us successful for the last 40 years,

Operator

The next question comes from Irene Nattel with RBC Capital Markets. Please go ahead.

Speaker 7

Thanks and good afternoon. I just want to clarify something from your answer, Todd, to Martin on the timing Of the new stores next year, you said 4 in Q2 and 7 in Q3. Is that correct? And does that 7 New includes the repositioning of the flagships?

Speaker 3

No, it does not. So the 4 and the 7 Are the new stores and the repositions would be on top of that.

Speaker 7

Okay. And Chicago, you said is H2 And the others are do you have the timing on those?

Speaker 3

They're in the back half of the year.

Speaker 7

Okay. Got it. Thank you. Coming back to the topic of newness, you did confirm that You are. Some of it is in the store for fallwinter.

Speaker 7

So can you give us an example of if we walk into the store today, What would we see in that kind of newness bucket that perhaps we wouldn't have seen a year ago?

Speaker 2

Well, I can tell you what we're really excited about. We're really excited about our sweaters, our sweater program. We're really excited about our wool coats. We have a couple of new Super Puffs in the Super Puffs franchise that we're excited about. So That should give you like it's across multiple categories, but those are probably some of the things to give you a flavor of what we're excited about.

Speaker 7

That's helpful. Thank you. And then just switching gears a little bit to consumer behavior. Can you talk a little bit about what you're seeing in terms of consumer sensitivity to promotions? When you said the traffic is down a little bit, when people are in the store, are they gravitating to slightly lower unit price points?

Speaker 7

Like What are you actually seeing in terms of consumer behavior?

Speaker 2

Well, in a nutshell, what we're seeing is, well, I guess I'll relate it to the traffic and the Acro with what we can control. I think when people are being careful about spending their money, They're a bit more discerning about what they're choosing to buy. And so less money to Spend means that for us, we have to make sure that we have the most appealing assortment that we possibly can offer. And so when the clients are shopping with us, what we are seeing is that the clients are shopping maybe less frequently with us, But when they are shopping with us, they are buying. And we're seeing no change to our average basket size.

Speaker 2

And we're seeing in fact, I think In the past quarter, it might have been a bit higher, and we're seeing no change in terms of the average selling price. So it's not so much about I think it's more about Volume than actual like behavior in the store in terms of when they see something they like, they're buying it.

Speaker 7

That's really helpful. Thank you.

Operator

The next Question comes from Lou Cannon with Canaccord Genuity. Please go ahead.

Speaker 8

Thanks and good afternoon. Jen, you had mentioned, I think earlier in your prepared remarks that you're continuing to test and refine the algorithms when it comes to e commerce. I'm just curious if e commerce, if there's any difference versus in store when it comes to driving, We'll say client engagement with newness versus client favorites. In other words, is it a better or worse channel for driving interest in newness versus your source?

Speaker 2

What's interesting about e commerce is because we don't aren't limited by square footage size, we can offer everything. So we offer like pretty much everything is offered online. What we do see is that there is high engagement with newness And there's also high engagement with discontinued product honestly. And so that's why the beauty of the personalization efforts and Yes. Our partnership with Dynamic Yield, I think I mentioned is a platform we use, really makes it so that depending on the customer And given our broad assortments, we can make sure that we're catering to their preferences in terms of what they're looking for.

Speaker 2

Okay.

Speaker 8

And then when it comes to the competitive landscape, I appreciate your and Todd's commentary that the Markdowns level of markdowns that you have in your own assortment is still below pre pandemic levels. Are you seeing any reaction from competitors that are being more or less Promotional than you would have originally anticipated?

Speaker 2

No. I'm not sure if I understand your question. Are we seeing our competitors be more promotional? Certainly, We're not we don't go on sale to drive sales, which A lot of our competitors I know do. So that's sort of the root of the question.

Speaker 2

When we go on sale, we go on sale to clear Inventory to make room and start clean for the following season. That has always been how we've done it. That is how we did it Last spring summer sale, as I mentioned, we didn't have any changes to our promotional calendar. And so, again, that's just a Fundamental pillar of how we do business. And for us, that hasn't changed even despite the maybe more promotional environment around us.

Speaker 8

Understood. Last one and then I'll pass the line. Todd, in the past, you've shared what your total committed inventory position Has been, I'm curious to know if you can share where that is either ending the quarter or as of today.

Speaker 3

Yes, absolutely. And frankly, that's one of the things that's giving us confidence in our current inventory position because now looking at it, When you do include on hand in transit and on order with the factories, our Committed inventory is actually down 15%. So it's obviously a clear indication of where we're headed, and It's just now a matter of time where we'll be reporting inventory It's either flat or even down to the prior year.

Speaker 8

Great. Thank you very much.

Operator

The next question comes from Mark Petrie with CIBC. Please go ahead.

Speaker 9

Yes, thanks. I actually just have a few follow ups to some previous comments. So maybe first, Jen, on the digital marketing topic, Have your efforts on that started already? Or when do you expect that that would Kick in and I assume this is about like online advertising and paid search and those types of things?

Speaker 2

Yes. We're just in the very beginning. As you know, we've done very little to know Digital marketing in the past, I know you've asked me about that in prior years. And we are now we do have people on the team that are seasoned professionals in this area. And so we'll start with Paid search, then paid social and ensuring that we're getting into digital performance marketing specifically I would say at all levels of the funnel, top, middle and bottom, but in particular, converting into sales at the bottom of the funnel.

Speaker 9

So is that something that you would expect to be having an impact in the second half of this year? Like is it going to be able to ramp that quickly?

Speaker 2

We're just formulating our strategy now, and we're building the team now. As I said, we've started some initial Paid search for sure. And I do expect to see some effect in the back half of the year. But really what we're building is a strategy towards fiscal 2025.

Speaker 9

Yes, understood. Okay. And gentlemen, you were talking about the buy online, pick up in store and also Ship from store, having launched in Canada, you spoke about sort of the top line opportunity. I'm just curious if there's also A margin angle to that or not really?

Speaker 2

There is slightly when we did our analysis. Our analysis did indicate that there might be some savings with delivery costs for sure, but the big overarching Sort of bottom line benefit is the optimization of our inventory. It makes our inventory available to both channels and then allows us to really optimize our inventory position.

Speaker 9

Yes. Yes, understood. Okay. Appreciate that. I'll pass the line.

Operator

The next question comes from Alice Zhao with Bank of America. Please go ahead.

Speaker 10

Hi. Thank you for taking my questions. Can you talk more about the components that will allow for the approximately 100 basis points of gross margin improvement that is currently implied in 4Q by your guidance. I know you touched a little bit upon the second half as a whole to Steven's question, but in for 4Q in particular, how are you planning the mark Down component, are we assuming all preopening lease costs are gone, all the temporary housing costs are gone in 4Q?

Speaker 3

Yes. Thanks, Alice. You've hit on a number of the key components, but starting with the Temporary warehousing pressure that we've been experiencing in the first half of this year and actually also last year. Obviously, as Jennifer said, it's going excellent. The Actually, well ahead of our expectations, the implementation at the new DC, but it will still take some time To get out of the leases on these auxiliary buildings.

Speaker 3

So there is some pressure in the Q3 from those auxiliary buildings And it does diminish into the Q4 to the point where we actually may see a benefit In the Q4 because of the labor optimization. So that's one of the dynamics that helps with the sequential improvement from Q3 to Q4. And then we also our smart spending initiative that we have underway is through the year and we expect to benefit more in the Q4 from that than in the Q3. So again, also helping with the sequential improvement From Q3 to Q4 and from a you asked specifically about markdowns, we expect The pressure to be relatively consistent Q3 and Q4 on markdowns.

Speaker 10

That's super helpful. Thank you. And then I have two quick follow ups on your store opening plans. So a lot of retailers have guided to very back half weighted store opening cadence this year. And I was wondering if you can help us understand a little bit why that is and what gives you confidence in all the stores can be opened in the last weeks of 4Q that you have planned?

Speaker 10

And then are there any possibility of changes to the planned cadence of square footage growth next year? Or Is that pretty set in stone the current plan? Thank you.

Speaker 3

Yes. I'll take that one. I guess, obviously, we're talking about construction. So it's never set in stone. So I don't I can't commit to that For certain, what I had communicated was our estimates as of today, that's our plan For those openings, but obviously in some cases we're as much as 12 months away.

Speaker 3

So there's a lot of things that can happen between now and then. Specifically for the Q4 and why the cadence for us, I mean, it's really just a matter of when these deals Come to fruition and the timing of the design and then the build that follows once the deals are done. And obviously availability of space comes into it too. So there's like a long list of factors of why stores Would get delivered at a certain time and I can't speak to others, but that would be the factors affecting us. And So yes, what I just described or outlined is our current thinking On the timing and again, obviously, we're 12 months away in some cases.

Speaker 3

So there could be adjustments to that. But As of right now, that's what when we think those stores will be delivered.

Speaker 10

Got it. So is visibility to next It looks like it's going to be easier than this year to for new stores to come online. Is that right Understanding?

Speaker 3

No, I don't know that there would be a change in the environment. It's this is just when based on again like when we get occupant When we get possession and then when we were planning for occupancy, when they're all coming planned to come online, it's that the environment It's not necessarily going to get easier.

Speaker 10

Got it. Thank you.

Operator

The next question comes from Mauricio Serna with UBS. Please go ahead.

Speaker 5

Great. Good afternoon and thanks for taking all the questions. First, I would like to ask about the Q3 sales guidance. How should we think about the implied comp sales, just given that there's like the total sales outlook implies a deceleration. So I don't know if Does that have to do with less store openings on a last 12 month basis or how should we think about that?

Speaker 5

And then On the implied Q4 SG and A dollar growth, I think it seems that Looking at the model, I think it implies like the SG and A dollar growth will accelerate in Q4. So just want to corroborate that. That will be super helpful. Thank you.

Speaker 3

Yes. Okay. The first question sorry, I got thinking about SG and A there. Your first question was on?

Speaker 5

Implied comp sales.

Speaker 3

All right. Thank you. So the implied comp within our guidance is effectively Flat with what we were seeing in the Q2. And so we've planned the rest of the fiscal year Based on the trends that we saw in the 2nd quarter and the trends that we're seeing quarter to date in the 3rd quarter, there is Implied benefit in the 4th quarter are increased, but it's not coming from comp. It's coming from the 53rd week In the Q4, as well as the new store openings that we've been discussing.

Speaker 3

But there isn't any incremental benefit in the 3rd quarter Compared to the second anyways as it relates to new stores.

Speaker 5

Yes. So like you had a minus 4.3, that's like how you're thinking about Q3 comp sales?

Speaker 3

It's exactly in the sort of down mid single digits.

Speaker 5

Okay, got it. And yes, the other

Speaker 3

question is about Yes. In the Q4, Our SG and A, again, we expect it to sequentially improve From the 300 basis points of pressure in the Q3 and the benefits are coming from Lapping of investments we've been talking about that we made in the really the back half of last year in wages, Both in support office, adding support office heads and as well from a retail perspective, we made investments in retail wages that We've been cycling on really for 2 quarters now and that will be for the most part coming off in the 4th quarter. And then again, the scaling of our smart spending will help the sequential improvement In the Q4 on a margin basis.

Speaker 5

Got it. And then just one last follow-up on inventory. It seems it's great to see that progress both on a reported basis and on the committed inventory. Maybe can you elaborate a little bit more on like that composition? Is it like How does that look when you think about proven sellers versus unit?

Speaker 3

Yes. Our inventory continues to be heavily concentrated improvement sellers as it would be at any point. And so that hasn't changed And is again providing us the confidence in that inventory.

Speaker 5

Got it. Thank you very much.

Operator

The next question comes from Dylan Carden with William Blair. Please go ahead.

Speaker 11

Thanks. Curious, Jennifer, on the marketing comments. Is that incremental to prior thinking? Or asked another way, is the idea here that the ratio of Spend the sales would increase with flow through at higher conversion at the online channel?

Speaker 2

Well, as I've said, we've done very little to no digital marketing in the past. It hasn't necessarily been a primary driver of our business. We grew quite well This last year and the year before without doing much of it, but what we have learned is that this is a huge opportunity for us, If one of our primary growth levers overall for the next few years is about digital and digital in the U. S. So yes, there will be incremental spend.

Speaker 2

It will be a new aspect of our overall business strategy. But it's specifically Digital performance marketing, which does translate directly into results and sales results. And so I think that If we get the strategy together and go about it intelligently and smartly and as we do with Everything that we do around here, I do think that the return on what we spend will definitely make sense. And the good news is, is we're building a team to do that. We're building a team and have a couple of people already who are, as I said, seasoned professionals In this space.

Speaker 11

Great. And then on new markets, paying back within a year, You're opening up new markets go forward this year and next. Are volumes still kind of double Broad strokes what they were pre pandemic. And has there been any impact on new markets from Kind of the hampered newness in the inventory position in some of these markets such that you might expect the volumes could be even greater? And I have a follow-up to that.

Speaker 2

Generally speaking, the new store openings in new markets are consistent with the new stores we've opened in prior years. Like we're really pleased, Like for instance with the Tampa one that it's performing better than we expected and paying back In 10 months, not even 12 months, it appears that they'll pay back in 10 months. And volume wise, They're performing exactly, if not better than what we projected before when we first leased the space. So we're really encouraged by their retail business. As I say, our everyday luxury value proposition really, really comes through in person and in our stores, whether it's through Our product, our store design, our exceptional client service, the locations that we choose, I think we're I continue to believe we're industry leaders in retail.

Speaker 2

As I said, They're paying back in less than 12 months and our expectation is 12 to 18 months. They're performing at $1600 a square foot. We're very pleased with our retail performance. And so this really encourages us and gives us a lot of confidence to continue to open these stores that we have on the pipeline and we're super excited for the flagship stores that we're opening next year.

Speaker 11

Okay. And then Todd, given that kind of shortened payback period And where you should theoretically land the year from a gross margin standpoint, which isn't all that far off from some prior years. What's sort of the structural margin level here go forward? Do you think sort of low 40s, Which you've achieved historically even pre-twenty 2016, is there upside to that? I know you're not going to commit to a number per se, but just trying to sort of flow through the compressed Payback period to an actual kind of structural gross margin, anything you can say there would be helpful.

Speaker 11

Thanks.

Speaker 3

Thanks, Dylan. So as I've described, the 500 basis points of improvement that we're expecting next year, majority of that will be within gross profit, Save the portion of the smart spending initiatives that are from SG and A. And so that will be a step function Returning us to our normal gross profit margin or on the way to, But we do it will be sort of sequential year on year getting us back To where we expect to be by the end of our multiyear plan and it's really driven 1 by opportunities in product costs, we think we have a multiyear Product cost opportunity that will improve over time. And then I think we've talked about this, but as Our business grows in the United States. We have meaningful benefit to gross profit margin just because of the margin profile within the U.

Speaker 3

S. Compared to within Canada. So again, sequentially, as our gift business grows in the United States And becomes a larger and larger portion of our overall business, we will see benefit within our gross profit.

Speaker 11

And on the project margin side, remind us about a third of that I think was coming from selective price increases. Is that something we should expect to see more springsummer 2024? Or

Speaker 3

The pricing improvement is being feathered in. It's already started now In fallwinter, so that we're seeing some of that benefit for the back half of the year. But from an IMU perspective for next year, we're expecting about 150 basis points of improvement. And the majority of This year's improvement will be coming from costs, so lower product costs.

Speaker 11

But you've been successful in pushing through some pricing in the present period, it sounds like.

Speaker 3

Yes. I mean, I think Jennifer

Speaker 2

We've said in the past that Dylan that The pricing actions that we've taken have been on very selective strategic choices On an item by item basis, on the grand scheme of things, it's affected very, very small portion, the vast minority of our overall product assortment. And the results that we're seeing so far is that there's it hasn't affected at all The unit sales of those items. So we're selling just as many of those items at the new price as we were at the old price.

Speaker 11

Very good. Thank you.

Operator

The next question comes from Brian Morrison with TD Securities. Please go ahead.

Speaker 12

Good afternoon. I apologize I joined the call quite late. So if I repeat some questions, we can talk about it later. Just in terms of the Q3 guide, the 300 basis points of SG and A increase, Todd, I thought we were lapping the Support staff and wage pressures. I understand Q4 you're going to see a benefit, but why so large an increase in Q3 after you're only up $150,000,000 in Q2?

Speaker 3

We were up 400 basis points in the 2nd quarter. So it is a sequential decline from $400,000,000 to an increase of $300,000,000 So it is coming down in the 3rd quarter. And then further there'll be a further sequential decline in the Q4. Within the Q3 though to answer your question, I mean, we're So lapping the retail wage investments that we made as well as the support office. It's really not till the Q4 That will be lapping when the majority of those were introduced at least from a retail wage perspective.

Speaker 3

And then we just have deleverage on higher fixed costs that we discussed. So We haven't changed our outlook for the year. We're still expecting the 300 basis points of pressure for the year. But again, we've gone from the 400 in Q2 to 300 in Q3, basically as we were expecting.

Speaker 11

I see that. I apologize.

Speaker 12

Okay, that makes sense. And then, are you able to provide the rent expense that gets you from post IFRS 16 to pre For Q3 and Q4 and into next year, I assume it's going to increase substantially.

Speaker 3

Yes, I mean, I don't have the number in front of me to Quote the exact number, but yes, obviously, as we're adding all of these stores, there will be Incremental rent, but actually as the stores open, we potentially will have benefit From the percentage of rent costs, but that's obviously as they get open and ramp up, etcetera.

Speaker 12

Okay. Last question, the NCIB, I think last quarter you mentioned that you didn't plan on being active, you just cover your options. It looks like you were somewhat aggressive in the quarter. Maybe your go forward plans with it.

Speaker 3

Yes. So we did we've repurchased approximately 400,000 shares In the most recent quarter and had repurchased about $300,000 prior to that. So we have been a little more aggressive. I guess, again, you would have noted that We are $100,000,000 drawn on our line of credit as of right now. So we will be paying that back by the Majority of it back by the end of the Q3.

Speaker 3

So again, as I've said all along, I think it's as we get into a stronger cash position, we will look at Buying back more meaningfully, but we do have meaningful capital investments this year as well as next year. So it just That's obviously our primary focus and it continues to be so.

Speaker 12

Okay. Thanks, Kymi.

Speaker 3

Yes.

Operator

This concludes the question and answer session. I would now like to turn the conference back over to Beth Reed for any closing remarks.

Speaker 1

Thanks again to everyone for joining us this afternoon. We're available after the call to answer further questions and we look forward to providing another update at the end of next quarter.

Operator

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.

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Key Takeaways

  • Aritzia delivered Q2 net revenue of $534 M (+2% y/y) with comparable sales down 4.3% as year‐over‐year growth lapped 28%, led by +6% growth in the U.S. and a 3% decline in Canada.
  • Retail channel sales increased 3% driven by one new Tampa boutique and two repositioned stores, while e-commerce revenue dipped 1% amid softer traffic despite strong conversion under the e-commerce 2.0 program and ongoing omni-channel initiatives (BOPIS, Ship-from-Store).
  • Q2 gross profit margin fell to 35% (down 690 bps) due to higher product costs, normalized markdowns, temporary warehousing and boutique pre-opening amortization, with SG&A rising to 32% of revenue (+400 bps) from labor and distribution center project costs, driving adjusted EBITDA margin to 4% (down 1,570 bps).
  • Supply chain upgrades include the August go-live of the new Toronto distribution center (KPI productivity at ~90% of target) and exit of three temporary warehouses, helping normalize inventory (+10% y/y) and achieve top-tier fill rates.
  • For fiscal 2024, Aritzia expects Q3 revenue flat to slightly down on tough comps, sequential margin improvement in H2, full-year sales of $2.25–2.35 billion (+2%–7%), gross margin down ~300 bps and SG&A up ~300 bps, with fiscal 2025 set for renewed growth and ~500 bps EBITDA margin expansion.
A.I. generated. May contain errors.
Earnings Conference Call
Aritzia Q2 2024
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