Aritzia Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
January 10, 2024

There are 12 speakers on the call.

Operator

You for standing by. This is the conference operator. Welcome to Aritzia's Third 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.

Operator

I would now like to turn the conference over to Beth Reed, Vice President, Investor Relations. Please go ahead.

Speaker 1

Thanks, Ashia, and thank you, everyone, for joining Aritzia's Q3 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. As a reminder, please note that remarks on this call may include our Expectations, future plans and intentions that may constitute forward looking information. Such forward looking information is based on estimates and 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 which include a summary of the material assumptions

Speaker 2

as well as

Speaker 1

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. Following prepared remarks, in order to give everyone the opportunity to have their questions addressed, please limit yourself to one question and a related follow-up. I'll now turn the call over to Jennifer.

Speaker 2

Thanks, Beth. Good afternoon, everyone. Happy New Year and thank you for joining us today. For the Q3 of fiscal 2024, we delivered net revenue of $654,000,000 an increase of 5% compared to the Q3 of fiscal 2023. This is on top of delivering revenue growth of 38% in the Q3 last year and 63% in the Q3 of fiscal 2022.

Speaker 2

Comparable sales growth increased 0.5% for the quarter on top of a remarkable 23% comparison last year. In the U. S, our net revenue increased 4% for the quarter on top of 58% growth in the Q3 last year, While in our Canadian market, sales grew 5% as we lapped 22% growth in the Q3 of fiscal 2023. In our retail channel, net revenue increased 4% in the 3rd quarter, driven by the progress we've made on Real Estate Expansion Strategy. During Q3, we opened 1 new boutique in Charlotte, North Carolina, as well as our newly expanded Prudential location in Boston.

Speaker 2

In Q4 so far, we have opened new boutiques in Indianapolis, Indiana Quarter Madera, California and 1 boutique expansion in Skokie, Illinois. Next month, we plan to open Another new boutique in Roseville, California, representing 3 new boutiques in the 4th quarter. The performance of our new boutiques remains strong and continues to result in better than expected payback periods. Our most recent new boutiques We remain on track to pay back in approximately 1 year or less, ahead of our expectations for 12 to 18 months. The new Charlotte boutique we opened in November is generating better than planned sales results and tracking to pay back in just 10 months.

Speaker 2

Our boutique expansions also continued to perform well, elevating the customer experience as well as driving increased revenue and profitability. The expanded boutique we opened in Boston last August is generating incremental sales growth of 40% And rent has increased by only 25%, delivering a meaningfully higher contribution. Turning to e commerce, the net revenue increased by 6% in the 3rd quarter, following 3 years of extremely strong growth and resulting in a 4 year CAGR of nearly 40%. That said, we believe the potential growth in our e commerce channel is greater and our recent performance. And with that, I'm extremely pleased to announce that we have added a Chief Digital Officer to our senior leadership team.

Speaker 2

The Chief Digital Officer has oversight of the digital customer journey and is responsible for bringing everyday luxury to life online. This individual has a proven track record of delivering impressive top line and bottom line results through successfully building and scaling best in class digital We've also increased our level of digital marketing. As a natural next step in our influencer strategy In a complement to our boutique opening, we believe digital marketing will help grow our brand awareness in the U. S, protect our product franchises and position us to acquire even more new customers. We're also in the process of upgrading our technology stack, which is a major milestone in the E Commerce 2.0 journey and will help unlock all future customer facing experiences online, ultimately positioning us to realize our E Commerce 2.0 vision across our three value propositions: Tailored product discovery, intuitive experiences and creative innovation.

Speaker 2

Throughout the quarter, We continued our pilot of additional omni channel services, buy online, pickup in store and ship from store. We completed our ship from store rollout in Canada with revenue exceeding our expectations. At a minimum, we believe the incremental contribution of our omnichannel Services could ultimately drive a low to mid single digit percentage of e commerce sales. We're very encouraged with our early omnichannel results and look forward to beginning our rollout in the U. S.

Speaker 2

Next month. In product, Our assortment of new styles resonated well with our clients during Q3 and we saw strong starts to the outerwear season across Puffers and Woolcoats. We continue to expect our assortment to improve with a higher proportion of new styles for spring 2024, which begins to launch at the end of this month. From an inventory perspective, we're very pleased with the progress we've made in continuing to optimize our position. At the end of Q3, inventory was down 22% over last year.

Speaker 2

We were able to clear through our inventory And have less product at the end of the season compared to last year. And we therefore expect to sell more new products and client favorites for spring. During the quarter, we had our first ever digital archive sale, building on the success of our annual physical warehouse sale here in Vancouver. The event went better than planned, allowing us to profitably clear more product early in the season and to test Additional inventory clearing strategies as we grow. To date, we have not seen any material cannibalization to regular price or seasonal sales as a result of the archived sale.

Speaker 2

And to be clear, our promotional strategy has not changed. We run a full price retail model with markdowns used Clear items that we no longer plan to sell in the future. Throughout the Q4, we expect our inventory position to continue to improve and we look forward to starting spring 2024 with a more optimized product assortment. In marketing, as I mentioned earlier, we have increased our level of digital marketing to propel brand awareness in the U. S, Including paid search and paid social and successfully launched our affiliate marketing program.

Speaker 2

Early results have been positive, and we are expanding our social and affiliate programs to help ensure our brand is top of mind, Our SuperPuff campaign this year features a cast of High profile influencers and celebrities, including Emma Chamberlain, chef and model, Gabriel Bechtel NASCAR driver, Tony Breidinger skier, Ross and a musician named Maria Zardoya. We strategically partnered with a wide range of athletes and fashion and cultural icons to connect our Super Puff with the whole of our client base. Our puffer is designed for anyone and everyone. Already well known for its style, This year, we highlighted its superior technical qualities, positioning the SuperPuff as the most versatile puffer in the marketplace. Turning to supply chain.

Speaker 2

This was our 1st Black 5 Day and Cyber Monday utilizing our new Ontario distribution center, And it was a tremendous success. After coming online just 3 months earlier, the new facility ramped up smoothly Packing 3 times the number of orders compared to the peak day of our outsourced Ontario distribution center last year. Our already exceptional click to door improved meaningfully in both countries and by 45% or more than an entire day in Canada The in source facility is both more productive than our prior facility and able to handle all of our East Coast volume. Needless to say, we're extremely pleased with the ramp up of our new facility where productivity KPIs continue to exceed our expectation. In addition, we have exited all but one of the temporary off-site warehouse facilities, which has resulted in a significant reduction in our inventory management costs.

Speaker 2

Our community remains a key priority for Aritzia, And this year marks the 2nd year Aritzia created an orange t shirt in recognition of Orange Shirt Day. We partnered with indigenous artist Alana Morningstar Jewel to create a specially designed t shirt for our people and clients, which sold out in a matter of hours and enabled us to make our largest donation to date to this organization. In addition, this holiday season marked our 4th annual warm coat donation where we gifted 4,000 winter coats to our Aritzia community partners all across North America. With that, I will now pass the call over to Todd.

Speaker 3

Thanks, Jennifer, and good afternoon, everyone. Our revenue for the Q3 of fiscal 2024 was better than our expectations We drove meaningful sequential margin improvement compared to the first half of the year. Let me take you through the results for the quarter. In the Q3, we generated net revenue of $654,000,000 representing an increase of 5% from last year. This increase is on top of 2 years of extraordinary growth in the 3rd quarter, 38% in fiscal 2023 and 63% in fiscal 2022, resulting in a 3 year CAGR of 33%.

Speaker 3

Comparable sales growth for the quarter increased 0.5% Following a remarkable increase of 23% last year. Net revenue in the United States was $327,000,000 in the 3rd quarter, An increase of 4% on top of the 3rd quarter increase of 58% in fiscal 2023 and 115% in fiscal 2022. In Canada, net revenue increased 5% to $327,000,000 on top of an increase of 22% in fiscal 2023 and 37% in fiscal 2022. In both countries, trends improved sequentially throughout the quarter, which ended with our Black 5 day event that broke several records. Net revenue in our retail channel was $441,000,000 an increase of 4% from the Q3 last year.

Speaker 3

This was driven by the performance of our new and repositioned boutiques, which continued to generate better than expected payback periods. In e commerce, net revenue was $212,000,000 An increase of 6% from last year as we lap 3 years of unprecedented growth in this channel, resulting in a 4 year CAGR of nearly 40%. We continue to see significant opportunity in our e commerce business, particularly in the United States, where we expect new boutique openings and increased marketing to generate accelerated traffic trends in fiscal 2025. We delivered gross profit of $271,000,000 roughly flat compared to the Q3 last year. Gross profit margin was 41.5 percent, declining approximately 180 basis points from 43.3% last year and representing a meaningful sequential improvement compared to the first half of this year.

Speaker 3

The margin decline in the quarter It was primarily driven by higher markdowns to support the optimization of our inventory position and pre opening lease amortization costs for our flagship boutiques. These impacts were partially offset by lower warehousing and freight costs. SG and A expenses were $187,000,000 up 14% from last year. SG and A as a percent of net revenue was 28.7 percent representing an increase of 250 basis points compared to 26.2% last year, Better than our expectations. The increase in SG and A expenses was driven by investments in talent made through the end of fiscal 2023, marketing initiatives and support office expansion, all to support our growth.

Speaker 3

Adjusted EBITDA in the 3rd quarter was $92,000,000 a decrease of 23% from last year. Adjusted EBITDA was 14% of net revenue compared to 19.2% last year. The decline in adjusted EBITDA margin primarily reflects two things: Higher markdowns to support the optimization of our inventory position and investments made to support our growth. At the end of the Q3, inventory was $397,000,000 down 22% from the end of the Q3 last year. We are pleased with the progress we've made as we continue to optimize both the quantity and composition of our inventory.

Speaker 3

Since the implementation of our current normal course issuer bid on January 20, 2023, We have repurchased 1,100,000 subordinate voting shares, returning $30,000,000 to shareholders. Subsequent to the end of our current NCIB, we anticipate commencing another for a 1 year period, which we will use to offset the dilution of option exercises over time and purchase shares opportunistically. During the Q3, we generated $172,000,000 in free cash flow and ended the quarter with $141,000,000 in cash. We also fully repaid the $100,000,000 drawn on our revolving credit facility. In addition, given our growth, we extended our revolving credit facility to October 2026 and increased the availability from $175,000,000 to $300,000,000 We remain focused on maintaining a strong balance sheet, which has served us well through time.

Speaker 3

Shifting to our outlook. Based on quarter to date trends, Net revenue in the 4th quarter is expected to be in the range of $670,000,000 to $690,000,000 representing an increase of approximately 5% to 8%. This increase includes the benefit of approximately $30,000,000 from the extra week in the Q4 of this year. This net revenue expectation is on top of 2 years of exceptional growth, 44% in fiscal 2023 and 66% in fiscal 2022. We expect gross profit margin in the 4th quarter to be flat to slightly up compared to the prior year.

Speaker 3

This represents a continued sequential improvement, primarily driven by the ongoing reduction in our warehousing costs. And we expect SG and A as a percent of net revenue to be up approximately 2 50 basis points compared to the prior year. For the full year, we currently expect net revenue in the range of $2,320,000,000 to $2,340,000,000 compared to our previous outlook of $2,250,000,000 to $2,350,000,000 This outlook now represents growth for the year of approximately 6% to 7% from fiscal 2023, on top of a 47% increase last year and a 74% increase in fiscal 2022. In addition to the 5 new boutiques and 3 expanded boutiques Already opened year to date, we plan to open 1 additional new boutique and one additional boutique expansion late in Q4. The timing of 2 of our boutique openings, including our Chicago flagship, have shifted from the Q4 in the next fiscal year.

Speaker 3

We continue to expect gross profit margin to decrease approximately 300 basis points in fiscal 2024 and for SG and A as a percentage of net revenue to increase approximately 300 basis points compared to last year. We now expect capital expenditures for fiscal 2024 of approximately $180,000,000 This includes the $100,000,000 related to our new and expanded boutiques, where we continue to see our most recent new boutiques tracking to payback in approximately 1 year or less, ahead of our expectations for 12 months to 18 months, as well as $80,000,000 primarily related to the expansion of our distribution center network and support Office Space. The $40,000,000 reduction compared to our prior guidance primarily reflects the timing shift From fiscal 2024 to fiscal 2025 of improvements to our distribution center in Columbus, Ohio and certain store openings. Looking to fiscal 2025, we expect top line momentum to accelerate supported by square footage Growth of approximately 20% to 25%. This is driven by 11% to 13 new boutiques next year, including our Chicago flagship And 4 to 5 newly expanded boutiques, including 2 of our Manhattan flagships.

Speaker 3

Importantly, Our new stores are our most consistent growth driver, historically delivering predictable revenue growth and propelling our brand. With continued investment in both our digital experience and digital marketing, we remain confident that both our e commerce and retail channels will fuel growth of our omni channel business. We continue to expect meaningful adjusted EBITDA margin improvement in fiscal 2025 with 500 basis points of expansion driven by IMU improvements, our smart spending initiatives, subsiding transitory cost pressures as well as leverage on fixed costs. In closing, we expect sales to accelerate next year, driven by the 20% to 25% square footage growth as well as an improved product position and the execution of our e commerce 2.0 strategy. Compared to the first half of this year, We have already seen our margins begin to normalize with further improvement expected in fiscal 2025.

Speaker 3

We continue to anticipate That our expected revenue acceleration and margin expansion will drive significant earnings growth next fiscal year and beyond. With that, I'll now turn the call back to Jennifer.

Speaker 2

Thanks, Todd. As you can see, Aritzia delivered meaningful sequential improvement in the Q3 and we remain extremely optimistic about our prospects for accelerated growth. In Q4, as we continue to anniversary 2 years of unprecedented sales results, we remain focused on investing in the scalability of our business to set the stage for our next level of growth and help ensure that we can expand in an agile pace. We're pleased overall with the holiday season, which started off with a record breaking Black 5 Day event, and we've seen a solid start to the fall and winter sale period. We're encouraged by the strong response to our assortment of new styles and we expect the mix of our assortment to be further improved for spring 2024, which launches at the end of this month.

Speaker 2

Our real estate strategy continues to deliver better than expected results and we We have an extraordinary pipeline of boutiques opening in fiscal 2025, representing annual square footage growth of 20% to 25%. In addition to accelerating retail sales trends, we expect the increased pace of boutique openings to drive incremental e commerce Sales as we expand into 5 new markets next year. In addition to geographic expansion, we see a huge opportunity to accelerate our e commerce trends through a strategic focus on leadership, digital marketing, technology and creative innovation. In closing, I would like to thank all of our people across Canada and the U. S.

Speaker 2

For their dedication and hard work, particularly during our busiest time of year as we delivered another successful holiday season. I'm extremely honored to lead this team into the next Last but not least, I'm also very excited for our spring collection to hit the store And I look forward to introducing Everyday Luxury to more and more clients as we head into fiscal 25.

Speaker 1

Great. And with that, let's please open up the line for questions.

Speaker 4

Thank

Operator

The first question comes from Brian Morrison with TD

Speaker 5

Congratulations on a good quarter. Todd, I want to ask about the 500 basis points for fiscal 2025. It seems like all the buckets remain unchanged, but you also comment about A step forward with respect to paid search and digital marketing. I'm wondering if you can maybe go into detail if that is factored into your guidance And what steps you have taken and what approach you'll be taking with that?

Speaker 3

Well, Brian, I just thanks for the question. I can answer from an overall 500 basis point impact perspective of what we're Expecting for the margin, but maybe I'll let Jen answer the second part of your question.

Speaker 2

I'll touch on the digital marketing part of the question. We have a significant opportunity in the U. S. E commerce space and we see digital marketing as being a key driver. So to just give you some color, we increased our digital marketing spend this past quarter compared to last quarter, which is essentially 0.

Speaker 2

We, as you know, spent little to no dollars on digital marketing. And we will increase our digital marketing spend over time. But given the base that we're starting from, It will remain at very low single digit percentage of revenue and this is primarily drive our U. S. E commerce, which is our most profitable channel.

Speaker 3

Yes. And then from an impact to a margin perspective, we've considered that in our guide of the 500 basis point improvement. So There obviously with the additional marketing will come additional revenue that will leverage other areas. So while potentially marketing will be a higher percentage of revenue, we will see leverage in other areas that will offset that expenditure.

Speaker 5

Okay, great. And then follow-up, in terms of product newness, Jen, you sound very excited about what's going to hit the stores in spring and fall of next year. Maybe you can just give us some examples of not necessarily hurdle rates, but examples of why you're excited in terms of the seeding that took place this year and what we should expect.

Speaker 2

Absolutely. Super excited for the spring launch this month. In a nutshell, the proportion of the new in our overall assortment will increase for spring. And I would say, we're most of the way there in terms of where we want to be. Essentially expects our assortment to be much more in line with our historical balance.

Speaker 2

So What does that mean? That means when you walk into the store, so you walk in the store at the beginning of the season next month once we're fully launched, Roughly half the store will be merchandised with new products and the other half will be merchandised with client favorites that makes our boutiques a destination. And so knowing that we're getting back to our original playbook, if you will, is what has me excited because that's essentially What has driven our success among other things, but it's been at the center of the product driving success for almost nearly 40 years.

Speaker 5

And respect and the seeding that you've done examples of why you're excited about that?

Speaker 2

Because what I do know is our merchandising strategy and our assortment strategy, allocation strategy It's a proven strategy for us. That is what's driven our success for years. And so we got away from that In the last few years, coming out of COVID, during COVID, there was no playbook, sort of through the playbook as the windows talked about that. And coming out of COVID and emerging out of COVID, what was needed to do was get back to this original playbook. So Getting in line with where we have been historically and knowing that when we introduced newness and showcase that to our clients and then in turn Portions of that become client favorites in and of themselves is what fuels our product strategy.

Speaker 5

Good luck and thanks very much.

Speaker 2

Thank you.

Operator

The next question comes from Luke Cannon with Canaccord Genuity. Please go ahead.

Speaker 6

Yes, thanks and good afternoon. I just wanted to ask about the success Of the archives, so Jen, it sounds like you're pretty positive on what you're able to see there. Is the expectation that going forward, You may look to clear more product earlier in the season than maybe you have in years past or maybe you can just give us some thoughts on the success of the archive sale and maybe the learnings from it.

Speaker 2

Absolutely. The first archive sale Definitely went better than we planned. As you said, it's allowed us to clear more product and I will say profitably clear more product earlier in the season. This is something that we thought we would try this season given the elevated levels of inventory. We're not making any changes to our promotional strategy per se, but this gives us an additional tool or channel, shall I say, That as we grow and scale and expand into geographies, it's something that can augment our physical warehouse sale that we have annually here in Vancouver.

Speaker 2

So we think that this will be something that we could use in the future. Although at this time we have no plans to have a digital archive sale, we will continue to have our annual physical warehouse sale here in Vancouver.

Speaker 6

Got it. Thanks. And then my second question here is just on maybe where markdown levels or rates are as of today and where that sets up versus pre pandemic levels and maybe what the expectations are, what you're seeing so far in Q4 and your Expectations moving forward into fiscal 2025 as well.

Speaker 3

Yes, sure. I'll take that one. So we're pleased with obviously the improvement in our inventory levels, which were down 22% in the quarter. And we did still achieve our gross margin guidance, but the normalized markdowns were slightly higher than pre pandemic levels In Q3, but for the year, we still expect that our markdowns will continue to be below pre pandemic levels And expect that next year will be the same.

Speaker 7

Okay. Thank you very much.

Operator

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

Speaker 8

Thanks and good afternoon everyone. As you know, the store openings is obviously a big driver of the revenue growth that you're anticipating in F Can you please give us an update of the timing within F-twenty five now that we Seeing kind of that slippage from late Q4 into next year.

Speaker 3

Yes. Hi, Irene. It's Relatively consistent with what I provided last quarter. So the concentration of the new stores is in the 2nd and third quarter. But I can give you more specifically, we're expecting 1 new store in Q1 and then 4 in the second quarter, 7 in the Q3 and 1 in the Q4.

Speaker 3

And then I think importantly to note that The expansions, which will primarily be the at least the largest of which will be our 2 Manhattan expansions Our schedule for the back half of next year.

Speaker 8

Understood. So if we think through sort of the timing of all this, Todd, if we're looking at 20% to 25% square footage growth, If we were to think maybe half of that on a run rate on revenue growth or a little bit more than half, does that seem kind of reasonable given the timing? Yes,

Speaker 3

Yimin. On the retail revenue, I would say a little bit less than that given the heavy weighting In the back half of the 8 stores, 8 new stores in the back half and then there's 3 expansions, but the 2 largest Or the Manhattan one. So it would be a little less than that, that we would benefit from NextGear.

Speaker 8

Okay. That's really helpful. Thank you. And then just shifting topic slightly. In terms Of the retail revenue or the revenue growth, let's call it mid single digit.

Speaker 8

What is your sort of data telling you Around spend per client versus new spend particular or new clients, particularly as you're increasing other digital And to what degree is extending your customer base a key element of that strategy?

Speaker 2

Quarter over quarter, what we're seeing with New clients and existing clients is that the average basket size is generally consistent. What happens is with the new when the new clients come aboard and they become returning clients, we see the frequency of their visits increase. And so that's what we're looking to do is acquire clients and then also retain and cultivate a loyal client base. We have a very loyal clientele in Canada and our objective is To achieve that same level in the U. S.

Speaker 2

So we see that we still we Expect to see client growth continue. That's what we're aiming for. And as far as overall spend, We believe that that will remain consistent across time, over time and between two groups. That's great. Thank you.

Operator

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

Speaker 9

Hi, good afternoon. I wanted to touch on your 2 main markets, the U. S. Canada, your revenues in the U. S.

Speaker 9

Were up 4.2% year over year. It's a Slower pace than what you've generated in Canada despite the fact that most of your store openings were in the U. S. In last year. So I was wondering, is there anything that could explain why Canada outperformed The U.

Speaker 9

S. In terms of revenue growth during the quarter?

Speaker 2

Overall, as we said, what we see is there is macroeconomic pressure on the consumer Across the board, across both geographies, across both channels. There may be some country differences between the two countries. Overall, that's what we're seeing. What I will say in Canada, with our very loyal clientele, we do have a very, very loyal Following, we're very well known and loved in Canada, and we are getting more famous in the U. S.

Speaker 2

But What we're seeing is that our new client growth did moderate over the period and existing clients were shopping less. So we see that there's a period where things have moderated, and what we see is that This

Speaker 3

is likely

Speaker 2

reflected from the macroeconomic pressure on the consumer.

Speaker 9

Okay. And do you expect that trend to continue into Q4 for the U. S?

Speaker 3

Hi, Melton. It's Todd here. No, what we're seeing actually is a bit of a pickup In the Q4 in trends in the United States. And I think you could also look at just the lapping the U. S.

Speaker 3

Had Meaningful comps over the last 2 years. And so that's also making it even tougher compare. But We actually have seen those trends start to turn in the 4th quarter. Okay.

Speaker 9

Okay, that's helpful. Thank you.

Operator

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

Speaker 10

Yes, good afternoon. I know it won't be until next month where you're back to sort of normal levels on new items, but you did Call it out as a benefit in Q3 and just hoping you can expand on that a little bit, specifically how the performance varied, if at all, between Canada In the U. S. As well as across categories and brands.

Speaker 2

Hi. Definitely, I wouldn't say that there was a notable difference between the two countries. But what We did see this quarter is that compared to last year, if you look at it in terms of the contribution to overall sales, newness doubled From last year, same time last year.

Speaker 10

Yes. Okay. Okay, perfect. And then following up on Irene's question, Obviously, the flagship stores are a big part of the square footage growth for fiscal 2025. I know you secured attractive rent deals, and that goes a long way in terms of supporting the financials for those But how are you thinking about the sales productivity of that space versus your prototypical store?

Speaker 2

These flagship, there's a very important brand propelling factor with these flagships. So where they're located, As we've shared, some of the best real estate in the U. S. Is arguably North America. So the positioning and the actual Physical location of these stores is very important to our overall marketing and brand awareness campaign, if you will, as we expand in the U.

Speaker 2

S. In terms of actual productivity, I would point to what our existing expansion so far have indicated, which is when we expand a store Like the one we did in Boston, we see that the overall contribution increases as a result of the increased square footage because it allows us to showcase more product, in a very elevated, everyday luxury, fashion. It improves the shopping and client experience because there's more space, we can have more fitting rooms, we can have This is generally a nicer client experience. And then with yes, I got to give a shout out to the leasing team that Negotiates great leases for us that allows us to have an overall Higher contribution on the bottom line between the total productivity of the stores and the lower rent per square foot, This is meaningful contribution. So we know that our boutique expansion is a meaningful contribution to our overall sales.

Speaker 10

Okay. That's very helpful. And if I could ask one more, I guess for Todd. What was the impact of the efficiency work in Q3? And how should we think about the benefit flowing through in Q4 and then in fiscal 2025?

Speaker 3

Sorry, Mark. I missed that. You said efficiencies and then of something. I mean, it was inaudible what you said. Well, I just

Speaker 10

Yes, sorry. I mean, you guys have been working on a whole host of projects regarding the efficiency and I think you've quantified it. How much of that flow through in Q3? How should we think about the benefit in Q4 of next year?

Speaker 3

Yes. So for next year, Which would be inclusive of things we're seeing this year is $60,000,000 is the benefit we're expecting, but It won't be completely incremental because we're expecting about $30,000,000 of the benefit this year. And so that's Coming primarily in the 3rd Q4. So you can think of that as approximately $15,000,000 of benefit in Q3 And $15,000,000 in Q4. And then the remaining $30,000,000 will come next year And then potentially some additional.

Speaker 10

Okay, understood. Thanks for all the comments. All the best.

Operator

The next question comes from Stephen MacLeod with BMO Capital Markets. Please go ahead.

Speaker 11

Thank you. Good evening. Good afternoon. Thanks, Hooper.

Speaker 9

Just wanted

Speaker 11

to ask a question about SG and A. When you think about the Q4 guidance that you've laid out, I would have expected to see a bit more SG and A leverage. So I'm just curious if there's anything that you can point to that's happening in Q3 sorry, Q4 on the SG and A side?

Speaker 3

Yes. So specifically, as we said, we are expecting 250 basis Points of pressure in the 4th quarter, which is consistent with the Q3. It's really from the same items, which is Investments in retail and support office talent, digital marketing initiatives and support office expansion. And we have left the guidance for the year at 300 basis points up. So I think that's what you're driving at given The improvement that we saw in Q3 against our guide, but I think we just felt from a conservatism perspective that It made sense not to flow through that benefit into the full year, but it will be the same pressures in the 4th quarter That we saw in the 3rd, and that's how we're planning for it.

Speaker 11

Yes. Okay. Okay, great. And just in terms of the sales by channel, you gave some color on sort of what you saw in Q3. And I'm just wondering if you can give some color on what you're seeing on a quarter to date basis in Q4 in terms of by geography and channel.

Speaker 11

Like are you seeing that sort of positive same store sales growth trend continuing into Q4?

Speaker 3

Yes, our trends in Q4 have continued. The momentum has continued effectively from the Q3. So we're pleased with that and happy with the start to the quarter. Obviously, still a lot of weeks to go, especially with the additional week, but We're very pleased with what we're seeing right now.

Speaker 11

Yes. And able to comment just around what you're seeing by specifically by channel and geography?

Speaker 3

We think we'll get into that detail when we report the quarter.

Speaker 2

But it is consistent from the Q3 leading into the 4th. There's been no March changes all of a sudden going from one quarter to the next.

Speaker 3

Yes, save a little bit of pickup in the United States as we said.

Speaker 11

Yes. Yes. Okay. Okay, that's great. Thank you very much.

Operator

The next question comes from Michael Glen with Raymond James. Please go ahead.

Speaker 7

Hey, thanks for taking the question. Just going back on the 500 basis points for fiscal 2025, have you provided or given an indication about how to think about that, Bucket that between gross margin expansion and SG and A leverage?

Speaker 3

Yes. A lot of the components hit gross profit. So If you walk through them, 150 basis points from IMU improvements, obviously, that's all within gross profit. The 150 to 200 basis points in our smart spending initiatives, that's about 60% SG and A, 40% Gross profit and then the 125 basis points pickup from transitory costs subsiding is effectively our distribution center In Toronto, as that ramps and we have our temporary warehousing costs fall off, Which sits within gross profit or COGS, so it affects the gross profit line. And then our pre opening lease amortization is the other transitory cost.

Speaker 3

So that's also An improvement to the gross profit line. So the majority of the $500,000,000 is hitting the gross profit line.

Speaker 7

But you would expect to be able to leverage SG and A next year. Is that a fair assumption?

Speaker 3

Yes, there is some improvement from SG and A related to the smart spending initiatives as well as Leverage from our higher revenue. So there is obviously, this is all contingent On the revenue levels that we achieved next year. Okay.

Speaker 7

And then, what kind of commentary can you provide around The competitive environment that you're seeing, are you seeing increased competition in your core markets, Like how things evolved over the past year?

Speaker 2

Yes. My comments on The competitive landscape is essentially we still continue to see no one that can compete with us on the breadth of our products More on the quality, care and attention that go into our products or our boutique. We have operated Since for decades, right, we've always operated in a competitive environment. And while As we become more well known and get more famous in the U. S, certainly we are coming up on competitors' radars.

Speaker 2

And I just see this as an opportunity to double down on our marketing and communicating effectively to ensure that our everyday luxury value It is well understood by the U. S. And prospective clients alike as it is with our existing oil clientele.

Speaker 7

Okay. Thank you for taking the questions.

Operator

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

Speaker 4

ahead. Hi, thanks for taking the question. Can you give an update about

Speaker 2

how much outerwear is As a

Speaker 4

percent of total sales and what percentage of that is the Super Puff franchise? And also how outerwear sales have trended versus last year given the recent warmer weather in both U. S. And Canada? Thank you.

Speaker 2

Well, I won't tell you exactly how much outerwear makes up as a percentage of our sales. We never share what how our categories stack up. But what I will say is overall our outerwear sales were positive to year over year. Certainly this is driven by the Super Puff that is a product franchise of ours. But as mentioned, our Woolcoats received a lot of attention, just given their high luxurious quality and attainable price point.

Speaker 2

So we're super pleased that the Superfast continues to perform well for us. And as I said that we We still saw strong demand for our Gold Coast. That said, outerwear across the board performed very well. And I'll remind you that No one brand, including the Super Puff, accounts for more than 10% of our annual sales, generally speaking.

Speaker 4

Thank you. And if I may, one more, just can you also talk a little bit about the sales trends by month? And if Black Friday was stronger than Christmas and also if certain categories and sub brands did better than others? Thank you.

Speaker 2

During the quarter, we had Sequential improvement, I guess, I would say throughout the quarter with November being our best month. What we're finding with Our holiday period essentially now starting in Black 5 Day. Things have kind of evened out between the Black 5 Day period versus Boxing Week, which historically was very it's still very big in Canada, but historically it was our equivalent of Black Friday. But things have kind of What I would say is we saw it smooth out a little bit and not be Peak and Valley, if you will, as we've seen it in the past. Certainly, we broke a lot of records.

Speaker 2

As Todd mentioned in his prepared remarks, we Broke a lot of records on Black Friday, including it being some of our top sales days in our retail Stores ever that includes even in Canada as well in a couple of cases. So we just kind of continue to see Block V, they'd be a big event And it's just being an extended long period between November into December.

Speaker 4

Thank you.

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

  • In Q3 fiscal 2024 Aritzia delivered net revenue of $654 M, up 5% YOY (+0.5% comps), with U.S. revenue +4% and Canada +5%, while gross margin fell 180 bps to 41.5% on higher markdowns and pre‐opening costs.
  • The company’s real estate expansion strategy remains successful, opening new and expanded boutiques in Q3 and Q4 (Charlotte, Boston, Indianapolis), with new locations tracking to ~10–12 month payback ahead of expectations.
  • Aritzia grew e-commerce revenue by 6% (4-year CAGR ~40%), appointed a Chief Digital Officer, advanced omnichannel services like buy-online-pickup-in-store, and is upgrading its tech stack for an “E-commerce 2.0” vision.
  • Inventory was reduced 22% YOY and the inaugural digital archives sale cleared excess product profitably without cannibalizing full-price sales, setting the stage for a spring 2024 assortment with ~50% new styles.
  • For Q4 the company expects net revenue of $670–690 M (+5–8% including an extra week) and a full-year outlook of $2.32–2.34 B (+6–7%), with fiscal 2025 square footage growth of 20–25% and ~500 bps of margin expansion.
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Earnings Conference Call
Aritzia Q3 2024
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