Aritzia Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
October 10, 2024

There are 10 speakers on the call.

Operator

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 2025 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 will 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 Plus as well as the Investor Relations section of our website. I'll now turn the call over to Jennifer.

Speaker 2

Good afternoon, everyone, and thank you for joining us today. We're very pleased with our performance in the Q2 of fiscal 2025. We delivered a 15% increase in net revenue to $616,000,000 Comparable sales grew 6.5%. The momentum we saw in June July accelerated in August, driving higher than expected net revenue in the quarter. Our growth was fueled by our business in the United States, which generated a 24% increase in sales in the Q2.

Speaker 2

This was driven by our proven real estate expansion strategy, a meaningful acceleration in e commerce growth and strong comp growth in our existing boutiques. In Canada, we saw less momentum, which we believe is due to a softer consumer environment. Sales growth of 6% was driven by the benefit from a calendar shift, which Todd will discuss later. In our retail channel, we drove an increase of 18% in net revenue in the 2nd quarter. This is primarily due to the progress we've made on our real estate expansion strategy.

Speaker 2

In Q2, we opened 2 additional boutiques in the state of Florida in Boca Raton and Jacksonville, as well as our 6th boutique in Texas, north of Dallas. Thus far in Q3, we've opened 2 boutiques, one in San Diego and one in the Chicago area. For the balance of the year, we plan to open an additional 9 to 10 new boutiques and 2 to 3 boutique repositions. This includes our new Chicago flagship and the repositions of our SoHo and Fifth Avenue flagships in Manhattan. Needless to say, we're super excited about this extraordinary pipeline of openings, the most we've ever had in a single year.

Speaker 2

Our boutique openings have a consistent track record as our most predictable driver of top line growth and it's clear they help drive brand awareness and client acquisition in both new and existing markets. At our Jacksonville location, which is in a new market for us, 60% of clients during the opening month were new to Aritzia. And in our newest Texas boutique, an existing market

Speaker 3

for

Speaker 2

us, 30% of clients during opening months were new to the brand. Boutique repositions also continued to perform exceptionally well, driving top line growth and profitability while elevating the customer experience. Our newest reposition, near Chicago, is generating incremental net revenue of 60% and delivering meaningfully higher contribution. Turning to e commerce. We returned to double digit growth in the Q2 as net revenue grew 10%.

Speaker 2

This was primarily driven by increased traffic in the U. S. As well as a strong response to our fall product. We are encouraged by the momentum in this channel. We continue to focus on a number of initiatives to drive future growth in e commerce and enhance our clients' digital journey.

Speaker 2

During Q2, we continued to make progress on enhancing aritzia.com and we expect the improved site to go live in the back half of this fiscal year. Improved functionality across the site such as 1 page checkout and AI driven search results will offer clients an even more frictionless and easy shopping journey helping to drive conversion. Foundational components will also enable the development of a mobile app, which we expect to launch next fiscal year. In addition, we've kicked off a project to enhance our international e commerce site and customer experience. By optimizing for features such as local currency and prepaid duties and taxes, we'll be able to drive higher conversion.

Speaker 2

These enhancements will not only fuel revenue growth, but are also expected to improve channel operating margin. Last but not least, our investment in digital marketing this year has been successful showing strong positive results across the business. We're excited to continue to optimize and build on our learning. Turning now to product, we saw a strong start to the fall season driven by both new styles and our client favorites. We've seen continued success in our well known and loved categories like sweat fleets and suiting as well as exciting growth in newer collections like Home Stretch.

Speaker 2

New launches aimed at maximizing share of closets resonated very well with our clients indicating we have opportunity to expand in these offerings. Our focus on optimizing the quantity and composition of our inventory is reflected in our strong second quarter net revenue growth. In addition, due to our improved inventory levels, we had a lower mix of markdown sales compared to the Q2 last year, which helped to drive more than 500 basis points of gross margin improvement. As part of our strategy to grow brand awareness, particularly in the U. S, we remain focused on amplifying our product and our much loved everyday luxury experience, including the compelling value we offer to our clients.

Speaker 2

We also continue to strengthen our cultural relevance and enhance awareness by partnering with brand compelling influencers and growing our roster of celebrity fans. In Q2, influencer, Nara Smith, known for her meticulous and viral content on TikTok, starred in our fall Sweat Fleece campaign. Her attention to detail aligns wonderfully with our commitment to perfecting every aspect of Sweat Fleece from fit to fabric. In addition, the roster of celebrities wearing our product included Blake Lively in Sculp Knit and Emily Ratajkowski in Sweat Fleece, highlighting the best in class quality of our iconically Aritzia products. It's important to me to see things firsthand and to stay connected to what's going on in our stores.

Speaker 2

In my boutique visits this quarter, I was particularly impressed with how well all of the beautiful products we have this season is merchandised, highlighting the differentiated styling and the excellent quality of our fabrics. It's elevated and there's great balance across the assortment between print, solids, core and fashion colors, tailored and casual styles. I also visited our flagships under construction. There is still work to do, but I can tell you no detail has been left unconsidered. They're stunning.

Speaker 2

They're aspirational. They offer amazing exposure and I'm so excited for them to open in time for holiday. We have a long history of executing with excellence and we intend for this to be no exception. We spent recent months hiring, developing and building our team, perfecting design elements and honing store operations to prepare for this level of retailing. We'll be able to offer an exceptional client experience and showcase our product in the most compelling and shoppable way.

Speaker 2

We're absolutely thrilled to provide this experience to Chicago and Manhattan and to all who may visit those locations. To celebrate the opening, we're planning some exciting activations in store and in the community. Stay tuned. Now, let me turn the call over to Todd.

Speaker 4

Great. Thanks, Jennifer, and good afternoon, everyone. We're very pleased with our performance for the Q2 of fiscal 2025, which exceeded both our top and bottom line expectations and continues our progress toward our fiscal 2027 targets. Top line trends accelerated in August and we delivered substantial gross margin expansion, resulting in another meaningful improvement in our adjusted EBITDA margin. Turning to the details of our performance.

Speaker 4

In the Q2 of fiscal 2025, we generated net revenue of $616,000,000 representing an increase of 15% from last year. Comparable sales grew 6.5%. We're particularly pleased with the strength we're seeing in the United States, where net revenue increased 24% to $345,000,000 in the 2nd quarter. Growth was relatively consistent across both channels. Our retail channel was driven by the contribution from 7 new and 3 repositioned boutiques in the last 12 months, as well as strong comp growth in our existing boutiques.

Speaker 4

The accelerated performance in our e commerce channel was primarily due to growing brand awareness and a positive response to our fall product. In Canada, net revenue increased 6% from last year to $270,000,000 Our results benefited from a calendar shift causing the week of our annual warehouse sale in Vancouver to fall in the Q2 of this year compared to the Q3 last year. Excluding this benefit, our growth in Canada was in the low single digits. Net revenue in our retail channel was $426,000,000 an increase of 18% from the Q2 last year. This was driven by the performance of our new and repositioned boutiques as well as mid single digit comp growth in our existing boutiques.

Speaker 4

In e commerce, net revenue for the quarter was $190,000,000 an increase of 10% from last year. The increase was primarily driven by traffic growth in the United States as strong response to our fall product and our investments in digital marketing. We're encouraged by the sequential improvement and a return to double digit growth and we continue to see opportunity to further drive momentum in this channel. We delivered gross profit of $247,000,000 an increase of 33% compared to the Q2 last year. Gross profit margin increased 520 basis points to 40.2% from 35% last year.

Speaker 4

We drove better than forecasted markdown and IMU improvements resulting in gross profit margin exceeding our outlook. We also benefited from lower warehousing costs and savings from our smart spending initiative. These tailwinds were partially offset by higher freight costs. SG and A expenses for the quarter were $200,000,000 up 17% from last year, driven by investments in digital marketing to help protect and propel our brand as well as infrastructure projects and technology initiatives to support our growth. SG and A as a percent of net revenue increased 40 basis points to 32.4% compared to 32% last year.

Speaker 4

The better than expected performance was driven by fixed cost leverage on higher than anticipated revenue. Adjusted EBITDA in the Q2 was $55,000,000 an increase of 161 percent from last year. Adjusted EBITDA as a percent of net revenue expanded 500 basis points to 9% compared to 4% last year. Turning to the balance sheet. At the end of the 2nd quarter, inventory was $483,000,000 down 4% from last year.

Speaker 4

We had $104,000,000 in cash and 0 drawn on our $300,000,000 revolving credit facility. Shifting to our outlook, net revenue in the Q3 of fiscal 2025 is expected to be in the range of $675,000,000 to $700,000,000 representing growth of 3% to 7% compared to the Q3 last year. It is important to note that the Q3 last year benefited from two factors, which contributed approximately $25,000,000 in revenue. First, the digital archive sale, which will not reoccur this year. And second, the fact that our annual warehouse sale in Vancouver fell in the Q2 this year as opposed to the 3rd last year.

Speaker 4

Excluding these factors, our expected net revenue in the 3rd quarter represents growth of 7% to 11% compared to the Q3 last year. We continue to expect gross profit margin in the Q3 to increase by approximately 400 basis points compared to the Q3 of fiscal 2024, despite absorbing meaningfully higher freight costs. We forecast SG and A as a percent of net revenue to increase by approximately 100 basis points in the Q3 compared to the Q3 of fiscal 2024. The increase is driven by additional spending related to key strategic initiatives to drive our growth. For the full year of fiscal 2025, we now expect net revenue in the range of $2,540,000,000 to $2,600,000,000 representing growth of 9% to 11% from fiscal 2024 or growth of 10% to 13%, excluding the 53rd week last year.

Speaker 4

Our net revenue outlook for the back half reflects softer trends in Canada where we're navigating a more challenging macro environment. Importantly, we continue to see strength in the United States driven by our boutique openings and ongoing momentum in our e commerce business. Despite changes to some opening dates, we remain on track to open 12 to 13 new boutiques and reposition 3 to 4 boutiques this fiscal year. We now expect to open 5 new boutiques and 1 reposition in the 3rd quarter and 4 to 5 new boutiques and 1 to 2 repositions in the 4th quarter. Nearly 90% of our square footage growth for the year occurs in the 3rd and 4th quarters.

Speaker 4

In the 4th quarter, these openings are expected to fuel an acceleration in revenue growth to 15% to 20%, excluding the 53rd week. We're raising our outlook for gross profit margin for the year to approximately 4.50 basis points of expansion compared to fiscal 2024. Given the strength in the first half of the year and despite absorbing meaningfully higher freight costs. We now expect SG and A as a percent of net revenue to be approximately flat to up 50 basis points compared to fiscal 2024. Always with a long term view, we continue to invest in our future growth while working to deliver meaningful margin expansion over the near term.

Speaker 4

We expect adjusted EBITDA as a percent of net revenue in fiscal 2025 to increase approximately 400 to 4.50 basis points, reflecting the leverage across the range of our net revenue outlook. In closing, the actions we've taken to improve the performance of our business fueled 24% net revenue growth in the United States and 500 basis points of adjusted EBITDA margin expansion in the 2nd quarter. The record number of new and repositioned boutiques that we're opening in the back half of this year along with our e commerce initiatives will drive accelerated revenue growth this year and next. Further, we expect to continue to drive margin improvement back toward our historical levels in the high teens. All of this keeps us on track to achieve our fiscal 2027 top and bottom line targets.

Speaker 4

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

Speaker 2

Thanks, Todd. Our strength in the United States has continued into the Q3. While our outlook for Q3 is impacted by the timing of boutique openings, we expect to fuel additional momentum in the back half of the year as we complete our real estate projects and make further progress on our e commerce initiatives. In Canada, we have seen a slower start to the quarter as we navigate a softer consumer backdrop. That said, we have a large base of highly engaged and extremely loyal clients in Canada.

Speaker 2

And with our optimized inventory position, we are in a very well positioned situation to meet incremental demand as the environment improves. Along with our growing brand awareness, the momentum we're seeing in both retail and e commerce, particularly in the United States keeps us on track to deliver on our long term goals. First, our real estate expansion strategy continues to produce exceptional results. In addition to the record number of new boutiques this year, we have another strong pipeline of openings planned for fiscal 2026. This increased pace of openings is expected to fuel retail sales growth and drive incremental e commerce sales as we expand into new markets.

Speaker 2

In e commerce, we've started to generate accelerated sales growth driven by successful product launches, inventory optimization and digital marketing initiatives. We have a number of initiatives underway to fuel further acceleration

Speaker 5

in

Speaker 2

our e commerce business, including the upcoming launch of our new and improved aritzia.com. For 40 years, we successfully run our business with a long term view and a disciplined approach. We continue to make strategic investments to support our recent and future growth. The investments we're making today in real estate, digital, marketing and technology will help position us to generate profitable growth well into the future. With just 56 boutiques in the United States, we're only just getting started.

Speaker 2

The opportunity to grow our brand remains tremendous. In conclusion, we have great momentum behind the brand and we look forward to our bright future ahead, both in the very near term and over the long term. We're confident that our commitment to executing on our proven business model will drive value creation for all of our stakeholders for many years to come. Thank you.

Speaker 1

With that, let's please now open up the line for Q and A. Thank

Operator

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

Speaker 6

Yes, thanks. Good afternoon. Maybe we'll start with the difference that you're seeing right now between the your Canadian clientele and then your U. S. Clientele.

Speaker 6

So I think that's something that most folks on this call are seeing that all across the consumer universe. So that's not really a surprise. But how exactly is that manifesting itself in your business? Is that just shying away from higher ticket items? For example, is trip frequency a little bit different north of the border versus south of the border?

Speaker 6

Maybe just additional commentary on how exactly that's manifesting itself in your business?

Speaker 2

Hi, Lou. Yes, ultimately, we saw started to see a bifurcation in the second quarter, mainly due to the U. S. Momentum. Our Canadian business between Q1 and Q2 was relatively balanced, relatively consistent between the quarters in Canada, but it was because of the U.

Speaker 2

S. Momentum that we saw it falling apart from the U. S. Business. Canada has been performing consistently until we entered into Q3 where we started to see a little more softness.

Speaker 2

What we're seeing is no difference in average order value, average selling price, units per transaction may have remained consistent year over year in the quarter. It's really just volume. It's related to volume and traffic. So the shopper, when she's shopping, she's shopping less, but when she is shopping, she's more discerning. And when she what we're seeing even just the conversion on our e commerce site, it's improving.

Speaker 2

So when she's coming to the site, when she's coming to the store, she's buying it, so she's shopping less frequently in Canada.

Speaker 6

Okay. Thanks. That's helpful. And maybe just to follow-up, I apologize I missed this in your prepared remarks. But when it comes to the store level economics for those boutiques that you had opened during the quarter, is it fair to say that they are still tracking around that 12 month payback period or better or has that changed in the U.

Speaker 6

S. At all?

Speaker 4

Yes. No, nothing has changed. Our new stores continue to perform exceedingly well. All of the new stores we're opening right now are in the United States. We do have one scheduled for Canada later in the year.

Speaker 4

But yes, we were extremely pleased obviously with the 24% growth in revenue that's being driven by all of those new stores. And the new stores contributed roughly 50% of our growth in the United States in the quarter. And so, yes, we're excited about not only the stores we've been opening, but obviously the number of stores that we have from now through the end of the year.

Speaker 6

Okay, great. And then last question and then I'll pass the line here. When it comes to the updated guidance, specifically the updated SG and A guidance, I know that there's different investments that you're making in the business right now. But can you give a little bit more specificity on what exactly that is that's maybe changed from last quarter to this quarter? Is it more investments in some of the existing initiatives that you're going to have planned for?

Speaker 6

Is it an expansion in scope of those initiatives? Just any incremental detail there would be helpful.

Speaker 2

We're continuing with a lot of the investments that we have mentioned in previous quarters. Some of the more notable ones are in place to fuel growth. For instance, our digital investments including the replatforming of aritzia.com, that's been in the worst now for a year. That's going to be launched in the back half of the year. We'll start to see improvements with our site experience.

Speaker 2

We'll be able to do more things, more innovative, creative features on the site. And then that platform will be the underpinning for the mobile apps that we started development on, which will come out next fiscal year. These are all things that are related to our 2nd growth lever of accelerating digital. The international e commerce enhancements is in the same category. At the same time, we're making infrastructure investments as we always have for our the last 4 years, we like to build our infrastructure lock in step with our growth.

Speaker 2

In particular, the last couple of years, we've had to invest in infrastructure to catch up with some of the extraordinary growth that we experienced coming under the pandemic. And certainly as our sights are set on further growth going forward, we're making investments in technology and some systems like merchandise planning as well as workforce planning and things of that nature.

Speaker 6

Okay, helpful. Thank you very much.

Operator

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

Speaker 7

Yes, thanks. Good afternoon. Could you just clarify for the Q3 trends to date, are you saying that the U. S. Is stable and it's Canada that's decelerated?

Speaker 2

Yes. What we're seeing is the momentum remains strong in the U. S. And it's dampened unfortunately with what we're seeing starting Q3 in Canada.

Speaker 4

Yes.

Speaker 3

Okay.

Speaker 7

Okay. And I wanted to just clarify, Jen, one of your comments around the digital marketing, I think you said your plan from here is to optimize and build. Does that imply that you expect overall investment to sort of be stable from here? Or are you still in ramp up phase?

Speaker 2

Right. I'll let Todd speak to the specific numbers. But right now, what we have planned for the year, what we have shared with you has not changed. When I say optimizing, it's about getting more precise with our targeting, more just more precise with the actual placement of the paid media spend. And we're learning I'll tell you, we're learning lots and we're very encouraged by the results.

Speaker 2

As I mentioned, it's very positive. It's incremental and accretive to both our top line and bottom line. So we're feeling really good about the overall concept of incorporating that into our overall strategy. And now it's about making sure it's most efficient, it's most efficient as we can possibly get it.

Speaker 7

Okay. And if I could just ask one other one, which is just regards to sort of the consumer trends and sort of shifts in taste, what categories or occasions or types of product they're sort of under or over indexing versus your expectations, so far in fallwinter?

Speaker 2

We continue to see that many of our items, both the existing client favorites as well as the new items that we introduce every season continues to be balanced in terms of how it's performing and we like how it's performing. And I think given what we've done in optimizing our product that kind of shows in the results in Q2. And so it still remains relatively consistent across the categories, whether it's our beloved sweat fleece and effortless pant collection. I mentioned on the call that newer programs like the home stretch, we're starting to see encouraging results. So really again, it's across the entire range and assortment that we're offering and nothing is really spiking.

Speaker 2

What we like to see is a balance across everything. And I think we're this season, we're really achieving that.

Speaker 7

Okay. Appreciate all the comments. All the best.

Operator

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

Speaker 8

Hi. Good afternoon, guys. I was wondering if you can help us out. Just to clarify, Wonton, did you delay some store openings into fiscal 'twenty six? Or it's just the delay between Q3 and Q4?

Speaker 4

Yes, I can take that. No, there's no change to our annual numbers for the new stores. We're expecting 12 to 13 new stores and 3 to 4 expansions and repositions. We have seen a shift from Q3 to Q4 for a couple of them. But as I outlined in my prepared remarks, we've opened 5 new stores year to date.

Speaker 4

We have 3 more scheduled to open in the 3rd quarter and then we have 4 to 5 new store openings planned for the Q4. And then from a reposition perspective, we've opened 1 year to date. We have one planned for the Q3, which is our SoHo flagship location. And then we have 1 to 2 repositions planned for the Q4. Keeping in mind that as I said, I've already started to say it and one of the last answers, but those stores as I commented are delivered roughly 50% of the revenue growth in the Q2 in the United States.

Speaker 4

And in our outlook, we're expecting an acceleration in the Q4 with those all of that new square footage driving 15% to 20% growth in the 4th quarter. Again, as you've heard us say, 90% of the square feet square footage that we're opening is in the back half this year. And it's going to drive meaningful growth, not only in the 4th quarter, but also in next fiscal year.

Speaker 8

Yes. Thank you. And that's a good segue into my next question. You opened up a little bit about saying that you're excited with your plans for fiscal 'twenty for your real estate. And I was wondering if you can give us a peek as to what that could look like in terms of store openings?

Speaker 4

Yes. I mean, we won't have the exact number of new stores until we would typically communicate that in January. But our range of 8 to 10 new stores, obviously, were higher than that this year. And I would anticipate that we will likely be slightly above the top of the range for next year as well.

Speaker 8

Okay, that's helpful. And then maybe I'll ask a question for you, Todd. You actually reiterated your fiscal 'twenty seven goals. I think it's great to see. That includes, I think, an EBITDA margin that's near 19%, if I recall correctly.

Speaker 8

Wondering what's the path from here to there? Is this a straight line? Is this going to be back end loaded in terms of gross margin EBITDA margin expansion? Just a little bit of color would be helpful for modeling purposes.

Speaker 4

Yes. I mean, I don't want to particularly provide the exact target for next year, but I would say straight line is safe at this point from this fiscal year through to FY 'twenty seven, but we'll communicate specifics when we provide our guidance for next year. But suffice it to say, and I think I've reiterated this previously, but we're obviously making great strides this year in our margin improvement. The IMU that we're seeing this year is really a start and we expect to see multiple years of IMU improvements. We have a number of smart spending initiatives that are still underway that will deliver further margin improvement.

Speaker 4

The flagship locations and the rent that we're paying in both locations or amortizing in both locations for those stores will benefit us next year. And then just the overall growth in our U. S. Business is accretive to our margins. So each with each year and literally each new store opening, as the U.

Speaker 4

S. Becomes a larger portion of our business, we have a lift from that as well. And we actually I mean, just to give a little bit more color, we have just gone through a bit of a planning exercise to evaluate the FY 'twenty seven targets. And from a top and bottom line perspective, we still feel confident that we are on track to achieve those.

Speaker 8

Okay, great to hear. Best of luck and thank you for the answers.

Operator

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

Speaker 5

Thank you. Good evening everyone. Just wanted to follow-up on the SG and A guidance. I understand that there are investments that continue to be ongoing. But just was there anything incremental because the sales number roughly guidance at the midpoint is unchanged, but SG and A as a percent of sales has changed a little bit.

Speaker 5

So I'm just curious what the incremental piece is in the SG and A that wasn't there 3 months ago?

Speaker 4

Yes. The incremental investments are what Jennifer was describing, the investments in infrastructure projects and technology initiatives where we've effectively green lit projects that we hadn't initially planned to start this year and we've now started them. And then there was Jen already ran through the list, but those projects as well as incremental marketing spend as we launch our flagship locations, We're obviously

Speaker 2

We're celebrating. It's a historic milestone in our 40 years of business to be opening 3 flagships of those sizes in effectively a 1 month period. So we're really excited. As I mentioned, hopefully you could hear in my voice the excitement that I have for the flagship. They're iconic locations.

Speaker 2

They're going to get us famous in the U. S. They're going to ultimately be a beacon for everyday luxury. And we have some really exciting things planned, as I mentioned, in store activations, activations within the community, digital, PR, media, we're really this is a big deal. This is a very big deal for us.

Speaker 5

Yes. That's great. Okay. So those are that's incremental spend that you expect to generate a return on, I just did here. Okay.

Speaker 5

That's great. And then I just wanted to clarify, and you mentioned a number a couple of times, but just in terms of the new stores being weighted to Q4, you said that those stores are expected to deliver 15,000,000,000 to 20,000,000,000 of growth in Q4. Is that are you talking in the U. S. Alone or is that are you kind of giving guidance as to what you think the top line consolidated number is?

Speaker 4

Yes, that's the range for I mean, it's the implied range given the Q3 guide and the guide for the full year. It's the implied range for Q4, that's for total growth. The stores that we're opening will be supporting the acceleration of revenue in Q4 that's implied in the guidance.

Speaker 5

Right. Okay. Okay. No, that's helpful. Thanks, Todd.

Speaker 5

And then maybe just finally, you talked about some of those non comparable items in Q3, the fiscal Q3. Is it fair to say that comps maybe have decelerated a little bit excluding those non comparable items just given the incremental weakness you've seen in Canada?

Speaker 4

Yes. So the way we've modeled out comp for the Q3 is actually a slight acceleration in e commerce. If you exclude the impact of the digital archive sale. So a slight increase from the 10%, so still low double digits. And then for the retail channel, there is a slight deceleration from the trends in Q2, but entirely driven by effectively what we've seen in Canada in the 1st month of the quarter.

Speaker 4

And we're continuing to see strong momentum in the United States and that has not changed.

Speaker 5

Yes. Okay. And then would the net of that be a somewhat similar type comp in Q3 you saw in Q2?

Speaker 4

Yes, it will be the mid single digit. Yes.

Speaker 5

Okay. Okay. That's great. Okay. Thanks, Jennifer.

Speaker 5

Thanks, Doug. Appreciate it.

Speaker 3

Yes.

Operator

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

Speaker 3

Hi, good afternoon. Thanks for taking my question. I just wanted to clarify the two factors that are impacting your Q3 sales guidance that you're lapping. Is that impact on both markets or is it more weighted to 1? I just want to make sure from that regard that like one market is not different than the other.

Speaker 4

Yes. So there's 2 factors that total $25,000,000 One is the Vancouver warehouse sale, which it still occurred in the same week, which is prior to Labor Day weekend in but it occurs in Vancouver. So it's in the Canadian results. But this year, it's in Q2. Last year, it was in Q3.

Speaker 4

So there's a benefit of roughly 200 basis points in the Q2 this year and then Q3 will be impacted this year by not having it. And then the digital archive sale was in both countries, so across e commerce in both countries. So the impact is spread.

Speaker 3

Got it. And then on just thinking about Q4, the implied comp sales guide, fair to assume also like a mid single digit comp sales guide or is it like some sort of acceleration there? Just trying to understand like what are you how are you thinking about Q4 sales?

Speaker 4

Yes. It would be slightly higher, but still mid single digit. And the revenue acceleration, as I was saying, is driven by the new stores and the expansions and repositions that we're opening.

Speaker 3

Got it. And then just last question on the gross margin. For the Q3, the expansion of 400 basis points, could you give us like a sense of what are like the main drivers behind that?

Speaker 4

Yes, it will continue to be the same drivers that have benefited us through the year, which is IMU improvements, lower markdowns, the warehousing costs being lower. Now that item is less of a benefit in Q3 and Q4 because we're lapping when we had the new distribution center open last year. So we were already benefiting in Q3 and Q4 from the synergies from the new DC. And then we have some smart spending initiatives as well that will benefit us in the Q3. And I should say that we also continue to expect pressure from freight costs that are included within that 400 basis points.

Speaker 3

And is that freight cost pressure kind of like did it get worse versus when we were like 3 months ago or is that like consistent with

Speaker 9

what we're seeing before?

Speaker 4

It's definitely higher than the beginning of the year. So when we originally provided our annual guidance, we weren't anticipating one meaningful acceleration in airfreight costs. And then 2, this sea freight, we've had to due to the different strike situation, we've had to redirect some of our shipments from Vancouver and that's been at a higher cost, but obviously ensuring the timeliness of the deliveries. So, yes, it is higher than what we were initially expecting.

Speaker 3

Got it. Okay. Thank you so much. Congratulations on the results.

Speaker 4

Thank you.

Operator

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

Speaker 9

Thanks very much. Going back to the SG and A, you mentioned the higher infrastructure costs and the marketing of the flagships. I assume that the marketing of the flagships was already planned in that number. So is the infrastructure, the SG and A spend, is that a pull forward or is that just incremental?

Speaker 4

The infrastructure spend is incremental to this year. I mean, we were planning all of these projects in the coming fiscal years, the ones that Jen listed, but we've moved them forward and started them earlier. And then we are spending incrementally as well. Yes.

Speaker 9

Is that because of the successes you're seeing to date from them?

Speaker 4

No, it's the opportunity that we see. So the app is a meaningful opportunity as well as improving our international e commerce site and the merge planning software that we already had planned, but we have increased spend on that because of all of the benefits we're expecting to get and we're trying to accelerate those projects to receive the benefits quicker obviously. And then the marketing, it actually is there is incremental spend. We made the decision to increase the spend around the flagship locations from what we had originally planned.

Speaker 2

With the timing of the flagships all opening close together, which was not necessarily originally our plan, we thought that this is a great opportunity to be, as I said, celebrate that we're opening between the square footage between the 3 of them that's effectively I know it's not the same, but it's effectively like opening 10 in line stores all at once. So you can imagine the scale of what this means and it's not just for the locations that they're opening in. This will be something that we can celebrate across our entire store base and in both countries because I think it'll be a very big brand propelling opportunity. And as I said, it's a historic milestone in our 40 years of business. As it relates to the e commerce growth initiative, the mobile app will be a digital flagship property that unlocks everyday luxury digitally.

Speaker 2

It will allow for omnichannel connections and integrate all of the touch points. It will drive frequency among our clients and compel loyalty. And of course, the internationally concept right now international makes up just barely over 1% of our e commerce sales right now. And with this enhancement to the e commerce site, we think that will triple in the 1st year. Okay.

Speaker 2

So on the flagships These are all reasons why.

Speaker 9

Understood. So on the flagships, will they be open for Black Friday? How much is the incremental spend on that? And Todd, what will be the fall off of the pre lease amortization associated with that?

Speaker 4

So we're currently planning for 2 of the flagships to fall within the Q3, which Black Friday is extremely late in the Q3. That's the Chicago and SoHo location. And then Fifth Avenue is planned for the first half of the fourth quarter. So that's the timing.

Speaker 2

That said, I just want to interject. These are big projects. I was there last month and we want to get them right. And this is so we want to make sure that we get these flagships that will be with us for decades to come. We want to get them right.

Speaker 2

And there are inherent risks to timelines and constructions as you know. We always say that there's risks that we can't control. I just want to share with you that the sellhold building we're in, it was built in 18/83. It's over 140 years old. When we're opening up walls, we're opening up walls with the original lathe and plaster.

Speaker 2

We're installing up and down escalators, cutting big holes in the floor. And the sheer amount of structural that's required is astounding. It was astounding to me when I saw it. The floor in some cases are uneven by up to 7 inches from one end to the other. So these things take time and these are all on their individual cases, normal occurrences that arise in construction of this nature.

Speaker 2

And I do want to give a shout out to our team who have done an extraordinary job, masterfully managing all of these elements. But the sheer size and scale requires time to ensure things are built. So right now, when we say that we're opening 5 stores in Q3 and 4 to 5 in Q4 and the reposition following suit, we're contemplating 2 of those flagships in Q3, but it will be towards the tail end and things may slide into Q4 and we're giving you our best visibility into what's happening.

Speaker 9

Yes. Thank you, Jen. I actually poked my head in the Rockfeller new store last

Speaker 5

3 weeks ago and it looks brilliant.

Speaker 9

I agree with that. Can you quantify what that cost is on the flagship celebration and also the pre lease amortization?

Speaker 4

The budget for the marketing is roughly $3,000,000 but we haven't it hasn't been 100% finalized. And then the so it could be less, I guess is my point. The amortization benefit next fiscal year will be roughly 50 to let's call it 50 basis points.

Speaker 9

Thank you very much.

Operator

We have a follow-up question from Mauricio Serna with UBS. Please go ahead.

Speaker 3

Great. I just had a quick follow-up. Now that you're lapping the I mean, you would not be recurring on the digital archive sale. Like, do you expect some sort of like gross margin benefit because of that? Could you quantify it if possible?

Speaker 3

Thank you.

Speaker 4

We are expecting to see a benefit in the Q3. This is going to be offset by the freight. And then in the Q4, we obviously won't have that benefit and we're expecting the freight headwind to be less. So that's why we have 400 even across both quarters despite the fact that we do have a tailwind from the removal of both of those sales in the 2nd or in the 3rd quarter. And the impact again is roughly 50 basis points as well.

Speaker 3

Got it. Thank you so much.

Operator

This concludes the question and answer session. I would now like to turn the call back over to Beth Reed for closing remarks. Please go ahead.

Speaker 1

Thanks again to everyone for joining us this afternoon. We're available after the call to answer any follow ups and we look

Operator

forward to talking to you again next quarter. Have a good evening. 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 Q2 fiscal 2025, Aritzia delivered a 15% increase in net revenue to $616 million with comparable sales up 6.5%, driven by a 24% U.S. sales jump on real estate expansion and e-commerce acceleration, while Canada grew 6% aided by a calendar shift.
  • The retail channel saw an 18% revenue boost from seven new and three repositioned boutiques in the last 12 months, including openings in Florida and Texas, and Aritzia plans a record pipeline of 9–10 new boutiques and 2–3 repositions in H2.
  • E-commerce returned to double-digit growth with a 10% revenue rise, led by increased U.S. traffic and strong response to fall merchandise; site enhancements (one-page checkout, AI search) roll out in H2 and a mobile app is slated for next year.
  • Gross profit margin expanded 520 bps to 40.2% thanks to improved initial markup, lower markdowns and warehouse savings (partially offset by higher freight), and adjusted EBITDA margin widened 500 bps to 9%.
  • For fiscal 2025, Aritzia now expects net revenue of $2.54–2.60 billion (+9–11% or +10–13% ex-53rd week), gross margin expansion of ~450 bps, SG&A of flat to +50 bps of sales, and adjusted EBITDA margin up ~400–450 bps.
A.I. generated. May contain errors.
Earnings Conference Call
Aritzia Q2 2025
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