Sep 28, 2023
Good afternoon, and thanks for joining Aritzia’s second quarter 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 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.
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&A are available on SEDAR, as well as the Investor Relations section of our website.
I’ll now turn the call over to Jennifer.
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 second quarter of fiscal 2024, we delivered net revenue of $534 million, an increase of approximately 2%. This is on top of delivering outstanding revenue growth of 50% in the second quarter last fiscal year and 75% in the second quarter of fiscal 2022.
We remain confident that the level of overall sales achieved in the last two 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. Comparable sales growth decreased 4.3% in Q2 as we lapped a remarkable 28% comparison last year.
In the US, our net revenue increased 6% on top of 80% growth in the second quarter last year, while in our Canadian market sales declined 3% as we lapped 29% growth in the second quarter of fiscal 2023. In addition to cycling two years of outstanding sales results, we believe our second quarter top-line trend was impacted by the level of new styles in our product assortment, as well as a mixed consumer environment.
And before I discuss the results of our sales channels, I want to first provide some color on our levels of new styles. Over the past two fiscal years our primary focus was on maximizing sales growth by fueling the unprecedented demand for our products.
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 through 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 at 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 centers on our ability to create new styles to maintain freshness in our assortment over time.
With a normalized supply chain and operating environment, we've now returned to our proven products development cadence. Our team is laser focused on our product pipeline.
So far, we're encouraged that even for this fall new, seasonal style are resonating extremely well with our clients and we continue to expect to be in a strong position for spring summer 2024, which begins to launch in February. Shifting back to our Q2 performance, net revenue in our retail channel increased 3% in the second quarter driven by the progress we've made on our real estate expansion strategy.
We opened one new boutique during the quarter, our third boutique, in the state of Florida at International Plaza in Tampa, which is a new market for us. We also recently opened two expanded boutiques, Short Hills, New Jersey, and July, and Prudential in Boston at the end of August.
In Q3, we planned to open two 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 remain 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 pay back in approximately one year or less ahead of our expectations for 12 to 18 months. 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 exceptional talent in new markets, we made significant investments in retail labor, over the last couple of years.
Having passionate dedicated people in our boutique 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.
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 sighting Q1 and Q2 we've 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 omni-channel services, by online pickup in store, and ship from store earlier this month in Canada.
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 US, which is planned to begin after the holidays with completion in Q4. We believe, one of our biggest opportunities is arises from these additional services is to convert more single channel clients to Omni-channel.
The strength of our current Omni clients highlights the magnitude of this opportunity. Our Omni clients spend approximately three times more than clients who shop exclusively and either our retail or our e-commerce channels.
In addition, the retention rate for Omni clients is substantially higher than for single channel clients. We also expected 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.
As expected, the overall markdown rates during our spring summer sale period remained below pre-pendamic 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 five.
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 three of the six additional temporary offsite warehouse facilities and are working towards subleasing the remainder by the end of the year.
This has resulted in a significant and immediate reduction in our inventory carrying costs, particularly with labor, having accounted for more than half of the additional cost pressure. 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.
Some of the areas in which we've already begun to realize benefits include vendor negotiations, process optimizations and KPI improvements. And with that, I will now pass the call over to Todd.
Thanks, Jennifer, and good afternoon, everyone. In the second quarter of fiscal 2024, we generated net revenue of $534 million representing an increase of approximately 2% from last year.
This increase is on top of two years of extraordinary growth in the second quarter, 50% in fiscal 2023 and 75% in fiscal 2022 resulting in a three-year CAGR of 39%. Comparable sales growth decreased to 4.3% following a remarkable increase of 28% last year.
Net revenue in the United States was $279 million in the second quarter, an increase of 6% on top of a second quarter increase of 80% in fiscal 2023 and 152% in fiscal 2022. In Canada, net revenue decreased 3% to $255 million on top of an increase of 29% in fiscal 2023 and 43% in fiscal 2022.
Net revenue in our retail channel was $362 million, an increase of 3% from the second quarter last year. This was driven by the performance of our new and repositioned boutiques, which continued to generate better than expected payback periods partially offset by software comparable sales.
In e-commerce, net revenue was $172 million, a decrease of 1%. The deceleration was driven by softer traffic trends in both countries, following three years of unprecedented growth.
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 million, compared to $220 million in the second quarter last year.
Gross profit margin was 35% declining 690 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 amortizations for flagship boutiques and our new distribution center.
These pressures were partially offset by lower expedited freight costs. SG&A expenses were $171 million, up 16% from last year.
SG&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&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 million, a decrease of 74% from last year. Adjusted EBITDA was 4% of net revenue compared to 15.7% last year.
This margin decrease primarily reflects three things; ongoing inflationary pressures, 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 pressure 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 second quarter, inventory was $501 million, up10% from the end of the second quarter 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. We have $77 million in cash at the end of the second quarter and $75 million available on our $175 million revolving credit facility.
We expect the majority of the $100 million drawn on our facility to be repaid by the end of the third quarter. We remain focused on maintaining a strong balance sheet, which has served us well through time.
Shifting to our outlook, based on quarterly trends, net revenue in the third quarter is expected to be flat to slightly down from the prior year, again, on top of two years of exceptional growth. 50% in the third quarter last year and 75% two years ago.
Following peak pressure in the second quarter, we expect gross profit margin in the third quarter to decline 200 basis points, compared to the prior year, a meaningful sequential improvement. And we expect SG&A as a percent of net revenue to also improve sequentially in the third 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 $2.25 billion to $2.35 billion, 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 two 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, 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 the last year when markdowns began to normalize off of low levels from fiscal 2022. We continue to expect SG&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 district 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 merchant improvement in the second half and end of fiscal 2025 will be partially driven by one of our key priorities for this year.
Smart spending, this cross-functional priority is driving meaningful results with approximately 150 opportunities identified across the business with over a half already complete. The estimated annualized run rate savings total over $60 million 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 million. This includes $120 million related to our new and expanded boutiques, which continue to pay back in approximately 12 months or less, as well as a $100 million 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 fourth quarter, along with accelerated square footage growth of approximately 20% planned for fiscal 2025. Importantly, our new stores are most consistent growth driver delivering predictable revenue growth, and propelling our brand.
With continued investment in the client digital experience we remain confident that both our e-commerce and retail channels will continue to fuel our growth in our omni-channel strategy. We continue to expect meaningful 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 two 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 e-commerce 2.0 strategy.
We also expect that peak merger pressure is behind us, and 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.
With that. I'll now turn the call back to Jennifer.
Thanks, Todd. And 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 in a strong position for spring summer 2024, which begins to launch in less than five months. Second, we have an extraordinary pipeline of boutiques opening over the next 18 months.
Our pace of store expansion is planned to accelerate to six new boutiques in the back half of this year, followed by roughly 20% square footage growth in fiscal 2025, including repositions of our three Manhattan flagships. This is compared to four new boutiques opened in the trailing 12 months.
Third, 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 ecommerce 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 re-acceleration in our adjusted EBITDA margin next year. From 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. We remain extremely confident in our long runway for growth as we seek to deliver our unique value proposition, high quality products at an attainable price point to more and more clients across North America.
Operator we are ready to now please open up the line for questions.
Thank you. The first question comes from, Stephen MacLeod with BMO Capital Markets.
Please, go ahead.
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, you had a lot of positive commentary around customers’ response to your fall winter collection.
I am just curious, if you can give a little bit of color around what you're seeing both in store and online?
Hi, Stephen. Yeah.
Traffic is softer. We are seeing softer traffic patterns.
That said, what that tells us because it's broad base, 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 bucks a square foot.
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 as I did say that but we do see that there is an opportunity to drive traffic to our stores through incorporating digital marketing into our overall business strategy in addition to the new store openings which has been up until now our number one client acquisition tool and a primary driver to our e-commerce.
Okay. That's helpful.
Thanks, Jennifer. And then and I just was 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 into next year?
And I'm wondering if you could also just provide like the buckets of ‘25, fiscal ‘25 margin improvements.
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&A perspective. But we have maintained our annual guidance of 300 basis points of pressure in both gross profit and SG&A.
And the benefits that we saw in the second quarter within gross profit were primarily related to improved freight costs. And then, from an SG&A perspective it was just benefits from retail, wages and SO labor, that helped us exceed our initial expectations for the quarter.
But if as I look forward, if there's no real change and what we're expecting as we roll through Q3 and Q4. And as we said all along that we thought it would be a tale of two halves with meaningful pressure in the first half of the year and that pressure is subsiding in the back half and the benefits they were expecting in Q3 from a gross profit perspective would be from the product costs 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 warehouse and costs. So obviously, Jen mentioned it, but the new DC opening is critical to our margin improvement, both from a gross profit perspective and SG&A because the project costs are now done, which were hitting SG&A.
And within gross profit, we're seeing the benefit obviously from just the improved handling costs and the closing of all the auxiliary facilities. So, again, a lot to impact in your question there, and I haven't even hit the FY ‘25 part yet.
But does that answer your question on this fiscal year before I move on to FY25?
Yes, it does. Yeah.
Yeah thanks, Todd.
Okay great. Yeah.
So, from from an FY ‘25 perspective no change there as well. We expect approximately 150 basis points of improvement for IMU and that's from the select pricing actions and also product cost savings.
We expect another 150 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 et cetera.
Okay, that's really helpful. Thanks Todd.
Thanks, appreciate it.
The next question comes from Martin Landry with Stifel. Please go ahead.
Hi, good afternoon. As you as you've mentioned, you're entering into a period of rapid square footage expansion.
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 per quarter would be super helpful to help us better model your revenue growth on a quarterly basis.
Well, maybe I'll project from a store account perspective. So - we as Jennifer said, we have six stores for the remainder of this year.
Two are planned for the second or the third quarter and four in the fourth quarter. And then the bulk of our stores next year are coming in both the second and the third quarter.
And so, we have four new stores planned for the second quarter of next year and then seven planned for the third quarter. Obviously the from a square footage perspective, the flagships are going to be a 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. So, I don't know if that helps, but that gives you a bit of an idea of the cadence that we're expecting.
That's helpful. And you're - switching gears, you're mentioning that you're in good position from a product standpoint for your spring summer collection.
And as, we like numbers. So I was wondering if you could give us maybe a proportion of your line up next summer, spring summer, that's going to be new products that you're introducing.
And how does that compare to historical levels?
Well it kind of depends, it depends based on store size, it depends on region, geography. We have stores at range from 4,000 square feet to about 20,000 square feet be bigger with the flagship stores, depends, if it's a suburban versus urban.
So it depends. What I would say is if you were to walk into a store at the beginning of the season and have a look at our assortment when you walk in, you'll see that it’s merchandised in a very balanced way between new styles and our clients favorites.
And in particular, it's it's merchandised 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, it depends on the situation.
Okay. Is it - is 2020 the spring summer 2024 is that going to be a baker year in terms of new styles or an average year in terms of styles?
We have targets that we hit. And as I said, in returning to normalized, there is 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 is essentially what it is. We are returning to normalized operations.
We're returning to our normalized product development, lifecycle cadence. And so, what you'll see obviously our assortment, we 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 that's why we feel very confident about our position going into spring.
Okay, that's it for me. Thank you.
The next question comes from Irene Nattel with RBC Capital Markets. Please go ahead.
Thanks and good afternoon. I just want to clarify something from your answer Todd pan on me timing of the new stores next year.
You said four in Q2 and 7 in Q3. Is that correct?
And does that seven new includes the repositioning of the flagships?
No, it does not. So the four and the seven are the new stores and the repositions would be on top of that.
Okay. And Chicago, you said, is H2 and the others are - do you have the timing on those?
They're in the back half of the year.
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 fall winter.
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?
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 puff 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.
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 so the traffic is down a little bit.
When people are in the store, are they gravitating to slightly lower unit price points? What are you actually seeing in terms of consumer behavior?
Well in a nutshell, what we're seeing is, well, I guess all really to the to the traffic and the macro 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 may be 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.
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 or buying it.
That's really helpful. Thank you.
The next question comes from Luke Hannan with Canaccord Genuity. Please go ahead.
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, 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 stores?
What’s interesting about e-commerce is because we aren't limited by a square footage size. We can offer everything so we offer, like we are pretty much everything is offered on line.
What we do see is that there's 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 our partnership with dynamic yield I think I'm mentioned as a platform we use really makes.
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.
Okay. And then, when it comes to the competitive landscape, I appreciate your and Todd's commentary that the, the markdowns - level of markdowns that you have in your own assortment is still below pre-pendemic levels.
Are you seeing any reaction from competitors as being a more or less promotional than you would have originally anticipated?
No, I'm not going to entertain your question. Are we seeing our competitors being more promotional?
Certainly we're not a - we don't go on sale to drive, we don't go on sale to drive sales which I think a lot of our competitors I know do. So that about sort of dilutive question, okay?
When we go on sale, when we go on sale, we go on sale to clear inventory, to make room and start cleaning 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.
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?
Yeah, 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 that's it's either, flat or even down to the prior year.
Great. Thank you very much.
The next question comes from Mark Petrie with CIBC. Please go ahead.
Yeah, thanks. I actually just have a few follow-ups to some previous comments.
So, maybe first Jen on the, on the digital marketing topic. Have your efforts on that started already?
Or when do you expect that that would sort of kick in? And I assume this is about like, online advertising and paid search and those types of things?
Yes. It's we're just in the very beginning.
As you know, we've done very little to no 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 will start with paid search then paid social and ensuring that we're getting into digital performance marketing specifically at - 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.
So is that something that you would expect to be having an impact in the second half of this year? Like is it is it going to be able to ramp that quickly?
We are just formulating our strategy now and we're building the team now. As I said we've, we've started some initial paid search for sure.
And we – yeah, I do expect to see some effects in the back half of the year but really what we're building is a strategy towards fiscal ‘25.
Yes, understood okay. And Jen when you were talking about the bottom-line 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?
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 - 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.
Yes, yes. Understood.
Okay, appreciate that. I'll pass it on.
The next question comes from Alice Xiao with Bank of America. Please go ahead.
Hi, thank you for taking my questions. Can you talk more specifically about the components that will allow for the approximately 100 basis points of gross margin improvement that is currently implied in 4Q cubed by your guidance?
I know you touched a little bit upon the second half as a whole to Stephen's question. But in 4Q in particular, how you are planning the mark down component?
Are we assuming all pre-opening lease costs are gone. All the temporary warehousing costs are gone in 4Q?
Yes, thanks, Alice. As you 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 that 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.
So there is some pressure in the third quarter from those auxiliary buildings and it does diminish into the fourth quarter to the point where we actually may see a benefit in the fourth quarter because of the labor optimization. So that's one of the dynamics that helps with this sequential improvement from Q3 to Q4.
And then, we also - our smart spending initiative that we have underway is ramping through the year and we expect to benefit more in the fourth quarter from that and in the third quarter. So again, also helping with the sequential improvement from Q3 to Q4.
And from a UEF specifically, the markdowns, we expect that pressure to be relatively consistent to Q3 and Q4 on markdowns.
That’s super healthful. Thank you.
And then I have two quick follow-ups on your store opening plans. So, a lot of retailers have guided to a 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 when all the stories can be opened in the last weeks of 4Q that you have planned?
And then, are there any possibility of changes to the cadence of square footage growth next year? Or is that pretty set in stone to the current plan.
Yeah. I'll take that one.
I guess, obviously this we're talking about construction. So it never said in stones.
So I don't - I can't commit to that for certain. What I communicated was our estimates as of today that's our plan for those openings.
But obviously, in some cases where as much as 12 months away. So there's a lot of things that can happen between now and then.
And, specifically for the fourth quarter 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 of the design and then the build, that follows once the deals are done and obviously availability space comes into. 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, that would be the factors affecting us. And so, yeah, what I just described or outlined is our current thinking on the timing.
And again obviously we are 12 months away in some cases. So, there could be adjustments to that.
But as of right now, that's that's what when we think those stores will be delivered.
Got it. If there is visibility to next year, it looks like it's going to be easier than this year to for new stores to come online.
Is that is that right understanding?
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’re planning for occupancy when there are all coming, planned to come online, it's that the environment is not necessarily going to get easier.
Got it. Thank you.
The next question comes from Mauricio Serna with UBS. Please go ahead.
Great. Good afternoon, and thanks for taking our questions.
First, I would expect to ask about the Q3 sales guidance. How should we think about the implied comp sales just given that if there's like the total sales out load it implies the acceleration.
So I don't know if it's that those that that have to do with last door openings on a last 12 month basis, or how should we think about that? And then on the implied Q4, SG&A dollar growth, I think it seems that, looking at the model, I think it implies like that the SG&A dollars will accelerate in Q4, So just want to like, corroborate that.
That will be super helpful. Thank you.
The first question, sorry I got thinking about SGA there, first question was on
Implied comp sales.
Thank you. So the implied comp within our guidance is effectively flat with what we were seeing in the second quarter.
And so, we've planned the rest of the fiscal year based on the trends that we saw in the second quarter and the trends that we're seeing quarter to-date in the third quarter. There is a implied benefit in the fourth quarter or increase, but it's not coming from comp.
It's coming from the 53rd week in the fourth quarter, as well as the new store openings that we've been discussing. But there isn't any incremental benefit in the third quarter, compared to the second anyways as it relates to new stores.
But, I knew you had a minus 4.3 is that like probably you are thinking about a Q income?
Yeah. It's exactly in the sort of down mid-single-digits.
Okay. Got it.
And then, yes, in the in the fourth quarter, our SG&A again, we expect it to sequentially improve from the 300 basis points of pressure in the third quarter and the benefits are coming from, lapping of investments we've been talking about that 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 two quarters now and that will be for the most part coming off in the fourth quarter.
And then again the scaling of our smart spending will help the sequential improvement in the fourth quarter on a margin basis.
Got it, Just one last follow up on inventory. It seems - it's great to see that that progress both on a reported basis on and on the committed inventory.
Maybe can you just elaborate a little bit more and like that competition is it like, how does that looks, when you think about proven sellers versus units?
Yes. Our inventory continues to be heavily concentrated in proven sellers as it would be at any point and so that hasn't changed and is again providing us the confidence in that inventory.
Got it. Thank you very much.
The next question comes from Dylan Carden with William Blair. Please go ahead.
Thanks. Curious, Jennifer on the marketing comments.
Is that’s incremental to prior thinking or as to another way is the idea here that the ratio of marketing spend to sales would increase with flow to a higher conversion at the online channel.
Well, as I've said, we've done very little to no digital marketing in the past. It hasn't necessarily been in primary driver of our business.
We grew quite well this last year before without doing much of it. But what we have learned is that this is a huge opportunity for us particularly if one of our primary growth levers overall for the next few years is, is about digital and digital in the US.
So yes, there will be incremental spend. 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 it 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 the team to do that we're building a team and have a couple of people already who are, who are see, as I said seasoned professionals in this space.
Good. 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.
Clearly 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 that it's performing better than we expected and paying back in 10 months, not even 12 months, and it appears to pay back in 10 months. And volume wise, if they're performing, exactly if not better than what we projected before when we first leased the space, 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 a product or store design, or our exceptional client service, the locations that we choose, I think we're - I continue to believe we're industry leaders in retail. As I said, they're paying back can less than 12 months in our expectation, is its 12 to 18 months.
They are performing at $1600 a square foot. We are very pleased with our retail performance.
And so, this really encourages us, and gives us a lot of confidence to continue to open new stores that we have on the pipeline and we're super excited for the flagship stores that we're opening next year.
Okay. And Todd, given that kind of shortened payback period in where you should theoretically land a year from a gross margin standpoint, which isn't all that far off from some prior years, what sort of the structural margin level here to go forward?
Do we think sort of low forties which has achieved historically even, pre-2016? Is there upside to that.
I know you are 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 could say would be helpful.
Thanks, Dylan. So, as I described the 500 basis points of improvement that we're expecting next year, majority of that will be within gross profit saves a portion of the smart spending initiative that are from SG&A.
And so that now will be a step function returning us to our normal growth profit margin or on the way to. But we do - it will be a sort of sequential year-on-year getting us back to where we expect to be by the end of our multi-year plan and it's really driven, one by opportunities in product costs.
We think we have a multi-year product cost opportunity that will improve over time. And then, I think we 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 US, compared to within Canada. So again, sequentially as our good business grows in the United States and becomes a larger and larger portion of our overall business, we will we will see benefit within our gross profit,
And on the project margin side, remind us about a third of that I think was coming from selective price increase. Is that fine we should expect to see more spring summer ‘24 or – your stars of feathers, some of that in?
The pricing improvement is being feathered in. It's already started now in fall winter.
And 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 next year's improvement will be coming from costs.
So lower product costs.
But given successful and pushing through some pricing in the present period, it sounds like?
Yeah, I mean, I think, Jennifer?
We’ve said in the past that Dylan that the pricing actions that we've taken have been on a very selective strategic choices on an item-by-item basis on the grand scheme of things that’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 that the new price is we were at the old price.
Very good. Thank you.
The next question comes from Brian Morrison with TD Securities. Please go ahead.
Good afternoon. I apologize.
I joined the call quite late. So if I repeat some questions if we can talk about later.
Just in terms of the Q3 guide that 300 basis points of SG&A increase So like how you are overlapping the support stack and wage pressures. I understand keep before you're going to see a benefit, but why so large and increase in Q3 after you're rolling up 150 in Q2?
We were up, 400 basis points in the second quarter. So it is a sequential decline from 400 to an increase of 300.
So it is coming down in the third quarter. And then further - there'll be a further sequential decline in the fourth quarter.
So within the third quarter though, to answer your question, I mean, we're still lapping, the retail wage investments that we made as well as the support office. It's really not till over the fourth quarter, that will be lapping when the majority of those were introduced at least from a retail wage perspective.
And then, we just have a deleverage on higher fixed costs that we discussed. So we haven't, we haven't changed our outlook for the year.
This - 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.
I see that. I apologize.
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.
Yeah, I mean I don't have the number in front of me to quote the exact number. But yeah, obviously, as we're adding all these stores, there will be incremental rent.
But actually as the stores open, we potentially will have benefit from a percentage of rent costs. But that's obviously as they get open and ramp up, et cetera.
Okay. The last question, - you initiated I think last quarter you mentioned that you didn't plan on being active, you just cover your options.
It looks like you're somewhat aggressive in the quarter maybe you go forward plans with it.
Yeah, so we did we've repurchased approximately 400,000 shares in the 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 a $100 million 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 third quarter.
So, again, as I 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 that continues to be so. Okay.
This concludes the question and answer session, I would now like to turn the conference back over to Beth Reed for any closing remarks.
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.
This concludes today's conference call. You may disconnect your lines.
Thank you for participating and have a pleasant day.