Q2 2021 Aritzia Inc Earnings Call
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Ladies and gentlemen, please hold the line the conference call will begin shortly thank you.
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Thank you for standing by this is the conference operator.
Welcome to Ritchie <unk> second quarter 2021 earnings call.
Are you reminder, all participants are in listen only mode and the conference is being recorded.
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I will now turn the conference over to Helen Kelly, Vice President of Investor Relations. Please go ahead.
Thank you Anastasia and thank you all for joining <unk> second quarter 2021.
Cool.
Apologies for the brief delay.
On the call today I'm joined by Brian Hill, Our founder Chief Executive Officer and Sherman.
Jennifer Wahl, President and Chief operating operating officer, and taught angle do our Chief Financial Officer.
Well I noninterest discussion will host a question and answer period open to analysts.
That's true.
Please note that remarks on this conference call May include our expectation future plans and attention since they constitute forward looking.
Yes, certain and dynamic nature of course like tea.
And.
It continues materially I'll jump on it.
We will refer you to our most recently filed management's discussion and analysis and annual information form which include a summary of the material assumption I soliciting material risks and factors that could affect our future performance and our ability to deliver on these forward looking statements.
Our earnings release.
On the financial statements Mdna are available.
Well at the Investor Relations section of our website at <unk> Dot com.
I'll now turn the call over to Brian.
Thank you Alex and thank you everyone for joining us this afternoon.
I'm pleased to report alongside Jennifer and Todd, our Q2 results, which reflect the encouraging recovery of our business.
Notwithstanding the ongoing impact of COVID-19, and the evolving social economic and political climate we are.
We are pleased with our performance and excited about the outlook for the future and I could not be more grateful for our incredible team with whom I have had the privilege of working alongside every day.
All of our boutiques are now open and have been performing better than our expectations.
Our E Commerce business has maintained its exceptional growth, albeit not at the same rate as when our boutiques are closed.
At far higher projections than previous to Covance.
Our world class talent and infrastructure in which we continue to invest remains strong and we have capitalized and will continue to capitalize on the many opportunities made available in this unprecedented time.
Net revenue was 200 million in Q2 down 17% from 241 million last year as you will recall, our net revenue was down 43% in Q1.
The significant improvement in our quarter over quarter results is an encouraging sign of our businesses ongoing recovery.
Despite shattering our retail operations in March we were thrilled by the response of our people and our clients as we reopened and began the recovery of our retail operations early may this enthusiasm carried forward into Q2.
Our multi channel client relationship continued holding the momentum of our E commerce business, which delivered 82% growth compared to last year. Despite the reopening of our boutiques throughout the quarter.
Importantly, our increasing revenue combined with highly effective inventory and cost management allowed us to maintain our strong cash position.
As a result of keeping all our people employed during the shutdown.
And starting to plan our reopening the moment, we closed our doors, we're able to reopen our boutiques quickly efficiently and above all remain vigilant with our health safety precautions for our people our clients our communities at.
At the start of the quarter, 31% of our boutiques were reopened and by the end of it 96% were as of September night, all our boutiques were reopened.
Notwithstanding lower traffic and social distancing limiting our installed capacity.
As we reopened our boutiques in the second quarter.
Our clients enthusiastically returned.
While it is too early to tell what our new normal boutique performance will be we were encouraged by the persistent improvement in our boutique productivity during the quarter.
With reopen boutiques performing on average at 70% of last year's productivity.
[noise] with geographical variation in performance, depending on the past and present impacts of COVID-19. This is clearly a regional recovery for us suburban boutiques outperformed downtown boutiques and Canada Unsurprisingly recovered in Q2 at a quicker pace than the United States.
During the quarter, we began a number of initiatives and launched new enhancements to our E. Commerce website, enriching our client shopping experience, which Jennifer will share with you shortly.
In addition, our site navigation and content on the breadth of offerings were optimized, allowing our clients to more easily shop various attributes such as fabric rise lengthen color. This meaningful extension of our site navigation supports our expanding product offering and we will continue to scale with the growth of our assortment.
And while we have typically largely forgone paid advertising the online environment offers compelling opportunities to test as such we recently launched a paid media pilot to evaluate the potential return on a on a formal paid media program.
We will share more details if this becomes a meaningful ongoing initiatives.
As noted we see unlimited potential on our online growth.
Complementing the strategic advantage of a strong beauty network.
Our clients continue to demonstrate their desire for an omni experience and this multichannel relationship presents boundless opportunities.
Since the beginning of COVID-19, as we have discussed our product team pivot to the pivoted flawlessly.
Immediately upon closing our boutiques in the first quarter, we focused on moving our spring summer inventory.
This put us in great inventory position to start the second quarter and allowed us to maintain markdown levels consistent with the same time last year.
This man that at the beginning of August we're in a remarkably clean inventory position, which allowed us to launch fall with new exciting product that has been incredibly well received and notably has facilitated full price selling.
Second.
We effectively pivoted, our inventory to reflect our clients lifestyles and activities with less professional and event product to more of a casual and lifestyle product as it.
As we recently saw on our clients' response, the launch of our fall 20 product lines, we're still chasing the overwhelming demand that we have experienced since the start of cobot.
And thirdly.
We began our exciting new initiative to significantly expand our product assortment the expansion of bread, including new style development.
Yep, including sizes length in colors, and new categories, such as swim intimates bags shoes, and beauty many of which are targeting our E. Commerce channel began with our fall 20 collection and we will have an even larger impact on spring 21 and thereafter.
As Jennifer will elaborate in a minute we are exceedingly pleased with the launch of our product lifestyle management system. This week, which will support the ongoing expansion of our product strategy.
As we move forward with our expansion attracting top creative talent remains an utmost importance in the second quarter, we expanded our design team with talent acquired from World renowned fashion brands are already making a significant contribution to our product expansion strategy.
And to complement our design team, we further invested in our manufacturing talent securing senior leaders, whose global experience is invaluable.
In marketing, we presented our clients with captivating campaigns at both reflected their stay at home reality and resonated with their adjusted lifestyles.
Our product catalog continues to successfully a featured model shooting from home and our compelling product campaigns continued with the fall launch of each of our major brands.
During the quarter, we wrapped up our ritzy community care program, which we launched to show our heartfelt gratitude and support from those fighting on the virus front lines.
Through the program, we gifted 100000, frontline health care workers in Canada, and the United States with custom clothing packages, a total retail value of $10 million.
It was our honor to do our part to support the selfless health care heroes.
Last but not least sustainability has always been a priority for us. We are proud to have completed our first CDP climate assessment in August and officially became a company with carbon neutral operations within our offices stores and managed Dcs as of the second quarter covering our two night 2000.
In 19 scope, one and two emissions we.
We achieved all this through all of our efforts to minimize our footprint complemented by purchasing renewable energy credits and Vcs certified carbon offsets.
While this is an important first step we know there is more we can do as an industry leader to make a difference.
We are committed to this important work and we will continue on our journey to do the right thing for our people and the planet.
As we progress into our new normal we are encouraged by our results and in embracing our opportunities. We are proud of how much we have accomplished as a team in the second quarter.
Our results are testament to the everyday lives lifestyle, let everyday luxury experience that continues to resonate with our loyal clients.
Our engaging service beautiful product aspirationally environments, and the unwavering commitment of our people.
Looking at Q3 to date, we are pleased with the positive client response to our fall winter product launch. This has manifested itself into sustained momentum every commerce business and continued improvement in boutique productivity in the first six weeks of the third quarter.
As we now prepare for the holiday season, which represents our busiest time of year, we're cautiously optimistic about our potential.
Given our clients enthusiastic response to our fall launch we're prepared as always to respond to the demand with flexibility.
As we move forward through the fall season, and enter winter, we are already experiencing sellouts and are quickly chasing reorders on these highly productive styles and while occupancy restrictions recent increases in COVID-19 positive a case rates and new corresponding government restrictions in some market.
We will continue to impact our retail performance our E Commerce business is well positioned to continue to offset these measures.
I will now turn the call over to Jennifer to give you an update on some of the key areas of our operations Ken.
Thanks, Brian and good afternoon, everyone.
The past six months to stretch just a new and in many cases previously unimaginable ways as a team we've come up with creative and agile measures to pivot our business as we faced unprecedented challenges head on.
And we've achieved this while continuing to delight our clients with the everyday luxury experience they have come to love and expect from us.
Although the pandemic is not yet behind us from an operations perspective, the second quarter was about resuming our long term strategy and building for future growth I'd like to give you a progress update in four key areas first continually improving our distribution and logistics second supporting our product.
Spansion strategy third driving top line growth by empowering our clients to shop seamlessly between our physical and digital channels and finally, fulfilling our commitment to cultivate and celebrate diversity and inclusion anorexia.
With this sustained momentum in our E commerce channel carrying through the second quarter, we continue to refine our processes and activities across our distribution and logistics operations to accommodate the doubling of our E Commerce unit I'm.
Im pleased we've been able to keep our people safe, while maintaining delivery times that meet or exceed our clients' expectations.
Starting with our layer it on sales. This past weekend, we have recently ramped up hiring and training of additional DC associates in preparation for upcoming holiday season.
While the retail environment in the near term remains uncertain, our infrastructure is well positioned to continue to meet growing demand.
As you May recall, one of the infrastructure projects Weve been working on for the past few years as our product lifecycle management system or P. L. M.
We reached an important milestone just yesterday with the official launch of the platform. This.
This is the combination of years of hard work and dedication of our team who along the way Matt over 129 processes gathered over 600 business requirement executed over 20000 steps in the system develop.
Develop training materials for over 245 processes and consolidated thousands of data records.
Pleading this launch was a marathon and while we have additional phases to come I'm proud of our team for this major accomplishment.
PLM enhances our efficiency in bringing a product to market and provides the scalability to support the expansion of our product offering well into the future.
The adoption of PLM will follow the normal cadence of our product lifecycle with multiple seasons cycling through their respective checkpoints.
Fall Twentytwenty, one will be the first collection to see it product cycle through PLM from initial concept right through to delivery.
Next with personalized experiences and enduring relationships as an ongoing priority we continue to invest in an exceptional omnichannel experience.
Earlier this year, we launched and have gradually expanded the use of digital selling tool our results. So far show a meaningful increase in both conversion rates and average order values. We are excited about the potential of digital selling tools and we'll continue to expand the usage across our boutique in the coming months.
With our E commerce business steadily growing we also continue to invest in our digital capabilities as Brian noted during the quarter, we implemented a number of initiatives honor ritzy, a dot com to enhance our clients shopping experience as a law.
As a larger portion of our business shift to E. Commerce. It is increasingly important to accurately convey size and fit information with our clients online.
We are excited to be rolling out an AI tool later this month for size and fit optimization. This.
This technology allows us to provide highly personalized size recommendations to our clients on originally a dot com.
Based on the measurement data and preferences of our that our client provides this tool leverages machine learning algorithms to generate precise fit guidance based on past purchases and his exceptional knowledge of our products.
Given the strong client engagement and positive feedback on our fit enhancements to date. We expect these added features willing increase client satisfaction and boost conversion.
In the coming weeks, we're also launching a buy now pay later payment option that allows for seamless checkout, while decreasing the barrier to purchase.
We expect this deferred payment method to be an effective tool to augment our omni initiatives by increasing brand awareness.
Attracting new clientele and driving traffic.
It also has the potential to meaningfully contribute to our top line growth by enhancing our conversion rate and average order value.
Turning now to people as Brian has noted we continue to add world class talent to support our growth as we do we are intent on ensuring for both our current and future employees that we are and inclusive culture that inspires high levels of engagement and performance.
Since our last call, we made encouraging progress towards our commitment to cultivate and celebrate diversity and inclusion at all levels of our organization.
We took our first ever company wide deny survey in August and we shared the topline results with all of our employees in September along with an action plan we.
We learned that we have a strong foundation to build on we also learned that there is room to improve our diversity in certain markets and in positions of leadership we are.
We're already using this data to inform our DNA strategy.
Going forward our top three actions are number one.
Laying the foundation by embedding deny into everything we do companywide. This.
This includes more diversity in key areas, such as hiring clear growth and leadership to.
To increasing learning and development through D., and Iterating, and our workplaces, which is already underway and last but not least we are evolving our brand by more clearly defining and expressing our diversity and inclusiveness.
To that end, we launched our first deny campaign titled with Love Orencia at the end of September this.
This campaign shines a spotlight on six inspiring individuals from around the globe, who articulate and embody our diverse a ritzy a community.
Through a series of letters featured in captivating videos images and editorial broadly shared across our various platform, we're highlighting diversity that inspires us.
We've recently received highly positive feedback on the campaigns authenticity and it's a powerful and timely way to connect with our clients on a unique new level.
We will continue to seek out further opportunities to share our values and our commitment to authenticity diversity and inclusion with our loyal clientele.
In conclusion, I share Brian's cautious optimism, we are not immune from the impact of the co that virus literally quite literally and figuratively. However, our powerful business model combined with our at depth to ability to the evolving retail landscape continues to serve us well.
In these extraordinary times I'll now.
Ill now turn the call over to Todd to discuss our financial results. Thank.
Thank you Jennifer and good afternoon, everyone.
We're pleased with the momentum we saw in the second quarter that drove meaningful improvement in both our top and bottom line results as strength in our ecommerce business continued and we reopened our boutiques.
The ongoing recovery in our performance demonstrates the resilience of our business as.
As we.
As we adapt and navigate the uncertain environment.
Net revenue for the second quarter was $200 million a decline of 17%. This compares to a decline of 43% in the first quarter.
At the beginning of June the start of our second quarter 30 of our boutiques were reopened.
At the time ever last call on July 9th 89, boutiques had reopened and were trending on average at 55% to 65% of last year's sales productivity.
The sales momentum increase through the remainder of the quarter driving overall boutique sales productivity, a 70% for the full second quarter.
By the end of the quarter, we had 93 of our 97 boutiques reopened.
As sales ramped in our boutiques the strength in our ecommerce business continued delivering 82% growth in the quarter.
The exceptional growth in E commerce revenue year over year was driven by the positive response to our product, which manifested in meaningful increases to both traffic and conversion.
Similarly strong performance in both Canada, and the United States.
Gross profit in the second quarter was seven and it was $78 million or 35.2% of revenue compared to 39.6% last year.
The decrease in gross profit margin was largely driven by occupancy warehousing and distribution center cost de leverage from the reduced retail revenue.
This was partially offset by improved merchandise margin from the cancellation of the warehouse sales this year as well as modestly lower markdowns in the quarter compared to last year.
Gross margin also benefited from rent abatements and government payroll subsidies recognized during the second quarter.
While the overall landfill response has been mixed we appreciate the support in the form of Abatements that we've received to date from many of our landlords we.
We're continuing to work with each of them for further relief as we evaluate ongoing boutique performance and future traffic impacts in this uncertain environment.
As DNA expenses in the second quarter were 60 million.
Effectively flat compared to last year.
SGT expenses during the second quarter included additional costs related to the implementation of health and safety measures and other corporate related costs as well as investments in talent year over year.
These were both offset by government payroll subsidies and savings in operating expenses.
Adjusted EBITDA returned to positive in the second quarter at $12 million compared to $36 million last year.
We maintained our solid liquidity position through the end of the second quarter cash balance of $207 million.
Excluding the cash drawn down from our revolving credit facility cash increased $77 million from the same period last year.
Despite the significant revenue decline associated with the T. closer closures, we have maintained our liquidity since the start of the pandemic.
Through strong E commerce revenue as well as prudent inventory and expense management.
Given our strong cash position subsequent to the end of the second quarter. We made the decision to repay in full the $100 million drawn on our revolving credit facility.
Inventory at the end of the second quarter was $141 million, a 3% increase compared to last year.
Our Swift action to calibrate inventory and immediately drive E Commerce revenue enabled us to enter the fall season in a clean inventory position within onpoint product assortment and a return to full price selling.
Turning to our third quarter.
We are pleased with the enthusiastic client response to the launch of our fall product, which may.
Which manifested itself into sustained momentum in our E commerce business and ongoing improvement in our boutique productivity in the first six weeks of the third quarter.
While we're pleased with the trajectory of our business and believe we are well positioned for holiday. We are only halfway through our third quarter we have.
We have recently seen a return to tighter government imposed COVID-19 restrictions in two of our Canadian markets and saw an immediate impact to sales in our boutiques.
In addition, occupancy restrictions and reduced hours remain in place across our boutique network.
Therefore, we are tempering, our enthusiasm for the short term and anticipate our retail performance to moderate in the back half of the third quarter.
We expect the momentum in our ecommerce business will remain strong and continue to partially offset the potential impact of reduced boutique traffic.
To ensure the health and safety of our people and clients, we are maintaining stringent protocols for our boutiques distribution center and support offices.
These incremental measures are expected to add additional labor and operating expenses of approximately $4 million per quarter for the foreseeable future.
Based on the level of our current performance, we expect government subsidies will be immaterial going forward.
We continue to expect capital expenditures for fiscal 2021 in the range of $30 million to $35 million, including the three new boutiques already opened in this fiscal year, we plan to open an additional two to three new boutiques and two exclusive pop up locations we have.
We have also repositioned three of our existing locations already this year.
In conclusion, we are pleased with momentum in our business.
The ongoing recovery in our financial performance and our healthy liquidity position and we remain confident in our ability to successfully navigate the crisis.
As we look ahead, we will continue to strategically invest in our business to drive long term growth and enhance shareholder value with.
With that I'll now turn it back to Brian.
Thanks Todd.
As I look forward, while the near term remain somewhat uncertain I could not be more excited about our long term opportunities fueled by our four strategic growth drivers.
Geographical footprint expansion product expansion.
Brand awareness and customer loyalty and.
And channel capabilities Omnichannel capabilities in digital enablement.
We've been building our digital capabilities for several years, and we are well positioned to capitalize on our accelerating E commerce business.
Over and above the digital enhancement of our web site and our expanding footprint of profitable retail boutiques are most effective marketing tool.
Fiscal 2022, well see our full attention directed to our omni channel capabilities, which.
Which will seamlessly connect our E commerce and retail sales channels.
There were a handful of services such as store in Missy inventory visibility ship from store and buy online pickup in store, we will elevate our clients experience.
Fueling sales in both our boutiques and our web site.
Speaking to our geographical footprint already in the third quarter.
We have expanded to boutiques and opened two new boutiques, one in the new market for Us Philadelphia.
For the remainder of the fiscal year, we plan to open three more boutiques one.
One in the new market, Honolulu, which I'm confident we will have no problem finding teams to support the opening out.
In addition, we are looking forward to the expansion of our signature Superpipe brand and vastly expanded product line. This season with the.
With the opening of two exclusive superpower pop ups in iconic locations at the former Dean Luca located Dina.
Dean into Luca in Soho in New York City, and the former Fred Segal location in Los Angeles.
With many shutting their doors premier real estate locations across North America, our plenti with corresponding financial terms that are unheard of well.
While our boutiques have always been highly productive with opportunities coming available. We are an exciting position to strategically expand our boutique network in world class highly profitable locations.
As mentioned earlier in the call we have begun to implement our product expansion.
This initiative and its potential to grow E commerce business is compelling.
Our product calendar has us expanding our breadth and depth each season, doubling our product selection by fiscal 2025.
We are confident in the tremendous growth potential of our business as we continue to enhance our E commerce capabilities and Omnichannel experience.
Expand our exclusive product offering and capitalize on unprecedented real estate opportunities increasing our geographical footprint.
All supported by investing in World class talent and infrastructure.
Our results our results over the past several months have proven the viability of our powerful business model, our people's commitment to excellence and teamwork and our clients enduring loyalty during this time of crisis.
Although the retail landscape is shifting from many our long term future is rich with potential and we are well positioned to capitalize on the boundless opportunities that lie ahead.
Thank you.
[laughter].
We will now begin the question and answer session today.
To join the question queue. You May Press Star then one on your telephone keypad your wallet share a tone acknowledging your request. If you are using a speakerphone. Please pick up your handset before pressing any key.
Withdraw your question. Please press Star then two well.
We'll pause for a moment as callers join the queue.
The first question comes from Mark Altschwager with Baird. Please go ahead.
Good afternoon, and thank you for all the detail and congrats on the progress and the recovery so far.
I'm wondering if you could share any more perspective on what the store productivity recovery looks like in August sounds like maybe it was in the 80% range based on the quarterly average that you shared.
Also digital sounds like that has remained pretty steady relative to when you gave the update in July. So I guess is it a fair takeaway here that digital has not materially changed quarter to date relative to the Q1 average EBIT as the boutiques have ramped back up.
Hey, guys part of this and I'll pass it to Todd here. Thanks.
Thanks for the questions and welcome.
We've found our boutiques getting increasingly better every month every period.
P. Six was better than P., five and P sevens being better than T. Six we have of late with some of the shutdowns in key markets, like Ontario, and Quebec and uptake in.
Co bid numbers throughout.
South America, and we have seen sort of flattening and some pressure off its retail sales just stipulate, we'll see will manifest themselves. It's too early in two reason to be able to figure that out.
But I do I I am really optimistic, but I am a little cautious of what's going to happen during peak periods running into Nova.
November and specifically Black Friday in those weak sales are big important weeks for us and then I'm, a little concerned with store capacity issues and things around then I mean.
Typically it doesn't really affect us much on a Tuesday afternoon with capacity issues, because we probably weren't a capacity anyway only get to these peak periods and we start getting lineups at our boutiques and things like that and particularly with spikes up in coal that we're getting to lean on a little bit concerned what's going to happen.
We haven't seen it manifests itself too much but I'm a little bit concerned.
Do you want to take the ecommerce question then.
Yes, I mean, we've continued to see strength in our ecommerce business. So as as we said.
And are expecting that that that strength will.
Almost offset or potentially offset.
Shortfall that we're expecting to continue in the boutiques, but but.
The answer your question is no we're not we're not running at a 150% like we were when the stores are close in ecommerce so.
That is.
Has subsided a little bit, but it's still our E. Commerce business is far far better than it was pre call that the growth is far far better than it was in pretty cold and so you know we're we're super excited of the E Commerce, and I think a little bit or a lot of it might have to do with coal that I think we've done a great job on our product and anticipating.
Trends and things I think the fact that that we've we've.
We got out our inventory and we've had these great new collections that I don't think all other competitors that had entered the marketplace. This this fall.
And enhancements to our E commerce sites and things have all contributed to that and certainly.
People shifting to more digital has had an effect, but I wouldn't suggest is accounted for all that I'd like to get shadow to my teams here at our teams here, who have done an exceptional job product teams E. Commerce teams marketing teams and fluency of our distribution centers and our share retails teams.
Reacting well and making customers feel like Super Super comfortable in our stores, so everybody's banded together and done a great job and I know I'm missing some teams here, but we just we just super excited about the business and what's been going on and are really happy with our performance throughout this period.
That's really helpful. Maybe just a quick follow up there I guess it makes sense that store productivity you may get more difficult to sustain as we approach the higher volume periods in the coming weeks here, we have seen efforts from some other brands and retailers to pull forward events to smooth out demand now.
I know you haven't historically been a promotional retailer so tougher to do that but just curious if you're making any changes.
On this front for this holiday any different approach to the Black Friday period for instance, given the capacity constraints you mentioned in the stores.
Yes.
Theres, probably mixed reasons why people are pulling for Vince made or maybe they have too much inventory, which we don't have a problem maybe they have cash flow challenges I mean, we're super excited to see that we were you know.
In the midst of this pandemic Q2, we've made money and a lot of people didn't there's still losing money. So.
We don't have a presently touchwood cash flow issues.
Business remains strong and we think that weve have our promotional calendar and everything.
Sort of aligned to where we want to be and we're kind of going about this as normalcy as much as we can and it seems our customers are responding there. There is some concerns during these peak peak periods.
Around sales.
Store capacities and things so we've been looking at maybe stretching some of these opportunities out both from a sales perspective, but also a health and safety for our clients and our people. So.
You know, we're just we're making adjustments in everything that we're doing but we're not abandoning what's made us successful in the past and what our customers have appreciated in the past and we're still committed to that everyday luxury experience and so.
No that is not really promotional calendars and things like that that's not how we operate we've now.
We've never operated by having promotions and sales to generate sales, we've always used it to clear out inventory when.
Inventory that that that you know is it a little bit more it's a little bit slower selling but we haven't ever used it smooth things out in sales. So we're not going to lose sight of that we're going to stay true to who we are and it seems to be working right now so we're super thrilled.
Great. Thanks, again and best of luck over holiday. Thank you.
Thank you.
The next question comes from Mark Petrie, you would see RBC. Please go ahead.
Hi, good afternoon, Brian given the unprecedented real estate opportunities that you mentioned and the compelling store economics that Youre seeing does this open a window to accelerate the store opening pace specifically in the U.S.
You know, we've we've discussed that you know I'd.
I think I think when you know somebody might be suggesting you should be accelerating and opening a ton of new stores and more so than we have in the past.
Others are suggesting.
That.
It could get things could get the opportunities could get even better and then in some cases some of the landlords not recognized or or is this sort of a new reality, so but realistically we do have logistics challenges with building them right now we can cross the border and lot of our teams up here in Canada and that hasn't really impeded.
But it certainly hasn't made it easier.
And then obviously all the color coded restrictions on site and things like that we haven't really been able to go look at sites. Although we do have a senior real estate executive down in the U.S., but.
So you know and then and so we kind of approach that is look it's the same as anything we have our pipeline we wait for the right deals both from a location in shape and store perspective, as well as financial terms and we're going to continue to do that so we're not really in a position that we are thinking let's push the pedal down but we're also not letting it.
They are the opportunities are too good too too to pass you know I would say, we're probably going to start getting more aggressive. We don't think these opportunities are going to go away in the next week or month or anything else and but at the.
But at the same time, we are driving a lot more of our business through E. Commerce. So we think we can grow our business at a very very good clip with continuing to promote and invest in E commerce and continuing to open stores and continuing to invest in our product and we're pretty comfortable with the mix that we have right now and have had in the past and you know as the opportunities come up though.
We're not hesitating doing deals I can tell you that but are we doing more going to push the pedal down more not necessarily we have our pipeline and if those opportunities come up that we're going to hit them, but the pipeline is the pipeline and the opportunities are the opportunities and we can't really force them, if they're not there.
The next question comes from Irene Nattel with RBC capital markets. Please go ahead.
Thanks, and good afternoon, if I might just a a shorter term question can you talk a little bit about sort of the cadence of demands in terms of the mix of products that you're selling versus what you would normally shell and then as we move through the balance of the year, what you're kind of thinking in terms.
Holiday and I guess sort of more formal wear and what have you I guess, how you order again, given the new reality.
Yeah, Thanks, Irene and welcome.
You know weve shifted people are spending more time at home they are buying more comfortable clothing, and they're buying more casual clothing I sat with our babbit's on designer here last night till I think it was 10 o'clock something chatting with her about.
The demand that she's had and we've seen some of the demand for certain professional where in the event where go down but it's going to come back I mean people in a lot of people.
Change in their lifestyles are working from home and everything else, but I can't find the single person lakes being shut in Eldoret every day I mean, everybody wants to get out is clamoring to get out and quite frankly, I think we're all going a little stir crazy so and when you know once people start going out again, they're going to want different types of close and when they're hanging at home.
So what's so beautiful about our brand is that in our product mix is is we have Brian we have products and we have as you know as well as anybody Irene we have our lines that cater to professional and event, but also have a casual and lifestyle and active lines and practical lines and.
We have a balance between coats sweaters and pants and.
Shorts, and dresses and everything and I think thats one of the things we always being the most proud of is our product mix and everything else. So.
We we we've we just pivoted quite fluent.
Fluently to than our new product mix and it's certainly different than it was a year ago for sure, but I'm pretty confident that it's going to go back and look a lot more hopefully.
Hopefully if we get this behind US a year or two from now this is going to look a lot more like it did a year ago that has looked in the last six months and we're going to be ready for that too and so we're ready for everything I mean as I. Just mentioned we were profitable for the quarter had a great start to our Q3 and.
So we're super excited and whatever the situation is we're ready for it and we'll adapt accordingly.
That's great. Thank you I really appreciate that.
Yes, Please god I'd love to get out of the house, Oh, I'm, just thinking a little bit further ahead.
How should we expect to see the evolution of the extended offering.
Happened overtime, you said and John how are we as consumers as analysts going to really see it as it happens.
You know I think part of the whole.
Impetus of this is the fact and I've mentioned on the last call. The fact that we're not constrained by the four walls of our retail stores anymore, and although retail drives a still a majority of our sales.
E Commerce has hit a critical mass now that we can explore and develop product that could come out as E. Commerce only product. So we're going to continue to do that and you know we have a list of 18 initiatives and we have them all jammed into the next year and a half two years and we had a board meeting the other day and they all look to me and said to come on.
Brian it's getting a little bit less realistic. So you don't like by Big take away from the board was at our Board meeting was prioritized these initiatives and obviously hit the ones that are the easiest to do and certainly going to generate the most profit maybe.
Some of the other ones secondary and tertiary, but there's some super easy ones, just adding colors that we couldn't do before because our stores have limitations in size and sizes and and links and things like that so these are no brainers were already.
Executing on most of these right now as we started this fall season. We've had most of these we've had extended sizing since last spring we've we've.
We've added colors more colors. This fall, we're going to see a lot more next spring and summer.
So we're going to see a lot of that more online there might be a bit more variability in the stores for the stores have their limited capacity is we're going to start seeing or warm weather collections be a little bit more robust, particularly since were opening in Texas. We have three stores open in Texas, now or San Diego or just the store, we just mentioned and Alamo on.
In Hawaii in places so we're going to continue to pursue that warm weather initiative and then we're going to start looking into other categories and we're actually already started building the teams to explore other categories expand on our denim and just.
Really.
[noise] facilitate the breadth of offering as I mentioned I think on the last call. If you look at a lot of the pure play E. Commerce people out there who have no limitations there merchandise Brett is multiples of ours and so for us to compete and then to execute well and continue due to capture customers.
Imaginations and give her luxury everyday luxury we need to to.
Strengthen and broaden the appeal of all our products and so we're going to continue to explore that and we're really excited about our whole product teams energized and it's going to cost money its going to cost to capital, we need more space and more people and more heads and more expertise and some of these people don't come inexpensively, because we're bringing this summer Canadians and some of the support people are Canadians, but were bringing some.
These experts in from all over the world, but we're pretty excited about what we've assembled so far what we're going to assemble so we're.
We're looking forward to it and we're going to see you're going to start seeing things hopefully.
Hopefully already with the sizing and things, but you're going to start seeing.
A lot more colors and start seeing a lot more breadth of styles and some of these categories as soon as next year.
That's great. Thank you looking forward to it.
The next question comes from Derrick Blayne with Canaccord. Please go ahead.
Hi, there and congrats on the strong quarter and outlook. Just wondering just in terms of gross margin came in quite strong this quarter and I get.
You're not expecting that to happen million and subsidies going forward, but likely some of the rent abatement may continue so our when we think about gross margin do you feel you're getting closer to that sort of normalized range call. It 38, 39% over the over the balance of the year, especially given your healthy inventory position.
Yes.
Well. This is there's obviously a number of factors impacting gross margin.
One that Brian discussed is that we have returned to full price selling so from a merge margin perspective, we expect to be flat with the prior year.
But we still continue to expect.
Deleverage from occupancy and warehousing costs, because we do have all the boutiques opened now so that the pressure from deleverage is lessened.
But.
We are still expecting to have.
Yep Yep, lower boutique sales and so that that will drive some de leverage.
And.
We did receive significant rent abatements that we negotiated in the second quarter, we do expect.
Abatements similar to that in the third quarter. However, we currently aren't planning for any that are that material for the fourth quarter. So there is a difference between the two quarters and you know to maybe put a bit finer point on it.
We expect the gross margin will be below last year in Q3.
Potentially that the gap will be smaller than the 440 basis points.
That we saw in Q2.
And if I could add to that.
If I could add to that.
You know as you may or may not recall.
Nine months ago, 12 months ago I was discussing increased.
Raw material prices will silks, all those things had gone up.
So we are actually buying all the product we've received in the season is with those higher.
Higher inventory costs, the local raw material costs, so our starting margin isn't quite as high as it was that said going forward. There we're seeing far it we're seeing a lot of actually downward pressure on these prices due to the demand the worldwide demand.
And so.
We.
Well, we're we're we're going to start seeing some better margins due to raw material costs, probably not springs. So much we're going to see a little bit in spring, but next fall we're booking in Wilson downs and things like that are far less prices than we than we are now so we're going to pass some of those on or consumers who.
We think are going to have some place so financial challenges due to the economy, but some of them.
Some of them will help us retain or regained some of the margin that we lost this year.
This year from get backup to previous years.
Okay. No. That's that's really it really really helpful. Appreciate the color.
Maybe just one more quick one just regionally I think last quarter you commented that.
Vancouver, the Pacific Northwest is performing a little bit better than some of the other regions, where there any big sort of disparities this quarter on a on a regional basis.
You know I think Todd tried to you want to.
Yeah, I mean, we're seeing you know we saw some of the same trends we saw as I mentioned in my discussion earlier that.
It's not just president co bid situations. We've all we've seen previous covance. So regions that were affected dramatically by Cove. It. They just they were hit hard and they haven't recovered quite as well as regions that that weren't but now with this sort of so called second wave were seeing a whole nother new pattern develop and you know.
With Ontario, shutting down I was in Ontario, and end market and in our stores on Saturday and I notice a definitive decrease in.
In traffic once.
The Premier shutdown the province on Friday night so.
Well, that's a bit I believe it's a 28 day shutdown, but we've we've already seen the effects at retail now whether those get made up from an E. Commerce perspective, I don't know, but once again, you know when things like that happen at Roxa consumer rocks people. They don't go out as much. They don't go not just shopping in the stores, where they don't have events and things are going out too so.
Were they just be controlled dinner parties or whatever I think ibrox everybody. So.
We're seeing these patterns we've seen these patterns evolve, but now we're seeing new patterns take place says falls reopened and weve seen seen different regions gets affected a little bit heavier I mean, we're getting affected probably had the worst case, we've had out here in British Columbia, Ontario re shutting down again all of a sudden.
And as there are numbers from the U.S., which is harder hit before are almost flat with the numbers in Canada are now as far as percentage soft so its ever evolving its really organic and its unfortunate we're all going through this but where it is going to roll with the punches and do the best we can and so far the team's done a remarkable job.
Terrific appreciate the color. Thank you.
The next question comes from Stephen Macleod with BMO capital markets. Please go ahead.
Thank you good evening good afternoon.
I just wanted to follow up specifically on on your comments, Brian around the online category expansion. When you gave some good color in the Q and I, but I think in your prepared them.
But I think in your prepared remarks, you sort of suggested that you know you've actually.
You know you've actually have have introduced some new products or new category expansions online. She wanted to give a little bit of color around you know what what we have seen so far and what the customer reaction has been to that.
Yes, no I I hope I didn't miss lead and that I I think I know what I'm trying to communicate is we're grouping sort of three different groupings of products expansion, we're grouping colors lengths sizes.
That's sort of an existing styles were grouping then.
Then the second group is with new styles in existing product lines and the third is new categories.
I didn't mean to mislead and I apologize if I did what or where we're already seeing is the first category. We have new sizes, we have new lengths now hitting the stores and we have new colors, and just more selection of colors hitting the stores.
[music].
And we've just seen a positive response figure I mean, it's hard to predict exactly because you can't really tell with new items, whether you would have sold.
The rate of sale would have been nor what the percentage of.
Black would have been versus yellow versus green versus if now you have black yellow green purple and in Blue are those sales in the purple and blue incremental or you know or some of them incremental and then taking away from so it's hard to figure that out we do know, though that by just offering different lengths and things like that we're going to appeal to.
Broader range of customers so.
My daughter's always complain and she's five nine and she's always complained that their brands are too short to where the risk and now she's thrilled because she can bypass subsidiary now.
So ER.
And buys the operative word here.
For her so so yes.
Yeah see she's out buying you know those sorts of things now and she can buy and fit in or PANSS quite well. So I think there's just an opportunity for us to be a lot more things to a lot more people here from a color on that.
And that perspective, even even sort of more body conscious items that have skin tone looks different on different skin tones and being able to offer a wider variety of that looks better on different people in the different skin tone. So we're excited about that and that's what we've seen so far we haven't really introduced a broader.
Range and quite frankly.
Last spring when Cove. It hit one of the first things. We did was have a really good hard look at our breadth of our existing lines and we kind of called some of the items that we didnt think we we needed so.
Quickly have pivoted, though on that as our business picked up in our.
Our we got clean clean down or inventory quickly pivoted and been adding new styles and our customers have responded very much so that.
We've we've added new styles in existing programs and things like that and we've seen it perform extremely well, which is probably something I I just left out.
But there really isn't you know the quantity of new styles were just being focusing on our core strengths and.
Our business is good for we're super pleased with it so.
At this point in time, but if you're not going to see any of these things as I mentioned Irene for a little bit here. So I apologize if I misled you there.
No no. That's that's great well, that's that's good incremental callers. Thank you [laughter] and then I just wanted to just maybe along those lines in general you're talking about the product lifestyle management, which was officially launched can you just give us a little bit of color around kind of what benefits.
Our expected to to realize from from this new new products. I think you said that smaller 2021 will be the first collection with products cycling through this new tool. So just want to get a little color there.
Parents. This this strategic benefit ultimately is to enable the product expansion strategy that Brian has just.
So you don't mind group build infrastructure to enable growth and essentially everything we do.
Generally tied to a growth initiative or growth driver or optimizing our current business in some way. So ultimately we're going to scale, our product assortment and create more skews essentially is what it translates to write down to lower class.
Well, we need and system to help manage the data and manage the process is to make sure we do it efficiently.
And can manage it you know essentially cost effectively so some of the you know sort of size NSS apart from strategically, enabling us to expand our product mixes.
More greater efficiency, greater greater control and management over design quality construction quality, possibly fit.
Possibly fit quality so all of the aspects that go into the development of the product will now be managed through a system rather through manual processes and spreadsheets and basically document so it.
So it's kind of critical in order for us to expand our product.
Right. Okay. That's helpful.
Helpful. Thank you that's it for me.
The next question comes from Megan and match with TD Securities. Please go ahead.
Thank you good afternoon, just more of a follow up question on the buy now pay later option that you discussed so is that more of a regional initiative and how meaningfully do you see that impacting conversions and basket size.
And do you think that there's any maybe potential offsets to those benefits.
As the product Hi, Meg and welcome back to Jan we.
We chose a product that has a great prominent I guess I would say in Canada, and the U.S. and so for US we will be starting with the product online I think they have worked I think they do have a presence with us in actual bricks and mortar that we're going to use it for our online business first and foremost and you out.
In the U.S. and in Canada, and essentially I'm not sure. If you know how these how.
How these payment solutions work, but it's at the end of the day, it's a deferred payment solution.
And so what it allows it allows greater accessibility for parts.
For purchasing power to our clients.
There's also a tremendous marketing synergies between the company that we chose and ourselves and that can drive a client acquisition, but essentially the end of the day when I say it drives conversion and possibly average order value.
That's because it allows our clients to make their purchases you know they essentially have credit and that allows them to make their purchases now rather you know right now and and and defer the payment over a period of time.
Okay. So does that impact returns at all or.
[noise] [noise].
I don't think it will impact it one way or the other I don't like that it's it's just it's actually just making our products more accessible what I would say is is as it relates to returns that's where the size and fit optimization product that I spoke about actually will impact positive.
Right and that we would hope to see that if a client is purchasing items more accurately there'll be feeling a return so that's what we've done to address.
Return metrics.
Okay. That's it for me. Thank you that makes sense great.
The next question comes from Lorraine Hutchinson with Bank of America. Please go ahead.
Thanks, Good afternoon.
Your comments about evaluating paid media.
It's really leading to my question about the long term implications of higher online penetration to your margin structure can you just talk a little bit about the puts and takes there. Please.
Yeah.
It really is a test and we don't really have we're not gonna that sole purpose of it and we're not going to have any numbers until we actually come up with that.
Our team is a lot more bursa team that that we have presently is a lot more burst in this area than previous to two had passed and.
No I think our our.
Their perspective is pretty balanced.
There is some people would tell you that paid digital is is something that the end.
At the end of the day, you don't eventually make money on and others and tell you, it's a windfall and client acquisition and everything else. So you know, we're going to explore and see what that means for its here in our biggest client acquisition and I've always said this and to this call and our teams as our retail stores and always retail footprint and we've seen that.
In the past.
When we've had these these are stores open in our sales and E commerce sales in those regions go up.
But you know at the end of the day. This is there's been this major shift there already was a shift but as you know there's more of an exponential shift to digital and.
We need to become more famous in the United States and.
With our sales and our E commerce sales accelerating and everything else, we still have a huge opportunity in the U.S. and.
Really the end of the day hopefully five years from now we'll be doing more business in the U.S. market in ecommerce and we will in Canada, and that's just the nature of the people and the size of the market presently we're not so we're exploring everything here and they're going to get back to see if it's profitable. If it makes sense are we driving incremental sales are weak.
Trading dollars or whatever it is that we are doing here you know from a marketing perspective, I historically thought that we're better off treating our people and our existing customers and spending the money on fem, rather than acquiring new customers, but the digital landscape is different and and unlike real estate everybody's website is treated.
Equally as far as searches and everything else goes to some degree, but so we're we're going to.
Well actually not treated equally based on that so we're going to have to explore that you know it was simple before you go by to get a good location in retail and a better location retail now you need to to have that equivalent you need to do to spend money on digital and everything else and then paid digital so that's what the exploration is it's not.
We're not going to see a meaningful increase of our business in the short term because we're quite frankly wrote testing all sorts of different digital paid digital vehicles and they report back we're doing some aid these testing around that and things like that so we see this is something that is going to be evolving and as I mentioned in the call and we will if it becomes something or.
Meaningfully going to do a change in strategy will.
Yeah, everybody here on the call will be the first to know.
Right now we're still in the test phases, and quite frankly, I just don't know the answers all the puts and takes obviously its investment.
And less expenses you know is is your revenues less expenses are returned but I just don't know what that equation is going to look like and what buttons within the digital landscape are going to work for us and proved to be incremental versus ones that are not.
Thank you.
This concludes the question and answer session I would like to turn the conference back over to Helen Kelly for any closing remark.
Thank you Anastasia and thanks again to everyone for joining us. This afternoon, we will be available after the call to answer any questions.
Take care and we look forward to speaking with you again.
Thank you.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
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