Q2 2022 Aritzia Inc Earnings Call
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Thank you for standing by this is the conference operator, welcome to Ritchie of second quarter of fiscal year 2022 earnings call.
As a reminder, all participants are in listen only mode and the conference is being recorded.
After the presentation, there will be an opportunity to ask questions to join the question queue. You May Press Star then one on your telephone keypad should.
Should you need assistance during the conference call you may signal, an operator by pressing star and zero.
I will now turn the conference over to Karli, Bishop Executive manager office of the CEO. Please go ahead.
Thank you Carl and thanks for joining our rich yes.
2022 earnings conference call.
On the call today, I'm joined by Brian Hill, our founder and Chief Executive Officer and Chairman.
Jennifer Wong President and Chief operating Officer, and Todd <unk>, Our Chief Financial Officer.
Following managements discussion will host a question and answer period open to analysts and investors.
Please note that remarks on this call may include our expectations future plans and intentions that may constitute forward looking statements.
Due to the material impact of COVID-19 on business operation in fiscal 2021, certain references to our pre pandemic results in the second quarter of fiscal 2020 had been included where management teams to be a more meaningful measurement of performance.
The uncertain and dynamic nature of COVID-19, and its ongoing impact could continue to materially alter our performance.
We 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 these forward looking statements.
Our earnings release.
The related financial statements and MD&A are available on SEDAR and the Investor Relations section of our website at Arista.
I will now turn the call over to Brian.
Thank you Carla and thank you for joining us this afternoon.
I'm incredibly pleased to share with you together with Jennifer and Todd our results for Q2.
Okay.
The outstanding performance of our brand continues through the second quarter of fiscal 2022.
We're seeing accelerated momentum across all geographies and all channels as our United States business grew at an unprecedented pace.
E Commerce channel continued to surge and sales in our boutiques surpassed our most optimistic expectations exceeding pre pandemic productivity levels.
For me personally these results speak to our World class team, who I am deeply grateful and proud of for facilitating our rapid growth of unprecedented demand, while delivering exceptional everyday luxury experiences for our clients.
All on the backdrop supply chain disruptions labor shortages and the ongoing effects of COVID-19.
Looking forward I could not be more excited as we focus on fun on our fundamentals and invest in the infrastructure required to enable our growth for years to come.
Well Todd will provide a detailed financial perspective, I am extremely pleased to share our performance highlights for the second quarter.
We delivered record net revenue of $350 million with growth of 75% or $150 million from $200 million last year, and 45% or $109 million compared to $240 million two years ago.
I would also like to note that for the first half of the quarter, Ontario, which comprises 50% of our Canadian boutiques was closed.
We continue to advance our business and brand awareness in the United States and an unprecedented pace.
As we develop deeper relationships with our existing and many new clients net.
Net revenue in the United States increased to 174% from last year and 108% from two years ago.
I'd States now accounts for 42% of our revenue and importantly over the last 12 months, our active clients grew more than 50% in the United States.
Our E Commerce channel continued to surge as net revenue increased 49% from last year and 171% from two years ago.
Counting for 37% of our revenue in the quarter.
Our boutique sales were also exceptional with our entire retail business open to clients as of the second week of July and capacity restrictions lightened.
This positive resurgence resulted in retail comparable sales growth of 60% from last year and 14% from two years ago exceeding pre pandemic levels in both Canada and the United States.
Our ongoing investment to optimize our everyday luxury experience of engaging service beautiful products as Bruno aspirational environments, and captivating communications continued to drive our business.
In ecommerce, we further enhance our digital experience with new features and functions being added on a regular basis.
We also delivered on our omni capabilities initiative, we launched store inventory visibility says.
Allowing clients to view store inventory availability, while shopping online.
At the beginning of August.
Sorry at the beginning of August so far this has yielded positive results and contribute to our boutique sales surpassing pre pandemic levels.
Jennifer will speak to this in the remaining omni initiatives in a few minutes.
In addition to reopening our entire store fleet in Q2, we expanded our presence in the United States in the quarter. We opened two new boutiques in California went into panga and another one at the Grove in West Hollywood to outstanding client response.
The performance of our new and existing boutiques continues to exceed all of our expectations.
In Canada, we expanded our sure way garden's boutique in Toronto with tremendous success as well breaking a record for our new boutique openings that day.
With boutiques opened in capacity restrictions ease and the majority of markets. Our team is excited to continue welcoming new and loyal clients surpassed only by our clients' enthusiasm to enjoy our everyday luxury experience.
Shifting to product our clients responded exceptionally well to the launch of our fall winter season, as our team delivered on meaningfully extending our assortment breadth.
With new styles, and depth with new colors sizes and lengths across our various brands and categories.
Accomplished while navigating the pandemic continued supply chain disruption.
To grow on our already strong full price selling strategy as we did with our spring lighten up sale, we made the decision to not hold our traditional fall layered on sale.
While this may put a little pressure on our top line and importantly, it will result in improved gross margin and motivate our clients to purchase our beautiful products at full price.
As we have previously stated we completed our expansion in the men's as we closed the reigning Champ deal in late June.
The reigning Champ team have done an excellent job continuing to independently manage their business as most of our resources have been focused on a rapid growth. We are now in the process of prioritizing where we leverage our world class infrastructure to grow the reigning Champ business.
We continue to develop our suite of marketing capabilities as we welcome Dana girls as CMO.
We expect our exceptional leadership and particularly her date of digitally native experience will significantly advance our marketing initiatives.
We're hiring a testament to the growth of our brand and the ability to attract top talent from across the globe.
Although Jennifer will provide more detail I'm proud to say, we remain relentless in our commitment to being responsible for the planet and the people who live on it as we continue to embed sustainable practices across our business.
Ill now turn it over to you Jennifer.
Thanks, Brian and good afternoon, everyone.
Our strong second quarter performance is underpinned by our efficient operations and best in class infrastructure, which we continue to build and enhance to enable our growth today I'll update on four areas within our operation first our supply chain second our digital infrastructure investment.
Third our talent landscape and fourth our progress on ESG.
During the quarter, we successfully minimized the impact of pandemic related global supply chain disruption through a geographically diversified supply chain strategic inventory management and the use of expedited freight.
Our production is geographically diversified in facilities across numerous countries all of which are operating at between 80% to 100% capacity and we did move some production between facilities, where it made sense.
Our inventory management measures included early anticipation of the need for more inventory and continuing to closely monitor our projected inventory requirement.
On the freight side, we are strategically increasing our use of expedited freight by three to four times in response to ocean shipping timelines that have doubled compared to a year ago.
While the cost of this approach is meaningfully higher it's well worth it in light of our sales momentum.
We will continue to proactively carry higher inventory balances and to use expedited freight to mitigate the manufacturing and freight challenges that are expected to continue for the foreseeable future.
On our Q1 call we confirmed our plans to build a new distribution center in the greater Toronto area, the largest capital infrastructure project in our rich history.
I'm pleased to report that the conceptual design of this exciting new D. C is complete and we just broke ground at the end of last month.
And during the quarter, we continued to optimize our client's digital experience with further expansion to our product assortment online and several notable upgrades as Brian mentioned, we launched store inventory visibility known it says at the beginning of August providing clients the.
Ability to search product availability in our boutiques.
<unk>, so far is exceeding our expectations with an encouraging lift to sales.
And our clients you said the volume.
Product availability inquiries to our concierge team has declined by 36%, allowing them to increasingly focus on higher value inquiries and outbound client telling.
We continue to enhance our technology infrastructure recently completing the following key implementation. We went live with the upgrade of our warehouse management system at our Vancouver D. C. This is a meaningful milestone that allows us to continue to scale and as a prerequisite for our new <unk>.
D C.
We implemented phase two of our product lifecycle management system to support product expansion.
And on October six we successfully transitioned our order broker system in our point of sale to S. P.
This ensures we have the right foundation to launch the next phase of our Omnichannel capabilities for which we have engaged a market leader in Omnichannel services.
This next phase, which will include our buy online ship from store and our buy online pick up in store functionality will roll out in due course building on our learnings and early positive results from says.
With our business flourishing, especially in the U S. Our peak season, just around the corner and talent and high demand. We continue our full court press on talent retention and acquisition.
In short we are confident in our ability to retain our high performing team and attract the dedicated people needed to maximize the season ahead as well as our long term growth.
Our employer employer brand is strong we have a compensation structure second to none including top of the market wages.
We have exceptional benefits and an energized stimulating work environment.
Throughout the pandemic, we strengthened our reputation for caring for our team.
We kept everyone both safe and employed deepening our relationship with current and prospective employees.
In addition to numerous key management positions, we are actively recruiting.
Over a thousand additional permanent full time style advisors boutique wide to provide our beloved everyday luxury experience.
And over 800 seasonal positions at our D C and concierge as we ramp up for our peak period, all of whom are important a ritchie our brand ambassadors.
And many of whom may join us permanently.
As a matter of fact I was actually hired back in November 1987 for seasonal work at that time and I'm still here.
Moving on to ESG, we disclosed our climate related performance to CDP climate change for the second year and are developing a robust climate strategy with science aligned targets, we've maintained our carbon neutral operations status with the purchase of offsets and renewable energy.
And are excited to have launched a zero waste pilot program at select stores to minimize our waste impact.
Our D N I calendar has been busy with pride celebrations in June and honoring days of significance in our communities with the help of expert counsel, we continue to focus on change from within through ally ship and positive everyday activism.
World Mental health day underlying the importance of mental wellbeing and as part of our ongoing commitment to wellness. We are expanding our program for our people and finalizing new partnerships in this space for women and girls across our communities.
On governance, we're refreshing our sustainability materiality assessment and building a board level committees, specifically dedicated to environmental and social matters.
Having successfully navigated the last 18 months. The Auryxia leadership team is looking forward to building on our success and looking forward to growth and expansion bar.
Barring any unforeseen challenges beyond those we are discussing today, we plan to share our multiyear business strategy with you in the first half of the next fiscal year.
In closing I'm proud that our infrastructure remains the bedrock of ongoing successful operations with our people at the heart of it we simply would not be where we are today without them all 5000, plus and we deeply appreciate their ongoing tremendous hard work and unwavering dedication.
Patients I'll now turn the call over to Todd to discuss our financial results.
Thanks, Jennifer and good afternoon, everyone.
As Bryan noted our outstanding performance in the second quarter reflects accelerated momentum across all geographies and all channels.
As a reminder, on June 25, we acquired 75% of the premium athletic wear brand reigning Champ.
Their results are consolidated within our financials from the date of acquisition.
For the second quarter, we generated net revenue of $350 million, an increase of 75% or $150 million from $200 million last year.
And 45% or $109 million from $241 million in the second quarter two years ago.
We are seeing meaningful growth in the United States with net revenue in U S dollars of $118 million in the quarter.
Growing a 174% or $75 million from last year, and 108% or $61 million from two years ago.
Our business in the United States continues to grow at an accelerated rate comprising 42% of net revenue in the second quarter this year compared to 30% last year and 31% two years ago.
Our total ecommerce business accelerated with net revenue of $130 million.
An increase of 49% on top of the 82% increase in the second quarter last year.
E Commerce penetration in this quarter was 37% up significantly from 20% in the second quarter two years ago.
Retail revenue was $220 million.
An increase of 95% from the second quarter last year and 14% from two years ago.
This was despite approximately 50% of our boutiques closed in Canada for the first half of the quarter.
Sales in our own boutiques were exceptional with comparable sales growth of 60% for fiscal 2021, and exceeding pre pandemic productivity levels in both Canada and the United States with total retail comparable sales up 14% from fiscal 2020.
These topline results exceeded our expectations for the quarter with the pace of boutique recovery in Canada occurring meaningfully faster than expected.
After having fully reopened by July 12.
As well as strong demand for our fall collection as our various product initiatives began to take hold.
We delivered gross profit of $156 million up 122% from $70 million in the second quarter of fiscal 2021.
Gross profit margin was 44, 6% in the quarter, expanding 940 basis points from 35, 2% last year.
The improvement in gross profit margin was primarily due to leverage on occupancy costs lower markdowns and the strengthening of the Canadian dollar. These.
These gains were partially offset by higher expedited freight costs and lower lease abatements.
When compared to fiscal 2020, our gross profit margin expanded 500 basis points, driven primarily by lower markdowns, the strengthening of the Canadian dollar and leverage on occupancy costs.
These gains were partially offset by higher warehousing and distribution center costs from higher E Commerce volume and higher expedited freight costs.
SG&A expenses in the quarter were $92 million or 26, 3% as a percent of net revenue compared to 31% last year.
The 380 basis point decrease was primarily driven by leverage as our boutiques returned to pre pandemic levels in our E Commerce business continued to grow.
When compared to fiscal 2020, our SG&A as a percentage of revenue increased by 120 basis points.
The increase was primarily driven by continued investment in talent across E Commerce marketing and.
To support the future growth of our business.
Overall adjusted EBITDA in the second quarter was $73 million, an increase of 494% from the $12 million last year and.
100% from $36 million two years ago.
Adjusted EBITDA was 28% of net revenue compared to six 1% last year and 15, 1% two years ago.
Inventory was $182 million at the end of the quarter up 29% from last year.
We generated $77 million of free cash flow during the second quarter repaid our $75 million term loan and funded the $33 million initial payment for the acquisition of reigning Champ.
Finishing the quarter with $132 million of cash and zero drawn on our $175 million revolving credit facility.
The initial payment for the acquisition of Ranch App was funded with cash on hand based on a total enterprise value of approximately $63 million.
Two liabilities have been added to our balance sheet related to the transaction.
The first relating to the holdback amount due from the purchase of the initial 75% and the second for the remaining 25% equity interest held by rating chance management shareholders.
Turning to our outlook.
We're extremely pleased that the strength of our business across all geographies and all channels has extended into the third quarter.
We expect net revenue for the third quarter to be in the range of 350 million to $375 million.
As Jennifer discussed we continue to navigate the global supply chain disruptions and work to mitigate their impacts our mitigation strategies are ensuring we have the necessary inventory levels to deliver on or exceed our revenue targets for the remainder of the year.
Therefore, despite the supply chain challenges, we are increasing our full year outlook and now expect net revenue to be in the range of $26.0 billion to $4.0 billion up $100 million.
From our previous outlook of 1.15 billion to $3.0 billion.
The updated outlook implies a full year increase of approximately 45% to 50% from fiscal 2021.
The anticipated increase is led by sustained momentum of our business in the United States continued growth in our ecommerce business and the strength of our boutique performance.
We expect gross profit margin to be relatively consistent with pre pandemic levels from the third and fourth quarter of fiscal 2020.
This reflects leverage on fixed costs and the strengthening Canadian dollar offset by meaningfully higher expedited freight costs higher warehousing and distribution center costs and continued investment in talent to drive our expansion strategy.
SG&A as a percent of net revenue is expected to increase relative to pre pandemic levels from the third and fourth quarter of fiscal 2020 as accelerated investments in people processes and technology more than offset the leverage on fixed costs. The increase in the second quarter over fiscal 2020.
Was 120 basis points, and we expect the increase in the third and fourth quarter to be slightly higher.
We continue to expect net capital expenditures in the range of $55 million to $60 million comprised primarily of boutique network growth ongoing investments in technology and expansion of our distribution Center network.
As an additional note reigning Champ is still expected to deliver approximately $14 million in net revenue and $3 million and adjusted EBITDA in the second half of the year.
In summary, we are excited about the strength of our business in the United States. The continued growth of our ecommerce business and the faster than anticipated recovery of our boutiques to pre pandemic levels.
While we recognize the pressure from macro headwinds we remain extremely optimistic about both the short and long term outlook of our business.
With that I'll now turn the call back to Brian.
Thank you Jennifer and thank you Todd.
As Todd just mentioned, we are thrilled with our Q2 results and equally excited for the road ahead.
We continue to see strength across all geographies and all channels in Q3, despite navigating the persistent supply chain disruptions labor shortages and indirect effects of COVID-19.
You have previously heard me talk about becoming famous in the United States and we are well on our way our business continues to accelerate and we expect it to now be the leading driver of our growth exceeding Canada in the not too distant future.
Client demand across our channels remains robust as we continue to see e-commerce growth even on the back of our 89% growth last year.
Our existing boutiques remained trending above pre pandemic levels in our new boutiques are outperforming our expectations. In addition, we remain committed to our expansion within the United States and are excited to add boutiques in four to five new markets over the back half of the year, including boutiques in Las Vegas, Nashville, and Miami.
As our business continues to grow beyond our expectations. So does our demand for inventory and labor.
As mentioned, we are not immune to the global supply chain disruptions, which are impacting us through select product shortages and challenged shipping timelines.
However, we are doing our best to mitigate the impact of these disruptions by leveraging our geographically diversified supply chain strategic inventory management approach and increasingly use of expedited freight we are confident we have the inventory to deliver our <unk> exceed our increased revenue targets for the remainder of the year.
As discussed earlier like all businesses. We are also currently experienced the challenges of the labor market. However remain extremely competitive due to our incredible employment brand industry, leading wages and benefits and energizing.
World class workplace environments.
Looking beyond Q3, we will continue facilitating sustaining our rapid growth we will do this by focusing on our fundamentals and staying committed to delivering our much loved everyday luxury experience to all our clients across all geographies and all channels and as always continuing to invest in the infrastructure required.
To enable our growth for years to come.
We are deeply aware of course that what has made all of this possible as our clients during a loyalty to a risk here.
Our team's relentless focus on excellence and teamwork for that could not be more grateful.
Nor could I be more excited about our future. Thank you for joining us today.
Thank you.
We will now begin the question and answer session.
And the question queue you May Press Star then one on your telephone keypad.
Here with Tony acknowledging your request.
You're using a speaker phone.
Please pickup your handset before pressing any keys to withdraw your question. Please press Star then two.
We'll pause for a moment as college trying to queue.
My first question comes from Mark All Schwager from Baird. Please go ahead.
Good afternoon, nice quarter really great to see the ongoing momentum.
So I wanted to ask you about growth in the U S really pretty incredible seeing 95% growth versus fiscal 'twenty I think that's over double the rate of the boutique expansion. So I was hoping you could just talk a little bit more about what's working from a marketing perspective that may be accelerating the brand awareness and overall.
And how should we be thinking about the sustainability of the growth rates in the U S that you've been delivering year to date.
Thanks Mark.
Yeah, I mean, we're pretty excited about our U S business, we've been in the U S. Since 2007, and although we are growing every year, we've never seen growth like this.
You know.
I've told my team and everybody here is aware win win when you see the growth growing youre, probably doing the certain pieces, you're probably doing a few things right.
Not to be.
Too enthusiastic, but I think we're doing a ton of things right right now in the U S.
We're opening incredible stores, our ecommerce business is doing really really well our product we have our product assortment has improved particularly in our warm weather areas.
And our retail teams are incredible.
It's not easy I mean, the backdrop isn't easy, but we are doing a lot of things I mean, we've added these customers. We just don't see our business in the U S. We actually see are getting stronger I mean, where we're opening these stores, we're opening in new markets and never be had exposure to red team. When you think about it a lot of them haven't traveled to Ritchie and last two <unk>.
Years, because they've been keeping close to home. So when we're opening in Las Vegas, we're opening in Nashville, We're opening in Miami, there's lots of other new locations down in the U S. Atlanta.
Fort Lauderdale, and Theres, a lot of great shopping districts in Shaw and customers in the U S that were not even tapping right now so we just don't see R. R.
Our expansion into the U S slowing and anything else, we see it continuing on the same pace. It has so we're super excited about it.
Great. Thank you and maybe a follow up for Jennifer and then Todd I guess first on the supply chain, maybe you sound pretty confident that youre going to be able to manage through.
Some of these headwinds through the remainder of the year just any additional color you can give us on how youre thinking about spring inventory flows and how those might be impacted by.
Some of the production issues, we've been reading about and then raw material costs cotton has been a big topic, but obviously pressure across a lot of commodities.
Any color on how youre managing through that and any change in philosophy.
Price increases given the inflationary backdrop. Thank you.
I'll take that it because of its product related so we.
We've expect expedited our some of our spring deliveries because we need them before the end of the year. So.
You know we have some some deliveries are slower and then we're expediting some of the spring deliveries, where we actually do have availability and they haven't been supply chain shortages. So.
We're needing to get that inventory and so.
The spring, we should we should be okay, I'm, not saying, we're not I'm not saying we're immune to the challenges we have shortages we've had shortages throughout this quarter, they're probably getting worse not probably they are going to be worse over the next four to six weeks.
And we see these shortages continuing and as as Tod and Jim have mentioned the shortages are twofold. There one because we have factory disruptions through the effects of Covid and some of these countries that we are dealing with an area, where we're doing business with and then the second thing is.
Free.
Times in shipping times are exponentially longer than they were so it's a double whammy, we're not immune to a like anybody else. We don't have a secret formula at all but as you I was question.
Nine months ago.
Well, it's for six months ago about our increased inventory levels.
We made a decision to increase our inventory levels.
A year ago and it wasn't an anticipation I'd love to say, we had a crystal ball on this supply chain shortages, we did not but we increased our inventory because we just felt our business was we had momentum in our business. We thought we were doing a lot of things right. So we went and bullish on our inventory and it seem to have paid off so we're not immune to it.
As Jan said, we are sort of working around mitigating as best we can.
It's not inexpensive doing so.
But at the end of the day, we'll make more money and mitigating in investing in this inventory then we will if we did so.
It's going to affect us for sure it already has affected us but.
We think we can maybe do better than most people out there.
Raw material prices one of the one of the things that's been sort of.
As I've shared on this call I mean, it's something it's a $100 in.
In the U S. It's Eric candidates $100 in U S and as far as our product shifts more and more sales come out of the U S. We already are getting built in margin increases to some degree now these are going to get mitigated quite a bit from manufacturing cost for sure but in raw material costs, but we think we are.
Okay for now.
There's a lot of mixed feelings on inflation I'm not sure if there is.
Mixed feelings that there isn't going to be it's really a mixed feelings on how much inflation there will be in the marketplace.
We're seeing it we're seeing it everywhere, we're seeing its costing more money to build our stores its costing more money to make our products, causing more money to ship our products is costing more money to hire people and get them in your on your teams is costing more every everywhere, we look its costing more money, but as you see with our profitability.
In the second quarter.
We brought a pretty darn good business here that that is extremely profitable and as we get some.
More and more product sell sold in the U S and as we get higher and higher sales and hopefully a bit of leverage there we should be okay to continue on without passing on further increases any increases to our customers.
Very helpful. Thank you for taking my questions.
The next question comes from Mark Petrie from CIBC. Please go ahead.
Yes, thanks, good afternoon.
Obviously tons of momentum in the U S and growth well ahead of your plans does that change how you think about the pace of store openings.
And I know the GTA distribution center.
<unk> broken ground on us to help partly to help support the U S as well, but I guess the same question about your distribution infrastructure.
Sort of support this momentum.
I will take the retail I'll pass a D C. After gen.
The retail yeah, I mean, we're focused most of our stores and new openings are focused in the United States and into some of these new market type suggested.
We don't have a store in Tampa Bay, we do not have the story.
Fort Lauderdale, we do not have a store in.
The new markets are about to open in Nashville and.
And Las Vegas, we do not have stores in Atlanta.
<unk>, we did not have the store in Phoenix I mean, there is.
Countless cities that we do not have stores in the U S and that's what's so exciting about our growth opportunities as not only do we have the opportunities to open these stores and do great retail sales, but.
The bump as we get in e-commerce sales and as a whole overall macro factors.
Doing so it's fantastic lease rates are still competitive not necessarily because I think the ship sailed on the sort of COVID-19 bargains, but what.
What hasn't sailed on on leasing is the fact, there is still not that many people out opening stores and expanding stores. So.
Supply and demand.
It has tilted in our favor meaningfully style.
Pass over the rest to Jan as far as D. C goes in.
Thanks for your question, Mark, but we talk about trying to look into the future all the time, particularly when it when we're talking about planning D. C. We've had lots of analysis and lots of projections and many different kind of scenario that we've run through and I would say you know how to answer your question is that with the Toronto one.
With actually with all of our D. C. We have a planning horizon that goes out as far as seven to eight.
Eight years, so right now we're looking at a planning horizon that takes us out to fiscal year I think 2028.
And it's generally using our our growth projections I suppose if our growth.
So higher than expectations. It just means that planning horizon is shortened and obviously we're monitoring it as we go all the time and we've talked about being put in a high class problem situation, where we might be having to expand in D. C sooner than we had planned and we do view that as a high class problem.
So right now not worried about the capacity for the Toronto DC in fact, I think we.
We are leasing space, it's a little bit bigger than we were talking about sub leasing a portion of it would probably won't do that now and and we think that we're.
Well you know we are well taken care of at least for the for the next three to five years for sure.
<unk> I'll just add.
I've talked about expanding the U S. D C. At the three PL are about a year ago, we have lots of space there to grow into.
So not not an immediate concern at this point in time.
Okay. I appreciate the comments I guess, Brian just to follow up on specifically the U S store opportunity I mean, I certainly appreciate that there's a lot of markets.
You guys are not serving today and I guess, that's obviously the opportunity I guess my question is more specifically do you think theres an opportunity to accelerate the opening pace from kind of the six to eight that you've targeted for this year.
To something higher than that for next year.
I think.
We potentially could.
We were.
Very hands on and we are very centralized in everything we do so we not only do leasing in house, we do design in house, we do CAD drawings in house, we do.
Construction and everything we do we do in house with contract out the actual building itself, but all the construction management everything we do in house too. So we do have limitations to some degree in our retail teams have limitations and we can't just open these stores and go higher.
30 people 40 people in a new market and expect them to be able to.
Open and just start operating at the level of customer service that we're accustomed to and our customers are accustomed to so we have to be measured in our growth here and we're going to we're going to continue to be measured in our growth here in quite frankly.
As you can see by the quarter and so far this year, our business has been growing at a more than.
A very healthy growth rate without expediting our store openings. So perhaps maybe if for whatever reason that might slow, but we don't see that happening so while our business is growing at these.
Growth rates as we've seen we don't see any need to actually accelerated anymore I would think that logistically it might pose some challenges in us continuing to deliver everyday customer everyday luxury experience to our customers.
Okay I appreciate it I also wanted to ask about your margin outlook.
Into next year.
Or even potentially beyond obviously, there is a lot of tailwind just given the leverage.
Sales leverage, but also sort of beneficial channel and geography mix.
But also headwinds as you continue.
To face some of these supply chain challenges, but also continue to invest to support sort of longer term growth. So I guess just thinking about the next year or two do you think there is a meaningful opportunity to see margin leverage or would you expect some of these headwinds and the choice to continue to invest in longer term growth.
To offset some of those tier ones.
Hi, Mark it's Todd here.
You mentioned it in your question, we obviously.
Some tail winds that are that are driving driving our margin improvement whether that leverage or lower markdowns, even the Canadian dollar, but we also have significant headwinds and <unk>.
The primary form for the next six months.
Being the expert increase in expedited freight and so we are seeing additional cost coming coming against those the tailwind that we have and that's why we're expecting gross profit to be relatively flat to FY 'twenty levels for the back half of the year.
Then going forward I think it's difficult to say at this point.
However, I think we've talked about before over the long term as our business grows in the U S and E. Commerce continues to grow we will see.
Sort of incremental margin improvements over time from from that mixed shift in our business.
Okay I appreciate all the comments and congrats on the on the results.
Thank you.
The next question comes from Derek <unk> from Canaccord Genuity. Please go ahead.
Yes, hi, everyone.
So I just wanted to follow up on that on that question on.
Store openings, how far how far out do you have visibility on on new leases.
You take it.
John You mentioned the seven to eight year view on the D. C. What is your view.
In terms of securing leases over the near term from new stores.
I'll, let Brian answer that that stores.
Yes, so we have a seven stage program or a process that starts with.
Identifying where we want to open a store to sort of picking out where the location and particular locations are within the shopping area of shopping center two negotiations to Finalization.
Have a it's about a six or seven step process approval.
Approvals and things with our leases and so we're working on leases we have some leases come up that we get a store presented to us.
Because.
There is a we had an idea of a shopping center and we wanted to be in there and for whatever reason there was no availability in that shopping center.
And all of a sudden availability happens because someone goes bankrupt or someone wants to move and be in a bigger stores smaller store and we get very some very short notice.
On that and we have to scramble other times for instance, we just opened in North Park in Dallas, which has been an exceptional opening for US we did at least three and a half years ago.
So.
I think that it varies and how far out we're doing we do have a plan. We do have a plan all of the stores, we know exactly what stores, we want to open in the U S. Over the next five years, we have them in the prioritized order typically by volume not typically buy.
Bye.
Operational ease.
And because that's how we choose as based on where are we going to do the most volume will figure out how to operate it.
It's how we approach it and.
Right now we're presently probably in discussions on 15 stores right now and some of them. They don't have locations for us and some of them they do and some of them. They do in their two years out and some of them are.
Six months out and so you know.
At any point in time, and so we don't kind of go okay, well, let's open a store unless negotiated this lease and then let's open the next storm or negotiate this lease or we'll do this and this and this we do a basket of leases in sort of phases, and we go out and try to get.
We negotiate and pursue 10 to 15 leases in order to get five or six with so.
So many things this location in the shopping center the size of the location of shape of location Theres presence within the center, where it's got a big storefront or not.
Then there is all the financial terms.
With releases, so theres a lot of things have to go right and we just have never.
Have compromised on what it is with our real estate and that's why I think we have the two best corners in Manhattan, and certainly southern Manhattan in Soho.
Some of our new locations, we've always had the best locations in.
In Canada, and we think we're on that pace now in the U S. We have world class real estate positioning in the U S. As well now and so we're not going to compromise on location, we're not going to compromise on size, we're not going to compromise on presence and we're certainly not going to compromise on <unk>.
Financial.
I mean I've been pay over market because we are in a rush so.
We have a process it seems to work our business is solid and growing and so we're just going to continue to do that and you know.
As we mentioned about marketing, we haven't even put in any marketing initiatives at this point in time, and our full omni slate of capabilities as they rolled out yet at this point in time and we're not finished with our product expansion. So we have all these other initiatives that we think will help grow our sales let alone all the improvements to ecommerce and everything else. So retail is not our only growth.
I'd just related ironic.
A year ago.
Even we thought we had too many retail stores and now our retail is booming so.
It's an interesting what 12 months will do and quite frankly with six months will do I mean, our stores are still closed in Toronto three months ago. So.
We're pretty excited about that now, but we don't want to knee jerk on this we wanted to just continue facilitating as best we can the way we always have.
Okay, I really appreciate all that color.
Todd maybe just one for you just looking at that.
At the balance sheet now that you've repaid the term loan.
I have nothing drawn on the credit facility of about $132 million of cash on the balance sheet can you just talk about capital allocation priorities.
There is there are there any discussions on any return of capital to shareholders.
Yeah.
Yeah.
Obviously as we said are our first use of cash.
Is opening new stores building the distribution centers, we've been talking about investing in technology and infrastructure to grow the business and so we're focused on that today.
Down the road, we'll we look at re implementing a share buyback or other options.
Yes.
We're not there yet.
Yeah.
The next question comes from Irene <unk> of RBC capital markets. Please go ahead.
Thanks, and good afternoon, everyone before I get to the questions wanted to ask just a follow up on your answer there Todd.
You said, yes, but not yet to a N C E O.
What would be the precondition that would cause you guys to say, yes, okay. We're ready.
Yeah.
As Brian just said, we opened our our lapsed stores on July 12th reopened our last source on July 12, and Theres still a lot of uncertainty in the environment. So it right now it makes sense for us to.
Hold on to the cash that we have and I think once we get clearer and clearer view on on the go forward.
Would consider it at that time.
That's great. Thank you. So one of the things that's really interesting is a comment I think it might have been Brian who made this that.
You decided not to do one of your follow up promotions.
Similarly kind of shifted or pulled back on some of your spring promotions. So I was just wondering how you're thinking about that.
Cadence or the depth of promotional activity on a go forward basis because in other words, that's why I'm really saying is do you think it's sustainable like can you guys. Just given the really strong demand to shift and pull back a little bit on that promotional.
Calendar.
I think that's a great question, Irene and we will be discussing it and truthfully, we only made the decisions.
We are.
Layered on sale usually occurs Canadian Thanksgiving.
Okay.
And.
So it was just this weekend that we did not do it.
We're just not seeing the drop in our sales when where.
When we're not having these promotions and certainly not a drop in our gross profit gross margin. So.
We're just not title at this point in time, we're not really inclined to do it maybe we will have one.
The nice thing about being somewhat.
Sure.
Not necessarily irrational about random is that people don't wait as well and so the last thing you want is an expectation and people are waiting to buy full price and because waiting for you to go off price. So that's the key.
The fact that we haven't now had either of these sales. So we're going to go a year without either of those two mid season sale and granted they are only on the weekends. Just so we know just to be clear too and I believe they are only.
Online as well so but.
The fact that people don't wait now because I don't know if youre going to have it just even by doing that.
That's that fulfills probably 50.60, 75% of what we're going to do is just the customers don't know if we're going to have a sale or not so we find that helpful as well.
But.
We just.
We just havent found the need there was.
Challenges as well because we had a lot of product and we are at the time, we were trying to play a little catch up as well with online sales and trying to drive people to our ecommerce website, because it used to be 2021% to 15.
Started the sales 15% of our business, where it is now people are shopping omni shopping us in both E com and online and in our stores. So that that need is gone away as well. So there's a whole bunch of factors that are suggesting that we don't have these sales and.
It's been great and what else we did if I could remind everybody here is that we didn't just not have our fall sale.
<unk> layered on sale our spring.
Sale.
We also delayed our ongoing our sale in the U S, which used to break three weeks before our Canadian sales as well.
Last year, and we're going to leave that in line with our Canadian too. So we wanted to become more of a full price retailer and particularly in the U S and I think we've achieved that now and it certainly hasn't affected our sales.
And that's great and it's also.
Jordan Gary.
So and I guess that leads into the next discussion, which is thinking about all of the input cost I'll just all of the cost pressures. How can you think about your price points, how do you think about it.
What would cause you may be to raise pricing on certain items.
Do you look at the competitors like just how do you think about all of that.
I think we analyzed our product when it comes in I mean.
Well, we're going to have to look at it a little bit differently now Irene as some of the other factors and other costs that we're dealing with here that we haven't previously had that arent necessarily showing up in our landed cost line of duty paid costs in our product our labor in our stores is going to go up our store capital expenses to build our stores is going to go up.
Theres other inflationary pressures over and above our product cost that we're going to have to weigh out and figure out where those are going to land. So I mean, there is there is a bunch of costs and inflationary pressure on freight costs and raw material costs and labor costs overseas that are that are affecting our landed price of our <unk>.
Products, but then there's also a bunch of cost as well and the rest of our business and we're just going to have to see where those net out were right quite happy and theyre being offset with our growth in the U S. Right now and leverage we are getting because of our high sales.
But.
I think that.
It is something that we analyze every season, when we sit down and price all of our new product. We sit down every season look at it and say, okay. What do we need to do Unfortunately, when you. It's not just about the product people buy it or at CN and come to retire they love shopping in our environment both online in our stores.
They love the customer service, we provide and there is a whole bunch of different factors in there. So it's not just also a factor on the cost of the product as a whole bunch of other things that mitigate.
The prices and that's why we're an everyday luxury retailer not a fast fast fashion retailer our products lost and I think our customer, particularly in the U S. Now is that now and so they are prepared to invest in our close rather than buying throw discard other people's close.
Okay.
Thank you.
The next question comes from Stephen Macleod from BMO capital markets. Please go ahead.
Thank you and good evening good afternoon.
Lots of great color. So far so thank you for that a couple of follow up questions that I had.
We're seeing very strong in boutique and e-commerce growth, particularly in the U S.
Can you talk a little bit about how things are evolving with respect to your ability to track customers in online in boutique and kind of how their spend.
Compares for our customer who shops, both channels versus a customer who shops, perhaps one or the other.
I'll take that one so we've been saying for years I think we've been doing this for decades, we've been able to track our customer.
I have since the 19th I remember, writing and I'd say on a recipe carton filing it manually. So since we've had an electronic point of sale, we've been tracking our customer and her purchase history and our transaction travel we have that data and likewise for E. Commerce. So we have the data.
But getting it out in our reporting format that we can slice and dice is what we're actually in progress with rate right now as we speak so our investment in our data and analytics and with hiring of that new executive or earlier this year in building out that team and building that infrastructure.
<unk> will allow us to report on customer and do some really insightful.
Insightful customer analytics and in very very short order, we do have some of that information, but it's not quite at the level, where we would really really love to see it be and so I'm. You know our expectation is is that probably within this year, we will be able to have some more robust reporting on customer.
Okay.
Thank you.
We only have time for one more question. The next question comes from Megan Annette from TD Securities. Please go ahead.
Thank you and good afternoon.
Continuing to expand here in the U S. Just wondering if you're seeing any change in the uptake of E. Commerce as you continue to open new stores or does that remain strong as you're entering these new markets.
Take on E Commerce.
Yes.
Have we seen uptake in certain markets when we open new stores in certain markets you mean in new markets.
Right. So are you still seeing that that halo effect on the E Commerce sales yes.
Yes, we are 100% we are actually it may be even greater now and.
We don't see them when we open a new store per se. So if we open a second store or a third store in a market in Los Angeles when we've been in we've been opening a lot of stores in Los Angeles area, where now in San Diego South Coast Plaza in Orange County, or in century city to paying.
Americana brand and the growth now so we've gone from we have six stores in Los Angeles in South Los Angeles, and South of Los Angeles, now and a few years ago, We had one I think and so.
We don't see as much when we do fill in stores, but we enter a new market like Dallas or we enter a new market.
Yes.
Vegas, and we're going to go into in Miami, We certainly see that and it doesn't just happen overnight that would happen. It takes a while for the store to get exposed in the momentum, but we see both the store's sales grow and we see the.
The.
E Commerce sales grow but what is what has surprised US is is now there clearly is pent up demand, we clearly arent brand right across the United States now. So we're opening these stores when we opened our store in Dallas It far exceeded anything we.
Conjured up that our sales would be and so we're seeing our stores opened in these new markets and do exceptionally well so.
The store itself is doing well and then the E. Commerce is following right along with it so it's been or are you.
As I said earlier on the call.
And our U S business is growing such a rate that seems that everything right now presently touchwood is working for us at United States right now.
Thanks for taking my question I'll leave it there.
Thank you.
Thank you. This concludes the question and answer session and today's conference call. You may disconnect. Your lines. Thank you for participating and have a pleasant day.
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