Q4 2023 Aritzia Inc. Earnings Call
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Thank you for standing by this is the conference operator, welcome to Rich's first quarter and full year fiscal 2023 earnings call.
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I would now like to turn the conference over to Beth Suite, Vice President Investor Relations. Please go ahead.
Good afternoon, and thanks for joining our riskiest fourth quarter and full year fiscal 2023 earnings call on the call today I'm joined by Jennifer Wong Chief Executive Officer, and Todd <unk>, Our Chief Financial Officer. Please note that remarks on this call may include our expectations future plans.
And intentions that may constitute forward looking information such forward looking information is based on estimates and assumptions made by management regarding among other things general economic and geopolitical conditions and the competitive environment.
<unk> results may differ materially from the conclusions forecasts or projections expressed by the forward looking information we refer you to our most recently filed quarterly and annual managements discussion and analysis and our annual information form that are available on SEDAR, which include a summary of the material assumptions as well as the risks.
Factors that could affect our future performance and our ability to deliver on the forward looking information our earnings release, the financial statements and the MD&A are available on SEDAR as well as the Investor Relations section of our website I'll now turn the call over to Jennifer.
Thanks, Beth and good afternoon, everyone and thank you for joining us today.
Our strong results in Q4 wrapped up a tremendous here, where the momentum in our business surpassed our highest expectations. After 37 years of consistent growth.
Or we'd see a reached $1 billion in sales in fiscal 2022.
And just 14 months after that we achieved 2 billion ending fiscal 2023 at $2.2 billion in sales.
This resulted in an unprecedented two year topline increase of 160%.
And a new 2.2 billion baseline from which we will continue to grow.
Maximizing sales and meeting the surging demand for our product in an extremely dynamic operating environment with our top priority for the last two years.
In fiscal 'twenty to 'twenty, three we delivered 47% net revenue growth on top of 74% in fiscal 2022 primarily driven by client acquisition with consistency across customer metrics, such as spend per client shopping frequency.
He and basket size more people than ever before discovered our much loved everyday luxury experience with our active client base in the United States, increasing by more than 50% during the year on top of an increase of over 100% in the prior year.
In addition, we added seven new boutiques in the United States.
An increase of 18%.
U S now generate more than half of our total net revenue and we still have a long runway of growth ahead of us.
Turning to Q4 record sales were higher than anticipated across all channels and all geographies net revenue of $638 million increased 44% from last year with comparable sales growth of 32%.
This growth was primarily fueled by our business in the U S were outstanding pace continued growing by 56% from last year, while in Canada, we saw strong sales growth of 32%.
In E Commerce revenue grew an impressive 51% in Q4, driven by traffic growth in both Canada and the U S as well as improvements in conversion due to search and browse the site enhancement.
And our improved inventory position compared to last year.
We also made progress toward delivering ecommerce 2.0.
Personalized product recommendation test showed increased conversion rates and higher revenue per session.
We will continue to further refine our personalization strategies as we execute on our E. Commerce 2.0 road map to ensure that we are bringing a captivating personalized experience to our clients throughout their shopping journey on Auryxia dotcom.
We will seek to inspire the customer to discover our entire diverse product assortment, while tailoring content to their individual style and preferences to keep them engaged we continue to believe that E. Commerce 2.0 is the key to more than doubling our ecommerce revenue.
Fiscal 2027.
Our retail net revenue increased 38% in Q4, surpassing our expectations our momentum in the quarter was fueled by outstanding comparable sales growth in our boutique.
As well as the progress we made on our real estate expansion strategy.
We opened two new boutiques during the quarter La Cantera in San Antonio, Texas, which is a new market for us and our fourth boutique in the state of Texas.
As well as fashion outlets of Chicago Les.
Later this month, we will open our fifth boutique in Texas Southlake Town Center in Dallas.
New locations continue to open above our sales expectations and our growing collection of Premier boutique remains our number one client acquisition tool by propelling our brand and driving and supporting our ecommerce business.
In Q4, we also expanded our upper Canada boutique in Ontario to a stunning 15000 square foot space, including N. A OK cafe, a boutique expansions continue to perform exceptionally well with better than expected payback period as the additional square.
Footage allows us to provide our clients with an elevated shopping experience and a meaningfully wider product assortment.
In product sales of our professional Assortments continue to increase even as we maintained our momentum in casual and active wear styles.
We also experienced another strong outerwear season, as we continue to be the destination, the super Puff and won't Coke.
Our Super Puff Influencer program strengthened throughout winter with the supercuts seen on celebrities like Tracy Ellis, Ross Lupita, Nyongo and even Martha Stewart.
We also continue to see strong result through our partnership with Emma Chamberlain and recently featured her as the face of our Sunday Best Spring campaign Sunday Musing with Emma.
Supported by our social and Influencer strategies, our beautiful product and real estate expansion strategy are driving increased awareness of the or we'd see a brand and a greater market share propelling us along our path to gaining widespread recognition.
Across the U S.
Shifting to supply chain.
We took possession of our new cornerstone distribution centre in Toronto, which will serve as a fulfillment hub for eastern Canada, and eastern United States as soon as the floor was poured in January as a reminder, we are moving from a third party operated 150000 square foot facility.
To a brand new Auryxia operated 550000 square foot location that is designed to support several years of growth. They're racking is in now and it remains on track to open in late August .
We ended the quarter with inventory up 125% over last year, our inventory is heavily concentrated in client favorite and a year over year growth has further moderated throughout Q1 of fiscal 2024, we continue to expect growth to more closely align with.
Sales trends by the end of Q2.
Our growing recognition and industry, leading wages have allowed us to continue attracting world class talent the ongoing investments that we're making in retail labor help ensure that our clients continue to receive exceptional service, which is a key tenant of our everyday luxury.
We experience.
We are continuing to make smart strategic investments in our future.
This includes investments in infrastructure that will allow us to catch up with our recent tremendous growth.
And for example, we're currently in the process of upgrading our point of sale system for increased stability and performance, while laying the foundation for future enhancements, such as mobile point of sale and Omni channel services.
In addition, we are investing in talent across all areas of the business as we scale our teams to align with our recent growth.
That said, while we continue to strategically invest with a long term view. We are also focused on optimizing our processes to more efficiently manage our current business and ensure scalability for our ongoing growth we have already identified an accident opportunities that will deliver cost efficient.
See beginning in the back half of the year, which Todd will discuss momentarily.
Okay.
Turning to ESG and they rent it continues to grow and as our clients strive to live and purchase better we're working to extend our sustainability programs and accelerate our progress across the value chain.
2023 was our first full year with an established environmental and Social Board Committee and we plan to publish our second annual ESG report in June I will now pass the call over to Todd.
Thanks, Jennifer and good afternoon, everyone.
We're extremely pleased to have delivered another quarter of exceptional growth.
We generated net revenue of $638 million in the fourth quarter exceeding the high end of our guidance range and representing an increase of 44% from last year.
Boarded by comparable sales growth of 32%.
Our business in the United States sustained its outstanding growth with net revenue of $337 million in the fourth quarter an.
An increase of 56% from last year.
This momentum reflects our growing brand awareness and a significant increase in our U S client base.
We also experienced strong growth in Canada, where net revenue increased 32% to $300 million.
In ecommerce our business continued to grow sequentially with net revenue, increasing 51% to $274 million.
Even as demand in our boutiques remained extremely robust.
This speaks to the strength of our multichannel business.
E Commerce trends were strong across all geographies, primarily driven by traffic growth as well as increased conversion rates.
Net revenue in our retail channel was $363 million an increase of 38%.
This was led by growth in the United States, where our comparable new and expanded boutiques all performed exceptionally.
Our Canadian boutiques also saw a meaningful growth as we lap the period of restrictions from the army Kron wave during our peak selling period in the fourth quarter last year.
We delivered gross gross profit of $242 million up 35% compared to the fourth quarter last year.
Gross profit margin was 38% as expected declining 240 basis points from 44% last year.
The decline was primarily driven by additional warehousing costs related to inventory management ongoing inflationary pressures normalize markdowns and the weakening of the Canadian dollar.
These headwinds were partially offset by lower expedited freight cost and leverage on occupancy and depreciation cost.
SG&A expenses were $171 million or 26, 9% of net revenue compared to 27, 1% last year.
Leverage from increased revenue was partially offset by investments in retail and support office talent <unk>.
Getting initiatives and technology to support our accelerated momentum and fuel our future growth.
Our adjusted EBITDA in the fourth quarter was $79 million.
An increase of 20% from last year adjusted EBITDA was 12, 4% of net revenue compared to 14, 9% last year.
The margin pressure reflects ongoing inflationary pressure and investments in our infrastructure to sustain our rapid growth.
At the end of the fourth quarter inventory was in line with our expectations at $468 million, an increase of 125% compared to the end of the fourth quarter last year.
As of last Sunday April 30th our inventory was up 76% and we continue to expect the year over year growth to normalize by the end of the second quarter.
Our total committed inventory at the end of the fourth quarter, which includes on hand in transit and on order with the factory was up 14% over last year.
Yeah.
Our liquidity position remains strong at the end of the fourth quarter with $87 million in cash and zero drawn on our $175 million revolving credit facility.
I will now shift to our outlook for the first quarter and fiscal year 2024.
The first quarter is off to a healthy start we are on track to deliver first quarter net revenue in the range of $450 million to $460 million.
Presenting an increase of approximately 10% to 13% compared to the first quarter last year.
We continue to see strength in the United States across both our e-commerce and retail channels.
As well as continued growth in Canada.
For the full year of fiscal 2024, we expect net revenue to be in the range of 2.42 to $2 5 billion.
Representing growth of 10% to 14% for fiscal 2023, including the 50 <unk> week.
This growth is on top of a 47% increase last year and 74% increase in fiscal 2022.
Our fiscal 2024 net revenue outlook reflects current trends and the cadence of our boutique openings.
And fifth in the fiscal year, we plan to open eight new boutiques and to expand or reposition for boutiques all located in the United States.
We anticipate square footage growth of approximately 15% this year with the majority occurring in the fourth quarter.
Six of the eight new boutiques will open in the second half of the fiscal year, including three in the last months of the fiscal year.
In fiscal 2025, we expect topline momentum to accelerate with the addition of the boutiques late in fiscal 2024, along with accelerated square footage growth of approximately 20% planned for fiscal 2025.
Our expected revenue growth keeps us well on track to meet or exceed our long term target of three five to $3 8 million in fiscal 2027.
We expect gross profit margin for the year to decline by approximately 200 basis points compared to last year.
This reflects ongoing product and supply chain cost inflation.
Normalized markdowns.
Preopening lease amortization for our new cornerstone distribution center and flagship boutiques in Manhattan in Chicago and.
And additional warehousing costs related to inventory management.
These headwinds will be partially offset by lower expedited freight costs.
These pressures are expected to drive gross profit margin decline of approximately 600 basis points in the first half of the year.
In the second half of the year, we expect moderate growth profit margin expansion as transitory warehousing costs subside we.
We benefit from IMU improvement.
And we lap product and supply chain cost inflation from the second half of last year.
SG&A as a percent of net revenue is expected to increase by approximately 150 basis points compared to last year.
Pressure will be concentrated in the first half driven by the eastern distribution Center project costs and the annualized nation of investments in talent and increase retail wages made in the second half of last year.
These pressures are expected to drive SG&A margin decline of approximately 400 basis points in the first half of the year.
In the second half of the year, we expect modest SG&A leverage.
While we anticipate substantial margin headwinds in the first half of fiscal 'twenty 'twenty four we expect to see adjusted EBITDA margin expansion beginning in the second half.
The leverage in the second half will be partially driven by one of our strategic focuses for the year, which is to optimize our processes to more efficiently manage our current business and ensure scalability for our ongoing growth we.
We have already identified and begun to action opportunities that will deliver cost efficiencies spanning negotiations with vendors kpis improvements and automation opportunities.
Looking further ahead in fiscal 2025, we expect our adjusted EBITDA margin to return to at a minimum 16% driven by IME improvements cost efficiencies and subsiding transitory cost pressures all totaling unexpected benefit of approximately four.
Hundred basis points.
Okay.
As set out in our long term growth plan, we continue to expect to achieve an adjusted EBITDA margin of approximately 19% by fiscal 2027.
We expect capital expenditures for fiscal 2024 of approximately $220 million.
Comprised primarily of new and repositioned boutiques, our new 550000 square foot cornerstone distribution center as well as support office expansion.
We continue to expect total capital expenditures of approximately $500 million through fiscal 2027.
Our balance sheet is strong and even with the capital investments for fiscal 2024, we expect to generate meaningful positive cash flow as our inventory levels normalize, resulting in an even stronger financial position at the end of the year.
In closing I'd like to highlight three things.
First we've experienced unprecedented growth over the last two years and our forecasted.
In fiscal 'twenty 'twenty four to focus on building infrastructure to support our higher baseline and ensure scalability for our next phase of growth.
Second our boutique opening cadence will drive accelerated momentum in fiscal 2025, and third we expect actions taken this year to return our adjusted EBITDA margin to at a minimum 16% in fiscal 2025.
Again, while we expect to see near term margin pressure, we are confident that our growth strategies.
Targeted infrastructure investments and process optimizations will drive sustained double digit revenue and earnings growth for the long term, while delivering meaningful value for our shareholders.
With that I'll now turn the call back to Jennifer.
Thanks Todd.
As Todd mentioned, the first quarter of fiscal 2024 is off to a healthy start and new seasonal styles are resonating well with our clients. We continue to see strength in the United States across both our e-commerce and retail channels as well as continued growth in Canada, well quarter to date sales trends have normalized.
From the unprecedented levels of growth we saw over the past two years the strength of the Auryxia brand gives us confidence that we remain well positioned to capitalize on all of our opportunities in front of us.
As we digest the tremendous growth that we have experienced over the past few years building our foundation for the next phase of growth ahead is our top priority.
We are confident in the sustainability of our new higher baseline from which we will continue to advance our growth strategy.
This is why in fiscal 2024, we are focused on investing in infrastructure to support the size of our business today and fuel our future growth always with a long term approach.
Our expected revenue growth keeps us well on track to meet or exceed our long term target of three five to $3 8 billion in fiscal 2027.
We also remain committed to our 19% adjusted EBITDA margin target by fiscal 2027, as we expect to benefit from multiple tailwind. Beginning later this year and as the mix of our business shift further into the U S and e-commerce.
In closing I would like to reiterate that we are confident that our growth strategies targeted infrastructure investment and cost efficiencies will drive sustained double digit revenue and earnings growth for the long term, while delivering meaningful value for shareholders.
I would also like to thank our dedicated team for their commitment.
Excellent as we transition into our next phase of growth and we're all energized and excited for all of that is to come.
Yeah.
With that Brenda we're ready to please now begin Q&A.
Secondly, we will now begin the question and answer session.
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The first question comes from Mark Petrie from CIBC.
Please go ahead.
Yes, thanks, good afternoon.
Could you go through a little bit on the gross margin drivers and maybe you just sort of break down the biggest drivers are and give us a sense of sort of the relative first half second half impact of each of them.
Yes sure Mark.
So ongoing inflation.
As the largest impact.
Two to the margins in the first half and obviously that that continues into the second half as well.
And we're expecting as I said, approximately 600 basis points of pressure in the first half.
It will moderate.
Two expansion in the in the second half so we're expecting expansion in the second half of it was really from a cost perspective, a tale of two halves and.
The other pressures in the first half are those that.
We experienced already in the fourth quarter, so normalized markdowns the transitory warehousing costs related to our inventory management and then we also this year have preopening lease amortization.
For our Toronto distribution center as well as our new flagship locations, where we're repositioning all of the Manhattan.
Flagships as well as opening a new a new flagship in Chicago. So those have pre amortization of the lease costs associated that are hitting now and so that's that's the pressure in the first half and then as we move into the second half of the year, we will have our.
Distribution Center open at the end of August which is the end of the second quarter that will along with the moderating of our inventory levels will improve our supply chain costs.
Not immediately.
The beginning of the third quarter, but starting at the beginning and sort of working through the end of the year as it will benefit from that as well as we will benefit from IMU improvement in the back half of the year and also leverage on rent.
So those are the key drivers.
Obviously important to note as I said that we expect those improvements to begin to show in the back half, but but continue to improve into fiscal 2025.
Right, Okay, and can you quantify the impact of the warehousing costs in Q1 or in H, one our Q1 or Q2.
It.
For the for the full year, it's just a little under 100 basis points. So it would be north of 200 basis points.
For the first half because thats, where the majority of the pressure will be.
Okay.
It will link some of it will linger into the back half.
To be clear on that.
Yeah. Okay. So that was my other question I guess just related to that was your.
You commented about inventory levels continue to expect to normalize closer to revenue growth.
By the end of Q2. So is that is that still the case and how will that affect the gross margin in the second half.
Yeah, 100%, we're on track with our inventory levels as I indicated just this Sunday, we were at 76% and we expect it to be fully moderated.
To our revenue growth by the end of the second quarter.
And that will be part of.
The.
Benefit we'll see in the back half of the year, where we won't have the higher handling costs that are currently associated with that it just won't be immediate as we because we have.
Avila warehouse facilities that we have to.
<unk> closed down et cetera, so it won't be immediate as we opened the new distribution center, but but through the back half those costs will will dissipate.
Yeah understood, Okay, and you referenced improving product margins is that a reflection of.
A decision about about pricing within the portfolio or is that simply a matter of.
Reflection of.
New products continuing to come in and out at targeted margins, where did you land on the whole pricing analysis.
I'll just jump in on that one as Todd mentioned, we do expect to improve our I am you margins and were really strategically approaching our I M. U margins you will see it through a combination of cost efficiencies.
And as we mentioned on our previous call some selective pricing.
Where we know that the value proposition makes sense for our customer and so the key thing here is we're thinking about the <unk> strategy strategy carefully and above all I guess just to remind you that as our U S sales mix increases, we do get a natural pricing increase and a natural IMU benefit.
Yeah understood. Okay, and then I guess just one last question just with regards to the trajectory on sales growth, obviously appreciating that you're lapping some some enormous growth over the last couple of years, but I'm just curious.
When when you when youre looking at sort of the trends of Q1 or thinking about fiscal 'twenty four broad more broadly.
Is the deceleration consistent across geographies and channels are you seeing shifts in behavior of that.
Jeff You know, there's there's one channel or one geography is behaving a little bit differently.
No what we're seeing like.
High level, what we're seeing is strengthen our brand strength and our product product continues to resonate with our customer as we've mentioned on the call. It's broad based we're not seeing any regional differences at its strength across all geographies all channels all channels E Commerce retail.
Canada U S East West.
You know what we're what we're controlling or delivering on for our customer card outlook takes into account current trends in the macro effects and so really what we're seeing is a strength strengthened the auryxia brand in everyday luxury and.
Yes.
Really theres no question that when the weather Pops, we usually see a positive impact on our sales I mean for God's sakes. It. So I think it snowed in the Midwest there and what is it seven degrees in Toronto are 11, seven degrees in Toronto, where you are.
So.
So overall, we're still we're still very confident in the strength of Auryxia and what we're seeing high level.
Understood I appreciate the comments all of us.
Thank you.
Okay.
The next question comes from Irene <unk> from RBC capital markets. Please go ahead.
Thanks, and good afternoon, everyone. Just wondering exactly how confident are you in both the 16 plus percent EBITDA margin target or.
25.
And what would be the factors that you could see that would cause you to miss that margin target.
We're extremely confident in hitting that target.
Based on the items that I mentioned and one is the benefits that we're expecting from IMU increases.
We'll see some in the fall of this year or the back half of this year, but that will.
And translate into next year as well and then the cost efficiencies that we're currently working on we've been.
Really department by Department going through.
The process optimization opportunities and we expect meaningful benefit from from that exercise.
We've already.
Already implemented some and are expecting.
Have a long list of others that we are expecting to implement between now and the back half of the year.
As well as the subsiding of the transitory costs that we keep talking about in one of those is obviously the extra handling from from the inventory.
As we opened a new distribution center that will no longer.
Be an issue going into next year and also.
The project cost associated with that new distribution center, which are being extended expense in the first half of this year.
We also have.
As I mentioned, the preopening costs, the lease amortization that as we open these new buildings and then the new.
The new flagship locations next year, those those costs will become a tailwind as obviously, we begin to generate revenue.
All of those items put together, we feel very confident in the 400 basis points.
Get us back to the 16%.
That's helpful. Todd. Thank you and then just kind of thinking through so she'll afternoon D. C is coming online late in Q2, what are you assuming in terms of sort of the ramp around efficiencies around throughput is this a case, where it really does actually ran fairly quickly or do.
You have to kind of do it start slowly anything you can tell us around that please.
So excellent question Oh, the operation side here, there's always there's always around that that new building for us it's going to be a whole new crew.
We're onboarding a lot of the supervisors and the management team here in Vancouver, and we think they will hit the ground running but certainly it's immune facility. It's a much larger facility. We do expect that our metrics will improve over time, but certainly we will see a benefit as soon as we move and compared to what we're experiencing right now.
That's great. Thank you.
And then just finally, one question on the Capex.
So in your prepared remarks, you said that you still think it's gonna be about 500 million to F. 'twenty seven so that implies given the $220 million in F. 'twenty four that implies a substantial steps down again.
What is your confidence in in that 500 million and and is it really just around once Toronto is done.
That's the big chunk of that.
Yeah look.
As we've said this this year is a year of investment so whether that's on the capital front or or on the expense side in <unk>.
<unk>, our processes et cetera. This year is about investment because of the phenomenal growth we've seen and.
The capital is obviously concentrated this year, there's about $100 million of the $2 20 is from infrastructure spend DCF.
<unk>, our distribution center in Toronto would be one of them one of the components there, but also our three PL in Columbus, Ohio, We're expanding that from 250000 square feet approximately to approximately 500000 square feet. So theres capital.
<unk> laid there and then we have support office expansion that is that's hitting this year as well and those those projects, while we will likely have an.
Another DC on the West coast before the end of the outlook period, which we communicated previously.
The large infrastructure builds are happening this year and then on the.
Store or the boutique expansion front, the other $120 million is related to that and we're.
That's for the eight new stores this year as well as the four expanded or repositioned stores, but it's also include dollars being spent in this fiscal year for next year's locations.
The locations and so we have.
Obviously, these large flagships, where we're replacing again all of our flagship locations in Manhattan. All of those are opening next year and we're starting to spend on them. This year. So that's why the dollars are elevated in this fiscal year.
And I know I'm, not supposed to but I'm going to pile on.
We're well I know, we're not supposed to but I just wanted to ask Kevin Yeah. We are excited about the investments and you know our square footage is is is growing at 15%. This year as Todd mentioned, it's heavily concentrated in the second half of the year, that's going to be 20% square.
Square footage growth.
In fiscal 2025, so we would expect to see the momentum of the topline in 2025 as Heath mentioned and these are these are the store boutiques and on those repositions and expansions and in Manhattan, We do expect to see a 50% to 100% more productivity in those stores and I think we have said on a.
Previous call that they're more cost efficient than our current flagship. So we're super excited about these investments because we think that they're they're they're really going to pay off particularly in the back half of the year, but even more so into fiscal 'twenty, five and set us up for our topline growth and goal by fiscal 2027.
Yes.
Heard and understood. Thank you.
The next question comes from Steven <unk> from BMO.
Capital markets. Please go ahead.
Thank you. Thank you good evening everyone.
I was just wondering you know clearly like a bit of a pivot here with respect to build.
Building on infrastructure in the current fiscal year and I'm, just curious if youre able to was there any precipitating factors, where you're seeing bottlenecks in your system.
Whether it's on the supply chain or distribution side or store operations side that sort of led you to.
To take the.
It may take the decision to really focus on.
Building up that infrastructure backbone.
It's not any one thing David.
As we've mentioned our top line growth grew 160% in the last two years and in particular, the acceleration and in the last fiscal year has been incredible I sort of feel like you know if I can say, it's like a head start on this year and so if you just think about that growth overall and.
And the business digesting it and all areas. We're just we're just a much bigger business than we were two years ago considerably bigger and so with that it takes scaling and getting economies of scale and you know some automation, where automation makes sense and so I just I think it's a factor of of the tremendous growth that we've experience.
And the last two years.
Certainly we have a meal that distribution center that cornerstone distribution center in Toronto can open soon enough. So we're really looking forward to that opening at the end of at the end of August and these are just all things that we've lined up that will set us up for our next phase of growth.
Great Okay.
That message is loud and clear great.
And then maybe just on the inventory.
Is it still safe to assume that they were safe to say that the inventory composition is still largely comprised of a proven sellers and then secondly to that once you get through inventory growth normalizing our sales by the end of Q2 do you expect it to sort of.
Continue to be at that rate, where where your inventory is growing with sales as you roll through the balance of the year.
Yes.
Let's say that exactly Stephen that's what we're expecting today.
I would say at most growing with with our revenue in the back half of the year and then as we move into spring summer and the following season as it has always done historically it will move.
In lock step with our revenue growth with some seasonal adjustment but.
As we are now with supply chain, returning to normal able to get back to our normal operating procedures as far as.
Inventory goes.
Okay.
The next question comes from Derek <unk> from Canaccord Genuity. Please go ahead.
Yeah, Hi.
Just on the.
On the price increases and the impact from inflation. So I think you guys have you quantified the impact on the margins from.
The new DC and the new stores, but what.
What is the impact from inflation I get it's the biggest bucket, but can you quantify for us.
Well, we haven't quantified it specifically, but.
It is not quite the majority of the 600 basis points.
This is a fairly material I mean theres obviously.
We have offsetting benefits.
From lower freight costs as well, but if you look at the 600 on its own it wouldn't quite be a majority, but it is the largest by far the inflationary pressure.
Okay, and then on I guess, a couple of things on that.
On the freight costs are you guys still having to use the expedited freight or just given what you saw in Q3 as supply chains.
What are your you're almost not using that are really close to not having to use that and then number two just on that.
Inflation number is it is it mostly is it product inflation and inflation.
In other parts of the business I'm, just trying to get a better understanding of why that number is where it is.
On the air on the extra day of freight we always strategically use expedited freight as part of our.
Supply chain process.
No.
Particularly in season for Reorders, so that that won't change.
The amount that we're using it.
Is moderated back to normal levels, which is.
Meaningfully reduced from the elevated levels from from the last couple of years.
So there is still still expedited freight costs, but it's a lot lower and then.
As far as the inflationary pressures.
Product cost is a large a large one but we're seeing it really across the board.
The other larger <unk>.
<unk> would be.
Our delivery costs.
Where we have inflation.
And really.
Fuel surcharges et cetera, within those delivery costs as well as labor.
Whether that's at the distribution center or within retail.
Obviously, our wages as we've been describing has have gone up which is directly related to inflation, but those are the large buckets that I would point out, but really it's across the board when youre looking at expenses.
Okay, and then just one last one.
Just given now that the U S contribution in terms of revenue. It is now the majority.
Of your revenue and I expect this to increase over time at what point does the appreciation of the U S dollar inflect to becoming a net benefit Joe Ritchie I'd imagine you're pretty close to that level at this point.
Yes, we're not quite there yet.
It's still obviously, it's a benefit to the top line right now, but from a bottom line perspective.
It would still.
The strengthening of the U S dollar today or weakening of the Canadian.
As a slight drag on the bottom line, but we are very close to the neutral point and it would be somewhere in the in the high Fifty's.
Mix. So once the U S is in the sort of mid to high Fifty's we're at that.
That inflection point, and then anywhere beyond that obviously it reverses.
Okay got it that's really helpful. Thank you.
Okay.
The next question comes from Martin Landry from Stifel. GMP. Please go ahead.
Hi, good afternoon.
I wanted to dig dig a little bit in your in your revenue guidance, you're guiding for 10% to 14% for this year.
And I believe Todd you mentioned that you expect momentum to accelerate perhaps in fiscal 'twenty five.
So and as as I think you expect you know our square footage growth to maybe be a little higher in fiscal 'twenty five so I was wondering.
You know your your your revenue guidance. This year is it a factor it like it's a bit of a deceleration from what we've seen in.
In recent years and I.
And this may not have been sustainable, but I'm trying to figure out if your stores reached a sales capacity.
Capacity limit at this point and then you need you know where your growth maybe more line with square footage is that fair or.
No I wouldn't put it that way.
Our current.
Projection for this year again is based as we set off of the current trends for the year as well as the cadence of the boutique openings, but looking forward.
Our revenue growth will be from our new store expansions are obviously eight to 10, new stores per year, and three to four expansions and Repositions and we're expecting.
I would say.
Flat to modest growth in Canada from a comp perspective in retail, but in the U S. As we've said, we do expect comparable sales growth in our retail stores to continue and then e-commerce, obviously continuing to grow meaningfully so.
Those are the key drivers.
Our revenue growth going forward and that has not changed in any way.
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It's really in this fiscal year, obviously, we're moderating from an extremely high growth rate over the last two years, the 160% going from 857 million to $2 2 billion over the last two years and as you said that wasn't.
It to continue.
And this year, we have the majority of our square footage.
In the store expansion concentrated in the back half.
Which as we said.
We will drive increased revenue growth, primarily next year as well next year because of the flagship locations in Manhattan as well as the other boutiques were planning to open we have 20% square footage which is above.
At the Investor Day, we communicated.
Low double digit square footage growth annually, so that 20% is meaningfully above that obviously close to double.
As a normal.
A year and the outlook was expected so we expect meaningful growth acceleration in FY 'twenty five.
Okay, I'm I'm, just trying to understand like the timing of them deceleration in your revenue growth and I was wondering are you seeing any changes right now in your customer.
Customer patterns in terms of basket size order frequency average unit price any anything that has changed since our last year.
Oh, Yeah, I think I addressed this just a minute and previous questioner atop our topline sales still is driven by the strength of our brand and the strength of our product is still resonating broadly with the customer specifically, we're not seeing any any changes in basket. They continue to hold up.
Our conversion rates remain solid.
And as I say products are resonating with our clients.
Certainly we're controlling everything that we can deliver for our customers. So we're not seeing anything.
Changing.
Okay, and then maybe just lastly.
Are you surprised by that deceleration in revenue growth or were you expecting that.
As I said, we were expecting that it would moderate.
Obviously coming off the growth we're seeing in the last two years.
Okay. Okay. Thank you.
Okay.
Yeah.
The next question comes from Dylan Carden from William Blair. Please go ahead.
Thank you.
Just curious.
Thanks.
Tell me, if I'm wrong, but.
Part of the increase in the inventory was pull forward or sort of more complete ordering of certain seasons. So.
Historically, you've ordered 75% of the season.
Now, you're ordering 100% or close to it because you.
I wanted to I have that right.
And two did that impact in any way your capacity to kind of chase trends react to trends I know thats sort of promotions or normalizing, but more on the read and react capabilities with these higher inventory levels is that does that hurt or hindered at all.
No.
The 44% sales growth in Q4, I think we were more than comfortable with our ability to to drive demand.
So no it has not hurt hurt that ability.
And so that's one of the reasons why it's taking time for it to moderate is because.
We're not we're still ordering what we need to drive our spring summer today, and and therefore that extending the tail.
That inventory and why were not coming completely normalized until the end of Q2, but no. We have ensured that we aren't impacting the business because as we said again. It was it is heavily concentrated in proven sellers.
We just are working our way through.
Got it.
Last one just on HQ hiring.
You know I know you've done a lot recently continued to.
Benefit from everyone else shrinking.
Where are you as far as sort of capacity needs.
The headquarters level.
Well, we did we invested in talent.
And our support office, particularly in the back half of the year.
Last year.
And so one of them.
That is actually fueling a lot of these projects and a lot of the people that are our board here to help.
With these investment projects that we've mentioned on the call and certainly I think we still have pockets of areas areas, it's not across the board, but areas within support office, where we still want to make sure that we are investing in talent, namely product and creative.
Digital technology.
Certainly in the real estate area because of all of these exciting builds that we have going on.
Would you say, though that the pace slows relative to towards the back half of 'twenty two calendar 'twenty two.
Yes, certainly compared to last year, I would say, yes, but as you know we are still investing I think I mentioned, we're still investing in talent.
We always have the long term view of our business.
We might've been a front end loaded the back half of last year, but we have you know we're excited about the long range plan and we're committed to making sure that we execute on that long range plan and we need top talent to do that.
Yep understood. Thank you guys.
Okay.
The next question comes from Brian Morrison from T D Securities.
Please go ahead.
Okay. Thanks, very much I, just want to reference fiscal 'twenty five for a second so it looks like you're building off this 12, 5% margin for this year you have a 16% target in fiscal 'twenty five and your confidence from 19% in the long term. So you have this recovery of 400 basis points, you're talking about.
Why not 400 basis points plus scale from benefit from U S expansion flagships and the investments, you're making or you're being prudent are modest in terms of the timing of the investments to flow through.
Yeah, I would say all of those investments will require.
A ramp period and.
The old.
There are the existing locations will have to come off before we see the full benefit.
Of the new and.
Yes, I would say that there is some prudence.
In 2016, but thats why we are saying.
No.
No less than 16%.
So we should see some benefits from scale as we get into fiscal 'twenty five.
Yeah, I think that's fair, yes, 100%, okay. Okay, and then Todd I guess with your updated guidance with respect to margins and Capex. Maybe you can just outline what your plan is for utilization and CIB This year.
Yes, it will given the heavy capital expenditures this fiscal year.
We will add most be repurchasing to offset the exercising of options.
But Don don't plan to be meaningfully active on the NCI be except to do that.
Thank you.
The next question comes from Ali <unk> from Bank of America. Please go ahead.
Hi, Thanks for taking my question. My question is very similar to Brian's question on how we can reconcile the EBITDA margin guidance.
I know the efficiencies will take some time to ramp but what.
Are you attributing to some of the ongoing structural benefits from growth in E com and increasing U S mix them those aren't really talked about in the components of the margin back and forth. So can you.
How much of that as a base case, how much of a base case is the 16%.
For us to build on.
Yes.
One thing I would just reiterate is that we've been operating in an environment of unprecedented growth and with a backdrop of.
Covid and supply chain issues and and.
Very muddy operating environment over the last couple of years as we've experienced that growth and so that has made.
I guess, the the underlying pressures.
Somewhat.
Difficult to manage and so we have been working through that and that's part of what youre seeing in the pressure on our EBITDA, along with obviously inflation and what have you and and so we as I said, we're very confident.
That we're going to work through with our IMU improvements cost efficiencies and then there's the subsiding of those transitory cost pressures to get to 16% as a baseline for FY 'twenty.
25 next year, and then by FY 'twenty seven.
Bringing to bear other improvements along with the.
The growth in the U S. As a percent of our mix and the growth of E. Commerce also as a present of our mix those natural tailwind to the margin will help elevate us to that 19% target by FY 'twenty seven.
Got it so it's really a FY 'twenty five to 27 expectation for those tailwind.
Got it one quick one is what is the 50 <unk> week contribution to sales and EPS that you guys are contemplating.
Yes, its roughly 150 basis points.
To the revenue growth.
Okay. Thank you.
This concludes the question answer session.
I will now turn the call back over to Beth Reed for closing remarks.
Thanks, again to everyone for joining us. This afternoon, we're available after the call to answer your questions and we look forward to providing another update at the end of the next quarter.
This concludes today's conference call.
May disconnect your lines.
You for participating and have a pleasant day.
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