Q2 2024 Aritzia Inc Earnings Call
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Okay.
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Thank you for standing by this is the conference operator, welcome to <unk> second quarter 2024 earnings Conference 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 Jos.
And the question queue. You May Press Star then one on your telephone keypad should you need assistance during the conference call you May signal, an operator by pressing Star then zero.
Now I'll turn the conference over to Beth Reed, Vice President Investor Relations. Please go ahead.
Good afternoon, and thanks for joining our riskiest second quarter fiscal 2024 earnings call on the call today I'm joined by Jennifer Wong, Our Chief Executive Officer, and Todd English due our Chief Financial Officer. Following prepared remarks, there will be an opportunity to ask questions. Please note that remarks on this call may include our expectations.
Future plans and intentions that may constitute forward looking information such forward looking information is based on estimates and assumptions made by management regarding among other things general economic and geopolitical conditions as well as the competitive environment actual results may differ materially from the conclusions forecasts or projections expert.
By the forward looking information, 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 the risks and factors that could affect our future performance and our ability to deliver on our forward looking information our earnings release, the related financial statements and the.
M D N a are available on SEDAR as well as the Investor Relations section of our website I'll now turn the call over to Jennifer.
Thanks, Beth good afternoon, everyone and thank you for joining us today.
In the face of a challenging retail environment and following unprecedented growth year over year for the second quarter of fiscal 2024, we delivered net revenue of $534 million an increase of approximately 2%. This is on top of delivering outstanding revenue growth of 50%.
In the second quarter last fiscal year and 75% in the second quarter fiscal 2022, we remain confident that the level of overall sales achieved in the last two years, including most recent quarter is a strong base from which our future sales and operational efficiencies will meaningfully scale in the quarter and year.
I had.
Comparable sales growth decreased four 3% in Q2, as we lap a remarkable 28% compared to last year in the U S. Our net revenue increased 6% on top of the 80% growth in the second quarter last year, while in our Canadian market sales decline.
And 3% as we lap 29% growth in the second quarter of fiscal 2023.
And then additionally, just cycling two years of outstanding sales results. We believe our second quarter topline trend was impacted by the level of new styles in our product assortment as well as a mixed consumer environment.
And before I discuss the results of our sales channels I want to first provide some color on our level of new styles.
Over the past two fiscal years, our primary focus was on maximizing sales growth by fueling the unprecedented demand for our products, while navigating a challenging supply chain environment, we focused our efforts on ensuring sufficient supply of the products that were most in demand.
Clients favorite and on developing newness to variation of these items.
These actions are what drove sales growth.
74% in fiscal 'twenty, 'twenty, two and 47% in fiscal 'twenty to 'twenty three the trade off was that as we faced bandwidth constrained our level of new style development was not optimal.
Our proven strategy, which has served our clients face exceedingly well for many years centers on our ability to create new styles to maintain freshness in our assortment over time.
With a normalized supply chain and operating environment. We have now returned to our proven product development cadence. Our team is laser focused on our product pipeline. So far we're encouraged that even for this fall new seasonal styles are resonating extremely well with our clients and we continue to.
We expect to be in a strong position for spring and summer of 'twenty 'twenty, four which begins to launch in February .
Shifting back to our Q2 performance net revenue in our retail channel increased 3% in the second quarter driven by the progress we've made on our real estate expansion strategy. We opened one new boutiques during the quarter, our third boutique in the state of Florida and International Plaza in Tampa, which is.
As a new market for us.
We also recently opened two expanded boutiques short Hills, New Jersey in July and Prudential in Boston at the end of August .
In Q3, we plan to open two new boutiques, South Park in Charlotte and fashion mall at Keystone and Indianapolis, both are new markets for it yeah.
The performance of our new and expanded boutiques remains strong and continues to result in better than expected payback period, the new boutiques that we've opened in the past 12 months are all tracking to payback in approximately one year or less ahead of our expectations for 12 to 18 months.
As an example, our newest store in Tampa is generating better than planned sales results and currently tracking to payback in approximately 10 months.
Overall, our retail stores are supported by a world class team of people that exemplify our core values to ensure that we supported our employees during a period of unprecedented growth and heightened economic uncertainties as well as to attract and retain exceptional talent and new markets.
We made significant investments in retail labor over the last couple of years.
Having passionate dedicated people in our boutique is critical to delivering an exceptional client experience.
Okay.
After a sustained period of exceeding our own expectation E. Commerce net revenue decreased 1% in Q2, driven by softer traffic trends in line with a weaker retail environment conversion remained strong as we continued to execute our ecommerce 2.0 vision across our three value proposition.
Tailored product discovery intuitive experiences and creative innovation.
After launching multiple personalized recommendation experiences across our site in Q1 and Q2, we have continued to test learn and refine our algorithms to provide the most curated recommendations for our clients in Q2, we launched personalized product recommendations and the search channel and quick grab recommendations.
In bag. Additionally, we have made enhancements to our online checkout experience, which have improved checkout conversion.
Now that our point of sale upgrade is complete we have launched our pilot of additional Omnichannel services buy online pick up in store and ship from store earlier. This month in Canada. We are pleased with the preliminary result with revenue in the initial weeks exceeding our expectations.
In addition, our forecasted cost of implementation is tracking below budget.
Next up is our rollout in the U S, which is planned to begin after the holidays with completion in Q4.
I believe one of our biggest opportunities arises from these additional services is to convert more single channel clients to omni channel.
Strength of our current omni clients highlights the magnitude of this opportunity our army client spend approximately three times more than clients, who shop exclusively in either our retail or our E. Commerce channel. In addition, the retention rate for omni clients is substantially higher than for single channel clients.
We also expect to benefit from inventory optimization.
And from an inventory perspective, our position has continued to normalize at the end of Q2 inventory was up 10% over last year and we expect the year over year comparison to further moderate for the remainder of fiscal 'twenty 'twenty four.
As expected the overall markdown rate during our spring summer sale period remained below pre pandemic levels with no change to our promotional calendar in the quarter.
Shifting to supply chain I'm, absolutely thrilled to announce that our new distribution center in the Toronto area went live at the end of August as scheduled we seamlessly completed the transition out of our prior third party operated facility without any disruption to the business.
We've had a successful ramp up period with productivity Kpis at roughly 90% of our corporate target by week five and.
Our fill rate is already in line with that of our existing distribution center on the West coast and in line with top of industry metric.
We have already exited three of the six additional temporary offsite warehouse facility and are working towards sub leasing the remainder by the end of the year. This has resulted in a significant and immediate reduction in our inventory carrying costs, particularly with labor having accounted for more than half of the additional cost pressure.
We also continue to make these strides in finding efficiencies to optimize for our increase in scale over the last two years and better allow us to scale in the future some of the areas in which we've already begun to realize benefits include vendor negotiation process optimization and <unk>.
P I improvement and with that I will now pass the call over to Todd.
Thanks, Jennifer and good afternoon, everyone.
In the second quarter of fiscal 2024, we generated net revenue of $534 million.
Representing an increase of approximately 2% from last year.
This increase is on top of two years of extraordinary growth in the second quarter, 50% in fiscal 2023, and 75% in fiscal 2022, resulting in a three year CAGR of 39%.
Comparable sales growth decreased four 3% following a remarkable increase of 28% last year.
Net revenue in the United States with $279 million in the second quarter, an increase of 6% on top of a second quarter increase of 80% in fiscal 2023 and 152% in fiscal 2022.
In Canada net revenue decreased 3% to $255 million on top of an increase of 29% in fiscal 2023 and 43% in fiscal 2022.
Net revenue in our retail channel was $362 million, an increase of 3% from the second quarter last year. This was driven by the performance of our new and repositioned boutiques, which continued to generate better than expected payback periods.
Partially offset by softer comparable sales.
In E Commerce net revenue was $172 million.
A decrease of 1%.
Deceleration was driven by softer traffic trends in both countries following three years of unprecedented growth.
While year over year revenue growth has been modest.
Up against exceedingly high comparable we remain confident that we have achieved a sustainable sales base from which we will continue to scale our operations.
We delivered gross profit of $187 million compared to $220 million in the second quarter last year.
Gross profit margin was 35% declining 690 basis points from 41, 9% last year and marking the peak of our anticipated margin pressure for fiscal 2024.
The decline was primarily due to the following headwinds hi.
Product costs normalized markdowns temporary warehousing costs and pre opening lease amortization for flagship boutiques and our new distribution center.
These pressures were partially offset by lower expedited freight costs.
SG&A expenses were $171 million up 16% from last year.
As a percentage of net revenue was 32% representing an increase of 400 basis points compared to 28% last year.
The increase in SG&A expenses was primarily driven by the annualized nation of investment in retail and support office labor from the back half of last year as well as distribution Center project cost.
Adjusted EBITDA in the second quarter was $21 million, a decrease of 74% from last year.
Adjusted EBITDA was 4% of net revenue compared to 15, 7% last year.
This margin decrease primarily reflects three things.
Ongoing inflationary pressure multiple transitory costs and the run rate from the investments made in talent in the back half of last year.
The second quarter reflects peak margin pressure in fiscal 2024, and we continue to expect sequential margin improvement in the second half of the year compared to the first half.
At the end of the second quarter inventory was $501 million up 10% from the end of the second quarter last year.
Our inventory balance continues to normalize and we expect the year over year comparison to further moderate for the remainder of fiscal 2024.
With a normalized supply chain environment, we have now returned to a proven inventory management methodologies.
We had $77 million in cash at the end of the second quarter and $75 million available on our $175 million revolving credit facility.
We expect the majority of the $100 million drawn on our facility to be repaid by the end of the third quarter.
We remain focused on maintaining a strong balance sheet, which has served us well through time.
Shifting to our outlook based on quarter to date trends net revenue in the third quarter is expected to be flat to slightly down from the prior year again on top of two years of exceptional growth, 50% in the third quarter last year and 75% two years ago.
Following peak pressure in the second quarter, we expect gross profit margin in the third quarter to decline 200 basis points compared to the prior year a meaningful sequential improvement.
And we expect SG&A as a percent of net revenue to also improve sequentially in the third quarter, increasing by approximately 300 basis points compared to the prior year.
Turning to the full year for fiscal 2024, we continue to expect net revenue in the range of 2.25 to 2.35 billion.
Representing growth of 2% to 7% for fiscal 2023, including the 50 <unk> week.
This growth is on top of a 47% increase last year and 74% increase two years ago.
We continue to expect gross profit margin for the year to decline by approximately 300 basis points compared to fiscal 2023.
We expect sequential improvement in the back half of the year compared to the first half driven by improved buying used due to selective pricing actions and cost improvements.
In addition, temporary warehousing costs that are already beginning to subside with the opening of our new distribution Center and lastly, we will also be lapping the period in the back half of last year, when markdowns began to normalize off of low levels for fiscal 2022.
We continue to expect SG&A as a percent of net revenue for the year to increase by approximately 300 basis points compared to fiscal 2023.
We expect sequential improvement in the back half of the year compared to the first half, which will be driven by the elimination of distribution Center project costs as our new distribution Center opened last month, and the lapping of investments and support office and retail labor.
In addition to factors I already discussed we continue to expect that the margin improvement in the second half and into fiscal 2025 will be partially driven by one of our key priorities for this year smart spending.
This cost control priority is driving meaningful results with approximately 150 opportunities identified across the business with over half already complete the estimated annualized run rate savings totaled over $60 million was approximately 50% of the benefits expected to be realized this fiscal year.
Yes.
We continue to expect capital expenditures for fiscal 2024 of approximately $220 million. This includes $120 million related to our new and expanded boutiques, which continue to payback in approximately 12 months or less.
As well as $100 million, primarily related to the expansion of our distribution Center network and support office space.
Yeah.
Looking ahead to fiscal 2025, we expect top line momentum to accelerate with the majority of the square footage growth for fiscal 2020 for anticipated to occur in the fourth quarter, along with accelerated square footage growth of approximately 20% planned for fiscal 2025.
Importantly, our new stores are our most consistent growth driver delivering predictable revenue growth and propelling our brand.
With continued investment in the clients' digital experience, we remain confident that both our e-commerce and retail channels, we will continue to fuel our growth in our Omnichannel strategy.
Okay.
We continue to expect meaningful adjusted EBITDA margin improvement in fiscal 2025, with 500 basis points of expansion driven by IME improvements cost efficiencies subsiding transitory cost pressures as well as leverage on fixed costs.
In closing I want to reiterate that the investments we've made are to support our tremendous growth over the last two years and to help drive our future growth.
We expect sales to accelerate next year, driven by meaningful square footage expansion over the next 18 months as well as our improved product position and the execution of our E Commerce two point of the strategy.
We also expect that peak margin pressure is behind us and that the steps, we're taking will ensure that our margins begin to normalize in the second half of this year with further improvement in fiscal 2025.
We anticipate that our expected revenue acceleration and margin expansion will drive significant earnings growth next fiscal year and beyond.
With that I'll now turn the call back to Jennifer.
Todd.
As we look towards fiscal 2025, we are extremely optimistic about our prospects for renewed growth.
First as I said earlier, our new styles for fall are resonating extremely well with our clients and we continue to expect the mix of our assortment to be in a strong position for spring summer 2024, which begins to launch in less than five months.
Second.
We have an extraordinary pipeline of boutiques opening over the next 18 months our pace of store expansion is planned to accelerate to six new boutiques in the back half of this year, followed by roughly 20% square footage growth in fiscal 2025, including Repositions of our three Manhattan flagship.
This is compared to four new boutiques opened in the trailing 12 months.
Third we're continuing to execute against our ecommerce to point out a roadmap, making significant strides on our personalized experience and investing and upgrading the technology stack that underpin our ecommerce two point of vision.
Lastly, as Todd discussed we believe our peak margin pressure is behind US we expect to see substantial improvement in the back half of this year, followed by a meaningful reacceleration in our adjusted EBITDA margin next year.
Yes.
For almost 40 years, our distinctive everyday luxury offerings have been thoughtfully and meticulously refined or which it continues to prioritize design quality fit and construction and delivering an exceptional level of execution that's uniquely us.
We remain extremely confident in our long runway for growth as we seek to deliver our unique value proposition high quality product at an attainable price point to more and more clients across North America.
Operator, we're ready to now please open up the line for questions.
Yeah.
Thank you we will now begin the question and answer session to join the question queue. You May Press Star then one on your telephone keypad, you will hear a tone acknowledging your request if youre using a speakerphone. Please pick up your handset before pressing any keys.
Draw. Your question. Please press Star then two please.
Please limit yourself to one question and a related follow up before getting back in the queue.
The first question comes from Stephen Macleod with BMO capital markets. Please go ahead.
Thank you good good evening everybody.
Just a couple a couple of questions can you just talk a little bit maybe about what you're seeing in terms of Q3 to date are traffic trends.
Considering you had a lot of positive commentary around around our customers' response to your fall or fall Winter collection and I'm. Just curious if you can give a little bit of color around what you're seeing both in store and online.
Hi, Steven Yeah traffic is is softer we are seeing softer traffic pattern.
That said.
What that tells us because it's broad based because it's across both channels. It's across both geographies that does tell us that there is a macro environment impact for us.
Certainly as it relates to our digital traffic, we do see an opportunity in our digital traffic, where we you know where our stores are like our stores are busy work.
Or they're busy and our sales per square foot productivity is at 1600 Bucks a square foot the new stores are paying back in less than 12 months, but where we do see an opportunity is in our digital channel and what I've noticed after the last few months is that we have an opportunity in digital marketing. So our brand is resonating our newest.
While there are resonating, yes, I did say that but we do see that there is an opportunity to drive traffic to our stores to incorporating digital marketing into our overall business strategy. In addition to the new store openings, which had been up until now our number one client acquisition tool and a primary driver to our e-commerce.
Okay.
Okay. That's.
That's helpful. Thanks, Jennifer.
And I was just wondering I just wanted to clarify or just just just to ask about the margin progression in the back half of the year and into fiscal 2025.
Has anything evolved differently with how you thought it would when you think about the margin trajectory and and progression.
In Q2, and then and then beyond.
Q3 and into next year and I'm wondering if you could also just provide what the buckets are 25 special twenty-five margin improvements.
Sure. Thanks, So a lot to cover on that question, but maybe I'll just take a piece of it and then we can come back if there's if there's other components.
So as I said we.
We were slightly better than we had anticipated both from a gross profit.
And SG&A perspective, but we have maintained our annual guidance of 300 basis points of pressure.
In both gross profit and SG&A.
And the benefits that we saw in the second quarter within gross profit were primarily related to improved freight costs.
And then from an SG&A perspective, it was just benefits from retail wages and labor that helped us exceed our initial expectations for the quarter.
But if as I look forward.
There's no real change in what we're expecting.
As we roll through Q3, and Q4 and as we've said all along that we thought it would be a tale of two halves with meaningful pressure in the first half of the year and that pressure is subsiding in the back half and.
The benefits that we're expecting in Q3 from a gross profit perspective would be from the product cost improvements that we've talked about.
With select pricing actions and then the lapping of cost pressures from the back half of last year.
And then subsiding temporary warehousing costs, so obviously and John mentioned it but the the.
The new DC opening is critical to our margin improvement both from a gross profit perspective, and SG&A because the project costs are now done, which we're hitting SG&A in and within gross profit we're seeing the benefit.
Obviously from just the improved handling costs and the closing of all the ancillary facilities.
Again, I want to unpack and your question there I don't haven't even hit the FY 'twenty five part yet but.
Does that answer your question on this fiscal year before I move on to ask why 25, yes. It does yeah. Yeah. Thanks, Todd Okay, great. Yes, so from from an FY 'twenty five perspective, no change there as well.
We expect approximately 150 basis points of improvement for Miami, you and that's from the select pricing actions and also <unk>.
Product cost savings, we expect another 150 to 200 basis points from our smart spending initiative, which we've outlined and then 125 basis points from transitory costs subsiding. So obviously the distribution center.
And some of the.
Pre opening lease amortization et cetera.
Okay. That's that's really helpful. Thanks, Todd and I appreciate it.
Thanks, David.
Yeah.
The next question comes from Martin Landry with Stifel. Please go ahead.
Hi, good afternoon.
And I was wondering if you could give us a bit of visibility into that.
How that square footage growth is going to come about maybe you know.
A breakdown of.
Square footage growth per quarter would be super helpful to help us.
Better model of your revenue growth on a quarterly basis.
Well maybe.
Oh approach it from a store count perspective so.
As Jeff is that we have six stores.
For the remainder of this year to our <unk>.
Planned for the second or the third quarter and four in the fourth quarter.
And then the <unk>.
Bulk of our stores next year are coming in both the second and the third quarter and so we have four new stores planned before the second quarter of next year and then seven planned for the third quarter.
Obviously from a square footage perspective.
The flagships are going to be key components of that square footage growth and a number of those saves the Chicago one are actually repositions and those will be happening in the back half of next year.
So I don't know if that helps but that's.
That gives you a bit of an idea of the cadence that we're expecting.
Okay. Okay. That's helpful.
And.
You're switching gears, you're mentioning that you're.
We're in good position from a product standpoint for your spring Summer collection.
And.
As you know we like numbers. So I was wondering if you.
And if you could give us maybe your proportion of.
Your line lineup next summer or spring summer thats going to be new a new products that you're introducing and how does that compare.
Our historical levels.
Well it kind of depends.
It depends it depends.
Based on store size it they it depends on what.
Region geography, you know we have stores that range from 4000 square feet to about 20000 square feet and will be there with the flagship stores.
It depends if it's a suburban versus urban so it depends.
What I would say is if you were to walk into a store at the beginning of the season.
And have a look at our assortment when you when you walk in.
You'll see that it merchandise in a very balanced way between new styles and our clients favorite and in particular, if it's merchandise in a way that when you first walk into the store the assortment is engaging and inspirational for the client and that's essentially what we do in Japan.
It depends on the just on the <unk>.
<unk>.
Okay.
Okay.
Is it is it is 2020 the spring summer 2024 is that going to be a big.
Bigger year in terms of new styles or an average year in terms of new styles.
We have targets that we had and as I said no.
And returning to a normalized more normalized operating environment.
Well, we're just going back to our proven strategy and it's essentially you know we've talked about our test and react strategy in the past is essentially what it is we're returning to normalized operation, we're returning to our normalized product development lifecycle cadence.
And so what you'll see obviously our assortment. We you know over the last few years part of our growth strategy. It's been about product expansion I think we've done that very very successfully and so it's just a matter of making sure that we have the right product at the right price and the right place at the right time, and if we just take back to our fundamental.
Richard what has made us successful for the last 40 years.
That's why we feel very confident about our position going into spring.
Okay. That's.
That's it for me thank you.
The next question comes from Irene Mattel with RBC capital markets. Please go ahead.
Let me clarify something from your answer Todd to not pay on the timing of the new stores next year, you said boring Q2 and seven in Q3 is that correct and does that Kevin you include the repositioning of the flagships.
No. It does not so the floor in the seven or are the new stores and repositioned would be on top of that.
Okay.
Chicago, You said as H, two and the others are do you have the timing on those.
They are in the back half of the year.
Okay got it thank you.
Coming back to the topic of newness.
You just confirm that you are you know some of it was in the store for fall winter. So.
Can you give us an example of if you walk into the store today, what would we see in that kind of newness bucket that perhaps we wouldn't have seen a year ago.
Well I can tell you what we're really excited about we're really excited about our sweater. That's what our program. We're really excited about I will coats.
We have a couple of Super Puff in the in the Super Puff franchise that we're excited about them.
That should give you like you know, it's it's across multiple categories, but those are probably some of the things to give you a flavor of what we're excited about.
That's helpful. Thank you.
And then just switching gears a little bit your consumer behavior can you talk a little bit about what you're seeing in terms of consumer sensitivity to promotions.
When you said the traffic is down a little bit when people are in the store are they gravitating to slightly lower unit price points like what are you actually seeing in terms of consumer behavior.
Mhm.
Well in in a in a nutshell, what we're seeing is as well you know I guess all related to the to the traffic and the macro with what we can control.
No I think we're.
When people are being careful about spending their money.
Sure.
We're just starting about what they are choosing to buy.
And so less money to spend more but you know for US we have to make sure that we have the most appealing assortment that we possibly can offer.
And so when the clients are shopping with us what we are seeing is that the clients are shopping maybe less frequently with us but when they are shopping with us they are buying and we're seeing no change to our average basket size and we're seeing back I think.
In the past quarter, it might've been a bit higher and we're seeing no change in terms of the average selling price. So it's not so much of that I think it's more about volume than than actual like behavior in the store in terms of when they see something they like they are buying it.
That's really helpful. Thank you.
Yes.
The next question comes from Luke Hannan with Canaccord Genuity. Please go ahead.
Thanks, and good afternoon.
John You had mentioned I think earlier in your prepared remarks that you are continuing to test and refine the the algorithms when it comes to E. Commerce I'm just curious if e-commerce, if there's any difference versus in store when it comes to driving will say client engagement with newness versus claim favorites in other words.
Is it better worse channel for driving interest in newness versus your your source.
What's interesting about ecommerce is because we don't aren't limited by our square footage size. We can offer everything so we offer that like pretty much everything is offered online what we do see is that there is high engagement with newness and there's also high engagement with them with with discontinued product.
Honestly.
And so that's why the beauty of the personalization effort and are our partnerships of dynamic yield I think Ive mentioned as a platform is really makes it so that depending on the customer and given our broad assortment. We can make sure that we're catering to their preferences in terms of what they're looking for.
Okay.
And then when it comes to the competitive landscape I appreciate youre in Todd's commentary about the markdowns level of markdowns that you have in your own assortment is still below pre pandemic levels are you seeing any reaction from competitors are being more or less promotional than you originally anticipated.
Yes.
No.
I'm not sure I understand your question are we seeing our competitors being more promotional.
Certainly we're not we don't go on sale to drive you know, we don't go on sale to drive sales.
Which I like a lot of our competitors I know do so that is that instead of the root of the question. Yes. When we go on sale. When we go on sale. We go on sale to clear inventory to make room is dark clean for the following season that has always been how we've done it that is how we did it.
Last spring summer sale, you know that.
Actually we didn't have any changes to our promotional calendar.
And so.
Again, that's just a fundamental pillar of how we do business and for us that hasn't changed even despite some may be more promotional.
The environment around us.
Understood last one and then I'll pass the line Todd in the past you've shared what your your total committed inventory position.
It's been I'm curious to know if you can share where that is either ending the quarter or as of today.
Yes, absolutely.
Frankly, that's one of the things that are giving us confidence in our current inventory position because now looking at it.
You do include on hand in transit and on order.
With the factories are committed inventory is actually down 15% so.
Obviously, a clear indication of where we're headed and it's just now a matter of time.
There will be.
Reporting.
Inventory.
They are flat or even down.
To the prior year.
Great. Thank you very much.
Yes.
The next question comes from Mark Petrie with CIBC. Please go ahead.
Yeah. Thanks, I actually just have a few follow ups to some previous comments. So maybe first gen on the on the digital marketing topic.
How have your efforts on that started already or when do you expect that that would sort of kick in and I assume this is about like you know online advertising and paid search and those types of things.
Yes, it's it's we're just in the very beginning and as you know we've done very little.
To know digital marketing in the past I know you've asked me about that in prior years and we are now we do have people on the team that are a seasoned professionals in in this area and so it will start with paid search paid social.
And ensuring that we're getting into digital performance marketing specifically at I would say at all levels of the thought on top middle and bottom, but in particular converting converting into sales at the bottom of the funnel.
So is that something that you would expect to be having an impact in the second half of this year like is it is it going to be able to ramp that quickly.
We're just formulating our strategy now.
And we're building the team now as I said, we've started some initial paid search for sure and I do I do expect to see some effects in the back half of the year, but really what we're building are the strategy towards fiscal 'twenty five.
Yeah understood Okay.
And gentlemen, you were talking about the buy online pick up in store and also ship from store, having launched in Canada, you spoke about sort of the topline opportunity I'm. Just curious if there's also a margin angle to that or not really.
There is slightly when we did our analysis. Our you know our analysis indicate that there might be some savings with our delivery costs for sure, but the big the big overarching.
Sort of bottom line benefit is the optimization of our inventory. It may it makes our inventory available to both channels and and then allows us to really optimize our inventory position.
Yeah, Yeah understood. Okay, I appreciate that color.
Yeah.
The next question comes from Alex Yao with Bank of America. Please go ahead.
Alright. Thank you for taking my questions can you talk more specifically about the components that will allow for the approximately 100 basis points of gross margin improvement that is currently implied in for Q by your guidance I know you touched a little bit upon the second half as a whole so steven's question, but and foresee.
<unk> in particular, you know how are you planning to markdown component are we assuming all preopening lease costs are gone all the temporary warehousing costs are gone and <unk>.
Yeah. Thanks, Alex.
You hit on a number of the key components, but starting with the temporary warehousing pressure.
We have been experiencing in the first half of this year and actually also last year.
Obviously as Jennifer said.
It's going going excellently.
<unk>.
Actually well ahead of our expectations the implementation at the new DC, but.
Will still take some time to get out of the leases on these auxiliary building. So there is some pressure.
Pressure in the third quarter from those auxiliary building and it does diminish into the fourth quarter to the point, where we actually may see a benefit in the fourth quarter because of the labor optimization. So that's one of the dynamics that helped.
Helped with the sequential improvement from Q3 to Q4 and then.
We also are smart spending initiatives that we have underway is ramping through the year and we expect to benefit more in the fourth quarter from that and then in the third quarter. So again also helping with the sequential improvement from Q3 to Q4 and from our view you ask specifically about <unk>.
Markdowns.
We expect the pressure to be relatively consistent Q3, and Q4 on markdowns.
That's super helpful. Thank you and then I have two quick follow ups on your store opening plans.
A lot of retailers have guided to a very back half weighted store opening cadence. This year and I was wondering if you can help us understand a little bit why that is and you know what gives you confidence and all the all the stores can be opened in the last weeks of Q4 Q that you've planned and then are there any possibility of changes.
To the cadence of square footage growth next year or is that pretty set in stone, but plan. Thank you.
Yeah.
I'll take that one.
Obviously, we're talking about construction.
So it's never set in stone, so I don't I can't commit to that.
For certain.
What what I had communicated was.
Our estimates as of today, that's our plan for those openings, but obviously in some cases were as much as 12 months away. So there's a lot of things that can happen between now and then.
Specifically for the fourth quarter, and why or why the cadence for us I mean, it's really just a matter of when these deals come to fruition and.
<unk> of all of the.
The design and then the build that follows once the deals are done and obviously availability of space comes into it too. So there is there.
There's a long list of factors of why stores would get delivered at a certain time.
I can't speak to others, but that that would be the factors affecting us.
So yes, what I just described are all aligned is our current thinking.
On the timing and again, obviously, we're 12 months away in some cases, so there could be adjustments to that but as of right now.
That's what when we think those stores will be delivered.
Got it so as visibility into next year it looks like it's gonna be easier than this year or two for new stores to come online is that is that right.
This is just win based on again like when we get occupancy when we get possession and then when we were planning for occupancy.
When when Theyre all coming planned to come online is that the environment is not necessarily going to get easier.
Got it thank you.
The next question comes from Mauricio Serna with UBS. Please go ahead.
Great. Good afternoon, and thanks for taking our questions first I would like to ask about the Q.
Q3 sales guidance, how should we think about the implied comp sales just given that you know there's like the total sales outlook implies a deceleration I don't know if that happens, but that does not have to do with less store openings on a last 12 month basis or how should we think all of that and then on the.
On the implied.
Q4, SG&A dollar growth I think.
It seems that.
You know looking at the model I think it implies like the SG&A.
SG&A dollar growth will accelerate in Q4, so just wanted to let corroborate that that.
That would be super helpful. Thank you.
Yes, okay.
The first question, sorry, I got thinking about SG&A. There. Your first question was on.
Implied campaigns.
Alright. Thank you so the implied implied comp within our guidance is effectively flat with what we were seeing in the second quarter and so we.
Planned the rest the rest of the fiscal year based on the trends.
We saw in the second quarter and the trends that we're seeing quarter to date in the third quarter. There is <unk>.
<unk> benefit in the fourth quarter or increase but it's not coming from comp is coming from the 50 <unk> week in.
In the fourth quarter as well as the new store openings that we've been discussing.
There isn't any incremental benefit in the third quarter compared to the second anyways as as it relates to new stores.
Thank you.
Yes.
Minus four three sounds like how you're thinking about them.
Yes.
Yes.
Exactly and the sort of down.
Mid single digits.
Okay got it.
And then.
Yes.
In the fourth quarter.
Our SG&A again.
We expect it to sequentially improve.
From the 300 basis points of pressure in the third quarter.
The.
Benefits are coming from the lapping of investments we've been talking about that.
We made and the really the back half of last year and wages both in support office, adding support office heads.
And as well from a retail perspective.
We made investments in retail wages that we've been cycling on are really for two quarters now in and that will be.
For the most part coming off in the fourth quarter.
And then again the scaling of our smart spending will help the sequential improvement.
In the fourth quarter on a on a margin basis.
Alright, and then just.
One last follow up on inventory.
It's great to see that that progress both on a reported basis on an uncommitted inventory maybe can you elaborate a little bit more on like that competition is it like how does that look you know when you think about proven pillars.
Yeah.
Yes, our inventory continues to be heavily concentrated in proven sellers as it would be.
At any point.
And so that hasnt changed and as again, providing us the confidence.
In that inventory.
Thank you very much.
Uh huh.
The next question comes from Dylan Carden with William Blair. Please go ahead.
Thanks sure.
Jennifer on the marketing comments is that incremental to prior thinking or asked another way is the idea here that the ratio of marketing spend to sales would increase.
With full towards higher conversion of the online channel.
Well as I used to as I've said, we've done very little to no digital marketing in the past haven't necessarily been a primary driver of our business we grew quiet.
Quite well.
This last year in hand before.
Without doing much of it but what we have learned is that this is a huge opportunity for us, particularly if one of our primary.
Gross leverage overall for the next few years. It is about digital and just on the U S. So yes, there will be incremental spend it would be a new aspect of our overall business strategy.
But you know, it's specifically and digital performance marketing, which does translate directly into into results and sales results and so I think that you know if we get the strategy together and go about it intelligently and smartly and as we do with everything that we do around here I do.
I think that the return on what we spend Oh, well definitely makes sense and the good news is we're building a team to do that we're building a team and have a couple of people already who are who are as I said seasoned professionals in this space.
Great.
And then on new markets paying back.
In a year you are opening up new markets go forward this year and next.
Our volumes still kind of a double.
Broad strokes, what they were pre pandemic and has there been any impact.
On new markets from kind of the hampered newness and the inventory position and some of these markets such that you might expect the volumes could be even greater and I have a follow up to that.
Generally speaking the new store openings in new markets are consistent with the new stores. We've opened in prior years, we're really pleased like for instance, with the Tampa one that.
Got it.
Performing better than we expected and paying back in 10 months nine even 12 months in the paired with a payback in 10 months.
And volume wise.
They're performing exactly if not better than what we projected before you know when we first lease this space. So we're really encouraged by their retail business as I say.
Our everyday library value proposition really really come through and in person and in our stores, whether it's there or are our product our store design, our exceptional client service.
The locations that we choose I think where I continue to believe we're industry leaders in retail.
As I said, they're paying back in less than 12 months and our expectation is it 12 to 18 months Theyre performing at $1600 a square foot I. We were very pleased with our retail performance and so this really encourages us and gives us a lot of confidence to continue to open new stores that we have on the.
Pipeline and we're Super excited for the flagship stores that we're opening next year.
Okay.
And Todd.
Given that kind of shortening payback period.
Where are you should theoretically land the year from a gross margin standpoint.
Isn't all that far off from some prior years.
What's sort of the structural margin level here go forward do you think sort of low forty's.
What you've achieved historically, even pre 2000 2016 is.
Or upside to that I know, you're not going to commit to a number per se, but just trying to sort of flow through the compressed.
Payback period to an actual kind of structural gross margin anything you can say.
That'd be helpful. Thanks.
Thanks, Phil.
So as I've described a 500 basis points of improvement that we're expecting next year, a majority of that will be within gross profit.
<unk> saves a portion of the smart spending initiatives that are from SG&A.
So that that will be a step function.
Turn to returning us.
To our normal gross profit margin or or on the way too, but we do it will be sort of sequential year on year.
Adding us back to where we expect to be.
By the end of our multiyear plan and it's really driven.
One by opportunities in product cost and we think we have a multi year product cost opportunity.
That will improve over time and then.
I think we've talked about this but.
As our business grows in the United States.
We have.
A meaningful benefit to gross profit margin just because of the margin profile in the U S compared to within Canada. So again sequentially as our goods business grows in the United States.
Becomes a larger and larger portion of our overall business, we will see benefit.
Within our gross profit.
And on the project margin side remind us about a third of that I think it was coming from selective price increases is that something we should expect to see more spring summer 'twenty four or.
You are starting to feather some of them.
The pricing improvement is being feathered in.
<unk> started now in fall winter.
And so that we're seeing some of that benefit for the back half of the year, but from an <unk> perspective for next year, we're expecting about 150 basis points of improvement and the majority of next year's improvement will be coming from.
Cost so lower product costs.
But you've been successful in pushing through some <unk>.
Racing and the present period yet.
And then.
We've said in the past the feeling that the pricing.
Actions that we've taken have been on a very selective strategic choices.
On an item by item basis on the Grand scheme of things its effect is very very small portion.
Vast minority of our overall product assortment and.
That we're seeing so far is that there is it hasn't affected that affected at all the unit sales of those items that we're selling just as many of those items at the new prices, we were at the old price.
Very good thank you.
Mhm.
Okay.
The next question comes from Brian Morrison with TD Securities. Please go ahead.
Oh, good afternoon, I apologize I joined the call quite late so if I repeat some questions you can talk about later.
Just in terms of the Q3 guide to 300 basis points of SG&A increased what I thought we were locking the support staff and we'd private wage pressures I understand Q4, you can see a bunch of the why so large an increase in Q3. After you only got 150 in Q2.
We were up 400 basis points in the second quarter. So it is a sequential decline from 402, two an increase of 300 <unk>. So it is coming down in the third quarter.
And then further there'll be a further sequential decline in the fourth quarter.
So within the third quarter, though to answer your question I mean, we're still lapping the retail wage investments that we made as well as the the support office, it's really not until the fourth quarter.
There will be lapping when the majority of those were were introduced at least from a retail wage perspective.
And then we just have deleverage on higher fixed costs that we discussed so we haven't.
We haven't changed our outlook for the year.
We're still expecting the 300 basis points of pressure for the year.
But again, we've gone from 400 in Q2 to 300 in Q3 basically as we were expecting.
I see that I apologize, okay that makes sense and then are you able to provide the rent expense that gets you from post Ifr 16, the pre for Q3 and Q4 and into next year I assume it's going to increase substantially.
Yeah, I mean, I don't have the number in front of me to the exact number but yeah.
Yeah, obviously as we're adding all of these stores there will be.
Incremental rent but.
Actually so as as the stores open.
We potentially will have benefit from.
The percentage of rent costs, but that's obviously as they get open and ramp up et cetera.
Okay last question, you're in CIB I think last quarter, you mentioned that you didn't plan on being active you just cover your options. It looks like you are somewhat aggressive in the quarter.
Maybe your go forward plans with it.
Yeah. So we did we've repurchased approximately 400000 shares in the.
The most recent quarter.
<unk> had repurchased.
About 300000 prior to that.
So we have been a little more aggressive I guess again you would have noted that we are $100 million drawn on our line of credit as of right. Now so we will be paying that back by the way.
The majority of it back by the end of the third quarter. So again as I've said, all along I think it is as we get into a stronger cash position, we will look at buying back more meaningfully, but we do have meaningful capital investments this year.
Well as next year. So it just that's obviously our primary focus and it continues to be so.
Yes.
This concludes the question and answer session I would now like to turn the conference back over to Beth Reed for any closing remarks.
Thanks, again to everyone for joining us. This afternoon, we're available after the call to answer further questions and we look forward to providing another update at the end of next quarter.
[noise].
Uh huh.