Aritzia Inc.
Q2 2022 Earnings Call Transcript

Published: 13 Oct 2021

[Operator:]

Thank you for standing by. This is the conference operator. Welcome to Aritzia’s Second Quarter Fiscal Year 2022 Earnings Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. I will now turn the conference over to Carly Bishop, Executive Manager, Office of the CEO. Please go ahead.

[Carly Bishop:]

Thank you, Karl, and thanks for joining Aritzia’s second quarter fiscal 2022 earnings conference call. On the call today, I am joined by Brian Hill, our Founder, Chief Executive Officer and Chairman; Jennifer Wong, President and Chief Operating Officer; and Todd Ingledew, our Chief Financial Officer. Following management discussion, we will host a question-and-answer period open to analysts and investors. Please note that remarks on the call may include our expectation, future plans and intentions that may constitute forward-looking statements. Due to the material impact of COVID-19 on business operations in fiscal 2021, certain references to our pre-pandemic results in second quarter of fiscal 2020 have been included where management deems to be a more meaningful measurement of performance. The uncertain and dynamic nature of COVID-19 and its ongoing impact could continue to materially alter our performance. We would refer you to our most recently filed Management’s Discussion and Analysis and our Annual Information Form, which include a summary of the material assumptions, as well as risks and factors that could affect our future performance and our ability to deliver on these forward-looking statements. Our earnings release, the related financial statements and MD&A are available on SEDAR and the Investor Relations section of our website at aritzia.com. I will now turn the call over to Brian.

[Brian Hill:]

Thank you, Carly, and thank you for joining us this afternoon. I am incredibly pleased to share with you, together with Jennifer and Todd, our results for Q2. The outstanding performance of our brand continued through the second quarter of fiscal 2022. We have seen accelerated momentum across all geographies and all channels, as our United States business grew at an unprecedented pace. Our eCommerce channel continues to surge and sales in our boutiques surpassed our most optimistic expectations, exceeding pre-pandemic productivity levels. For me personally, these results speak to our world-class team, who I am deeply grateful and proud of for facilitating a rapid growth of unprecedented demand whilst delivering exceptional Everyday Luxury experiences for our clients, all on the backdrop of supply chain disruptions, labor shortages and the ongoing effects of COVID-19. Looking forward, I could not be more excited as we focus on our fundamentals and invest in the infrastructure required to enable our growth for years to come. While Todd will provide a detailed financial perspective, I’m extremely pleased to share performance highlights for the second quarter. We delivered record net revenue of $350 million with growth of 75% or $150 million from $200 million last year and 45% or $109 million compared to $240 million two years ago. I would also like to note that for the first half of the quarter, Ontario, which comprises 50% of our Canadian boutiques, was closed. We continue to advance our business and brand awareness in United States at an unprecedented pace, as we develop deeper relationships with our existing and many new clients. Net revenue in the United States increased 174% from last year and a 108% from two years ago. United States now accounts for 42% of our revenue. Importantly, over the last 12 months, our active clients grew more than 50% in the United States. Our eCommerce channel continues to surge, as net revenue increased 49% from last year and 171% from two years ago, accounting for 37% of our revenue in the quarter. Our boutique sales were also exceptional, with our entire retail business open to clients as of the second week of July and capacity restrictions lightened. This positive resurgence resulted in retail comparable sales growth of 60% from last year and 14% from two years ago, exceeding pre-pandemic levels in both Canada and United States. Our ongoing investment to optimize our Everyday Luxury experience of engaging service, beautiful products, aspirational environments, and captivating communications continue to drive our business. In eCommerce, we further enhanced our digital experience with new features and functions being added on a regular basis. We also delivered on our omni capabilities initiative, we launched store inventory visibility, SIV, allowing clients to view store inventory availability while shopping online, at the beginning of August. So far, this has yielded positive results and contributed to our boutique sales surpassing pre-pandemic levels. Jennifer will speak to this and the remaining omni initiatives in a few minutes. In addition to reopening our entire store fleet in Q2, we expanded our presence in United States. In the quarter, we opened two new boutiques in California, one in Topanga, and another one at The Grove in West Hollywood to outstanding client response, as the performance of our new and existing boutiques continues to exceed all of our expectations. In Canada, we expanded our Sherway Gardens boutiques in Toronto with tremendous success as well, breaking our record for a new boutique opening that day. With boutiques open and capacity restrictions eased in the majority of markets, our team’s excited to continue welcoming new and loyal clients, surpassed only by our clients’ enthusiasm to enjoy our Everyday Luxury experience. Shifting to product, our clients responded exceptionally well to the launch of our Fall/Winter season as our team delivered on meaningfully extending our assortment breadth with new styles and depth with new colors, sizes and lengths across our various brands and categories accomplished while navigating the pandemic’s continued supply chain disruption. To grow on our already strong full-price selling strategy as we deal with our spring Lighten Up Sale, we made the decision to not hold our traditional Fall Layered on Sale. While this may put a little pressure on our top-line, importantly, it will result in improved gross margin and motivate our clients to purchase our beautiful products at full price. As we have previously stated, we completed our expansion in the men’s as we closed the Reigning Champ deal in late June. The Reigning Champ team has done an excellent job continuing to independently manage the business as most of our resources have been focused on our rapid growth. We’re now in the process of prioritizing where we leverage our world class infrastructure to grow the Reigning Champ business. We continue to develop our suite of marketing capabilities as we welcome Dana Gers as CMO. We expect her exceptional leadership and particularly her digitally native experience will significantly advance our marketing initiatives, her hiring, a testament to the growth of our brand and ability to attract top talent from across the globe. Although Jennifer will provide more detail, I’m proud to say, we remain relentless in our commitment to being responsible for the planet and the people who live on it, as we continue to embed sustainable practices across our business. I’ll now turn it over to you, Jennifer.

[Jennifer Wong:]

Thanks, Brian, and good afternoon, everyone. Our strong second quarter performance is underpinned by our efficient operations and best-in-class infrastructure, which we continue to build and enhance to enable our growth. Today, I’ll update on four areas within our operations

[Todd Ingledew:]

Thanks, Jennifer, and good afternoon, everyone. As Brian noted, our outstanding performance in the second quarter reflects accelerated momentum across all geographies and all channels. As a reminder, on June 25th, we acquired 75% of the premium athletic wear brand Reigning Champ. Their results are consolidated within our financials from the date of acquisition. For the second quarter, we generated net revenue of $350 million, an increase of 75% or $150 million from $200 million last year, and 45% or $109 million from $241 million in the second quarter two years ago. We are seeing meaningful growth in the United States, with net revenue in U.S. dollars of $118 million in the quarter, growing 174% or $75 million from last year and 108% or $61 million from two years ago. Our business in the United States continues to grow at an accelerated rate, comprising 42% of net revenue in the second quarter this year, compared to 30% last year and 31% two years ago. Our total eCommerce business accelerated with net revenue of $130 million, an increase of 49%, on top of the 82% increase in the second quarter last year. ECommerce penetration in this quarter was 37%, up significantly from 20% in the second quarter, two years ago. Retail revenue was $220 million, an increase of 95% from the second quarter last year and 14% from two years ago. This was despite approximately 50% of our boutiques closed in Canada for the first half of the quarter. Sales in our own boutiques were exceptional with comparable sales growth of 60% for fiscal 2021 and exceeding pre-pandemic productivity levels in both Canada and the United States with total retail comparable sales up 14% from fiscal 2020. These top-line results exceeded our expectations for the quarter with the pace of boutique recovery in Canada occurring meaningfully faster than expected, after having fully reopened by July 12th, as well as strong demand for our fall collection as our various product initiatives began to take hold. We delivered gross profit of $156 million, up 122% from $70 million in the second quarter of fiscal 2021. Gross profit margin was 44.6% in the quarter, expanding 940 basis points from 35.2% last year. The improvement in gross profit margin was primarily due to leverage on occupancy costs, lower markdowns and the strengthening of the Canadian dollar. These gains were partially offset by higher expedited freight costs and lower lease abatements. When compared to fiscal 2020, our gross profit margin expanded 500 basis points, driven primarily by lower markdowns, the strengthening of the Canadian dollar and leverage on occupancy costs. These gains were partially offset by higher warehousing and distribution center costs from higher eCommerce volume and higher expedited freight costs. SG&A expenses in the quarter were $92 million or 26.3% as a percent of net revenue, compared to 30.1% last year. The 380 basis-point decrease was primarily driven by leverage as our boutiques returned to pre-pandemic levels and our eCommerce business continued to grow. When compared to fiscal 2020, our SG&A as a percent of revenue increased by 120 basis points. The increase was primarily driven by continued investment in talent across eCommerce, marketing and IT to support the future growth of our business. Overall, adjusted EBITDA in the second quarter was $73 million, an increase of 494% from the $12 million last year, and a 100% from $36 million two years ago. Adjusted EBITDA was 20.8% of net revenue, compared with 6.1% last year and 15.1%, two years ago. Inventory was $182 million at the end of the quarter, up 29% from last year. We generated $77 million of free cash flow during the second quarter, repaid our $75 million term loan, and funded the $33 million initial payment for the acquisition of Reigning Champ, finishing the quarter with $132 million of cash and zero drawn on our $175 million revolving credit facility. The initial payment for the acquisition of Reigning Champ was funded with cash on hand, based on a total enterprise value of approximately $63 million. Two liabilities have been added to our balance sheet related to the transaction, the first relating to the pullback amount due from the purchase of the initial 75% and the second for the remaining 25% equity interest held by Reigning Champ’s management shareholders. Turning to our outlook, we’re extremely pleased that the strength of our business across all geographies and all channels has extended into the third quarter. We expect net revenue for the third quarter to be in the range of $350 million to $375 million. As Jennifer discussed, we continue to navigate the global supply chain disruptions and work to mitigate their impacts. Our mitigation strategies are ensuring we have the necessary inventory levels to deliver on or exceed our revenue targets for the remainder of the year. Therefore, despite the supply chain challenges, we are increasing our full year outlook and now expect net revenue to be in the range of $1.25 billion to $1.3 billion, up $100 million from our previous outlook of $1.15 billion to $1.2 billion. The updated outlook implies the full year increase of approximately 45% to 50% from fiscal 2021. The anticipated increase is led by sustained momentum of our business in the United States, continued growth in our eCommerce business, and the strength of our boutique performance. We expect gross profit margin to be relatively consistent with pre-pandemic levels from the third and fourth quarter of fiscal 2020. This reflects leverage on fixed costs and the strengthening Canadian dollar, offset by meaningfully higher expedited freight costs, higher warehousing and distribution center costs, and continued investment in talent to drive our expansion strategy. SG&A as a percent of net revenue is expected to increase relative to pre-pandemic levels from the third and fourth quarter of fiscal 2020 as accelerated investments in people, processes and technology more than offset the leverage on fixed costs. The increase in the second quarter over fiscal 2020 was 120 basis points, and we expect the increase in the third and fourth quarter to be slightly higher. We continue to expect net capital expenditures in the range of $55 million to $60 million, comprised primarily of boutique network growth, ongoing investments in technology and expansion of our distribution center network. As an additional note, Reigning Champ is still expected to deliver approximately $14 million in net revenue and $3 million in adjusted EBITDA in the second half of the year. In summary, we are excited about the strength of our business in the United States, the continued growth of our eCommerce business, and the faster than anticipated recovery of our boutiques to pre-pandemic levels. While we recognize the pressure from macro headwinds, we remain extremely optimistic about both, the short and long-term outlook of our business. With that, I’ll now turn the call back to Brian.

[Brian Hill:]

Thank you, Jennifer, and thank you, Todd. As Todd just mentioned, we’re thrilled with our Q2 results and equally excited for the road ahead. We continue to see strength across all geographies and all channels in Q3, despite navigating the persistent supply chain disruptions, labor shortages, and indirect effects of COVID-19. You have previously heard me talk about becoming famous in the United States, and we’re well on our way. Our business continues to accelerate, and we expect it to now be the leading driver of our growth, exceeding Canada in the not too distant future. Client demand across our channels remains robust as we continue to see eCommerce growth, even on the back of our 89% growth last year. Our existing boutiques remain trending above pre-pandemic levels and our new boutiques are outperforming our expectations. In addition, we remain committed to our expansion within the United States and are excited to add boutiques in four to five new markets over the back half of the year, including boutiques in Las Vegas, Nashville and Miami. As our business continues to grow beyond our expectations, so does our demand for inventory and labor. As mentioned, we’re not immune to the global supply chain disruptions which are impacting us through select product shortages and challenged shipping timelines. However, we are doing our best to mitigate the impact of these disruptions by leveraging our geographically diversified supply chain, strategic inventory management approach, and increasing the use of expedited freight. We’re confident we have the inventory to deliver and/or exceed our increased revenue targets for the remainder of the year. As discussed earlier, like all businesses, we’re also currently experiencing the challenges of the labor market, however remain extremely competitive due to incredible employment brand, industry leading wages and benefits, and energizing world-class workplace environments. Looking beyond Q3, we will continue facilitating and sustaining rapid growth. We’ll do this by focusing on our fundamentals and staying committed to delivering our much loved Everyday Luxury experience to all our clients across all geographies and all channels. And, as always, continuing to invest in the infrastructure required to enable our growth for years to come. We’re deeply aware, of course, that what has made all this possible is our clients’ enduring loyalty to Aritzia and our team’s relentless focus on excellence and teamwork. For that I could not be more grateful, nor could I be more excited about our future. Thank you for joining today.

[Operator:]

Thank you. The first question comes from Mark Altschwager from Baird. Please go ahead.

[Mark Altschwager:]

Good afternoon. Nice quarter, really great to see the ongoing momentum. So, I wanted to ask about growth in the U.S. Really, pretty incredible seeing 95% growth versus fiscal ‘20. I think that’s over double the rate of the boutique expansion. So, I was hoping you can just talk a little bit more about what’s working from a marketing perspective that may be accelerating the brand awareness and overall growth? And how should we be thinking about the sustainability of the growth rates in the U.S. that you’ve been delivering year-to-date?

[Brian Hill:]

Thanks, Mark. Yes. I mean, we’re pretty excited about our U.S. business. We’ve been in the U.S. since 2007. And although we’re growing every year, we’ve never seen growth like this. I told my team, and everybody here is aware, when you see your growth growing, you’re probably doing -- the certain case is, you’re probably doing a few things right. Not to be too enthusiastic, but I think we’re doing a ton of things right, right now in the U.S. We’re opening incredible stores, our eCommerce business is doing really, really well. Our product we have -- our product assortment is improved, particularly in our warm weather areas. And our retail teams are incredible, like -- it’s not easy. I mean, the backdrop isn’t easy, but we’re doing a lot of things. And then, we’ve added these customers, we just don’t see our business in the U.S., we actually see it getting stronger. I mean, we’re opening new stores, we’re opening in new markets that never we had exposure to at Aritzia. When you think about it, a lot of them haven’t traveled to Aritzia in the last two years, because they’ve been keeping close to home. So, we’re opening in Las Vegas, we’re opening in Nashville, we’re opening in Miami, there’s lots of other new locations down in the U.S., Atlanta and Fort Lauderdale. And there’s a lot of great shopping districts and customers in the U.S. that we’re not even tapping right now. So, we just don’t see our expansion into the U.S. slowing, and anything else, we see it continuing on the same pace it has. So, we’re super excited about it.

[Mark Altschwager:]

Great. Thank you. And maybe a follow-up for Jennifer and then Todd, I guess. First on the supply chain and you sound pretty confident that you’re going to be able to manage through some of these headwinds through the remainder of the year. Just any additional color you can give us on how you’re thinking about spring inventory flows and how those might be impacted by some of the production issues we’ve been reading about? And then, raw material costs, cotton’s been a big topic, but obviously pressure across a lot of commodities. Just any color on how you’re managing through that change in philosophy on price increases, given the inflationary backdrop? Thank you.

[Brian Hill:]

I’ll take that, because it’s product related. So, we’ve expedited our -- some of our (ph) deliveries, because we need them before the end of the year. So, we have -- some deliveries are slower, and then we’re expediting some of the spring deliveries where we actually do have availability and there haven’t been supply chain shortages. So, we’re needing to get that inventory. And so, the spring, we should we should be okay. I’m not saying we’re not -- we’re not saying we’re immune to the challenges. We have shortages, we have had shortages throughout this quarter. They’re probably getting worse -- they’re not probably, they are going to be worse over the next four to six weeks. And we see these shortages continuing. And as Todd and Jen have mentioned, the shortages are twofold. They’re one, because we have factory disruptions through the effects of COVID in some of these countries that we’re dealing with and we’re doing business with; and then, the second thing is the freight times and shipping times are exponentially longer than they were. So, it’s a double whammy. We’re not immune to it like anybody else. We don’t have a secret formula at all. But as you know, I was questioned nine months ago -- six months ago about our increased inventory levels. We made a decision to increase our inventory levels a year ago, and it wasn’t in anticipation. I’d love to say we had a crystal ball on this, supply chain shortages, we did not. But we increased our inventory because we just felt our business was -- we had momentum in our business. We thought we were doing a lot of things right. So, we went bullish on our inventory and it seems to have paid off. So, we are not immune to it. As Jen said, we are sort of working around mitigating as best we can. It’s not inexpensive doing so. But at the end of the day, we’ll make more money mitigating and investing in this inventory than we will, if we didn’t. So, it’s going to affect us for sure. It already has affected us. But, we think we can maybe do better than most people out there. Raw material prices, one of the things that’s been sort of -- as I’ve shared on this call, I mean, when something is $100 in U.S. -- Canada, it’s $100 in U.S. And as our product shifts more, and more sales come out of the U.S., we already are getting built in margin increases to some degree. Now, these are going to get mitigated quite a bit from manufacturing costs for sure and raw material costs, but we think we’re okay for now. I think, there is a lot of mixed feelings on inflation. I’m not sure if there is mixed feelings -- if there isn’t going to be, it’s really mixed feelings on how much inflation there will be in the marketplace. We’re seeing it, we’re seeing it everywhere. We’re seeing it’s costing more money to build the stores. It’s costing more money to make our products. It’s costing more money to ship our products. It’s costing more money to hire people and get them on your teams. It’s costing more -- everywhere we look, it’s costing more money. But as you see with our profitability, in the second quarter, we’ve got a pretty darn good business here that is extremely profitable. And as we get some more and more products sold in the U.S. and as we get higher and higher sales and hopefully a bit of leverage there, we should be okay to continue on without passing on further increases -- any increases to our customers.

[Mark Altschwager:]

That’s helpful. Thank you for taking my questions.

[Operator:]

The next question comes from Mark Petrie from CIBC. Please go ahead.

[Mark Petrie:]

Yes, thanks. Good afternoon. Obviously, tons of momentum in the U.S. and growth well ahead of your plans. Does that change how you think about the pace of store openings? And I know that GTA distribution center that you’ve broken ground on is to help -- partly to help support the U.S. as well, but I guess the same question about your distribution infrastructure to sort of support this momentum.

[Brian Hill:]

I’ll take the retail and pass DC off to Jen. The retail, yes, I mean, we are focused, most of our stores and new openings are focused in the United States and into some of these new markets I suggested. We don’t have a store in Tampa Bay. We do not have a store in Fort Lauderdale. We do not have a store in the new markets we are about to open in Nashville and Las Vegas. We do not have stores in Atlanta. We do not have a store in Phoenix. I mean, there is countless cities that we do not have stores in the U.S. And that’s what’s so exciting about our growth opportunities is, not only do we have the opportunities to open new stores and do great retail sales, but the bump we get any eCommerce sales and then just the whole overall macro effect of doing so, it’s fantastic. Lease rates are still competitive, not necessarily because I think the ship sailed on the sort of COVID bargains, but what hasn’t sailed on leasing is the fact, there is still not that many people opening stores and expanding stores. So, supply and demand is tilted in our favor meaningfully. I’ll pass over the rest to Jen, as far as DC goes.

[Jennifer Wong:]

Thanks for your question, Mark. We talk about trying to look into the future all the time, particularly when we’re talking about planning DCs. We’ve had lots of analysis and lots of projections and many different kinds of scenarios that we run through. And I would say -- how to answer your question is that with the Toronto one and with actually all of our DCs, we have a planning horizon that goes out as far as 7 to 8 years. So right now, we’re looking at a planning horizon that takes us out to fiscal year I think 2028. And it’s generally using our growth projection. I suppose if our growth excels higher than expectations, it just means that planning horizon is shortened. And obviously, we’re monitoring it as we go all the time. And we talked about being put in a high class problem situation where we might be having to expand a DC sooner than we had planned. And we view that as a high class problem. So, right now, not worried about the capacity for the Toronto DC. In fact, I think we are leasing space. It’s a little bit bigger. We were talking about subleasing a portion of it. We probably won’t do that now. And we think that we’re well taken care of, at least for the next three to five years, for sure. The U.S. DC, I’ll just add, I talked about expanding the U.S. DC at the 3PL about a year ago. We have lots of space there to grow into. So, not an immediate concern at this point in time.

[Mark Petrie:]

Okay. I appreciate the comments. I guess, Brian, just a follow-up on specifically the U.S. store opportunity. I mean, I certainly appreciate that there’s a lot of markets that you guys are not serving today. And I guess, that’s obviously the opportunity. I guess, my question is more specifically, do you think there’s an opportunity to accelerate the opening pace from kind of the 6 to 8 that you’ve targeted for this year to something higher than that for next year?

[Brian Hill:]

I think, we potentially could, we’re very hands on and we are very centralized in everything we do. So, we not only do leasing in-house, we do design in-house, we do CAD drawings in-house, we do construction. Everything we do, we do in-house. We contract out the actual building itself, but all the construction management, everything we do in-house too. So, we do have limitations to some degree, and our retail teams have limitations. And we can’t just open these doors and go hire 30 people, 40 people in the new market and expect them to be able to open and just start operating at the level of customer service that we’re accustomed to and our customers are accustomed to. So, we have to be measured in our growth here. And we’re going to continue to be measured on our growth here. And quite frankly, as you can see by the quarter and so far this year, our business has been growing at a more than a very healthy growth rate without expediting our store opening. So, perhaps maybe if for whatever reason that might slow, but we don’t see that happening. So, while our business is growing at these growth rates, as we’ve seen, we don’t see any need to actually accelerate it anymore. And we think that logistically it might pose some challenges and us continues to live every day customer -- Everyday Luxury experience to our customers.

[Mark Petrie:]

Okay. I appreciate it. I also wanted to ask about your margin outlook into next year, or even potentially beyond. Obviously, there’s a lot of tailwinds just given the leverage, the sales leverage, but also sort of beneficial channel and geography mix, but also headwinds as you continue to face some of these supply chain challenges, but also continue to invest to support sort of longer term growth. So, I guess, just thinking about the next year or two, do you think there is a meaningful opportunity to see margin leverage, or would you expect some of these headwinds and the choice to continue to invest in longer term growth to offset some of those tailwinds?

[Todd Ingledew:]

Hi, Mark. It’s Todd here. You mentioned it in your question, we obviously have some tailwinds that are driving our margin improvement, whether that’s leverage or lower markdowns, even the Canadian dollar, but we also have significant headwinds. And the primary form for the next six months being the increase in expedited freight. And so, we are seeing additional costs coming against those -- the tailwinds that we have. And that’s why we’re expecting gross profit to be relatively flat to FY20 levels for the back half of the year. And then, going forward, I think it’s difficult to say at this point. However, I think we’ve talked about it before, over the long-term, as our business grows in the U.S. and eCommerce continues to grow, we will see sort of incremental margin improvements over time from that mix shift in our business.

[Operator:]

The next question comes from Derek Dley from Canaccord Genuity. Please go ahead.

[Derek Dley:]

I just want to follow-up on that question on store openings. How far out do you have visibility on new leases? Like, do you take it -- Jen, you mentioned the seven, eight-year view on the DCs? What is your view now in terms of securing leases over the near-term for new stores?

[Jennifer Wong:]

I’ll let Brian answer that, stores.

[Brian Hill:]

Yes. So, we have a seven-stage process that starts with identifying where we want to open a store to sort of picking out where the location and particular locations are within that shopping area or shopping center to negotiations to finalizations. We have a sort of six or seven-step process, approvals and things with our leases. And so, we’re working on leases. We have some leases come up that we get a store presented to us, because there is a -- we had an idea of a shopping center, we wanted to be in there, for whatever reason, there was no availability in that shopping center. And all of a sudden availability happens because someone goes bankrupt or someone wants to move and be in a bigger store or smaller store, and we get very -- some very short notice on that and we have to scramble. Other times, for instance, we just opened in North Park in Dallas, which has been an exceptional opening for us, we did that lease three and a half years ago. So, I think that it varies and how far out we’re doing. We do have a plan. We do have a plan in all the stores. We know exactly what stores we want to open in the U.S. over the next five years. We have them in a prioritized order, typically by volume, not typically by operational ease. And because that’s how we choose is based on where are we going to do the most volume, we’ll figure out how to operate it. But that’s how we approach it. And right now, we’re presently, probably, in discussions on 15 stores right now, and some of them, they don’t have locations for us and some of them they do, and some of them they do, and they’re two years out, and some of them are six months out. And so, at any point in time -- so we’d all kind of go, okay, well, let’s open the store and let’s negotiate this lease, and then let’s open the next store and negotiate this lease, or we’ll do this and this and this. We do a basket of leases in sort of phases, and we go out and try to get -- we negotiate and pursue 10 to 15 leases in order to get 5 or 6 with so many things, there is location in the shopping center, there’s size of the location, there is a shape of location, there’s presence within the center where it’s got a big storefront or not, then there is all the financial terms with leases. So, there’s a lot of things have to go right. And we just have never had compromised on what it is about real estate. And that’s why I think we have the two best corners in Manhattan and certainly Southern Manhattan and SoHo, some of our new locations. We always have the best locations in Canada. And we think we’re on that pace now in the U.S. We have world class real estate positioning in the U.S. as well. And so, we’re not going to compromise on location, we’re not going to compromise on size, we’re not going to compromise on presence, and we’re certainly not going to compromise on financial and pay over market because we’re in a rush. So, we have a process, it seems to work, our business is solid and growing. And so, we’re just going to continue to do that. And as we mentioned about marketing, we haven’t even put in any marketing initiatives at this point in time, and our full omni slate of capabilities hasn’t rolled out yet at this point in time. And we’re not finished with our product expansion. So, we have all these other initiatives that we think will help grow our sales, let alone all the improvements, eCommerce and everything else. So, retail is not our only growth. I just find that ironic, a year ago, even we thought we had too many retail stores and now our retail is booming. So, it’s interesting what 12 months will do and quite frankly what six months will do. And stores are still closed in Toronto, three months ago. So, we’re pretty excited about that now, but we don’t want to knee-jerk on this. We want to just continue facilitating as best we can and, the way we always have.

[Derek Dley:]

I really appreciate all that color. Todd, maybe just one for you, just looking at the balance sheet, now you’ve repaid the term loan, you have nothing drawn on the credit facility, you got $132 million of cash on the balance sheet. Can you just talk about capital allocation priorities? And, is there -- are there any discussions on any return of capital to shareholders?

[Todd Ingledew:]

Yes. Obviously, as we’ve said, our first use of cash is opening new stores, building the distribution centers. We’ve been talking about investing in technology and infrastructure to grow the business. And so, we’re focused on that today. Down the road, will we look at reimplementing a share buyback or other options? Yes, but we’re not there yet.

[Operator:]

The next question comes from Irene Nattel of RBC Capital Markets. Please go ahead.

[Irene Nattel:]

Thanks and good afternoon, everyone. Before I get to the questions I want to ask, just a follow-up on your answer there, Todd. When you said yes, but not yet to an MCID, what would be the precondition that would cause you guys to say, yes, okay, we’re ready?

[Todd Ingledew:]

Irene, as Brian just said, we opened our last stores on July 12th, reopened our last stores on July 12th, and there is still a lot of uncertainty in the environment. So, right now, it makes sense for us to hold on to the cash that we have. And I think once we get clear view on the go-forward, we would consider it at that time.

[Irene Nattel:]

That’s great. Thank you. So, one of the things that’s really interesting is a comment I think, it might have been Brian, he made this that you decided not to do one of your fall promotions. You similarly kind of shifted or pulled back on some of your spring promotions. So, I was just wondering how you are thinking about the cadence or the depth of promotional activity on a go-forward basis, because in other words, I guess, what I’m really saying is, do you think it’s sustainable? Like, can you guys just -- given the really strong demand to kind of shift and pull back a little bit on that promotional calendar?

[Brian Hill:]

I think that’s a great question, Irene. We’ve been discussing it. And we only made the decision -- we are layering on sale, it usually occurs on Canadian Thanksgiving, both in Canada . And so, it was just this weekend that we did not do it. We’re just not seeing the drop in our sales when we’re not having these promotions and certainly not a drop in our gross profit, gross margin. So, we are just not -- at this point in time, we’re not really inclined to do it, maybe we will have one. The nice thing about being somewhat -- not necessarily irrational, but random is that people don’t wait as well. And so, the last thing you want is an expectation and people are waiting to buy full-price and because waiting for you to go off price. And so, that’s the key. I mean, the fact that we haven’t now had either of these sales, so we’re going to go a year without either of those two mid season sales. And granted they’re only on the weekends, just so we know, just to be clear. And I believe they’re only online as well, so. But, the fact that people don’t wait now, because they don’t wait now, because they don’t know if you’re going to have it. Just even by doing that, that fulfills probably 50%, 60%, 75% of what we’re going to do is just the customers don’t know, if we’re going to have a sale or not. So, we find that helpful as well. But, we just haven’t found the need. There was a challenge as well because we had a lot of product and we’re at the time we’re trying to bring a little catch-up as well with online sales and trying to drive people through our website because it used to be 20% to 25% -- started these sales at 15%. Where it is now, people are shopping, omni shopping with us in both e-com and online and in our stores. So, that need is going away as well. So, there is a whole bunch of factors that are suggesting that we don’t have these sales and it’s been great. And what else we did, if I could remind everybody here is that we didn’t just not have our fall sale, our fall layered on sale, our spring sale, we also delayed our ongoing -- our sale in the U.S., which used to break three weeks before our Canadian sales as well, last year, and we’re going to leave that in line with our Canadian too. So, we wanted to become more of a full price retailer, particularly in the U.S. and I think we’ve achieved that now and it certainly has an effect on sales.

[Irene Nattel:]

That’s great. It’s also extraordinary. And I guess, that leads into next discussion, which is thinking about all of the input costs -- or just all the cost pressure. How do you think about your price points? How do you think about -- what would cause you maybe to raise pricing on certain items? Do you look at the competitor? Just how do you think about all of that?

[Brian Hill:]

I think we analyze our product when it comes in. I mean, we’re going to have to look at it a little bit differently now, Irene with some of the other factors and other costs that we’re dealing with here that we haven’t previously had, that aren’t necessarily showing up in our landed cost, landed duty paid costs in our product. I mean our labor in our stores is going to go up, our store capital expenses to build those stores is going to go up. There’s other inflationary pressures over and above our product costs that we’re going to have to weigh out and figure out where those are going to land. So, I mean, there’s a bunch of costs and inflationary pressure on trade costs, raw material costs and labor costs overseas that are affecting our landed price of our products. But then, there’s also bunch of costs as well in the rest of our business. And we’re just going to have to see where those net out. We’re right quite happy and they’re being offset with our growth in the U.S. right now and leverage we’re getting, because of our high sales. But, I think that it’s something that we analyze, every season, when we sit down and price all our new product. We sit down every season, look at it and say okay, what do we need to do? And fortunately, when you -- it’s not just about the product people buy at Aritzia, come to Aritzia, they love shopping in our environments both online and in our stores. They love the customer service we provide. And there’s a whole bunch of different factors in there. So, it’s not just also a factor on cost of the product, there is a whole bunch of other things that mitigate the price. And that’s why we’re in Everyday Luxury retailer, not a fast fashion retail. Our products last and I think our customer particularly in the U.S. knows that. And so, they’re prepared to invest in our clothes rather than buy and throw and discard other people’s clothes.

[Operator:]

The next question comes from Stephen MacLeod from BMO Capital Markets. Please go ahead.

[Stephen MacLeod:]

Lots of great color so far. So, thanks for that. Couple of follow-up questions that I have. You’re seeing very strong in-boutique and eCommerce growth, particularly in the U.S. Can you talk a little bit about how things are evolving with respect to your ability to attract customers online, in boutique, and kind of how their spend compares for a customer who shops both channels versus a customer who just shops, perhaps one or the other?

[Jennifer Wong:]

I’ll take that one. So, we’ve been saying for years, I think we’ve been doing this for decades. We’ve been able to track our customer for -- since the 90s. I remember writing it on a recipe card and filing it manually. So, since we’ve had an electronic point of sale, we’ve been tracking our customer and her purchase history and her transactions, right? We have that data and likewise for eCommerce. So, we have the data, but getting it out in a reporting format that we can slice and dice is what we’re actually in progress with right now as we speak. So, our investment in our data and analytics and with hiring of that new executive earlier this year and building out that team and building that infrastructure will allow us to report on customer and do some really insightful customer analytics and in very, very short order. We do have some of that information, but it’s not quite at the level where we would really, really love to see it be. And so, our expectation is that probably within this year, we will be able to have some more robust reporting on customer.

[Operator:]

Thank you. We only have time for one more question. The next question comes from Meaghen Annett from TD Securities. Please go ahead.

[Meaghen Annett:]

As you continue to expand here in the U.S., just wondering if you’re seeing any change in the uptake of eCommerce as you continue to open new stores, or does that remain strong as you’re entering these new markets?

[Jennifer Wong:]

Any comment?

[Brian Hill:]

Have we seen uptake in certain markets when we open new stores in certain markets you mean, in new markets?

[Meaghen Annett:]

Right. So, are you still seeing that that halo effect on the eCommerce sales?

[Brian Hill:]

Yes, we are, 100% we are. Actually, it may be even greater now. And we don’t see when you open a new store per se. So, if we open a second store, third store in a market in Los Angeles, and we’ve been opening a lot of stores in Los Angeles area, we’re now in San Diego, South Coast Plaza in Orange County. We’re in Century City, Topanga, Americana at Brand and The Grove now. So, we’ve gone from -- we have six stores in Los Angeles and -- Los Angeles and South of Los Angeles now. And a few years ago, we had one I think. And so, we don’t see as much when we do fill in stores, but we enter a new market, like Dallas or we enter new market like Vegas that we’re going to go into and Miami, we certainly see that. And it doesn’t just happen overnight though, it takes a while for the store to get exposed and the momentum. But, we see both the stores sales grow and we see the eCommerce sales grow. But what has surprised us is now there clearly is pent-up demand, we clearly are brand right across the United States now. So, we’re opening new stores. We opened our store in Dallas, it far exceeded anything we conjured up that our sales would be at. And so, we’re seeing our stores open in these new markets and do exceptionally well. So, the store itself is doing well and then the eCommerce is following right along it. So, it’s been -- our U.S. business, I said earlier on the call, our U.S. business is growing at such a rate that it seems that everything right now presently, touchwood, is working for us in states right now.

[Operator:]

Thank you. This concludes the question-and-answer session and today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.