Aritzia Inc.
Q1 2022 Earnings Call Transcript

Published: 13 Jul 2021

[Operator:]

Thank you for standing by. This is the conference operator. Welcome to Aritzia’s First Quarter Fiscal 2022 Results 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. I will now turn the conference over to Helen Kelly, Vice President of Investor Relations. Please go ahead.

[Helen Kelly:]

Thank you, Ariel. And thank you for joining Aritzia’s first quarter fiscal 2020 (sic) earnings conference call. On the call today, I am joined by Brian Hill, our Founder, Chief Executive Officer and Chairman; Jennifer Wong, our 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.

[Brian Hill:]

Thank you, Helen, and thank you all for joining us this afternoon. I am pleased alongside with Jennifer and Todd to share with you our Q1 results. We’ve had a terrific start to fiscal 2022. Our multi-channel business is thriving and we are emerging from the pandemic with sustained growth in ecommerce and accelerating sales in the United States. Adding to our already strong business momentum, as of the last two weeks, all our Canadian boutiques are now reopen, with most capacity restrictions coming off of the remaining 50% of our Canadian boutiques is coming Friday. With our entire business open, our clients everywhere can now enjoy the everyday luxury experience whenever, wherever and however they choose. Our future is bright and I could not be more grateful and proud of our extraordinary team, as we drive forward together, meaningful growth, leveraging our world class infrastructure and strong financial position to expedite investments across our four strategic growth drivers. While Todd will provide the details on our Q1 financials, I’m extremely pleased to share with you our performance highlights. We saw net revenue grow 122% from $111 million last year to $247 million this year and 26% from $197 million two years ago. This was despite half our Canadian boutiques remaining close for two-thirds of the quarter and ongoing capacity restrictions and open Canadian boutiques. In the United States, our brand affinity deepened, where in Q1 net revenues grew 63% in U.S. dollars from two years ago and 243% from last year.

[Jennifer Wong:]

Thanks, Brian, and good afternoon, everyone. Building on our strong operational foundation, we are extremely pleased to see the momentum in our business, as the building blocks we put in place continue to fuel our growth. Today I’ll touch on four areas in operation; first, an update on our distribution, logistics and concierge operations; second, infrastructure investments to support future growth; third, our ongoing investment in talent; and finally, our progress on ESG. As Brian noted, disruptions related to the pandemic continue to reverberate through the global supply chain. While we’re not immune to the industry-wide challenges, our teams have continued to successfully employ resourceful solutions to minimize the impact. As noted on the last call, we ramped up use of expedited freight to offset longer lead times caused by limited vessels and sailing. And in response to ongoing port congestion in LA, we continue to redirect freight to transferring our goods through Canada to our DC in Ohio, effectively reducing potential delays by 30% to 50%. Our DC and logistics team continued their exceptional performance in support of the increased demand. During the quarter, our DCs processed a record 11 million units. We had a 50% increase in units picked, packed and shipped compared to pre-pandemic levels, including a tripling of our ecommerce units. If you’ve been in a distribution center the size of ours, you’ll know that this level of demand can put real stress on operations and requires meticulous attention, as inventory is coming in, is being processed, picked, packed and shipped all at the same time. Every detail is carefully considered at our DCs to ensure the end result, whether it’s our product arriving at our boutiques or at the doorsteps of our clients, delivers our everyday luxury experience.

[Todd Ingledew:]

Thanks, Jennifer, and good afternoon, everyone. Our strong performance in the first quarter reflects our growing brand affinity in the United States and the strength of our multi-channel business. For the first quarter, we generated net revenue of $247 million, an increase of 122% from last year and 26% from the first quarter two years ago, pre-COVID-19. This was despite the closure of 34 boutiques in Canada for over two-thirds of the quarter. Of particular note, sales productivity in our open boutiques was essentially flat the first quarter of fiscal 2020, returning to pre-COVID-19 levels faster than anticipated. U.S. boutiques calm positively compared to pre-COVID-19 levels, while open boutiques in Canada began to build momentum despite ongoing capacity restrictions in the first quarter. Our ecommerce momentum continued in the first quarter as well, as our strategic investments continued to pay dividends. Ecommerce revenues were $104 million, a 19% increase on top of the 125% increase in the first quarter last year at the start of the pandemic when all of our boutiques were closed. Ecommerce penetration in the quarter was 42% more than double the 20% from the first quarter two years ago. Lastly, our business in the United States saw acceleration of sales as our brand affinity continue to grow and the country began to emerge from the pandemic. Our U.S. net revenues in the quarter grew 205% from the prior year and 51% when compared to two years ago. In U.S. dollars, excluding the impact of foreign exchange, net revenue grew 243% and 63%, respectively. Please note, I will compare gross profit and SG&A to fiscal 2020 two years ago pre-COVID-19 as it is a more relevant comparison. We deliver a gross profit of $109 million, up 28%, compared to $86 million in the first quarter of fiscal 2020. Gross profit margin was 44.2% in the quarter, expanding 70 basis points from 43.5% two years ago. The improvement in gross profit margin was primarily due to the strengthening of the Canadian dollar, improved leverage on store occupancy and lower markdowns. These gains were partially offset by higher warehousing and distribution center costs driven by the volume growth in our ecommerce business. SG&A expenses in the quarter were $70 million, up 29%, compared to $54.4 million in the first quarter of fiscal 2020. SG&A as a percent of net revenue was 28.5% in the quarter, up 80 basis points from 27.7% two years ago. This 8-point increase was driven by continued investment in talent across ecommerce, marketing and IT to support the future growth of our business. SG&A also included $3 million of incremental COVID-19 related expenses. Overall, we generated $41 million of adjusted EBITDA in the first quarter or 16.6% of net revenue, compared to $35 million or 18% of net revenue in fiscal 2020. Considering we have 34 boutiques close for two-thirds of the quarter and continued COVID-19 expenses, we’re very pleased with these results. Inventory was $165 million at the end of the quarter, up 44% from last year. As a reminder, our increase in inventory is comprised largely of strategic buyers and proven sellers from our feature programs that successfully fueled our revenue growth in the first quarter and are driving our performance in the second quarter. We ended the quarter with ample liquidity comprised of $158 million in cash and full access to the $100 million under our revolving credit facility. Subsequent to the quarter, we closed the acquisition of 75% of Reigning Champ based on a total enterprise value of approximately $63 million. The initial 75% or $47 million will be paid with cash, with $33 million paid at closing and the $14 million pullback to be paid over the next two years. The remaining 25% equity interest held by Reigning Champ’s management shareholders will be converted into Aritzia shares in up to three installments from 2024 to 2026. We’re excited about the acquisition and with the opportunity for men to become a meaningful part of our business. Another subsequent event, which just closed today is the refinancing of our credit facility, extending it four years to fiscal 2026. As part of the refinancing, we repaid our $75 million term loan and at the same time increase our revolving credit facility from $100 million to $175 million. This ensures we have access to the same liquidity and generates interest savings of approximately $1.2 million per year. Today, after the term loan repayment, we are zero drawn on the revolving credit facility and have approximately $120 million in cash on hand. Looking ahead, we are pleased with the sustained momentum in the second quarter to-date. We are on track to deliver second quarter net revenue of between $290 million and $300 million, representing growth of 45% to 50% compared to last year. Our strong performance reflects continue to accelerate growth in the United States across both channels, in addition to the ongoing retail recovery and the reopening of all of our boutiques in Canada over the last two weeks. We’re also seeing the continued easing of restrictions across Canada, with Ontario increasing storage capacities this Friday. While pandemic-related challenges aren’t completely behind us, we believe we’re well-positioned for the remainder of the second quarter. Given our strong performance to-date, we’ve raised our outlook for fiscal 2020 and now expect net revenue to be $1.15 billion to $1.2 billion, up from our previous guidance of $1.11 billion to $1.1 6 billion. For the fiscal year, we continue to expect gross profit margin to remain relatively flat to fiscal 2020. We anticipate gains in the first half resulting from leverage on fixed costs and the strengthening Canadian dollar will be offset by increased cost pressures in the back half from higher warehousing and distribution center costs, continued investment in product talent and the impact of higher costs related to expedited freight. SG&A as a percent of net revenue is expected to increase compared to fiscal 2020. Accelerated investments in people, processes and technology are expected to more than offset the leverage on fixed costs contributing to an approximately 75-basis-point increase over fiscal 2020. In addition, we expect to incur ongoing operating expenses related to COVID-19 of approximately $9 million for the year, a further 75 basis points. Reigning Champ is expected to deliver $25 million in revenue and $5 million in adjusted EBITDA for the full year. For reporting purposes, we will fully consolidate Reigning Champ’s financial position and results from operations for only eight months, from the June 25th closing date through to the end of the fiscal year and remove the 25% non-controlling interest from adjusted EBITDA. Therefore, Reigning Champ is expected to add approximately $17 million in revenue and $3 million in adjusted EBITDA for the remainder of our fiscal 2022. These amounts are incremental to the Aritzia outlook provided. In summary, we’re pleased with the strength of our business across all channels. Our product continues to resonate with our clients, our ecommerce is sustaining its momentum, our U.S. business is accelerating and all of our boutiques are now reopened and performing on average at pre-pandemic levels. With our strong balance sheet position, we are accelerating investment in our strategic initiatives. We’re excited about our future and are confident that our history of operational discipline and track record of driving profitable growth will continue to position us to deliver meaningful shareholder value. With that, I’ll now turn the call back to Brian.

[Brian Hill:]

Thank you, Todd. As Todd discussed, we’ve had a strong start to Q2, which we kicked off with our multi -- our much loved Annual Summer sale. We continue to see an acceleration of sales across both channels in the United States, as well as sustained growth in our ecommerce business in Canada, and we are delighted with the reopening now of all our Canadian boutiques. As I previously suggested, as a result of COVID-19, people have changed how they’re going about doing things. However, they have not changed what they do, socializing and going out, attending events and starting to travel again, and they need fashionable everyday luxury product to do so. Our expanding product assortment serves as well and reposition -- and responding to increasing demand and we will continue to do so in the future. As a pandemic continues to evolve, there are however ongoing impacts as we anticipated. While we could not be more excited by our results, we are maintaining vigilance. Like all global businesses, as I mentioned previously, we too are experiencing ongoing supply chain disruptions expected to carry on throughout the remainder of the fiscal year. We’re mitigating this through continued strategic order management is proven effective. However, as Jennifer mentioned, we’re meaningfully increasing our use of expedited freight, ensuring we enter the fall winter season in a strong inventory position. Building on the momentum of our business, we are driving hard on our four strategic growth levers and continue to make meaningful progress. First, ecommerce and omnichannel innovation, we are capitalizing on our multi-channel client relationship by progressing our omni initiative and personalization capabilities. We expect to launch store inventory visibility come August, quickly followed by buy online ship from store and buy online pick up in store beginning to rollout by the end of the fiscal year. Second, geographical expansion, we remain on target to open 68 new boutiques this year in premier U.S. markets and six expansions of existing boutiques across North America with additional deals underway. Already this quarter we have opened Topanga in Canoga Park, California and we’re very excited to open The Grove our first boutique in West Hollywood, California later this week. We’re also planning for our Super Puff -- Super World Pop-Up boutiques in time for our fall winter season come August. The first reopening in the heart of Soho in New York and the second new boutique opening on iconic Melrose Avenue in Los Angeles. Third, brand awareness and customer expansion, we’re capitalizing on growth opportunities in the United States including the ongoing build out of our paid media program and are developing both our customer acquisition and retention strategy. And fourth, product expansion, we’re meaningfully expanding our product lines by progressing with the development of new categories, extending our depth and widening our breadth. Over the last few decades, while we consider an expansion into men’s, we’ve always maintained the discipline focus on a woman’s business. However, when the opportunity to acquire Reigning Champ was presented earlier this year, it was too perfect to pass up. As I mentioned on the Analyst Call at the time of the acquisition, although there are cost savings and synergies, this isn’t a cost saving exercise. It is a revenue growth opportunity. We look forward to capitalizing on our world class operational expertise and infrastructure as men’s merchandise independently will become a meaningful part of Aritzia platform and corresponding growth. We are emerging from the pandemic confidently and our ability to consistently deliver profitable growth. Our business momentum led by the continued acceleration of sales in United States and sustained ecommerce growth will be supported with ongoing investments and strategic infrastructure, including the recruitment of targeted world class talent, continuously optimized processes, meaningfully enhanced technology and the significant expansion of our distribution network. I remain deeply grateful for our people’s unwavering commitment to Aritzia and our clients and during loyalty to our everyday luxury experience. I could not be more excited about our future. Thank you.

[Helen Kelly:]

Ariel, with that, let’s open the line up for questions.

[Operator:]

Certainly. Our first question comes from Mark Altschwager of Baird. Please go ahead.

[Mark Altschwager:]

Good afternoon and congrats on the continued momentum here. So it’s great to hear that all the boutiques are reopened in Canada. I’m curious, how are you thinking about pent-up demand with the stores now reopened? It -- I guess it seems you’ve very effectively captured demand in your digital channel through this period of disruption. So I’m trying to think through how much incremental growth you think you could see from here in the coming quarters versus perhaps just more of the normalization with some of these channel dynamics.

[Brian Hill:]

I’m going to start and I’ll pass this over to Todd here with the actual numbers if he has any. But it’s too soon with Toronto, the Canadian stores -- the other Canadian stores that were open, half our Canadian stores in the West. The challenge we had is that they were -- they stayed open during times oscillating up and down COVID numbers. So people felt comfortable and then not comfortable and comfortable and not comfortable and so there wasn’t really definitive sort of spikes in ecommerce business when people felt less comfortable and vice versa. So it was pretty hard to judge. And so far with Ontario opening, we think we probably get a pretty good read, but we’re not really going to get a good read until -- to be able to answer that question until these stores get open to figure out how much is actual incremental versus not. So while the stores are open until they get full capacity starting this Friday. So, I don’t know if we have an answer. Todd, do you have a feel for that yet? It’s too high.

[Todd Ingledew:]

I think it is too early to…

[Brian Hill:]

Yeah.

[Todd Ingledew:]

…speak on that.

[Brian Hill:]

Too early to comment. But what we have seen in the United States is our stores reopen and our ecommerce business continued to grow from this -- from last year. So we’re hoping the same -- we’re cautiously optimistic the same thing is going to happen here in Canada.

[Mark Altschwager:]

And that is helpful. And then, separately, you guys pulled back on your typical sale period, I think, in the first half of the calendar year here. I’m curious how you’re thinking about sale events and promotional strategies for the back half relative to what the company has done historically?

[Brian Hill:]

So what we’re thinking, yeah, we lost our regular lighten up sale in the spring. I’m not sure we’re going to have our regular layered on sale in the fall. We’ll determine if we’re going to have that. We’ll have to do a little bit to do with how our strategy and sales strategy, but also with supply chain disruptions and how businesses and how much inventory we have. So we’re going to be monitoring that. We delayed our American sale going early prior to Memorial Day to the beginning of June and that we’re going to continue -- that’s done, we’re not going to go back to what change that for a decade now. So that’s now fixed. But I think the different point here, one is, our marketing department feels that we’re talking about sale a little too much. But the product department needs to have sale to clear out inventory and we have an addiction at Aritzia to starting in mid seasons quickly clean inventory and we always will try to do that. So maybe the solutions decoupling and have us continuing with different sale periods and various sale periods, but have marketing speak to the class. And so we’ve been debating that of late, but our objectives to be on sale at a less than we have been in the past and so we’re going to sort of figure out and try and navigate that to see how that manifests.

[Mark Altschwager:]

Okay. Thank you for the detail. I’ll jump back in the queue.

[Operator:]

Our next question comes from Mark Petrie of CIBC. Please go ahead.

[Mark Petrie:]

Yeah. Good afternoon. Just want to ask about the differences you’re seeing between the Canadian and U.S. markets? And separate from the differences in opening restrictions, have you observed any differences in sort of consumer demand, what people are actually buying? And does that have any implication about how you plan or position for upcoming season?

[Brian Hill:]

I think that’s a good question. It’s going to be interesting to see, because we’ve all seen pictures of celebrations and festivals and music and get togethers in the United States. I saw about two months ago a video that just blew my mind on, I think, it was Vegas poolside. It seems like it didn’t even look like COVID everywhere existed let alone even happen. So we’ll see how Canadians react to that. Our sense is there’s been less euphoric response to COVID or maybe we’re just a little bit more cautious here. I don’t know. So your guess is as good as mine on what’s going to happen there. As far as product goes, we always did have a great mix of product and that’s one of the things we’ve always been most proud of is not just through the department, the various product types, T-shirts, blouses, sweaters, jackets, dresses, coats, whatever. It also across having different product for our customer and her needs, whether she’s going to work, whether she’s going out, whether she’s hanging out on the weekend, whether she’s exercising, whatever. We’ve always tried to have be there for her regardless of what her activities. When COVID first hit, we saw a definitive drop immediately in going out clothes, as well as professional wear. We’ve seen a rebound now in the going outwear but we haven’t seen a rebound in the professional wear quite as much. But time will tell and then we’ll see what gets mandated coming fall and we’re optimistic that people are going to want to refresh their wardrobes regardless of what they’re up to. So, we haven’t really got a good read on the U.S. versus Canada. But that’s a little bit has to do with the seasons too. People aren’t -- don’t typically dress up in the same manner in the summer and they’re a bit more casual and a little less clothing. So we’ll be able to answer that question a little bit more on our next earnings call after we see a reaction to our fall assortment. But we’re optimistic that people’s wardrobes are going to be going back to normal here and how they’d previously purchase. And as I mentioned, we’re set up at Aritzia to do whatever it may be, whatever way the wind blows here on clothing and what she wants, we’re there for her.

[Mark Petrie:]

Yeah. Okay. Thanks. And I guess just following up, but maybe a slightly separate topic. I’m just curious, maybe it’s difficult to answer given the noise of the pandemic. But is there any difference in how the Canadian consumer or the U.S. consumer has responded to your efforts around additional colors, cuts and sizes or is it pretty consistent across the two markets?

[Brian Hill:]

It’s pretty consistent across the two markets. We’re going to see some differences, I think, in color, particularly come fall and winter in the United States where we have a lot of growth in the Southern United States. But up to this point in time, it’s been pretty consistent. The reaction has been very positive both in Canada and the United States.

[Mark Petrie:]

Okay. And then one more if I could, this one maybe for Todd, I’m not sure. But I guess just generally, there’s obviously a lot of puts and takes on margin, but fundamentally as the business exit the pandemic, has the underlying profitability of the business shifted, given the changes in product and geographic mix or other factors. I mean, you highlighted some, relatively meaningful SG&A costs that you expected this year, but presumably that layers out over the course of time? But do you think the business exits the pandemic fundamentally different from a profitability perspective?

[Todd Ingledew:]

No. No. We do not. We’re still, as I discussed, experiencing COVID-related expenses that are material. And we’ve made investments over the last two years in our people. Last year, during the pandemic, we continue to invest, as we have done this year. And those investments in IT and ecommerce and marketing, they will all generate what we feel is outpaced growth in the years ahead. And so, no, we don’t believe there’s any fundamental shift. Having said that, as our business grows in the United States and that becomes a more meaningful part of our business, especially the ecommerce channel. I think we’ve talked about that quite a bit is that, that is our most -- our highest margin channel and the most creative. So as that continues to grow, we do expect margins over time will expand from that dynamic.

[Mark Petrie:]

Understood. Appreciate all the comments and all the best.

[Operator:]

Our next question comes from Derek Dley of Canaccord. Please go ahead.

[Derek Dley:]

Yeah. Hi. Thanks. I was just wondering if you could talk about how you envision now that you’re starting to see brick-and-mortar reopen across the Board here, the mix between ecommerce and brick-and-mortar stores. And I guess more curious in terms of your plan to -- in the past with the ecommerce strategy you were offering more sizes. Is that -- are you still going to have more sizes online versus in the store? How do you find on sort of managing that mix?

[Brian Hill:]

Yeah. I mean, our stores have been getting bigger over the years and they’re continue to get bigger. A lot of the stores are opening now. The growth we’re about to open isn’t particularly large. But some of the stores were reopening have been meaningfully larger than we have in the past. It’s helping us. We have some expansions happening in Canada with some flagship opportunities that we’re expanding in as well. So from a size perspective our stores are getting bigger, but they are not in any way shape or form keeping pace with the growth of our product online. So whereas our stores are growing, our average storage size is growing 10% a year, because we have 100 stores, so they’re not growing particularly unnecessary we’re getting reposition. Our product mix is growing far -- faster than that and larger than that. So we don’t have any stores now that whole -- house our whole product assortment and as we continue to expand in colors, sizes, length and other categories, our stores are not going to be able to hold their product to have be able to hold even less a percentage of the product. But that’s fine, because we have a robust ecommerce channel and that’s one of the benefits of ecommerce is you can sell as much as your warehouse can hold and your distribution center is going to hold and that’s why Jennifer is embarking on a big expansion of our distribution network right now to accommodate the expansion of our product specifically online. The stores we’ve been pleasantly surprised with how they bounce back. We don’t know if this is just pent-up demand or this is going to continue. We don’t know at this point in time, sort of a high class problem, wondering whether your stores will come back down to earth as we predicted. But I think that the stores and the positioning of the stores, although they are profit centers for Aritzia and although we sell a lot of product in our stores, the role of the store starts to change and it’s about the presentation of your brand and experience a customer has, and setting that up in real live versus online. So I think it’s a combination and I will continue to say, I think, we’re extremely well-positioned having world class retail and world class ecommerce and we think that’s a strategic advantage for Aritzia in particular both today and going forward. So we don’t see that changing. So the expansion of our product, not just in sizes and shapes and colors and things like that. Categories and all sorts of things, a lot of that expansion will occur online only.

[Derek Dley:]

Okay. Well, that’s really helpful. And then just one more just in terms of the expansion with the -- of the distribution centers, Jennifer, it sounds like that was predominantly meant ecommerce in Eastern Canada and the US market. But is there any update on an international strategy beyond North America or is it sort of too early to ask that question?

[Brian Hill:]

Yeah. We were really focusing on the international few years back and sort of dawned on us, maybe we’re better off looking at the easy, low hanging fruit of the United States, which is right there and that’s one of the reasons our business has grown so fast in the last 24 months and 12 months is through probably late or -- and certainly since last year is due to the fact that we focused on the U.S. and the U.S. is driving our growth right now. So we -- our -- international certainly back on our radar now and we are certainly putting strategies together to continue to grow our international, but our focus is still firmly in the U.S. There’s a huge opportunity for us there and we’re going to continue to explore that while we can. But the international is certainly back on the drawing board per se and figuring out strategies on how we’re going to grow that too.

[Derek Dley:]

Okay. Great. Thank you very much.

[Operator:]

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

[Irene Nattel:]

Thanks, and good afternoon, everyone. Just kind of thinking about the conversation that’s been happening so far. So I guess the first question is, obviously, as you expand the offering both in terms of categories and in terms of sizes, colors, et cetera. How do you effectively communicate that to your existing customer base to the extent that a lot of that is going to be available online, as opposed to in-store?

[Brian Hill:]

Well, hi, Irene. Thank you for that question. I think there’s a matter of with colors and things like that. We are going to start promoting color in general. There’s a lot of our competitors promote color out there right now and so we’re going to can, we’re going to start probably spending a little bit more time promoting color. I think from a sizing perspective, and length perspective, we have just -- we don’t have sizes and lengths in all our styles at the moment, it’s been successful. When we’re in a position that we feel confident that we can sort of promise to our customer that those sizes and lengths are there and deliver on those, that’s when we’ll probably start speaking about it a little bit more. It’s going to be pretty simple. We have a robust direct-to-consumer communication channels. We have social media. We have our website. So it’s going to be pretty and we obviously have our retail stores. It’s going to be pretty simple to communicate that. We just want to make sure that we’re comfortable with the length offering, the size offering and some of these other offerings. And then I think from a new product category perspective, I think the customers are going to be able to -- we’re going to be promoting those as they launch. And so I don’t think it’s going to be any secret to anybody of this product and I think it’ll be quite simple to communicate that. We just have to make sure that we have our ducks all lined up pretty comfortable before we start communicating too much about it.

[Irene Nattel:]

That makes a lot of sense. Thank you, Brian. And then just sort of continuing the discussion about sort of the potential impact of all of this, if we go back to pre-COVID you were on this great trajectory of let’s call it, mid-teens plus or minus in any given year sort of topline growth. But is it reasonable for me to think that over the next several years, as you do launch so many of these initiatives, that we could actually see an acceleration in that topline growth rate?

[Brian Hill:]

We’re -- Jennifer is always reminding both Todd and myself to plan for the worst and hope for the best. So we’re planning that same level of growth. We’re hoping that we will grow and we may see some more robust growth as well. And we’re certainly setting ourselves up for that, but we’re planning. We’re being conservative in our planning and making sure that whatever it is or we’re planning for is something that we feel pretty comfortable, because there’s a lot of moving parts, whether it would be distribution, center size, IT systems, headcount, all sorts of things. And we don’t want to be sitting here coming to you and one day and saying, hey, we invest in all these things, in sales and products here . So we’re going to be conservative and -- on how we plan everything and how our or hopefully we are going to set us -- we’re going to set ourselves up and hope that we will achieve some higher growth rates for sure.

[Irene Nattel:]

Okay. And then, finally, last question on this topic, I promise. And again, just continuing to think this through, you’ve been investing in all this talent, which is great, because it’s enabling you to do all that stuff. So presumably at some point and I don’t know if it’s two years and it’s probably too hard to put a pin in. But we should see sort of more of a convergence in terms of or we should see sort of, I guess, some of the SG&A growth into the sales levels. Is that a way to think about it?

[Todd Ingledew:]

Yeah. Yes. I mean, exactly, I think, as I was answering to Mark, that that’s exactly how we’re looking at it. And this year, is still being pressured again by COVID expenses and then two years worth of growth in our investments in our people that will contribute to outpace growth in the coming years and we fully expect to return and then likely exceed our previous margin levels.

[Irene Nattel:]

That’s very helpful. Thank you. I’ll get back in the queue. Thanks.

[Operator:]

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

[Stephen MacLeod:]

Yeah. Thank you. Good afternoon. Lots of great ground covered so far, but I just wanted to follow-up on two things. The first one was, Brian, in your prepared remarks, you talked a little bit about investments in social media and influencer type marketing. Can you just elaborate a little bit on what those investments might look like? Is the magnitude material and are these more focused on specific offerings, specific products or more broad based in terms of brand building?

[Brian Hill:]

I think, first of all, I will go backwards here. I think it is a combination of specific products if we have specific products to promote and brand building when cases where we don’t. We have been doing some in the past. We brought on some people now. I haven’t seen to kind of read our strategy here overall in those areas. I mean, we brought on some social. Our -- we have a fairly robust social platform right now. Is it perfect? No. Do we have holes in it? Yes. Can we be doing better? Yes. But we have extremely high engagement in Instagram people and places like that like some of them in the top quartile of the industry. So I have been told anyways. But the -- we’re waiting for strategy. We brought on some real professionals here. We’ve got a lot of experience in this area. We will and we will note that. There is TikTok has come to the forefront now and slightly for a reason too it’s getting. There is a lot. Instagram also Wild West for a while there and now. They’ve smartened up and is becoming expensive and the algorithms have been changing and things. So the need to get all -- to get through your customers and things like that. So, one thing I do know is that the social landscape changes fairly regularly and it’s evolving in various places and so it’s important that you stay ahead of that, so it’s not easy to put a strategy in place another three years or four years, you have to evolve that strategy and so we’re always really looking and looking at this and we have some real professionals now coming in. I haven’t seen sort of the next iteration of what our strategy is, but I’m hoping to see in the next few weeks and go from there, okay, see it.

[Stephen MacLeod:]

Okay. That’s great. Thank you. And then maybe just want -- just following up, Todd, on something in the last questions that you were talking about with respect to SG&A leverage. Do -- is the way to think about where we are today that this SG&A, the impact from the investment -- investments, as well as obviously COVID will be isolated to this year, well, presumably. But in terms of the SG&A that you’re taking on to support some of the investments that you’ve made. Do you expect that to continue to weigh, like, into the next fiscal year or is it too soon to tell? I’m just trying to get a sense as to, when you expect to leverage those SG&A investments in a more material way?

[Todd Ingledew:]

Yeah. Hi, Steve. I think the best thing to do is just know that, as we’ve been discussing for like the last 12 months or maybe even 18 months, we’re planning to provide a revised multiyear plan, which will obviously include the project revenue growth, as well as our margin expectations. And we are still targeting to do that this fall, but obviously need to ensure that the business continues to normalize here over the next two months to three months. So I think I would leave it till then. But as I said, we expect our margins will or even our margins will return to pre-COVID levels over time and then grow beyond that.

[Stephen MacLeod:]

Okay. That’s helpful. That’s great. Clearly understandable. And then maybe just finally, with respect to Reigning Champ, I know you’re in the early days of ownership. But I’m just curious what kind of industry feedback you’ve gotten on that acquisition and maybe even potential clients feedback as well?

[Brian Hill:]

Yeah. That’s an interesting question you asked. We haven’t -- the client feedback hasn’t gotten made its way up to me and anecdotally I have friends and people that have congratulated me. But from an industry perspective, we’ve gotten a lot of great feedback from people we do business with, prospective employees and senior employees that are coming I am super excited about it. Internal employees that are super excited about it. So we’ve gotten some really great feedback. And the good news has been as well as that, Craig and the team from Reigning Champ have received multitude of feed -- positive feedback from their end of the industry both men’s were in the street. So I think a lot of people felt this was a really great arrangement and up to this point in time, it’s early days, as you mentioned, but we couldn’t be more thrilled, how we’re going about the integration, everything Jen mentioned, but just anecdotally as well, talking to Craig a couple of times a week and what we’re able to do and some of the shifts we’ve already made and I think it’s going to be a great, great partnership here going forward.

[Stephen MacLeod:]

Right. Thanks so much.

[Operator:]

Our next question comes from Patricia Baker of Scotiabank. Please go ahead.

[Patricia Baker:]

Thank you very much, and good afternoon, everyone. Jennifer, I wonder if we could talk a little bit more about the Toronto, DC, you know that that it’s the largest project in the company’s history? Are there any incremental capabilities that we’ll come to Aritzia from having this facility, I mean, apart from the fact that it’s going to be 3.5 times larger than your existing DC?

[Jennifer Wong:]

And one of the big functionalities that we’ll be able to offer by insourcing is we’ll be able to ship cross border from the distribution center. So right now we ship cross border from our Vancouver, DC and for various reasons it’s difficult to do that with the 3PL that right now. So I think that will -- that’s going to add a ton of volume in particular, but just having that functionality to ship cross border will be a big game changer for us. And then in addition to that, we are exploring various levels of automation that might make it more cost effective. Although, what we have found with our business, in being such a unit-oriented business and highly personalized with the packaging and whatnot that, it will -- the level of automation will be very, very minimal in comparison to, say, an Amazon. But other than that, I think, we’ll find having control by insourcing it will be a real game changer.

[Patricia Baker:]

No. Absolutely. Thank you. And then just lastly, with respect to Q1 were there any particular product wins in the quarter?

[Brian Hill:]

I think we have -- what we’ve seen more so in Q1 and a continuation in Q2 is we had shortages of products in fall and winter. We were late on inventory as I think a lot of retailers were. But -- and we saw our business do extremely well in Q3 and Q4 last year, but we could have done better and that’s why you saw our inventory levels rise for the end of Q4, because we started finally getting enough product and -- to fuel our sales and our sales growth. So as far as wins go, I wouldn’t say there’s any particular item. It’s just the fact that we have right size or inventory for our growing business and it took us a while to catch up. It surprised us. We were quite bullish on fall winter, but we still didn’t have enough inventory. And so the great news is our inventory is in great position right now and the levels are great and we’re seeing that, we’re seeing that. We saw that in Q3, Q4 sales, but as I mentioned, that could have been better. But we’ve seen that’s what’s fueled our great Q1 and our strong outlook for Q2 now and hopefully that continues into the fall. But we’ve had a -- when our businesses is good when typically we have a lot of different products that are resonating with the consumer and not just one or two.

[Patricia Baker:]

Thank you very much, Brian.

[Operator:]

This concludes the question-and-answer session. I would like to turn the conference back over to Helen Kelly for any closing remarks.

[Helen Kelly:]

Thank you, Ariel. And thanks again to everyone for joining us this afternoon. We will be available after the call to answer any of your questions you might have. And if we don’t see you, enjoy your summer and we look forward to speaking with you again soon. Thank you.

[Operator:]

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