Aritzia Inc.
Q2 2018 Earnings Call Transcript

Published: 5 Oct 2017

[Executives Catherine Tang – Senior Director, PMOBrian Hill – Founder Chief Executive Officer and ChairmanTodd Ingledew – Chief Financial OfficerAnalysts Meaghen Annett – TD SecuritiesIrene Nattel – RBC Capital MarketsLorraine Hutchinson – Bank of AmericaPatricia Baker – ScotiabankCamilo Lyon – Canaccord GenuityMatt Bank – CIBCMark Altschwager – Robert W. BairdJohn Morris – BMO Capital MarketsOperator Thank you for standing by. This is the conference operator. Welcome to Aritzia's Second Quarter 2018 Earnings Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]I will now turn the conference to Catherine Tang. Please go ahead.Catherine Tang Thank you, operator, and thank you all for joining us for Aritzia's second quarter 2018 earnings conference call. Joining me today for the results are Brian Hill, Founder, CEO and Chairman; and Todd Ingledew, CFO. Jennifer Wong, President and COO, is unable to join today's call due to a bad flu.We will begin today's call with management's discussion followed by a question-and-answer period open to the analysts and investors. Please note that remarks on this conference call may provide certain information regarding our expectations, future plans and intentions that may constitute forward-looking statements.We would refer you to our most recently filed management's discussion and analysis, which includes a summary of the significant assumptions underlying such forward-looking statements and certain risks and factors that could affect our future performance and our ability to deliver on these forward-looking statements.The second quarter earnings release, the related financial statements, management's discussion and analysis are available on SEDAR as well as the Investor Relations section of Aritzia's website at aritzia.com. And finally, all figures discussed on this conference call are in Canadian dollars, unless otherwise noted.Brian will begin with the highlights in the quarter, followed by an update on our operational and strategic growth initiatives. Todd will then provide a detailed review of our financial results.I will now turn the call over to Founder, CEO and Chairman, Brian Hill.Brian Hill Thank you, Catherine, and thank you, everyone, for joining us today. During the second quarter, we once again delivered strong financial performance, double-digit revenue growth as well as a meaningful adjusted EBITDA margin expansion, excluding the impact of foreign exchange and duplicate rent expenses associated with our distribution center expansion and flagship stores.We believe that our results demonstrate the strength of our business model as an innovative design house and fashion retailer that provides beautiful, high-quality products and exceptional shopping experience, which resonate strongly with our customers.Highlighting our financial results, net revenue for the quarter increased 10.2% to $174 million, driven both by revenue from our new and expanded stores and by comparable sales growth of 5.4%. We delivered our 12th consecutive quarter of positive comp growth in both our eCommerce and retail channels.This was despite pressure on our overall revenue from the lower level of markdown inventory in July given the phenomenal spring and summer seasons we previously reported. As we have mentioned in the past, great full-price seasons are typically followed by softer sales seasons with lower markdowns. This, combined with our continued sourcing initiatives, had a significantly positive effect on our gross margins.In fact, removing the impact of the distribution center's expansion and flagships not yet opening straight-line rent expense, our gross profit margin was 37.4%, a 150 basis point improvement from 35.9% in the same period last year. Making the same adjustments, along with unrealized operational foreign exchange losses, adjusted EBITDA grew 23% to $24.3 million during the quarter and adjusted net income grew 39.2% to $13 million.In addition to delivering another quarter of strong financial results, we continued to make strides across our strategic initiatives. During the quarter, we remain focused on expanding our real estate portfolio with the addition of two premier locations:]

first, Aritzia Rush Street in Chicago; and second, Babaton Yorkdale in Toronto. We also expanded our Square One store in Toronto. These new locations are all performing at or above our expectations. We are particularly excited about the performance of our Rush Street flagship.We also saw the strong momentum in our eCommerce business continue and we are tracking ahead of the penetration expectations we laid out in our five-year plan. The performance in eCommerce was largely driven by meaningful growth in traffic. We are developing our analytical capabilities while successfully building out our team's leadership, demonstrating that we can operate both best-in-class retail stores and a leading digital business.As part of our continued efforts to manage our business for sustained long-term growth, we are committed to investing in both our talent and infrastructure. From a talent perspective, in addition to adding leadership in eCommerce, we've increased the capabilities across our senior management team including new senior-level talent in retail management, product, real estate, marketing and distribution.From an infrastructure perspective, we successfully completed the rollout of our new point-of-sale system to all our U.S. stores. This implementation, which was launched in mid-August in our Chicago area stores and rolled out to our 21 U.S. stores in September, has gone exceedingly well. We are currently in the process of our Canadian store rollout, which began in Ontario earlier this week. We anticipate the system will be fully rolled out to all Canadian locations by the end of October.The implementation has already begun to provide operational benefits and most importantly, the transition has been seamless for our customers. The new POS system is a critical building block for our omnichannel capabilities and will provide a holistic 360-degree view of our customer, enabling us to better personalize and enhance our customers' experience with Aritzia.In addition, we continue to make progress on our new Vancouver distribution center. During the second quarter, we completed the selection and procurement of all major equipment and started the build-out. In order to have our teams truly focused on the crucial holiday sales period, the facility's opening date has been shifted to the fall of 2018.Looking ahead, we see additional opportunities to grow the business as we execute on our strategies. First, we remain committed to creating beautiful product with the key focus areas currently being our denim and leather initiatives.Secondly, we are continuing to grow our store base, signing leases in first-class locations with favorable economics. The remaining new store openings this year include