Aritzia Inc. (ATZ) Earnings Call Transcript & Summary

Thank you for standing by. This is the conference operator. Welcome to Aritzia's First Quarter 2027 Earnings Conference Call. [Operator Instructions] I will now turn the conference over to Beth Reed, Vice President, Investor Relations. Please go ahead.

Thanks, operator, and thank you all for joining Aritzia's First Quarter Fiscal 2027 Earnings Call. On the call today, I'm joined by Jennifer Wong, our Chief Executive Officer; and Todd Ingledew, our Chief Financial Officer. As a reminder, please note that remarks on this call may include our expectations, future plans and intentions that may constitute forward-looking information. Such forward-looking information is based on estimates and assumptions made by management regarding, among other things, general economic and geopolitical conditions as well as the competitive environment. Actual results may differ materially from the conclusions, forecasts or projections expressed by the forward-looking information. We would refer you to our most recently filed management 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 the forward-looking information. Our earnings release, the related financial statements and the MD&A are available on SEDAR+ as well as the Investor Relations section of our website. I'll now turn the call over to Jennifer.

Thanks, Beth, and good afternoon, everyone. Thank you for joining us today. We began fiscal 2027 on an exceptionally strong note, delivering net revenue growth of 43% and a record Q1 adjusted EBITDA margin of 20%. This drove a 96% increase in adjusted EPS. These results underscore the sustained momentum of our business model and the best-in-class execution of our team. By consistently delivering against our 3 primary growth pillars: geographic expansion; digital growth; and increased brand awareness, we're amplifying the Aritzia brand and capturing robust client demand. We continue to successfully scale our footprint in the United States while deepening client loyalty in Canada. Best of all, this momentum across the board has carried into the second quarter. Looking at the drivers behind our momentum, our 43% top line growth was fueled by a robust 35% increase in comparable sales. This performance reflects broad-based strength across the entire business spanning all geographies, channels and brands. In the United States, Q1 net revenue growth accelerated to an exceptional 55%. This was fueled by widespread demand for our brand across new boutiques, existing boutiques and digital. In our U.S. retail channel, we benefited from 16 highly productive new and repositioned boutiques over the last year. We also delivered outstanding comparable sales growth across our existing boutiques. And in digital, accelerated momentum was fueled by our new mobile app and strategic marketing investments. In Canada, we delivered net revenue growth of 25%. Our success was underpinned by exceptional momentum in digital. We also had robust comparable sales growth across our established boutique network. In addition, our new boutique at Oakridge Park in Vancouver, and our 2 repositions in the past year are delivering excellent results. The reopening of our Oakridge boutique was a proud full circle moment for me. When Aritzia was founded by Brian Hill and his family back in 1984, Oakridge debuted as our very first stand-alone location at just 1,500 square feet. It's also in the exact shopping center I frequented growing up and where I first met Brian. Today, the reimagined 10,000 square foot space showcases our modern boutique experience while honoring our rich heritage defined by our loyal people and our loyal clients. To celebrate this milestone, we hosted a series of specialized events for our people, clients, media and influencers. Oakridge is a reflection of many of our boutiques with its long-tenured world-class style advisers. They're one of the enduring strength of our retail business. Their passion for fashion and deep knowledge of our products are integral to our differentiated premium client service model. As we continue investing in our boutiques, we remain focused on scaling this model as a key element of our brand and part of our everyday luxury offering. Turning to results in retail. We captured demand across every client touch point, reflecting the balanced omnichannel strength of our business. In retail, we delivered an increase in net revenue of 39%. Our performance was driven by exceptional comparable boutique sales, which was fueled by higher traffic. Our strategic marketing investments continue to help deepen brand affinity and drive sustained demand into our boutiques. Our growth was also driven by our real estate expansion strategy, which continues to yield exceptional results. In the past 12 months, we opened a total of 19 new and repositioned boutiques. Square footage growth was in the mid-teens. On average, new boutiques continue tracking to pay back in less than 1 year, beating our target of 12 to 18 months. We continue seeing highly attractive unit economics even as we scale into midsized metropolitan markets. Furthermore, we're seeing clear proof of concept with our larger boutiques. The 10,000-plus square foot locations are matching the strong productivity levels of our smaller footprint. Our digital channel delivered a phenomenal performance in Q1. Net revenue growth accelerated to 56%, led by strong traffic trends. This was fueled by our new mobile app and our investments in full funnel marketing. Our balanced investments across marketing channels continue to introduce new clients to our brand while reengaging existing ones. We're connecting with high-value clients across a diversified mix of owned and paid channels. Our growing brand affinity continues to translate into more efficient client acquisition and stronger retention rates. We continue to optimize our 3 digital channels through compelling brand storytelling and world-class commerce features. First, ongoing website enhancements, including personalized search improvements, immersive multimedia content and site responsiveness are driving strong conversion and sales momentum. Second, app adoption remains outstanding with sustained monthly downloads and deep client engagement. Our product initiatives, selling content and continuous release of new features are resonating with clients. This is driving repeat purchasing behavior and higher conversion. We're seeing clients browse and shop the app multiple times per week. Third, the improvements to our international e-commerce experience continue to pay off, with sales up nearly 170% year-over-year. In addition, our international marketing pilot showed strong initial results. Turning to products. Our commitment to offering high-quality styles at attainable price points continues to drive outstanding results. Widespread demand across all regions reflects the growing affinity for our brand and deep loyalty of our client space. Our broad assortment and disciplined inventory management fueled strong trends across diverse regional climates, and the healthy composition of our inventory continues to drive a lower markdown rate. For summer, we introduced [ fresh silhouettes ] and new color launches. From linen to [ satin ] to [ terry fleece and dresses ], we drove client engagement throughout the season. At the same time, we saw sustained momentum in the iconic franchises for which we are well known and loved. In marketing, our world of Everyday Luxury continued to successfully broaden our reach and introduce new audiences to Aritzia. This fueled another quarter of robust client acquisition. At the same time, we remain focused on deepening our connection with existing clients and maximizing share of [ wallet ]. Our bespoke boutique activations also yielded strong returns. With the highly anticipated openings at Oakridge Park at Toronto Eaton Centre, our activations generated incredible brand heat and community engagement. This drove strong traffic and sales, fueling outstanding opening weekends. In May, we achieved a meaningful milestone in the expansion of our supply chain network, the go-live of our new 380,000 square foot distribution center in British Columbia. This facility features industry-leading goods-to-person technology, enabling reduced pick times and greater order accuracy. The team executed an exceptionally smooth ramp-up over a matter of weeks, maintaining our high standard of client service throughout. The successful execution gives us great confidence as we pivot toward expanding our distribution network in the United States to support our growing digital and retail channels. As I noted earlier, our strong momentum has carried into the second quarter, propelled by exceptional client demand for our spring/summer products. This momentum is underpinned by the enduring strength of the Aritzia brand, our disciplined execution and our healthy financial foundation. Our business has never been better positioned for growth, and we are excited to detail our next multiyear strategic and financial plan this fall. Meanwhile, our focus remains squarely on our 3 proven growth levers: geographic expansion, digital growth and increased brand awareness. This fiscal year, we have a strong pipeline of 12 to 13 new boutiques in premier locations and 4 to 5 repositions. In Q2, we're on track to open 3 new U.S. boutiques. Each one is in a new market for us: Birmingham; New Orleans; and St. Louis. We're also opening 1 reposition in Canada. In addition to generating incremental top line retail growth, we expect these new boutiques to continue fueling an omnichannel halo effect, particularly in new markets. In our digital channel, we're executing on several key initiatives to support continued momentum. These are focused on channel expansion and digital marketing optimization. Near-term priorities include continuing to embed AI to how we work and support clients, releasing new mobile app features and upgrades, optimizing our omnichannel infrastructure and continuing to enhance our international digital shopping experience. In terms of brand awareness, our real estate expansion and strategic marketing investments represent proven multiyear levers to help scale the Aritzia brand across the United States. The affinity for our brand continues to grow, leaving us exceptionally well positioned to capitalize on our long runway for growth in the U.S. and beyond. Furthermore, we continue to strategically invest in world-class infrastructure to help ensure our businesses build a scalable, profitable growth for the long term. In closing, I am profoundly grateful to our people, whose dedication to operational excellence make these results possible. The strength of our brands has never been more evident. With great enthusiasm, we look forward to executing on our strategic vision for the future. With that, I'll now hand it over to Todd to discuss the details of our financial performance.

Thanks, Jennifer, and good afternoon, everyone. As Jennifer shared, in the first quarter of fiscal 2027, we generated a 43% increase in net revenue to $951 million. Comparable sales grew 35% in the quarter. This was driven by outstanding broad-based growth across channels and geographies. In addition, we expanded our adjusted EBITDA margin by 410 basis points, all resulting in a 96% increase in adjusted net income per diluted share. Our sustained momentum remains underpinned by 4 factors: one, exceptional demand for our products, fueled by extremely well-positioned inventory; two, our digital initiatives, led by our mobile app; three, highly productive new and repositioned boutiques with square footage growth in the mid-teens; and four, strategic brand and digital marketing investments, which generated meaningful traffic growth and new client acquisitions. In the United States, first quarter net revenue increased 55% to $638 million. The strength of this performance was fueled by balanced growth across our new boutiques, existing boutiques and our digital business. In the past 12 months, we opened a total of 16 highly productive new and repositioned boutiques in the United States. This resulted in U.S. square footage growth of approximately 25%. In addition, we generated outstanding comparable sales growth in our existing locations. On the digital front, the momentum in our business accelerated meaningfully, as our performance continues to be fueled by extremely strong traffic growth. In Canada, net revenue increased 25% to $313 million. This was primarily driven by outstanding variable sales growth in both our digital channel and our boutiques. Strong product performance and affinity for the Aritzia brand in Canada continues to drive exceptional client demand. Turning to our channel performance. Our digital business continues to have exceptional momentum, with net revenue increasing 56% in the first quarter to $285 million. Robust traffic growth remained the primary driver of our performance. This was fueled by the strength of our product, our new mobile app and our strategic marketing investments. In retail, net revenue increased 39% to $666 million. This reflects double-digit comparable sales growth across both our U.S. and Canadian boutiques as well as the strong contribution from our new and repositioned locations. As we continue to broaden our footprint in the United States, we see ongoing strength in our new boutiques, as well as consistently strong comp performance in our existing locations. In the first quarter, we delivered gross profit of $478 million, an increase of 53%. Gross profit margin expanded 310 basis points to 50.3% despite 190 basis points of pressure related to tariffs and the suspension of the de minimis exemption. Our gross profit expansion was driven by IMU improvements, leverage on store occupancy and other fixed costs, as well as lower markdowns. SG&A expenses for the quarter were $305 million, leveraging 150 basis points as a percentage of net revenue to 32%. The improvement was primarily driven by expense leverage and savings from our smart spending initiatives. Adjusted EBITDA was $192 million, an increase of 81% compared to the first quarter last year. Adjusted EBITDA as a percentage of net revenue expanded 410 basis points to 20.1% compared to 16% in the first quarter last year. We've now delivered sustained margin expansion for 9 consecutive quarters. This underscores our commitment to optimizing profitability while continuing to invest in our future growth. Turning to the balance sheet. Our inventory balance was $548 million at the end of the first quarter, up 34% from last year. We remain pleased with the quantity and composition of our inventory, which continues to be well positioned to drive sales. Our liquidity position at the end of the first quarter is strong with $472 million in cash, no debt and 0 drawn on our $300 million revolving credit facility. During the first quarter, we repurchased approximately 565,000 shares, returning $66 million to shareholders. We plan to continue to opportunistically repurchase shares throughout fiscal 2027. Turning to our outlook. The strong momentum in our business has continued into the second quarter of fiscal 2027. Our spring/summer product is resonating extremely well, and we continue to fuel robust demand with disciplined inventory management. Given quarter-to-date trends, we expect net revenue in the second quarter to be in the range of $1.1 billion to $1.125 billion. This represents an increase of 35% to 39% compared to the second quarter of fiscal 2026. This is driven by comparable sales growth in the high 20s and the strong contribution from our boutique openings. We expect gross profit margin in the second quarter to increase approximately 250 to 300 basis points, driven by ongoing IMU improvements and occupancy cost leverage. We forecast SG&A to leverage 25 to 75 basis points as a percentage of net revenue compared to the second quarter last year. Expense leverage and savings from our smart spending initiatives are partially offset by strategic investments in infrastructure to support our growth. Due to the strength of our first quarter and the continued strong momentum of our business, we're raising our net revenue forecast for the full fiscal year to $4.55 billion to $4.75 billion. This represents growth of 23% to 28% from fiscal 2026. Our guidance for the year is underpinned by high teens to low 20s comparable sales growth and the strong contribution from 12 to 13 new boutique openings and 4 to 5 repositions. We expect gross profit margin to increase by 175 to 225 basis points compared to last year. As a reminder, our outlook includes global tariffs in the United States at 10% and the ongoing suspension of the de minimis exemption for the remainder of the year. Our outlook does not yet include the benefit of any tariff refunds. We expect SG&A as a percentage of net revenue to be flat to down 50 basis points compared to fiscal 2026. Our outlook for adjusted EBITDA as a percentage of net revenue is now approximately 19.5%, primarily driven by improvement in gross profit margin. In closing, the ongoing strength of our performance further reinforces our confidence in our strategic growth levers. We continue to see a significant runway for profitable growth in the United States. Our strategic initiatives, including new and repositioned boutique expansions, digital growth and targeted marketing investments, continue to drive momentum and support our multiyear growth trajectory. These opportunities, our proven track record of successful execution and our strong financial foundation all position us well to sustain our trajectory of profitable, disciplined growth. Thank you.

With that, operator, let's please now open up the line for questions.

[Operator Instructions] The first question comes from Brian Morrison with TD Cowen.

I guess, well done on the print to guide the brand strength. And to the team's credit, you've had such success recently driving top line and notable same-store sales growth, including your Q2 outlook. But this has been against 2-year stacks in the 20s the past year. In the second half, you're going to start to lap 40% and 50% to your stack. So the question is, how do you plan for and approach inventory for fall and winter as you comp these numbers as it looks like high single digit, low double digits in the back half of the year? Is it simply plan conservatively and then air freight? I asked as it seems aggressive to think that this elevated rate can go on perpetually.

Brian, thanks for your question. No question that we are lapping extremely robust growth, particularly in Q3 and Q4. But I want to zoom out a little bit on your question there. And we're experiencing fantastic momentum in our business, which we did say has continued into Q2, and quite frankly, has accelerated slightly into Q2. And I am nothing but confident. I've never been more confident in the business as I am right now. We are very well set up with all of the elements to continue to drive the strength. Starting with product. It all starts -- it always starts with the product. We have an amazing range of products. The assortment is fantastically balanced between client favorites and newness. We absolutely have the right product in the right place at the right time. We will be opening another 12 to 13 boutiques this year. Plus, we're benefiting from the mid-teens square footage growth of the past year. We've got a slew of digital initiatives on the go. We continue our strategic investments in marketing. And as it relates to product, we have, over the last 24 months, honed our planning and allocation and inventory management aspect of our product strategy. And the team has done a phenomenal job in optimizing our inventory. Part of our business model [ and team part ] of our business model is our ability to flex our inventory in season to meet demand. And so that will be a fundamental part of our ability to perform and continue with the strength and meet the business as we continue with 2027.

The next question comes from Martin Landry with Stifel.

Congrats on your amazing results. I was wondering if you could talk a little bit about the fall/winter collection that's probably going to roll up into your stores in the coming weeks. If you can talk about it from a style perspective, but also from a numbers perspective, percentage of newness, average price point versus last year? Any tidbits on a numbers basis would be helpful as well.

Our product strategy, Martin, has not changed. Clearly, our strategy is working. We'll be launching fall later this month, and excited to see the fall launch perform. We'll be entering the season as we do every season with a balanced assortment between newness and client favorites. When you walk into the store, [ it went from fully ] launched. When you walk into the store, what you'll see is roughly 50-50 between the two. And as far as price points, as far as style, as far as our franchises, we will continue with our existing product strategy and continue to have a range of products that appears to be resonating with the client very, very, very well.

The next question comes from Jon Keypour with Goldman Sachs.

I guess the question I want to know about is the Canada business, considering how well it held up. And I think there were a good amount of fears heading into this quarter, and you guys did so well with it. Obviously, the growth numbers get bigger in the back half. I'm just wondering how you think about this business entering maturity? It doesn't seem like it's fully mature yet, but it's your most well-established business. So I guess, how long can these kinds of growth rates sustain? And what do you think exactly is driving it from a -- is it new customer acquisition? Or is it bigger basket, something like that?

Thanks for your question. I think you're asking specifically about Canada. And what we're seeing is the comps continue to be meaningfully positive in both countries in both Canada and the U.S. Obviously, our growth is driven by the U.S. But we're super pleased with the trends that we're seeing in Canada. Our performance continues to be strong, and it has been trending strong for the last several quarters. We're not seeing anything in our data that indicates the trend otherwise right now. And so for us, things continue to be strong, and we see that going forward.

The next question comes from Luke Hannan with Canaccord.

Jennifer, you touched on in your prepared remarks that you had undertaken a marketing pilot for the international business, which showed strong results. I'm curious to know if you can share anything, maybe a little bit more detail on what exactly that pilot showed you and whether or not the international customer or potentially the go-to-market strategy there differs at all compared to how it is that you're expanding into North America?

Yes, it was a very small pilot that we started in May. And I want to emphasize, a very, very small pilot. We launched with typical performance marketing in digital, paid search, paid social. We did some affiliate campaigns. We kept the 2 localized regions, 2 countries. And what we saw was a tremendous response, a tremendous response, both in terms of traffic and conversion. So all of our hypotheses appear to be playing out, and we'll continue with the pilot. It's still very early days, but it's a good test. It's a good test for us to see how our product and our brand is received around the world.

The next question comes from Irene Nattel with RBC Capital Markets.

Thanks, and let me add my congratulations on the quarter. You mentioned that your stores are paying back or you keep saying rather that the stores are paying back in less than a year. Can you talk about how they're maturing and whether some of these new stores are delivering significantly better-than-expected performance as they go through, let's say, year 2, year 3? And then sort of the related questions, particularly in new markets you're entering. Can you talk about sort of the extended halo effect there in both channels?

Yes, I'll take that, Irene. I hope you're doing well. So historically, when we look at a comp waterfall, our Canadian stores always open closer to maturity, with the U.S. stores having a multiyear ramp. But what we're seeing now and really over the last couple of years is that the U.S. stores are opening much closer to maturity. And we're seeing, especially with the FY '26 cohort of stores, that those -- they're opening in a very strong position from a productivity perspective. And then those stores are falling into the comp that we're seeing across the business, which obviously is extremely strong. So there is still growth in those new stores once they're open, but they're falling more in line with how we're comping across the business. And from a halo perspective, we continue to see approximately a 70% lift in the first year in new markets in our e-commerce business. So that's compared to the growth across the rest of, say, the United States in the case of the U.S. So we're seeing a 70% lift there. So it continues to be a very meaningful contributor to our overall growth, and we're really pleased with the performance of the new stores.

The next question comes from Chris Li with Desjardins.

Congrats on the strong results again. As you continue to exceed your expectations, I know you mentioned growth was very broad-based. I'm just wondering, as you look back, was there 1 or 2 areas that particularly outperformed your internal expectation? Was it the mobile app? Was it a new store contribution? Just curious to see, was it 1 or 2 that really kind of exceeded your own internal expectations.

Thanks for your question, Chris. Really, the strength is driven by a confluence of factors. It's never any one thing. It's everything working so well together and gaining the momentum together. Of course, as I've said in the past and said even on this call, it starts with products. Product is central and at the heart of what we do, and we've absolutely gotten the product right. We have the product that our client is loving and new clients are loving. And so we've had an exceptional response to our spring/summer product. This is, of course, supported by extremely well-positioned inventory. We continue to see strong momentum in e-commerce. That's led by the mobile app. The retail square footage growth, of course, contributes. And we've increased strategic investments in marketing to help keep awareness and help keep us top of mind with clients and attract new clients as well as, as I said, keep us top of mind with existing clients. So all of that working together, they're all synergistic together. And not one of those things on their own would be -- you can't be -- contributive to any one of those things. It's all of it working together.

The next question comes from Stephen MacLeod with BMO Capital Markets.

And I will also have my congrats on a great quarter. I just wanted to ask a question. You've talked a lot about kind of new client acquisition. And obviously, the investments in digital and further expansion in the U.S. as well as international is driving that. I was just wondering if you could give any color on any differences or nuances and shopping behaviors between new and existing clients in terms of things like traffic or basket size or frequency of repeat shopping?

We -- the short answer is we see consistency across both cohorts. We're loving the fact that our client base is growing, that we are acquiring new customers, but we're also seeing returning clients continue to love our product and love our Everyday Luxury experience. So really, the productivity that we're seeing is consistent across those cohorts. We're not seeing any market differences in any of those metrics. And again, really pleased and really encouraged, and really happy to see that we have a broad appeal across such a broad base.

The next question comes from Mauricio Serna with UBS.

Congratulations on the very strong results. Maybe just to follow up on Canada, pretty strong growth. Any sense of how you're thinking about the back half growth, just a sense of that? And then just on that point, maybe could you elaborate a little bit more on the profile of the new Canadian customer that you're acquiring? Is it like maybe in terms of like age or anything like that? That would be very helpful to start with.

Yes. In terms of how we're seeing the back half of the year, we're seeing our trends continue. We're not seeing any -- there's nothing in our data to indicate that anything going to change one way or the other. So we're anticipating that the trends will continue in Canada as we've been seeing them. And certainly, we have a very broad appeal across 3 generations, effectively. And we're -- as the younger cohort grows into our target, we're acquiring new customers. But certainly, with our broad product assortment and with the expansion of the different occasions that we develop products for, we're able to accommodate and meet the needs of a client as they go throughout all the different phases of their life, which I think is so amazing. So I think that, that -- between those two things, we're picking up new customers. And that's also what's driving the loyal customer who continues to shop with us throughout many, many, many years.