Aritzia Inc. (ATZ) Earnings Call Transcript & Summary

Thank you for standing by. This is the conference operator. Welcome to Aritzia Second 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 Second 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 made 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 sustained exceptional momentum in the second quarter, delivering 44% net revenue growth and a 35% increase in comparable sales. This, combined with disciplined execution and our profitability initiatives from a 590 basis point increase in our adjusted EBITDA margin, reaching a second quarter record of 21%. In addition, adjusted EPS more than doubled compared to last year. These results, which exclude the benefit of $97 million in tariff refund demonstrate the tremendous earnings power of our business model as we continue to scale. Strength was broad-based across geographies, channels and product categories, underscoring the wide appeal of our brand. We generated high demand for our summer and fall collection and supported this with optimal inventory positioning. In addition, strategic investments in digital, real estate and marketing continued to expand our reach. In the United States, Q2 net revenue growth accelerated to an outstanding 60%. This was fueled by widespread demand for our brand across our digital channel, existing boutiques, and new boutiques. In digital, momentum continued to build, propelled by our mobile app and full funnel marketing initiatives. In our U.S. retail channel, we delivered robust double-digit comparable sales gains across our existing boutique network. In addition, we added 15 highly productive new and repositioned boutiques over the trailing 12 months growing U.S. square footage by approximately 20%. Our performance in Canada also remained strong, with net revenue up 20%. Our growth was driven by momentum in digital, fueled by meaningful client acquisition and greater purchase frequency. In addition, we generated double-digit comparable sales growth in our Canadian retail business. Turning to our retail channel. We delivered another quarter of outstanding results. Net revenue rose 34%, marking an impressive 6 quarter street of top line growth exceeding 30%. Comparable store sales remained exceptional, primarily driven by strong traffic gains. Our strategic marketing initiatives are working. They're building deeper brand loyalty and generating sustained demand into our boutiques. Our growth was also driven by our real estate expansion strategy, which continues to yield phenomenal results. We opened a total of 19 new and repositioned boutiques over the trailing 12 months, yielding square footage growth in the mid-teens. New store productivity and paybacks remain exceptional. In Q2, we expanded into 3 new markets: Birmingham, New Orleans and St. Louis. Our bespoke boutique activations continue to yield great results. generating awareness and community engagement. This drove strong traffic and sales when we opened our doors. In addition to fueling a robust omnichannel halo effect, these boutiques are already generating highly attractive unit economics. In digital, our momentum continued to accelerate. Net revenue surged a 68% over last year, a gain led by strong traffic trends. As a percentage of net revenue, digital increased nearly 500 basis points year-over-year. Growth was fueled by exceptional demand for our product, our strong inventory position, our mobile app and our full funnel marketing initiatives. Balanced investments across owned and paid marketing channels continue to introduce new high-value clients to our brand and reengage existing ones. We further enhanced our marketing tactics across existing channels while launching new channels to fuel ongoing brand awareness. Our mobile app also delivered outstanding results. with sustained monthly downloads and deep client engagement. It continued to drive higher conversion, higher average monthly sessions and repeat purchase behavior. In addition, the improvements to our international digital experience continued to pay off with sales up 165% over last year. Turning to product. Our commitment to offering high-quality sales across a diverse assortment of categories continued to drive outstanding results. widespread demand across all regions reflected the growing love for everyday luxury and deep loyalty of our core client base. Our strong inventory position ensured we had the right product in the right place at the right time. This enabled us to fuel robust demand and achieve a meaningful year-over-year improvement in our markdown rate. Growth was driven by the combined strong performance of our new styles as well as the iconic franchises for which were well known and loved. We drove continued client engagement from our end of summer events through to the launch of fall. Our fall collections were extremely well received across many different categories such as T-shirts, blouses, wet fleets, shorts and pants among many others. In marketing, we continue to promote our world of everyday luxury, which expanded brand awareness and drove traffic to Aritzia. This builds another strong wave of new client acquisition. At the same time, we continued increasing loyalty and share of closet with our existing client base. Client growth was in the double digits in all channels and geographies. During our FIFA World Cup campaign, we extended our styling authority into sport during this year's most watched global event. We reached new audiences through spectator styling, product placement and paid media in host cities and key sport markets. Looking ahead, our strong momentum has continued into the third quarter. This is driven by exceptional client response to our fall product and the growing love for our brand. This quarter, we're introducing new and exciting styles and colors across cooler weather categories such as tailored outerwear, sweaters and the super cost. Our inventory remains well positioned to support upcoming holiday demand. In our retail and digital channels, we're executing on several key initiatives to support ongoing omnichannel momentum. This fiscal year, we have a strong pipeline of 12 to 13 new boutiques in premier locations and 4 to 5 repositions. In Q3, we're on track to open 6 new U.S. boutiques. 1 each in Florida, Georgia, Massachusetts and Nevada and 2 in Texas. We're also opening 2 repositions, 1 in California and 1 in Quebec. Our real estate expansion strategy is a proven multiyear lever to help scale the Aritzia brand across the United States. In digital, our focus is on channel expansion and digital marketing optimization. Near-term priorities include continuing to embed AI into how we work and support clients. ongoing website enhancements releasing new mobile app features and upgrades, honing our digital marketing tactics and optimizing our omnichannel infrastructure. As always, we continue to strategically invest in core infrastructure to help ensure our business is built for scalable, profitable long-term growth. This includes world-class talent to continue fueling our growth and execute on our digital and technology initiatives as well as the expansion of our distribution center network in the U.S. We remain exceptionally well positioned to capitalize on our long runway for growth in the U.S. and beyond. This opportunity is underpinned by proven enduring strength of the Aritzia brand, our disciplined execution and our healthy financial foundation. In closing, I'm incredibly proud of our people and their impeccable execution. This continues to differentiate Aritzia. Their commitment to delivering exceptional experiences for our clients and advancing our strategic priorities has positioned us well for the future. I look forward to sharing how we will build on this momentum and unlock our next chapter of growth at our Investor Day on October 27. With that, I'll now hand it over to Todd to discuss the details of our financial performance.

Thanks, Jennifer, and good afternoon, everyone. Our second quarter results exceeded our expectations on both the top and bottom line. This underscores the continued strength of the Aritzia brand as well as the disciplined execution across all of our teams. As Jennifer shared, we grew net revenue 44% to $1.17 billion and delivered comparable sales growth of 35%. This was driven by broad-based strength across channels, geographies and product categories. Excluding tariff refunds, we expanded our adjusted EBITDA margin 590 basis points. while continuing to invest in the capabilities that will drive our long-term growth. 4 key drivers continue to fuel our momentum in the second quarter. First, exceptional client demand for our product, supported by healthy, well-positioned inventory levels; second, strong execution across our digital initiatives, led by our mobile app. Third, square footage growth in the mid-teens with high productivity in our new and repositioned boutiques. And fourth, strategic brand and digital marketing investments that generated significant traffic growth and attracted new clients. In the United States, second quarter net revenue increased 60% to $779 million. Digital led our performance as strategic investments in full funnel marketing and our mobile app generated exceptional traffic growth and stronger conversion. Our U.S. retail business delivered outstanding double-digit comparable sales growth. We also benefited from the strong contribution of our highly productive new and repositioned boutiques. We increased U.S. square footage by approximately 20%. These results demonstrate that our omnichannel expansion is not only driving immediate top line growth but also building brand awareness and affinity in our highest priority growth market. In Canada, net revenue increased 20% to $390 million, led by the strength of our digital channel. In addition, retail delivered double-digit comparable sales growth. These results reinforce the strength of our Canadian market and the enduring loyalty of our clients. Turning to our sales channels. The momentum in our digital business continued to accelerate. Net revenue increased 68% to $403 million. Strong product demand, our mobile app and our strategic marketing investments drove traffic growth across the United States and Canada. Our performance reinforces our confidence in the significant opportunity to expand digital, particularly in the United States. In retail, net revenue increased 34% to $767 million. We delivered double-digit comparable sales growth in both the United States and Canada. We also benefited from the strong contribution of our 14 new and 5 repositioned boutiques opened in the trailing 12 months. Our most recent openings continue to perform exceptionally well. New boutiques opened in fiscal 2026 are generating higher sales per square foot than prior cohorts and are tracking toward faster payback periods. Excluding the benefit of $97 million from tariff refunds, we delivered second quarter adjusted gross profit of $570 million, an increase of 60%. Adjusted gross profit margin expanded 490 basis points to 48.7%. The improvement was driven by IMU expansion, leverage on store occupancy and other fixed costs and lower markdowns. SG&A expense was $345 million, leveraging 130 basis points as a percentage of net revenue to 29.5%. The improvement was primarily driven by expense leverage and savings from our Smart Spending initiative. Again, excluding the benefits from tariff refunds, adjusted EBITDA was $246 million, an increase of 100% compared to the second quarter last year. As a percentage of net revenue, adjusted EBITDA expanded 590 basis points to 21%. We have now delivered sustained margin expansion for 10 consecutive quarters. This underscores our commitment to optimizing profitability while continuing to invest in our future growth. Turning to the balance sheet. We ended the second quarter with $715 million of inventory, up 36% from last year. We remain pleased with both the composition and quantity of our inventory, which is well positioned to fuel demand through the back half of the year. Our liquidity position at the end of the second quarter is strong with $528 million in cash, no debt and 0 drawn on our $300 million revolving credit facility. During the quarter, we repurchased approximately 900,000 shares for $125 million. Year-to-date, through October 2, we have repurchased 2.1 million shares at an average price of $127, returning $270 million to shareholders. We intend to continue repurchasing shares opportunistically throughout fiscal 2027. Turning to our outlook. We have sustained our momentum into the third quarter of fiscal 2027 as clients continue to respond well to our fall product. Our performance remains robust in both the United States and Canada, showcasing the broad strength of our brands. Based on quarter-to-date trends and accounting for the exceptional strength of our business in the back half of the last 2 years, we expect third quarter net revenue of $1.275 billion to $1.325 billion. This represents growth of 23% to 27% from last year. We expect comparable sales growth in the high teens as well as strong contribution from our new and repositioned boutiques. We expect third quarter gross profit margin to increase 100 to 150 basis points. primarily driven by continued IMU improvements and occupancy cost leverage. We expect SG&A as a percentage of net revenue to increase 50 to 100 basis points in the third quarter compared to last year. Q3 SG&A outlook reflects the timing this year of some of our key strategic infrastructure investments that will power our long-term expansion. This timing, however, does not change our SG&A guidance for the full year. Due to our year-to-date performance and the continued momentum in our business, we're raising our full year net revenue outlook to $4.78 billion to $4.88 billion. This represents growth of 29% to 32% from fiscal 2026. The driven by comparable sales growth in the low 20s and strong contribution from 12 to 13 new boutique openings and 4 to 5 repositions. We are also raising our full year adjusted gross profit margin outlook to an increase of 225 to 275 basis points. We have assumed U.S. global tariffs of 10% to 12.5%. Our guidance excludes any benefit from tariff refunds. We continue to expect SG&A as a percentage of net revenue to be flat to down 50 basis points compared to fiscal 2026. We now expect adjusted EBITDA as a percentage of net revenue to be approximately 20%. In closing, our business continues to perform exceptionally well. and our core growth drivers are delivering. We have confidence in our momentum and we remain focused on what comes next. We will continue to invest with discipline, execute our long-term priorities and build the business for sustainable profitable growth. We look forward to sharing our next multiyear plan at our Investor Day on October 27. Thank you.

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

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

Question for Jen or Todd. Clearly, demand remains strong. My question is on an annual basis, how do you think about your sustainable top line growth algo, as we lap the forthcoming 40% and 50% 2 years tax. And I guess assuming new store grows at about 8% or so, what do you view as a steady-state same-store sales growth target? And any color how you parse that between bricks-and-mortar and e-commerce. I'm just trying to assess here for sustainable near mid-teen revenue growth rate is reasonable.

Brian, I would like to address that first, and then I'll hand it over to Todd. And I'd like to zoom out first and just discuss the drivers of the growth of our business. And these are all the things that we've gone over already in the past, I'm going to sound like a little bit like a broken record. But these drivers are the same drivers that have grown that have contributed to that robust growth pretty much over the last 8 quarters and will continue to drive our growth. And first and foremost, it starts with our position in the market. We were in the category of everyday luxury. We offer an everyday luxury value proposition, and our brand has never been stronger and it's the momentum of that brand that has really underpinned our growth. Then of course, product is at the center of everything that we do and we have had a phenomenal assortment and range in our product, and we continue to innovate in our product. And then that, coupled with our optimized inventory has really fueled the demand and we continue to be in a really, really great position on that front. And then the next thing is our boutique openings. We have consistently opened boutiques. Year-over-year, we're increasing the number of boutiques that we open here this year at [ 12 to 13 ], we have repositioned with that. So we benefit from new square footage growth from the prior year. They continue to drive traffic to our online to our online business. And with that, we have a multitude of digital initiatives underway, a whole road map of digital initiatives, whether it be redesigning our website continuing with features and functionality on our app on our mobile app, really exciting growth happening in digital. It is our fastest-growing channel. And then certainly, marketing, we continue our strategic investments in marketing full funnel marketing. We're at the top of the funnel, we're amplifying our brand and introducing new customers to our brands as well as driving traffic and conversion at the bottom of the funnel. We're getting better and better at that. And last but not least, it's all wrapped up in talent. We have a phenomenally talented team here that, as I said in my prepared remarks, are executing impressively. And all of those things together is what is driving our growth and is also what is driving our growth for the rest of the year and beyond that. So I personally couldn't be more excited about the business. As Todd said in his prepared remarks, the team continues to be excited about our business for the near and for the long term. And so that hopefully sets the stage for you. I'll let Todd go over the details for growth in the back half of the year. Todd?

Okay. Yes, sure. Yes, maybe I'll leave the long-term growth algorithm for the Investor Day. You might hear that a lot today, but we'll start with the first question. But I can focus on the back half of this year. So as you said, over the last 3 quarters, we've delivered exceptional revenue growth, and that's on top of more than 30% growth in the previous year in each of those quarters. And that strong momentum that we've been seeing has continued into the third quarter. But as we look towards the back half of Q3, we're anniversarying the launch of our mobile app on October 27. And where we drove substantial revenue in its first week last year. And then in November, we'll begin to lap not 1, but 2 years of exceptional growth. So obviously, we felt it was prudent to take this into consideration when providing our guidance, which is net revenue growth of 23% to 27% for Q3, reflecting revenue growth for the remainder of the quarter in the high teens to low 20s. And if you work out the map on the implied guide for Q4, it's the same high teens to low 20s. But I think you need to keep in mind, as Jen said, we're seeing broad-based strength across all channels and all geographies. And our inventory is in great position to continue meeting client demand.

The next question comes from Jon Keypour with Goldman Sachs.

Given that stores are performing so well in light of the online momentum exploding, I'm just curious, do you have a sense of what is keeping people coming back to the store? Why there isn't cannibalization online. And anything you can tell us about shopping trends of longer-term customers in terms of like what proportion of your customer book shop both online and in-store versus just online?

Yes, great question. Plain and simple, our retail experience is second to none in the world. I don't hesitate to say that it is world's best and our in-store environment and our in-store client experience is something that sets Aritzia apart from everyone else. So I think we offer something that is unique, and it is unique Aritzia as we continue to open new stores in new markets and new stores in existing markets. We continue to have lineups around the corner on the first day. So we continue to be very encouraged by the performance of our stores. And that said, we, at the same time, have a digital playbook and a strategy to accelerate digital because right now, we're -- we only have 70 as of the end of Q2, we have 79 stores today. We have 82, and so I think there's still a lot of opportunity for store growth, particularly in the U.S. And all of the things that I said at the beginning the call to add to Brian's question, those are all things that go into what drives the demand for Aritzia.

Next question comes from Irene Nattel with RBC Capital Markets.

Clearly, exceptional performance, and it sounds as though the new marketing initiatives, both digital and sort of otherwise, are really attracting new customers. And so I was wondering if you could talk -- and sort of loyal customers and spend. Can you talk about what you're doing differently. And where these new customers are coming from and how we should think about the evolution of all of these as we look forward.

We're simply getting better at what we're doing. And we have a culture here of continuous improvement in anything that we do. And marketing is an example of of where our marketing is becoming more and more effective. And so it's not any one thing. It's -- again, it's really a talented team across the board on all fronts that is contributing to that. Certainly, we're seeing double-digit client growth and we're seeing that in both countries. Obviously, U.S. is driving that growth. but it's really positive to see that it's happening in both countries. The nature of the customer that we're attracting is simply the Aritzia customer. And the customers that we are attracting are customers that stay with that, they're returning to us. So we're not just acquiring customers for a one and done. They're returning and as I said, welcoming them into the world of Aritzia. And I think it bodes very well for our future near and long term.

Next question comes from Luke Hannan with Canaccord Genuity.

Todd, I wanted to go back to your prepared remarks, I believe -- you had said that digital in the U.S., in particular, is an opportunity. And so maybe a 2-part question on that. First, if the inference for that is that as it stands right now, the proportion of Canada within overall digital revenue, if that's higher than your overall business today? Or maybe put differently, if the U.S. penetration for digital is a little bit lower than what you see. And if that's true, what is it that will help close that gap, I guess, for the U.S. versus Canada?

Yes. Thanks, Luke. Our digital penetration is relatively consistent across both countries. But we think there and lies the opportunity. When we look at the boutique footprint that we have in Canada versus the boutique footprint that we have in the United States, we should have meaningfully more opportunity from an e-commerce perspective in the U.S. And we're seeing that in the performance in the second quarter, the strength really, it was across both countries, but particularly in the United States. And on an ongoing basis, as we look forward, we do feel there's an opportunity, specifically in the U.S. to really expand and grow our digital business.

Our next question comes from Chris Li with Desjardins.

Would love to get an update on the mobile app in terms of the percentage of digital business that is transacted through the app, incremental sales growth contribution, the number of downloads, whatever stats you can provide would be very helpful.

Thanks for your question. As I said in my prepared remarks, the app is performing well above our initial expectations. In fact, we're coming up on the anniversary and we happen in just 1 year, we've pretty much catapulted to the top standings among our peers, where some of those peers have actually been operating an app for nearly a decade and in some cases, and more than a decade. So we're exactly where we want to be we're probably there a little bit earlier than we initially anticipated. We're performing at the high end of the range for best-in-class peers. We said we had over 2.5 million downloads, strong downloads do continue year-over-year. So it continues to be strong. And at the high end of the range, and we did report 34% of our business was in digital. You can see we don't want to continue to contribute to our overall business.

The next question comes from Mauricio Serna with UBS.

Maybe just on the comp sales growth, 35% pretty outstanding. Could you unpack a little bit more how much of that comes from AUR growth versus I know in the last few quarters, you talked about AUR maybe being like low single digits. Just wanted to get a sense if that's the case? And then on inventory, I know like that's also one of the -- has been one of your strong points. Just wondering if you could elaborate a little bit more on I see like you ended Q2 with inventory up 36% versus the expected growth of 23%, 27% for Q3. So I just wanted to see if you could reconcile a little bit how the high inventory growth versus your expectations for Q3 sales growth?

Mauricio, I'll take the first part, and then I'll let Todd take the second part. On the comp drivers, obviously, everything is going well on all fronts, as I've said now several times. As it has been in previous quarters, this pump has been primarily driven by traffic versus the ticket primarily all traffic. So remains consistent quarter-to-quarter, including Q2.