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Edited Transcript of ATZ.TO earnings conference call or presentation 9-Jan-20 1:30pm GMT

Q3 2020 Aritzia Inc Earnings Call

Vancouver Jan 22, 2020 (Thomson StreetEvents) -- Edited Transcript of Aritzia Inc earnings conference call or presentation Thursday, January 9, 2020 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian James-Beaumont Hill

Aritzia Inc. - Founder, CEO & Chairman

* Helen Kelly

Aritzia Inc. - VP of IR

* Jennifer Wong

Aritzia Inc. - President, COO, Corporate Secretary & Non-Independent Director

* Todd Ingledew

Aritzia Inc. - CFO

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Conference Call Participants

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* Brian Morrison

TD Securities Equity Research - Research Analyst

* Derek Dley

Canaccord Genuity Corp., Research Division - MD & Consumer Products Analyst

* Irene Ora Nattel

RBC Capital Markets, Research Division - MD of Global Equity Research & Senior Equity Analyst

* Mark R. Altschwager

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Mark Robert Petrie

CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst

* Stephen MacLeod

BMO Capital Markets Equity Research - Analyst

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Presentation

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Operator [1]

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Thank you for standing by. This is the conference operator. Welcome to Aritzia's Third Quarter 2020 Earnings Conference Call. (Operator Instructions) The conference is being recorded. (Operator Instructions) I would now like to turn the conference over to Helen Kelly, Vice President of Investor Relations. Please go ahead.

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Helen Kelly, Aritzia Inc. - VP of IR [2]

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Thank you, Ariel. And thank you all for joining us for Aritzia's Third Quarter 2020 Earnings Conference Call. With us today are Brian Hill, Founder, CEO and Chairman; Jennifer Wong, our President and Chief Operating Officer; and Todd Ingledew, our Chief Financial Officer.

We will begin today's call with management's discussion followed by a question-and-answer period open to analysts and investors. Please note that remarks on this conference call may provide 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 material assumptions as well as certain material risks and factors that could affect our future performance and our ability to deliver on these forward-looking statements.

The third quarter 2020 earnings release, the related financial statements and the MD&A are available on SEDAR as well as the Investor Relations section of our website at aritzia.com.

Finally, all figures discussed on this conference call are in Canadian dollars unless otherwise noted. I will now turn the call over to Brian.

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Brian James-Beaumont Hill, Aritzia Inc. - Founder, CEO & Chairman [3]

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Thank you, Helen, and thank you for joining us this morning. Happy New Year. I hope everybody enjoyed the holidays. As 2019 draws to a close, we celebrate another decade that has seen exceptional growth for our company. I am proud of the results we continue to accomplish year after year. And I'd like to thank the entire Aritzia team across our boutiques, Concierge, distribution centers and support offices for their hard work towards a great third quarter and a strong start to the holiday season.

We ended the third quarter with a strong November and our best Black Friday event to date. Despite slightly lower markdowns, we are pleased that sales continue to trend higher since we embraced the introduction of our Black Friday in Canada 5 years ago. Accompanied by a record surge in eCommerce penetration and notably stronger revenue contribution from the United States, the week of Black Friday now represents our single biggest week of the year.

Overall, revenue in the quarter grew 10% from last year, and we delivered a comparable sales increase of 5.1%, marking our 21st consecutive quarter of positive comparable sales growth. This comes back -- comes on the back of double-digit increases last year, resulting in a 2-year comp stack of 18%. These results reflect meaningful contribution from our new and repositioned boutiques and the ongoing momentum in eCommerce. As noted last quarter, our accelerating U.S. eCommerce channel continues to lead our growth.

Driving sales in the third quarter was our expanded fall and winter outerwear offering. In addition to our signature parkas and beautiful wool coats, our puffers performed exceedingly well and generated significant attention online and on social media. We made our first foray into Men's with Mr. Super Puff in late October. While we are optimistic with the initial order, sales have far exceeded our expectations to the point we have, for all intents and purposes, sold out.

Given the strong sales performance and positive client responses we have received, we will continue to build out our Men's puffer assortment next fall, although it's premature to predict at this point whether we will expand further into Men's wear.

The team also did an excellent job with our holiday collection in the third quarter. We launched our second collection of Ten by Babaton. Comprised of sleek evening wear and form-fitting silhouettes, we are pleased with the success of the brand to date and are excited about its sales potential as we build on the collection in future seasons.

Shifting to channels, strong double-digit revenue growth in eCommerce continued into the third quarter, supported by marked growth in both online traffic and number of transactions, particularly in the United States. Overall, we are confident that eCommerce will be a significant driver of our growth going forward.

At the same time, boutique expansion remains an essential component of our strategy. Our boutiques have proven to be powerful tools in building brand awareness, drawing new customers to Aritzia and delivering consistent revenue and earnings growth. During the third quarter, we opened a boutique in Cherry Creek, Denver and completed the repositions of Rideau, Ottawa and Coquitlam Centre, Vancouver. Payback on our investments in new boutiques continues to accelerate, and we are thrilled with the strong reception to the brand, both in boutiques and online as we enter these new markets.

We attribute our growing brand awareness, in part, to the success we have seen in our marketing efforts to date. Our list of paid and unpaid influencers continues to grow to reflect highly relevant celebrities and personalities. We had notable earned media hits in the quarter, including publications in Forbes and People as well as other significant influencer posts to propel our brand, particularly in the United States.

Finally, we continue to make important investments across technology, infrastructure and talent to propel our growth. We completed our first milestones for the Customer 360 project during the quarter and launched our new marketing communications platform, just in time for Black Friday.

These exciting developments build on our world-class infrastructure and are expected to drive meaningful revenue opportunities. We are confident that our partnership with the SAP and our ability to leverage best-in-class systems for advanced data and analytics position us well for the growth ahead. Jennifer will elaborate on these in a moment.

Overall, we are pleased with our performance this quarter and the continued strength in both our accelerating eCommerce business and our success in the United States. Before discussing our business outlook, I will turn the call to Jennifer, who will give you an update on our operational investments in detail. Following her comments, Todd will provide key highlights of our third quarter financial results. I will now turn the call over to you, Jennifer.

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Jennifer Wong, Aritzia Inc. - President, COO, Corporate Secretary & Non-Independent Director [4]

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Thank you, Brian, and good morning, everyone. From the launch of the customer program and our PLM implementation to the talent we are seeking to add to our incredible team, we are continuing to invest in technology and people to support our long-term growth objectives. I am pleased to give you an update on where we are today, beginning with our customer program.

With the launch of Customer 360 in November, we successfully migrated our central customer data repository to a new cloud-based system. Containing dozens of client attributes, the new repository facilitates the flow of information across our front-facing system to give us an enhanced view of our clients in real time. This milestone achievement is the foundation for the other 3 pillars of our customer program.

I am also proud of the effort the team put into the completion of the first phase of the marketing communications platform, which we used to send our Black Friday and holiday e-mail. Leveraging the data from Customer 360, the marketing communications platform is a powerful engine that will enable us to generate and personalize marketing campaigns based on the preferences of each of our clients, while ensuring a consistent omnichannel experience.

For example, for the client who's a dedicated Babaton shopper, we will be able to tailor specific communications regarding new Babaton collections. Alternatively, if we open in a brand-new market, we can identify and invite clients who live in the area to check out our new boutique. Without this tool, this type of outreach would be a very high effort. And now we will be able to personalize e-mails for our clients with the click of a few buttons. Needless to say, we are excited to roll out the second phase with enhanced campaign capability in the coming months.

Looking forward, we are excited about what is to come in fiscal 2021 with regards to the launch of the remaining projects within our customer program. Responsible for over 1.3 million interactions annually with our clients, Concierge represents a revenue-generating opportunity. In addition to replacing our old case management system that oversees client support through the life cycle of their purchases, we are also looking forward to the added capability for multiple communication channels with our clients in the future, including e-mail, live chat, text or phone. We have just started testing and expect to have the first phase of Concierge completed by the first quarter of fiscal 2021.

Lastly, the cornerstone of the customer program is the digital-selling tool. In the form of a mobile app, the tool will further empower our style advisers and elevate the client's retail experience. This digital black book will provide our style advisers with a wealth of information on client preference and purchase history and enable personalized one-on-one communications, appointment scheduling and inventory lookup capability. We are near completion of the planning phase and are targeting Phase 1 to go live in the second quarter.

All in all, we are thrilled with the progress we are making on each of the projects within our customer program. We are aiming to delight our clients by providing a seamless, consistent and personalized approach towards how we engage and service their needs.

Turning now to our Product LifeCycle Management system. We continue to advance this foundational technology, which provides visibility to the materials and processes that enable bringing our products to market. We are on track for Phase 1 in the first quarter. We are excited about the opportunities with PLM from product innovation to supporting sustainability to streamlining our operations.

Finally, we continue to invest in talent across our business to support our growth. During the quarter, we added key leadership positions across eCommerce, supply chain logistics and retail management in the U.S., and we will continue to build on the incredible breadth and depth of talent across the Aritzia team in the coming year.

I am confident our best years lie ahead of us, and it is our team of remarkable individuals who allow us to set our sights on new opportunities and continued success. I will now turn the call over to Todd to discuss our financial results and our outlook for the fiscal year.

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Todd Ingledew, Aritzia Inc. - CFO [5]

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Thank you, Jennifer, and good morning, everyone. We are pleased with our results in the third quarter and encouraged by the momentum leading into Q4.

As a reminder, we began reporting under IFRS 16, the new leasing standard, in the first quarter of our fiscal 2020. The net impact of IFRS 16 in the third quarter was a reduction of only $16,000 of net income. We do not expect the standard to have a material impact on net income in the fourth quarter. In my review of our financial results, I will focus my commentary on the comparative figures, which exclude the impact of IFRS 16.

Turning to our results, net revenue grew 10% to $267.3 million in the third quarter. This was driven by strength in our eCommerce business, 3 new and 4 repositioned boutiques, which opened since the end of the third quarter last year as well as comparable sales growth in our boutiques. Our annual warehouse sale shifted to the second quarter this year from the third quarter last year, negatively impacting third quarter net revenue growth in the low single digits.

For the third quarter, we delivered a 5.1% comparable sales increase. While warmer weather contributed to a slower start, growth accelerated in the back half of the quarter, and we ended the period with a record Black Friday. These results follow a 12.9% increase in the third quarter of last year, resulting in a 2-year stacked comp of 18%.

Our eCommerce business continues to lead comp sales growth. Our new boutiques are performing above expectations and are exceeding our targeted payback periods. Gross profit margin, excluding the impact of IFRS 16, was 42.6%, down 50 basis points.

We benefited from the shift in our warehouse sale in addition to improvements from our sourcing initiatives and leverage on occupancy costs. However, these benefits were offset by higher distribution center costs as we proactively ramped up staffing earlier for the holiday, continued headwinds from the Canadian dollar, U.S. tariffs as well as ongoing higher raw material costs.

SG&A expenses, excluding the impact of IFRS 16, increased by 13.4% to $64.1 million. SG&A expenses were 24% of net revenue compared to 23.3% last year. SG&A expenses in the quarter included $2.5 million of investments in our customer program. Excluding these investments, SG&A as a percentage of revenue was 30 basis points better than last year.

Adjusted EBITDA, excluding the impact of IFRS 16, increased by 2.4% to $58.4 million or 21.9% of net revenue compared to 23.5% last year. Adjusted EBITDA was impacted by the $2.5 million investments in our customer program as well as the $1.8 million reduction in other income year-over-year.

Adjusted net income was effectively flat at $35.7 million. Adjusted net income per diluted share increased to $0.32 from $0.31 in the third quarter last year.

Our balance sheet remains exceptionally strong with a cash balance of $95.7 million with 0 drawn on our revolving credit facility at the end of the quarter, which puts us back in a positive net debt position. This compares to a cash balance of $123 million at the end of the third quarter last year.

The primary use of our cash flow from operations in the third quarter last year was both the $107 million share repurchase as well as the $39.4 million of capital investments. We also ended the third quarter in a strong inventory position. Inventory was up 15.5% from third quarter last year, in line with the growth of our business.

Turning to our outlook. We are particularly pleased that the sales momentum from the end of the third quarter has continued into the fourth quarter. We expect positive comparable sales growth in the high single digits in the fourth quarter.

For the full year fiscal 2020, we continue to expect net revenue growth in the low double digits. Removing revenue from the additional week in fiscal 2019, net revenue in fiscal 2020 is expected to grow in the low to mid-teens. Including the 2 store openings planned for the fourth quarter, we remain on track to open 5 new boutiques, all in the United States this year.

Our outlook for gross profit margin remains flat to slightly lower than fiscal 2019 due to ongoing higher raw material costs and the impact of increased tariffs on goods coming from China.

We continue to expect SG&A to grow faster than revenue in fiscal 2020 as we make strategic investments in technology and infrastructure. These investments are predominantly cloud-based and are expensed. Incremental SG&A expenses related to these initiatives in the fourth quarter are expected to be $2 million to $3 million, with total project spend for the year to be approximately $7 million to $8 million.

We reduced our expected net capital expenditures to $40 million to $45 million, including costs related to new and repositioned boutiques in addition to infrastructure investments. The reduction in expenditure for the year are primarily related to timing of infrastructure projects.

In closing, we are pleased with the momentum that carried into the fourth quarter and remain confident about the outlook for our business. Our strong performance and solid balance sheet keeps us firmly on track to meet or exceed our stated 2021 financial targets and positions us to deliver on our future growth. With that, I will now turn it back to Brian to discuss our business outlook.

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Brian James-Beaumont Hill, Aritzia Inc. - Founder, CEO & Chairman [6]

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Thanks, Todd. As we head into 2020, we remain focused on: the development of beautiful, high-quality product from fabric to fit; the unique personalized service we offer our clients; our aspirational shopping environments; captivating communications; and, of course, the people who support these client interactions. They all touch our brand, and collectively, they are ingredients of everyday luxury.

In an industry where no detail is too small, each decision we make thoughtfully contributes to our unique positioning. I truly believe our ability to delight our clients on all these fronts will continue to set us apart.

Looking into the fourth quarter, the sales momentum from the back half of the third quarter continued through the holiday season and the start of the Fall/Winter sale. We are pleased with the balanced assortment in our product offering, and I feel we are well positioned with our inventory to capitalize on the revenue opportunities for the balance of the season.

Longer term, we continue to evaluate our opportunities in both product categories and brand expansions. We are progressing with our work on warm weather strategy as well as an extended sizing initiative that we expect to launch this Spring/Summer.

Shifting again to our channels, our eCommerce business remains a top priority. We are encouraged by the acceleration of our eCommerce business and continue to invest in marketing, infrastructure and talent to capitalize on these opportunities.

In the near term, we are advancing a number of initiatives to enhance and personalize our clients' online experience, including the addition of a fit module to better assist her in size selection.

In fiscal 2021, we will continue with site optimizations, improve our international site and expand our omnichannel fulfillment capability by putting in place a centralized view of our inventory and enable cross-channel fulfillment, such as buy online, fulfill in the store. We expect eCommerce to drive an ever-increasing component of our top line growth.

Augmenting our online growth is our premier real estate portfolio. I think it's fair to say, we have never been in a better position as we are now with regards to the pipeline of opportunities in front of us. We have access to some of the best real estate available with increasingly attractive financial terms. We are on track to open 2 new locations in the fourth quarter at Houston Galleria and The Domain in Austin, Texas. Both are located in Texas and represent new markets for Aritzia.

While we are still finalizing our pipeline for fiscal 2021, our plans include locations such as American Dream in New Jersey, which is already complete and waiting for the center opening, King of Prussia in Philadelphia and finally, a deeper push into Los Angeles.

As I have said before, our boutiques are the #1 driver of brand awareness, particularly as we expand into the United States. Our intention is to accelerate the cadence of new boutique openings going forward. However, we will not compromise site selection nor sacrifice our business requirements.

In conclusion, we're extremely pleased with yet another strong quarter and the sustained momentum in our business as we drive growth across products, channels and marketing. With investments in infrastructure to enable that growth, we remain on track to meet or exceed the growth and profitability targets we set out ourselves 5 years ago, and we look forward to sharing with you our version for the next 3 years in the upcoming months. With that, we will now welcome questions. I turn the back -- call back to the operator.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Mark Altschwager of Baird.

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Mark R. Altschwager, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [2]

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Congrats on the continued momentum. My first question, just with respect to the revenue performance in the third quarter, curious how the later Thanksgiving holiday may have impacted the growth in the third quarter versus what you're expecting in the fourth quarter?

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Brian James-Beaumont Hill, Aritzia Inc. - Founder, CEO & Chairman [3]

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Todd, do you want me to take this?

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Todd Ingledew, Aritzia Inc. - CFO [4]

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Sure.

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Brian James-Beaumont Hill, Aritzia Inc. - Founder, CEO & Chairman [5]

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Yes. I mean, we -- the weather was warm early earnings in the third quarter. And I think we felt that a little bit. And then as we started -- as the weather got a little colder, our sales picked up meaningfully. We had an extremely good holiday period -- the start of the holiday period at the end of the quarter.

And -- but those are big numbers, and we're comping -- it's our busiest weak of the year. And we've always found that it's harder to comp on the big weeks than it is on our more typical weeks. But the momentum played well and stayed strong right through the start of the remainder of the holiday season in P10. I don't know if that answers your question.

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Mark R. Altschwager, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [6]

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Yes, it does. That's helpful. And then also on the holiday strategy, I'm curious if there's any change in your sales strategy. It looks like you may have actually had a slightly shorter sale around the Black Friday period, but maybe confirm if that's right or not? And any implications on merchandise margin there?

And then just looking ahead, I know you're reaffirming the gross margin guidance for the full year. That leaves open a pretty wide range of outcomes for the fourth quarter. So just curious if you could get a little bit more specific on how you're thinking about that gross margin trajectory in the fourth quarter relative to the third quarter?

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Brian James-Beaumont Hill, Aritzia Inc. - Founder, CEO & Chairman [7]

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So I'll take the first 2 parts of that, and Todd will take the third part of that. Our strategy, we put in place probably about 3 or 4 years ago, when we recognized that -- particularly in Canada, that the Black Friday was going to be a meaningful sales driver.

So for the last few years, what we've done is just really tweaked it a little bit, and we've aligned it a little bit more with the United States. Obviously, because they have an actual holiday on the Thursday and we don't in Canada, there's some slight variances between the 2 countries. But generally, we're trying to align that, and we're trying to align our business in general.

When we first moved in the United States, we spent quite a bit of time analyzing the market, we tried to be -- have our various sales strategies and merchandising strategies and launch strategies reflect the market in the United States, just as is in Canada. But we found these have converged quite a bit, and so we were making an effort to align as much as we possibly can as far as the period went.

So nothing really notably changed as far as the sale period. We weren't quite as deep with our markdowns this season. We just -- it wasn't -- there's several reasons that went into that, but we didn't go quite as deep and it turned out to be a great strategy for us. It's not that meaningful, but it was certainly a little bit of a switch for us.

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Todd Ingledew, Aritzia Inc. - CFO [8]

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Yes, Mark, for the fourth quarter, we expect to continue to see pressure from ongoing raw material price increases as well as slightly elevated pressure from the new U.S. tariffs on goods coming in from China, just as more of our inventory that we're selling in Q4 has come in since the tariff has been in place. So we do expect to continue to see pressure that will be similar to what we saw in Q3.

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Brian James-Beaumont Hill, Aritzia Inc. - Founder, CEO & Chairman [9]

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And can I add something to that? As we continue to aspire for everyday luxury, we're making decisions on our product developments as well that we think elevates our product and -- whether that be trends or fabrications or construction and selling and things like that. So a little bit of the pressure Todd's speaking of is a little self-inflicted as we continue to elevate our product for our customers and try to delight them more and more.

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Mark R. Altschwager, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [10]

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And maybe one last one, just Brian, it sounds like we're going to be hearing more in the coming months on a refreshed 3-year plan, but any high-level thoughts you're able to share today just in terms of how you're thinking about the revenue growth and EBITDA margin trajectory for fiscal 2021?

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Brian James-Beaumont Hill, Aritzia Inc. - Founder, CEO & Chairman [11]

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Jennifer's going to share that. And right now, we -- the numbers are quite rough, so not really prepared to share the numbers specifically with you.

As I mentioned, we're going to look at increasing the cadence of the new boutique openings. I know we have a few more repositions this year than we had originally planned as well. But we just -- our business continues to accelerate in the United States, and our eCommerce continues to outperform from where we had initially planned. So we're really going to focus on those 2 areas for the 3-year plan is really driving our U.S. business.

We're still grossly undersized compared to our Canadian business, and our customers seem to love our product there. And so -- and the services and everything else that we -- our teams offer. And so we're going to continue to drive that. And then even -- as I mentioned eCommerce continues to exceed our expectations. Obviously, the landscape is changing for everybody, but we seem to be -- our pace of expansion in eCommerce seems to continue to surprise and delight us as well.

So we're going to be -- it's going to be a big focus in both those areas, the United States and eCommerce growth. And of course, we have an incredible base of business in Canada. We're not going to forget that. That's what we've built the organization on, and it's -- we're still industry leaders here in Canada and continue -- hope to continue to be for a long time.

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Operator [12]

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

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Irene Ora Nattel, RBC Capital Markets, Research Division - MD of Global Equity Research & Senior Equity Analyst [13]

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Happy New Year. Obviously, a great quarter. Really intrigued by some of the commentary around the success of, if you will, extended product offering. And I think in your closing remarks, Brian, you mentioned something about a sizing initiative. So I'm wondering, if you could kind of talk a little bit about what might be coming perhaps, sizing, Men's, warm weather, the evening collection, and kind of what's behind that thinking?

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Brian James-Beaumont Hill, Aritzia Inc. - Founder, CEO & Chairman [14]

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I'm just going to make a note of a few of these things. Sizing, warm weather --.

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Irene Ora Nattel, RBC Capital Markets, Research Division - MD of Global Equity Research & Senior Equity Analyst [15]

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Men's, warm weather, the evening collection of Babaton, which, by the way, is all really exciting.

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Brian James-Beaumont Hill, Aritzia Inc. - Founder, CEO & Chairman [16]

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Okay. I'm going to go in reverse order here. So one of the opportunities -- Happy New Year, Irene. One of the opportunities we found is that every day -- we've had a lot of everyday luxury, and we have a bit of joke internally, we need a little bit of every night luxury as well.

And so we think we have some opportunities here with a little bit more body-conscious, form-fitting clothing for women, so that we're not just supplying all our clothes during the day and on the weekends and things, but a little bit more effort into going out at night. So we launched Ten by Babaton, and it has been our most successful launch to date. We're super excited about it and we're going to be expanding that meaningfully.

As far as the Men's go, we're doing such a great job, and we're getting so many calls, and we started seeing a lot of men wear our ladies Super Puff last year. So we expanded into it. We took a pretty -- it certainly wasn't a conservative position. It was, I would argue, a bit of an aggressive position. And as I mentioned, we sold out for all intents and purposes.

We didn't quite get the sizing right. The fit was excellent, but we didn't get the sizing right. We probably bought a little bit too many in some larger sizes, so we have a few XLs and XXLs hanging around, but the smalls and mediums sold out almost immediately. And we're going to expand into that. We were shocked with the response we received.

And I don't know, Irene, if you saw -- you didn't mention anything about our dog initiative as well. But we've got a lot of social media.

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Irene Ora Nattel, RBC Capital Markets, Research Division - MD of Global Equity Research & Senior Equity Analyst [17]

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Sorry, not a dog owner.

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Brian James-Beaumont Hill, Aritzia Inc. - Founder, CEO & Chairman [18]

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We launched the Ruff Puff as a little bit of a fun thing to do while we're at it and send them out to celebrities and people like that, and we actually sold out. And I think it was our -- was it our highest --?

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Jennifer Wong, Aritzia Inc. - President, COO, Corporate Secretary & Non-Independent Director [19]

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#2 engaged social media post.

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Brian James-Beaumont Hill, Aritzia Inc. - Founder, CEO & Chairman [20]

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It was our #2 engaged social media post, was our Ruff Puff initiative, so we --.

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Jennifer Wong, Aritzia Inc. - President, COO, Corporate Secretary & Non-Independent Director [21]

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After Meghan Markle and the Cocoon Coat.

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Brian James-Beaumont Hill, Aritzia Inc. - Founder, CEO & Chairman [22]

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After Meghan Markle and the Cocoon Coat last year. So we had some fun with that. As far as sizing goes, I mean, there has been a push into more inclusivity, obviously, throughout society and certainly in the fashion business, and that's not lost on us. And one of our designers is quite passionate about it.

So we're launching a initiative presently. We do have -- our core sizes go up to 10, but we obviously do carry size 12. I believe we're going up to size 18 with this initiative. It's -- we're testing it in Babaton and then see how our customers respond to it. So we're excited about that. We're not sure it's going to make a meaningful impact to our sales, but we think it's the right thing to do for our customers.

And then warm weather. As we continue to push into the United States, we're pushing into Texas. We're going to be pushing into more Southern states, as I mentioned, California, and Los Angeles, specifically, we have a bit of a push going on there. And so these are all warm weather environments, and we need to make sure our collections, particularly our fall and winter collections.

Obviously, our spring and summer are suitable, but our fall and winter collections, which are typically being made up by sweaters and outerwear and things, we need to make sure we have the right offering there. And I think right now, we don't. Our offerings are not reflected entirely. And I think it's an opportunity for us and to be able to grow the collection such to appeal to these customer groups in these warmer weather markets in the fall and winter.

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Irene Ora Nattel, RBC Capital Markets, Research Division - MD of Global Equity Research & Senior Equity Analyst [23]

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That's great. And just one more. I really appreciate that. And one more, if I might. Obviously, eCommerce is a word that you -- that's mentioned a lot in the press release, you mentioned it a lot in the call. Significant growth, I think, is the terminology that you're using. Would you care to let us know what the current penetration is on eCommerce?

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Brian James-Beaumont Hill, Aritzia Inc. - Founder, CEO & Chairman [24]

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Well, I don't -- it's really hard to figure out the exact numbers because we have a lot of omni going on and a lot of product comes -- is bought online and returned to stores. We have a lot of activity in the stores. It's purchased online. And it's hard to, sort of, figure these out. With all our new systems and things we're putting in, we'll be able to get some numbers on it all.

But I'm not sure at this point in time, we share those numbers at this point in time because -- and we don't even really look at them specifically like that. And -- but as we continue, unfortunately, it's probably going to get even more confusing as we continue with our omni initiatives going forward. But all I can suggest is that we're on track for all our numbers as far as eCommerce goes and if not exceeding them.

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Operator [25]

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Our next question comes from Derek Dley of Canaccord Genuity.

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Derek Dley, Canaccord Genuity Corp., Research Division - MD & Consumer Products Analyst [26]

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Just wondering if you could help us out in terms of quantifying some of the magnitude of some of the impacts on the gross margin. Todd, you mentioned that you expect raw materials to be up in Q4 and some incremental costs associated with tariffs. But I guess the one that was more confusing to me was just the distribution center cost. Is that -- should we think of that as onetime in Q3? Or can you kind of just give us a pecking order of what impacted the gross margin the most in Q3?

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Todd Ingledew, Aritzia Inc. - CFO [27]

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Yes, I would consider the distribution center onetime in Q3. That, again, was in preparation for the holiday season this year. We hired up our seasonal staff earlier than in the prior year to ensure that everything -- everybody was trained and that we were running smoothly for holiday, but that will not happen, obviously, in Q4. And we don't quantify the particular pressures. But as I said, we expect similar pressure on gross profit as we saw in Q3.

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Brian James-Beaumont Hill, Aritzia Inc. - Founder, CEO & Chairman [28]

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And then if I could add, I thought this initiative of hiring early, I thought the teams did an incredible job. We had our best teams we've ever had leading into the holiday season, and we managed to be able to -- we saw very effective ship-through and turn rates even through the busiest periods here through eCommerce, Black Friday and Cyber Monday and things.

And so the initiative worked out extremely well, as you can see from our numbers. And so we're super excited with the initiative this year and we plan on doing a similar initiative next year.

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Derek Dley, Canaccord Genuity Corp., Research Division - MD & Consumer Products Analyst [29]

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Okay, great. That's very helpful. Just shifting gears a bit. Just in terms of your balance sheet, obviously, very healthy here in your net cash position. Can you talk about some of your capital allocation priorities over the next year or 2?

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Todd Ingledew, Aritzia Inc. - CFO [30]

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We, obviously, were very pleased to see the growth in our cash balance again. And our -- the growth in our business is always, as we said, our primary focus and the use -- the primary use of our cash. We do have our NCIB in place. We'll be purchasing through that opportunistically and reviewing other alternatives including paying down our term loan potentially at some point. But we're -- we've just now returned to a strong cash position, and we'll be reviewing our options over the next several quarters.

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Derek Dley, Canaccord Genuity Corp., Research Division - MD & Consumer Products Analyst [31]

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And what about the potential implementation of a dividend? Is that something that you'll be discussing at the Board level in the future?

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Todd Ingledew, Aritzia Inc. - CFO [32]

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It's obviously one of the things on the menu for capital allocation. We have not begun discussions on that in particular right now.

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Operator [33]

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Our next question comes from Mark Petrie of CIBC.

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Mark Robert Petrie, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst [34]

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Brian, just given the importance of the U.S. in terms of current performance but also future growth and -- could you just give us a little bit more detail in terms of the performance in your newer markets versus more established markets? And then any metrics or sense in terms of beyond just the sales results beyond -- in terms of progression on building the brand and brand awareness?

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Brian James-Beaumont Hill, Aritzia Inc. - Founder, CEO & Chairman [35]

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We're seeing strength in both markets. The last 2 stores we opened in Cherry Creek in Denver and Mall of America in Minneapolis, both exceeded our expectations. We've seen eCommerce growth in both those markets double, more or less double, last I checked since we reopened in both of them and this is a trend we're seeing in the United States is the store openings being extremely successful, and then eCommerce growing along with that at a meaningful clip.

So we're super excited about that, but we continue to see growth in our U.S. and our U.S. comps. Quite frankly, our U.S. comps need to be -- are very healthy. And so we're seeing mature markets in the U.S. continue momentum as well. So we're just really excited about our United States business and the opportunity ahead of us because really, our penetration is so small there right now that we just have a big opportunity that's going to keep us busy for some time here.

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Mark Robert Petrie, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst [36]

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And you've talked about sort of the enhanced social media programs, increased use of influencers and celebrities. Could you please give a bit more detail just in terms of the response from that strategy, how you're sort of looking at the returns from this? And then, I guess, more broadly, how you, sort of, think about differentiating in an increasingly, sort of, noisy, sort of, social media marketing space?

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Brian James-Beaumont Hill, Aritzia Inc. - Founder, CEO & Chairman [37]

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The social media -- thanks for that. The social media market is not increased -- just increasingly noisy, as you mentioned, but the landscape is changing a little bit as well. And we -- obviously, we've done a great job with the macro influencers. We've done a great job with the unpaid influencers. We have some opportunities certainly in the micro influencers, and I don't think we've really gotten going there yet but we plan on going there.

But there's some -- there's various data out that would suggest that the landscape is changing with the influencers as well. And so everything is happening in a lot faster pace, and we've kept up and the initiatives that we've done to date have been extremely successful. It certainly helped drive our outerwear program this past season. We invested heavier in that.

I don't know if you saw a recent post by Kris Jenner, who posted on her website, I mean, incredible. We did a favor for them and for the Jenners and the Kardashians. We did a -- created all their -- Kris' Christmas gift packaging and things that were enlarged versions of our Aritzia packaging, eCommerce packaging. And she was posting -- I think she got 33 million followers when we did that and she posted it, was it January -- December 31, if you want to check that out.

So we have relationships with various social media, important social media players and it's working well for our business. And so we're going to continue to pursue that. We're not a social media-led marketing organization. We like to think we're a product and boutique and eCommerce and customer service-led organization. But certainly, working with social media and social media players certainly enhances the recognition of our product and our services in the United States, particularly.

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Mark Robert Petrie, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst [38]

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Okay. And yes, I did see that post. And I think my Instagram algorithm is increasingly confused by all of my searches. But Jen, you highlighted the recent additions in different, sort of, areas of the organization. They sound like areas that you're going to sort of want to continue to invest. Is that a fair assumption? And do you think that that ramps from what we've seen in the last year or so or is this, sort of, steady state?

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Jennifer Wong, Aritzia Inc. - President, COO, Corporate Secretary & Non-Independent Director [39]

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We will continue to invest in enabling our growth over the coming years. And as you know, we always invest with the long term in mind. So certainly, across technology and talent, as I talked about earlier, we will continue on that trend for sure.

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Mark Robert Petrie, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Research Analyst [40]

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Okay. And then I guess just related to that, just sort of being more specific, Todd, you highlighted that excluding the IT platform investment in Q3, you would have seen positive SG&A leverage of 30 basis points. We know that continues in Q4. How should we think about that type of spending for fiscal 2021?

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Todd Ingledew, Aritzia Inc. - CFO [41]

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We'll be providing our fiscal 2021 plan in May. So at that point, we'll get into specifics. But as Jennifer just said, we're continuing to invest today, and we'll do so in the future.

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Operator [42]

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Our next question comes from Brian Morrison of TD Securities.

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Brian Morrison, TD Securities Equity Research - Research Analyst [43]

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If I can just go back to the success of the Men's platform that you were talking about. I realize it's small potatoes at this point in time, but if you could just go through the thought process of further expanding that portfolio. And potentially it's unfair at this time, but maybe your initial thoughts on long term, is this a material growth angle for the company?

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Brian James-Beaumont Hill, Aritzia Inc. - Founder, CEO & Chairman [44]

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Yes, it's actually -- we kind of joke about it internally because when we first went -- when we first did our partnership with Berkshire almost 15 years ago, Kevin Callaghan, the senior partner at Berkshire, mentioned Men's to the press, and they jumped all over it. And so we've been teasing him about that ever since. And so he was the most excited when we actually did launch this business -- outerwear program because he said, "I knew this was going to happen sooner or later." So 15 years later, and so he's finally been proven correct.

We had a great product, and we decided to leverage that into the Men's product. I was particularly passionate about it myself. I don't know if you have one. I'd like to get you one if we're not sold out. But I've been wearing mine and I absolutely love it. And all the feedback has been extremely positive.

We're expanding that program, specifically within that program, though, for next season and maybe look to outerwear. I mean, obviously, getting into the Men's business, certainly, in our stores, changes that dynamic in our store and we recognize that. We have fitting rooms that women feel comfortable in that are -- primarily men are excluded from typically. And there's dynamics that get changed in the stores in retail.

Obviously, from an eCommerce perspective, it's easier to get into Men's, but we're just -- we are cognizant that it would change the dynamics in our stores if we start having Men's product in there when people -- particularly product, that we'd have to start changing the fitting rooms.

In addition to that, we have such a great opportunity with our just continuing to grow our footprint in the United States, both online and physically. And so it's really something -- it's certainly a lot simpler business for us just to continue to push and where we did -- where we are. Obviously, it's fun, the Men's business. It's been incredibly successful. But we need to keep our feet on the ground here, we are a women's clothing retailer and, until further notice, we'll continue to be a women's clothing retailer.

And so the Men's is a fun and an extremely profitable pursuit in the short term, and we're certainly discussing the opportunity. And perhaps as eCommerce continues to grow, we would start with maybe introducing a few more products for men in our eCommerce. And then consider, I guess, at some point in time, some more physical stores. But truthfully, this is far off right now in our thinking and is certainly not our priority right now.

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Brian Morrison, TD Securities Equity Research - Research Analyst [45]

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Okay, that's -- appreciate the details. Maybe Todd, turning back to the balance sheet, I heard the response to the earlier question in terms of allocation of capital. Maybe you can just address on a pre-IFRS 16 basis, what you think the appropriate leverage is for your (technical difficulty).

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Todd Ingledew, Aritzia Inc. - CFO [46]

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Well, right now, we're by about 0.5. And I think we have always discussed maintaining a low leverage due to good flexibility that that provides. And it's not uncommon for retail companies to have 0 debt. And so I'm not sure that -- obviously, we could manage and would be comfortable with a higher level of debt if we had requirements for that debt, but we don't have any today.

So I don't know if that answers your question. But I would say, on a steady-state basis, business as usual, that we would likely look at paying the debt down at some point in the future, just as opposed to having it sitting on the balance sheet or in cash.

So again, if we have requirements for debt at some point in the future we feel like our business could manage a much higher turn than we have today. But we don't have any need for it at this point.

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Brian Morrison, TD Securities Equity Research - Research Analyst [47]

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Okay. I think that seems very conservative. Okay. Last question, and I apologize, this is a bit of a housekeeping question. But of the $7 million to $8 million strategic spend that you have going on this year flowing through your income statement, maybe just elaborate what you think is recurring for next year?

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Todd Ingledew, Aritzia Inc. - CFO [48]

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So the $7 million to $8 million is the beginning of the first in part of all 4 of those projects. And the digital selling tools is really getting kicked off in earnest right now. So that will continue into next year. It's new spend on that project as well as the future phases of the -- really, the other 3 as we ramp them up. We don't expect the spend to be in the magnitude of $7 million to $8 million for next year, but there's still -- there will be somewhat material spend or investment that will continue into next year.

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Operator [49]

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(Operator Instructions) Our next question comes from Stephen MacLeod of BMO Capital Markets.

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Stephen MacLeod, BMO Capital Markets Equity Research - Analyst [50]

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Lots of great color on the call so far, and many of my questions have been answered, but I just wanted to follow-up on 2 things. Specifically, on the gross margin, you've talked about the raw material pressure that crept into the back half of the year, Q3, Q4, the fiscal year. Historically, you've had pretty good visibility into your raw material costs. And I'm just curious, when do you expect to, sort of, cycle through that escalating or inflated raw material portion on the gross margin side?

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Brian James-Beaumont Hill, Aritzia Inc. - Founder, CEO & Chairman [51]

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Yes, we don't have a crystal ball, and so we don't -- can't really predict what's going to happen with raw material prices at this point. We do know that we continue to provide high-quality fabrics and construction on our products. And so we are a little bit at the mercy to some of these pressures, external pressures.

We have no idea when some of these pressures, particularly in wools and things, are going to subside. I can't recall, but a large percentage of the wool comes from Australia, and what's going on down there is certainly of concern even beyond the -- far beyond our industry for sure.

But we also had a little bit of pressure on initiatives that we're taking to improve various trends in construction and things like that. And so a little bit of it is -- as I mentioned, majority is external, but a little bit of it is self-imposed. And we just -- we want to continue to grow and improve our product. And so we're going to continue to do that.

And we're apprehensive on, certainly, a lot of our carryover products to pass on any of these increases to our customers. We want to -- the customers are used to paying certain prices for things, so we want to continue to do so. And we have an extremely successful and profitable business. So at this point in time, we don't see any need to increase the prices of our products to reflect these.

We're hesitant because we don't want to lose the momentum and the great momentum and opportunities we have going forward. So we're pretty -- unfortunately, as these things happen, we have to roll with it. But as we mentioned, we knew this was coming. We saw this happening, and we're going to continue to make sure that, first and foremost, our product and product pricing to our consumer makes sense to them and is palatable to the customer and they're excited about our product and our pricing, and then we'll figure out what's going to happen externally.

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Stephen MacLeod, BMO Capital Markets Equity Research - Analyst [52]

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Right. Okay, that's helpful. I don't know if you mentioned and if you did, I apologize. But did you mention a total U.S. revenue growth number? And if not, is that a number that you can provide? It's a number you've provided in past calls.

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Todd Ingledew, Aritzia Inc. - CFO [53]

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Yes, it's -- in the statements, it's 27.6% in the quarter was our U.S. growth or it (inaudible) from the second quarter.

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Stephen MacLeod, BMO Capital Markets Equity Research - Analyst [54]

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Okay. Great. And then maybe just finally, Jennifer, you provided some color around the new customer program implementation and the PLM program. Can you just remind us where that sits in terms of the broader, sort of, SAP initiatives that you announced in, I believe, it was Q1?

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Jennifer Wong, Aritzia Inc. - President, COO, Corporate Secretary & Non-Independent Director [55]

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The PLM is not part of the SAP partnership. The PLM is a stand-alone solution that supports the product processes. So that's not part of it. The SAP partnership that we had announced a couple of quarters ago involved the customer program, which is a program of 4 specific projects, 2 of which went live last quarter and 1 of which should go live in Q1 of 2021.

And then the digital sign tool, which is the one we're very, very excited about because it will leverage all of what we've put in, the 3 before that we put in, that first -- the first phase of that should go live in the summer of -- in the summer of calendar 2020.

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Operator [56]

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

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Helen Kelly, Aritzia Inc. - VP of IR [57]

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Thank you, Ariel, and thanks again to everyone for joining us this morning. The team and I will be available later to answer any additional questions you may have. We look forward to speaking with you again soon. Thank you.

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Operator [58]

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