Aritzia Inc (OTC:ATZAF) Q1 2018 Earnings Conference Call July 12, 2017 4:30 PM ET
Jamie Kokoska – Director, IR
Brian Hill - CEO
Todd Ingledew - CFO
Jennifer Wong - COO
Mark Petrie - CIBC
Patricia Baker - Scotia Bank
Megan Annette - TD Securities
Camilo Lyon - Canaccord Genuity
Irene Nattel - RBC Capital Markets
Lorraine Hutchinson - Bank of America
Trevor Lamb - BMO Capital Markets
Dylan Carden - William Blair
Welcome to Aritzia First Quarter 2018 Earnings Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation there will be an opportunity to ask questions. [Operator Instructions].
I would now like to turn the conference over to Jamie Kokoska, Director of Investor Relations. Please go ahead.
Thank you, operator and thank you for joining us for Aritzia’s first quarter 2018 earnings conference call. Joining me today for the results are Brian Hill, Founder, CEO and Chairman; Jennifer Wong, President and COO; and Todd Ingledew, CFO. We will begin today’s call with management’s discussion followed by a question-and-answer period open to the analysts and investors. Please note that remarks on this conference call may provide certain information regarding our expectations, future plans and intentions that may constitute forward-looking statements.
We would refer you to our most recently filed management’s discussion and analysis which includes a summary of the significant assumptions underlying such forward-looking statements and certain risks and factors that could affect our future performance and our ability to deliver on these forward-looking statements. The first quarter earnings release, the related financial statements, management’s discussion and analysis and annual information form are available on SEDAR as well as the Investor Relations section of Aritzia’s website at aritzia.com.
And finally, all figures discussed in this conference call are in Canadian dollars unless otherwise noted. Brian will begin with the highlights of the quarter followed by an update on our strategic growth initiatives, he will then be followed by Jennifer who will provide an overview of our operational initiatives, and Todd will then provide a detailed review of our financial results.
I will now turn the call over to our Founder, CEO, and Chairman, Brian Hill.
Thank you, Jamie. And thank you everyone for joining us today. We are pleased that we delivered another quarter of outstanding results driven by exceptional customer service, a focus on disciplined store expansion and accelerating e-commerce growth and our commitment to offering beautiful high quality products.
Net revenue for the quarter increased 14.7%, which was supported by 7 additional stores compared to Q1 last year and an increased revenue from our e-commerce business. We continued to drive strong comparable sales growth with an increase of 9.3% during the first quarter following 12.8% in the first quarter of fiscal 2017 and 26% in the first quarter of fiscal 2016, resulting in a three-year stack of 48.1%.
Overall, we expect this momentum to continue primarily led by our e-commerce business as growth in our retail comps taper as stores mature over time. That said we are pleased that we are exceeding expectations as well as outperforming the industry trends.
Our gross margins continued to benefit from improvement in product costs during the quarter. This was offset by additional straight line rent expense from both our Vancouver distribution center expansion and new flagship stores opened in the quarter or not yet open. Removing the impact of the distribution center expansion and flagship store related costs our gross profit margin was 40.6%, a slight improvement from 40.5% in the same period last year. Todd will elaborate more on this in today's call.
Overall, we achieved exceptional quarterly performance with adjusted EBITDA growth of 18.9% and adjusted net income growth of 29.8% relative to Q1 last year. Our consistently strong performance is due to our focus on providing both beautiful high quality products and seamless delivery through our stores and e-commerce channel. These elements work hand-in-hand as the best delivery in the world will not be effective without product that consumers want. Unlike many retailers in the industry that have a singular focus on delivery, we believe that our balanced approach sets us apart and continues to drive our industry leading results.
Looking ahead our primary goal is to sustain our strong revenue and profit growth. To do that we remain focused on several key initiatives to drive the business forward. Our first initiative is to strategically expand our premium North American real estate portfolio. During the quarter we opened two new stores, including our Los Angeles flagship and a Wilfred store in Greater Toronto Square One shopping center, bringing our total store count to date to 81 stores across North America.
We're on track to open two additional locations during the second quarter and expect to open two more stores by the end of fiscal 2018. We're also expanding and repositioning some of our locations. During the first quarter we expanded our Richmond store in Greater Vancouver and early in the second quarter have repositioned our Square One location in Greater Toronto. We expect to expand or reposition four to five more locations throughout the remainder of fiscal 2018.
Flagship stores continue to be an important part of our real estate strategy. Two of the new stores we plan to open in the remainder of the year will be brand propelling flagships as they will be located in iconic fashion districts including Rush Street in Chicago and Market Street in San Francisco. We believe with our new stores and our flagship stores in particular increase brand awareness and affinity as well as drive growth in our e-commerce business. We also see many additional compelling and largely untapped markets particularly in the United States where we can establish and build a store presence.
Our strong store performance is drawing increased attention from landlords, who are presenting us with prime real estate opportunities more frequently as fewer retailers are opening stores in this present environment. We're continuing to sign leases for our planned location and it is our belief that real estate opportunities will continue to present themselves for the foreseeable future as corresponding financial pressure on retail landlords will accelerate accompanied by our continued strong performance. This will likely manifest itself in the better financial terms in the years ahead.
Our second, but equally important initiative is to grow our e-commerce business. We think there's a synergistic relationship between our stores and our e-commerce site with the success of each benefiting the other. We were especially pleased with the results of business in the first quarter. Traffic to our website continues to grow at a meaningful rate.
E-commerce represents a significant growth opportunity for Aritzia and one that we're just scratching the surface of. We're implementing a number of strategies to grow our e-commerce business with a primary focus on driving traffic. These include utilizing advanced business intelligence and behavior analytics to better understand and more effectively engage our customers. We're also employing various PR and SEO tools to further drive brand awareness online. These initiatives will enhance our online customer experience to encourage more frequent visits and higher conversion.
Third, we continue to leverage our talented in house creative teams to create innovative and beautiful products that will further differentiate our portfolio brands. Our multi-brand strategy gives us control over our product and provides us a flexibility to optimize our brand mix as needed to address changes in consumer demand and fashion preferences. We’re pleased to see the introduction of new lines such as Little Moon, The Constant and The Group resonate well with our customers. We will continue to capitalize on our opportunities to address specific needs in the market place with both line extensions and brand additions.
Finally, our fourth focus is making strategic investments in our infrastructure to support the growth of the business. Ongoing investments in our people and our infrastructure will continue to be an important component of our success. These include investments in our talent, our distribution centers and especially as we grow our e-commerce business and store network and investments in technology across the company. Jennifer will discuss the infrastructure investments in more details shortly.
Overall, we’re generating strong momentum across the business. I've never been more excited about the prospect ahead for Aritzia and believe we're making smart decisions to support our mid and long-term growth ahead. Our growth strategy is proven, our execution is highly disciplined and the market environment continues to provide us with unprecedented opportunities to both grow our top line business as well as build the infrastructure to support this growth.
And with that business overview, I'll turn the call over to President and Chief Operating Officer Jennifer Wong to provide an update on our operational activities.
Thanks, Brian, and good afternoon everyone. There are three key areas of investment that are critical to our success, investments in our people, our processes and our systems. Combined these investments will provide us with the talent, scalability and technology platforms we need to deliver sustained growth in the future.
First, there is currently and unprecedented level of talent in the market place and we're taking this unique opportunity to further strengthen our teams both in our Head Office and at our stores. We grew our Support Office talent base by 13% since the first quarter last year. These roles support our objectives to build out our e-commerce products, data analytics and finance capabilities.
Going forward in our investment in talent will be focused on supporting e-commerce growth, improving products quality and cost and building infrastructure. We also continued to make investments in our distribution facilities and have made considerable progress on the expansion of our Vancouver area distribution center as we announced last quarter.
We are nearing completion of the design phase and are preparing to commence build and implementation. This is an important initiative that will enable us to support our expanding store base and growing e-commerce business. We still plan for this facility to be operational by spring of next year.
Finally, as we've announced last quarter, we're in the process of implementing a new retail point of sale system that will enable us to elevate our customer experience and offer her a more personalized shopping experience, whether she visits us in store or online. This new point of sale system will provide us with a holistic 360 degree view of our customer allowing us to compile comprehensive and accurate data on customer spend and preferences, both online and across our entire store base. This will ultimately enable us to better serve our customers, further refine our marketing efforts and deepen our connection with our customers. In addition, the new system will provide us with real time inventory management which will be key as we work towards certain omni-channel services in the future.
We are currently in the testing phase of this implementation to ensure the product is built as we specified with the functionality, reporting and compatibility we need to successfully launch the system across our store network. Once it has passed all the testing and quality assurance we will begin the deploying terminals in a phase approach, with locations in the U.S. being deployed first, followed immediately with stores across Canada. We anticipate the new point of sale will be fully rolled out across all our stores this fall. So we will keep you updated as we proceed.
With that, I'll turn the call over to our CFO, Todd Ingledew to review our financial results in further detail.
Thank you, Jen. Good afternoon everyone. Net revenue for the quarter increased by 14.7% to $145 million from $126.4 million in the first quarter last year. The increase was driven by comparable sales growth of 9.3% reflecting continuing momentum in our e-commerce business, as well as growth in our stores. The increase in revenue was also attributable to the addition of 7 new stores and the expansion or repositioning of 4 existing stores since the end of the first quarter last year.
After reviewing industry standard practice and considering our growing U.S. store-based and e-commerce revenue we have decided to update our methodology for calculating comparable sales results. Beginning this quarter and going forward we are reporting comps on a true constant currency basis to remove the impact of foreign exchange rate changes on our comparable sales growth figures. The prior year's average quarterly exchange rate is now applied to both the current year and prior year's comparable quarterly sales to achieve the consistent basis for comparison.
Our previously provided definition treated Canadian and U.S. dollars on the one-to-one basis. During the first quarter of 2018 using either the updated or previous method of calculating comparable sales growth resulted in the same 9.3% growth rate. The impact on previous quarters reported comp numbers is mostly minimal and the table comparing the results using both calculation method for the last eight quarters is available in our MD&A.
Gross profit for the quarter increased by 12.4% to $57.5 million compared to $51.2 million in the first quarter last year. Our gross profit margin was 39.7% during the quarter. As Brian mentioned earlier, we continue to benefit from lower product cost attributable to our sourcing initiatives. However, this improvement was offset by higher straight line rent expense related to both our new distribution center, under-construction in Vancouver, and from rent expense for new flagship stores that were not yet open during the quarter.
Specifically, a month and a half of straight line rent expense was recorded for our Century City store prior to it generating any revenue, and rent on our upcoming flagship store on Rush Street in Chicago is already being expensed with that source slated to open by the end of the summer. We expect to continue including duplicate rent expense for our distribution center in Vancouver until the new facility opens in the spring of calendar 2018, which as expected will temporarily inflate our reported cost of goods sold. Excluding these additional rent gross profit margins for the first quarter of 2018 would have been 40.6% a slight improvement from 40.5% in the same quarter last year.
Selling, general and administrative expenses were increased 18.6% to 40.8 million compared to 34.4 million in the first quarter of last year. The increase in SG&A expenses was primarily due to our ongoing investment in support office talent as well as higher store labor costs associated with initiatives to elevate our retail experience. The hiring initiatives began in the second quarter of last year, so we will begin lapping these expense increases beginning in Q3.
Stock-based compensation expense of 4.7 million in the quarter was comprised of 2.3 million in costs related to our legacy option plan and 2.4 million in costs primarily due to the company's new option plan. Adjusted EBITDA increased by 18.9% to 24 million compared to 20.1 million in the first quarter of last year. Adjusted EBITDA was 16.5% of net revenue compared to 15.9% of net revenue last year. Adjusted EBITDA excludes 4.7 million of stock based compensation expense, 800,000 of unrealized foreign exchange gains on U.S. dollar forward contracts, and 400,000 net cost related to other non-recurring items.
Finance expense was 1.3 million in the quarter, a decrease from 2.3 million in the first quarter of last year, this decrease was primarily driven by both lower average debt outstanding and lower average interest rates. Income tax expense for the quarter was 4.9 million compared to 3 million in the first quarter of last year. The increase was due to higher income from operations as well as the non- deductibility of stock based compensation expense in the first quarter of this year compared to the first quarter of last year, when stock based compensation expense for legacy time based options was treated as a deductible expense.
Adjusted net income increased by 29.8% to 12.5 million or $0.11 per diluted share compared to 9.6 million or $0.08 per diluted share in the first quarter last year. Our adjusted figures exclude stock based compensation, unrealized foreign exchange gains on U.S. dollar forward contract and other non-recurring items and the related tax effects. Reported net income was 8.1 million in the quarter, a 4.9% increase compared to reported net income of 7.7 million in the first quarter last year. We continue to have a strong balance sheet with a 1.1 times total debt to LTM adjusted EBITDA ratio. Total debt at the end of the quarter was 134.1 million compared to 145.6 million last year and we had zero drawn on our revolving credit facility as of May 28, 2017.
Overall, we're pleased with our strong start to fiscal 2018 with momentum continuing into the second quarter and positive comparable sale results quarter-to-date. During the second quarter we plan to open two additional stores, including our first flagship store in Chicago. We have also already repositioned one store in the second quarter, the Aritzia store at Square One Mall in Greater Toronto. In the second half of the fiscal year we plan to open two additional new stores and expand or reposition four or five additional stores including our new flagship in San Francisco.
In addition, we expect our e-commerce business will continue growing at a substantial pace. We expect that sourcing initiatives underway will likely result in continued improvement in product costs and benefit gross margin. This margin improvement is expected to be offset in the near term by the investments we’re making in our distribution center expansion.
Overall, we believe our gross margin will remain essentially flat with what we achieved last year. Likewise, for the year ahead, we believe our SG&A costs will increase alongside our revenue. We anticipate total CapEx spend in fiscal 2018 to be between 55 million and 65 million comprised of 30 million to 35 million from store growth investments and 25 million to 30 million from infrastructure. The increased infrastructure spend this year is driven by project timing, as we spend only $6 million on infrastructure in fiscal 2017. We believe, we will still average 15 million of infrastructure CapEx annually between fiscal 2017 and fiscal 2021.
Overall, our performance continues to be in line with our projections and we’re pleased with the revenue growth we’re seeing from both our stores and our e-commerce channel. We remain confidently on track to meet and/or exceed are stated 2021 performance targets.
And with that overview of our first quarter, we will now welcome questions from analysts and institutional investors. Given the amount of participation on today’s call, we will kindly ask that you please limit yourself to two questions before re-queuing. Operator?
Thank you. We will now begin the question-and-answer session. [Operator Instructions]. The first question comes from Mark Petrie, CIBC. Please go ahead.
The outlook that you provided included some more confident language around your e-commerce growth and tracking ahead of your five-year target. Obviously, you’re investing in infrastructure to be able to supply that growth. But how does this affect your thinking in terms of your store base, your new store opening plans? And I guess, could you give any comment about the productivity of your existing stores at e-commerce growths outperforms?
I’ll take some of those – it’s Brian here. I’ll take some of those in backward order. We don’t see -- we’ve yet to see any pressure on our retail growth with respect to our store growth - with respect to our e-commerce growth. We’ve been looking at them both as complementary to each other and it continues to appear to be complementary to one another. I think as more and more consumers overall shift to e-commerce and if that wave continues to increase and increase and increase, I think, it will start affecting everybody potentially, but up to this point in time we have no reason to think our stores are going to be affected at this point in time. We'll certainly let you know when they do, if they do.
Overall though, we see the opportunities in the marketplace for opening stores is incredible for us right now, we’ve never seen opportunities like this in our history. And I think that’s a combination of the struggles in the industry everybody else is having combined with the strength that we’re having at retail and, so everybody is lined up to try and get an Aritzia store in a shopping center or to expand -- if they don’t have one, or expand one that already is in the shopping center. So we're very bullish on both channels, as we have been in the past and continue to be bullish on both channels for us.
Okay, thanks, and then wondering if you could just give a bit of commentary about the performance of the stores by region, by store type, and then I guess related to that are you seeing stores -- new stores that you've opened in the last 12 months, are you seeing them ramp up in line with your past experience?
You know it's really difficult we don't -- it's not like we have a 1,000 stores, we don't have enough stores to be able to look at stores and look at massive regional differences. We see differences in trends all over the place within regions, within shopping centers, the streets, within coast to coast, north to south. A lot of it has to do with -- sometimes it has to do with weather. If it's raining on a particular day our street store won't do that well and the shopping center will do extremely well. You know if there is a concert in town of some meaningful performer, we'll see certain stores ramp in certain areas.
So some stores are more sale oriented shoppers, some are more full price oriented shoppers. We see, the shopping centers that are under construction, the roads are under construction, so we see all sorts of different nuances, and our sales will go up and down, so we kind of look at them more in a long term basis here.
So we have been seeing our new stores are performing as per our expectations. A few of them are performing over our expectations. So they're either at or performing above our expectation. So we continue to be very bullish on our model, of an omnichannel retailer of opening stores and driving our e-commerce business and we're pretty excited about the opportunities in both and we think there is large opportunities in both areas, so we're pretty excited about it.
Okay, that's helpful. I guess just to clarify or to follow up, so stores in Canada and stores in the U.S. roughly continue to track similarly in terms of growth?
Yes, that's correct. In fact, there is -- the indication to that would be the fact that when we changed the comp calculation this quarter, it remains 9.3% using our old methodology as well as using our new methodology now. So that, I guess, highlights the fact that the U.S. and Canada are consistent.
Okay, thank you very much.
The next question comes from Patricia Baker of Scotia Bank, please go ahead.
I just have a question, I think probably for you Jennifer. Just want to discuss and maybe just to review one of the big disciplines that you have at Aritzia that's been part of your success is the fact that you limit the extent of your sales and the timing of your sales. And just -- can you just clarify for me whether or not the timing of sales are slightly different in Canada than in the U.S. or are they exactly the same?
It's Brian, I'll take that call because this is retail and product, both report directly into myself. So I'll just give you a quick history on that; so in the past we used to break in the U.S. on Black Friday and we didn't use to break in Canada because there wasn’t a Black Friday in Canada, that's in the fall winter. However, the shopping centers and everybody adopted the Black Friday promotion in Canada about three-four years ago, I've spoken about those in our other calls. It's been quite successful in Canada, I don’t see it going anywhere. So the fall-winter sale calendar is identical in the U.S. as it is in Canada.
In the spring, we break in the U.S. a little bit prior to Canada and that has to do with a Memorial Day long weekend, so we break a little sooner in the U.S. than we do in Canada, but otherwise they are fairly closely aligned.
Okay because it just can create the impression that the sales are -- that there are more sales than we would have seen earlier, but in fact it's just that slight disconnect on the timing?
Sorry your perception is we were on sale more than we used to be previously?
I'm not saying that that’s my perception, but it could be the perception of certain people in the market place that your sales are, and particularly with the online presence that it looks like the -- if you're looking at both sites, it looks like the sales are slightly longer. But in fact they aren’t, it’s just the matter there is a disconnect on the timing, a slight disconnect on the timing.
No, the spring sale -- spring-summer sale is longer in the U.S. We do break sooner in the U.S. than we do in Canada a few weeks earlier.
And so it’s longer -- and it’s longer than the Canadian one?
Yes, in spring-summer, yes.
Perfect, I got the clarity that I need, that explains it.
So the fall-winter one is the same.
Are identical okay. And then my second question is just really a point of curiosity. So you talked about rolling out the POS or at least Jennifer did, and that you would be starting that in the U.S. first and then extending it to -- in phases to Canada. And I'm sure you have a very good reason why you’re starting in the U.S. first, I'm just curious about what that would be?
Hi Pat, it’s Jennifer, we're rolling out in the U.S. particularly because the pilot will start in the U.S. to give you -- like get into the nitty-gritty details, when we’re doing a pilot you have to isolate it to a geographical location store cluster, that's [indiscernible] and that store cluster that we were comfortable with happened to be located in the U.S. and once you go live in one country, it makes more sense to finish that country before you move on to the next.
Perfect sense, thank you Jennifer.
The next question comes from Megan Annette of TD Securities. Please go ahead.
On gross margin, so understandably you are lapping the significant benefits of product cost sourcing initiatives last year. So can you just help us better understand what these initiatives entailed last year and what’s been implemented this year?
The initiatives that we’re undertaking within the sourcing group are fairly consistent year-over-year, we're just broadening the scope of what products are included. So as we've discussed before, essentially our scale is allowing us to get into better mills and better factories and we’re seeing economy of scale from that and better purchasing power is garnering better cost.
And if I could add a superior product and superior time as well. So we're getting the -- we're just -- our reengineering of our supply chain is, as Todd mentioned is improving our cost, but we’re also -- it's also for sure improving the quality of the product we're delivering as well as the timing on the product.
And secondly, just on our marketing strategies that have been implemented recently. Specifically, with the focus on increasing brand awareness, can you just comment on what those strategies are exactly and how that's been impacting SG&A as a percentage of sales?
It's Brian again. We haven’t really done anything out of the ordinary in our marketing initiatives of late, we've been consistently working with direct-to-consumer, we've been consistently working with our PR teams to ensure they're doing their jobs, we've been doing our in-store marketing initiatives, we've been doing our social and digital marketing initiatives.
So we haven’t really done anything out of the ordinary at this point in time and I still think and it's our believe we can still focus on the -- on all of those typical areas that we're presently doing business in and marketing in and continue to improve and drive our business in that way.
We will probably later on this year or early next year be looking at other marketing initiatives that are probably outside of our general scope, but right now we're just looking at executing the existing channels that we have as well as we possibly can.
That's great. Thank you very much.
Next question comes from Camilo Lyon of Canaccord Genuity. Please go ahead.
Brian, staring off with a -- little more of a philosophical question. There is a lot of obviously a very evolving -- rapidly evolving retail landscape in North America, particularly in the U.S. and you have the benefit of been nimble not being over stored by any means, been under stored arguably. What do you see -- what clear falls [ph] that you see that you are avoiding now so you don’t make the same sort of errors that other mall players have made and had to retrench from? And does any of what's happened over the last year affect how you view the composition of your stores to commerce ratio in that five year outlook?
So I'll take a stab at a few of the answers here. The tendency in the industry right now is obviously not to be overstored, we're not in a situation being overstored. So we're looking -- ironically our previous strategy of opening in the best shopping centers as we possibly could and not necessarily having a heavy cluster strategy works in our favor as far as what's happening, as far as the retail landscape goes.
One of the trends in the industry we're seeing is shorter termed leases being executed and that's not just Aritzia, we're seeing in lot of people, rather than signing 10 years leases or trying to push out for 12 and 15 years leases, we see the retailers are actually looking to have shorter leases five year, and five and seven year and in some cases as short as three year leases. I think depending on the model certain length of leases work and certain length of leases don’t, and also depending where are those locations are and the landlords and how good the centers and locations are, will certainly drive some of those deals.
Furthermore, when we're making choices on locations it isn’t dissimilar to the flagship locations that we discussed in the past, but we want to have locations that work well with our e-commerce channels, so in other words, they have high exposure to e-commerce channels, the e-car [ph] e-commerce business as well and so we're looking at locations that potentially have higher tourism, potentially downtown locations where a larger group will travel to and places like that. So that's sort of the locations and things we're looking at.
So, our real estate strategy, as far as locations and geographies and things hasn't changed, we were anticipating the e-commerce and the shift in the landscape and things like that, but what has changed a little bit is how we're looking at our leases, because although I'm seeing opportunity from a leasing perspective that we've never seen, and certainly in my professional career, my [indiscernible] are going to actually get better here. So we're not sort of rushing to sign as many leases as we possibly can or sign up for long-long term leases, we're taking those into account as we're approaching our expansion here.
I guess just shifting gears to the commentary in the release and your prepared remarks around the strength of your same store sales, clearly very impressive on a two and a three year basis. Also impressive was the continuation of the momentum that's persisted into the second quarter. Should we take that strong start to look to be the first half of the year as the right kind of baseline to think about how fiscal '18 now doing high single digit type of comps to be the balance of the year? And if not, what is the rationale for the trend to not continue in that sort of a trajectory?
Todd, do you want to take this or you want me to take it?
You can go ahead.
Okay, so, we try not to ever get over our skis here and so every new season brings a whole new set of opportunities and things and we think that we're doing an exceptional job and I think our consistent comps quarter after quarter after quarter are proving that we're on top of our game here. On the other hand, I don't want to get too far ahead of ourselves, we've had a great start to the second quarter again and -- but as far as the third and fourth quarter we can't really give you guidance and not because I don't have it, I just don't know at this point in time.
Last one from me is, if any sort of sneak peek that we can get in terms of new brands that you may be launching soon or new categories that you may be interested in getting into?
You and I spoke last time we saw each other on how denim is playing a bigger role in the industry and things and I think that we're going -- it's certainly not lost on us from a fashion perspective that the denim business is more meaningful than it was in the last sort of three or four years and maybe even five years. Its shifted, its not an exact -- it's not manifesting itself exactly as it did on a high end luxury denim business, it's more in a fashion area, so we're certainly looking at that.
We're continuing to look at other categories that we can -- that we think we have ability to execute in and we think can add meaningful value to the business, so we're exploring a few others there. As far as new lines go, we're relaunching our Talula line in the fall, we're really excited about that, and I believe we're relaunching our Sunday Best as well line in the fall, and we're excited about that. But I just want to caution, it takes a few seasons and sometimes years for this line [ph] even though we have successful launches to be able to add meaningful impact to our top and bottom-line.
So as a factor, we’re launching these lines and particular the once we launched in the spring to great success is very encouraging. But it will take a few years for them to really, really make meaningful contributions to our top and bottom-lines. But the launches we’ve had in the spring were incredibly successful and we’re hoping the ones in the fall are going to be incredibly successful as well.
Our next question comes from Mark [indiscernible] of Roberts. Please go ahead.
Todd, I wanted to clarify in your gross margin. Where could all that the gross margin trend differ from expectations? I think we’re looking for something closure to flattish year-over-year and presumably the elevated [indiscernible] was built into plan. So just trying to reconcile the down 80 with the flattish outlook for the year?
Yes. So again, we’re very pleased with the product savings and continued improvement in product cost that we’re seeing within our cost of goods sold. But we do have pressures that are offsetting those from the straight line rent that we discussed. Those -- as you said, those were not and expected and for the year, we still are expecting to be flat with what we accomplished last year from gross margin perspective. There are just going to be variations within the quarter. Yes, including the rent that we brought forward this quarter.
And then just FX, how should we will be thinking about the FX implications for the remainder of the year? [Indiscernible] the Canadian dollar versus U.S. dollar since the May update?
Well, as you know the vast majority of our product is purchased in U.S. dollars and so we are very pleased to see the strengthening Canadian dollar over the last few weeks. Again, we have hedging program in place. We were hedged 30.5 million at the end of the quarter. And going forward, we will be benefit from a strengthening Canadian dollar.
Next question comes from Irene Nattel of RBC Capital Markets. Please go ahead.
Just looking at your performance, it’s particularly striking given the overall weakness in retail. But as I'm listening to you, it doesn’t -- it sounds as though you’re generating that performance by sticking to your approach and doing what you’ve always done. Is that a fair assessment?
Yes. Well it depends, what it is that we’ve always done. We’ve always felt that we’ve executed a very high level and have run the business in a sensible sort of business like matters. So we’re continuing to do that, we continue to drive our stores. But what’s a little bit different is we’ve been in business for 32 years, we haven't actually been in the e-commerce business for more than 4.5 I believe now. So that part of the business is different. That said, we’re approaching that in the same way we’ve always approached our retail business.
So I read an interesting article the other day and it was titled that, sort of some unlocking of some secret potion, that data and analytics have allowed people to understand what the customers wanted. So now what digital players are doing, what digital has allowed people to do is give the customers what they want.
I remember walking into Jennifer's office and said, the secret is out now. People are actually giving customers what they want, our secret that we've been doing for 32 years is out, we felt we were always giving customers what they wanted. You know we've always had a saying here at Aritzia is, we don't want to give people what you want, when I'm speaking to our team, we don't want to give people what we want, we don't want to give people what we think they want, we want to give people what they want, and that's what we've always done. And so from that perspective that hasn't changed either.
And so, some of the basic fundamentals haven't changed. I mean obviously how we're going about with technology and how we're going about things with e-commerce and how we're going about our business and facilitating that is different. But the basic rules and processes and philosophies that we have at Aritzia have not changed in 32 years and nothing's happening on the landscape to think that we would start changing anything from around that.
That's great thank you, and as you think about the growth in e-commerce and as you look at I guess the complexion of your e-commerce sales do you see any meaningful difference between what the customers are buying online versus in store versus -- or the sensitivity to promotional activity online versus in store, any of those category performance, anything like that?
You know we see some interesting things in e-commerce, and I don’t -- it's all pretty common sense. When you put something on your front -- first page, it’s like putting something at the front of your store, when you put it on a position at the back of a long series of photographs in your catalogue its same as putting something in the back of the store. What's a little different is it's a little bit easier to change your merchandizing in your e-commerce site than it is in the stores. The stores, you got 80 stores and lot of time and effort go into changing your stores, whereas e-commerce is certainly simpler to change.
And then we see certain -- it's certainly easier to promote and it has a -- when we have new collections and things like that. So these little nuances that are changes, the big thing though is I think is, it's easier to shop and sale online, it's just is easier to shop and sale online you can go into website and click at 40% or 50% off and hit that and all the products you're seeing is 40% to 50% off or whatever the bracket or whatever it is that you're searching for, whereas when you go into a retail store you have to navigate through the store. So it's a little bit more difficult from there and because of that we probably see a little bit off price shopping online than we do on our stores. But, I mean that's nothing new either and that's why a lot of retailers initially went out and created some offline stores and things like that to offline website.
So nothing -- we're not seeing anything that isn’t general common industry practice or isn't common industry knowledge and its all fairly basic common sense, nothing sort of particularly surprising. But there are some nuances that are slightly different but doesn't really affect -- seems to affect. We're still agnostic as to what channel we sell our product through because it doesn't really seem to affect our bottom line.
That's very helpful. And just to on the subject of promotional sensitivity, did you see any kind of shifts in the quarter or you're year-to-date just around the proportion of transactions in promotion?
No, we've not seen any difference as far as the promotional activity at Aritzia. But we're not on sale that often, and when we're not on sale, we’re really not on sale, nothings for sale. And I think our customers know that and its been the same for long, long time. So we haven’t seen any change in that, but nor have we given anybody any -- customers any reason to think any differently or behave any differently either.
The next question comes from Lorraine Hutchinson of Bank of America. Please go ahead.
Todd, could you help us just walk us through the gross margin progression that we should expect? Do you need further product cost gains this year to get to flat or is that just as the stores open and you're able to better offset rent expense, you will see that gross margin flatten out?
It will be a combination of both. We have been expecting some improvement to continue in the form of product cost perspective. And then as the stores open, the flagships and our other new location, as well as the continued momentum from our e-commerce business we'll begin get ahead of where we were last year in certain quarters and again ending the year flat with the gross profit margins that we've achieved last year.
And then you spoke in the release and on the call about meaningful strategic investments, it sounds like you still expect SG&A to grow in-line with sales this year. Should we expect that to step down next year or are you seeing so many opportunities that this might be a multiyear investment cycle?
I think in the short-term and in the near-term, we’re investing in our infrastructure and we definitely made that clear. So for this year, we will be growing it with revenue and I think we can foresee that continuing into next year and we're looking more at the longer term game and we do anticipate our potential leverage in outer years, but again I think as you know our five year plan and our 2021 targets do not relay on any leverage or very small amount of leverage on our costs.
If I could add that, when we're looking at the infrastructure piece in investing, it's not like there is only one channel or funnel that we're investing in. We're seeing opportunities -- we're seeing high hiring opportunities like we've never seen before as far as the talent goes. We're seeing store operation or store opportunities like we never seen before. And obviously then in the third part, the technology and that, we can assume that’s going to go down because technology continues to drive all our businesses right now, and its getting more in it any less expensive.
And then with it's shift into e-commerce and things we have to build an infrastructure for our stepping and delivering and like that too. It's not like there is one area that we're investing in particular, we’re investing across the board and as one ebbs and flows, the other might go in the opposite direction. So we're not counting on any leverage here in the short-term.
But truthfully, I think it's a good thing we're really excited about this and the best thing, and we think it will allow us to meet or exceed all our long-term goals here.
The next question comes from Trevor Lamb of BMO Capital Markets. Please go ahead.
Could you give a little more color anecdotally on the performance for the specific brands, which one performed better or worse than expected and which one saw any acceleration or slow down versus last year? Thank you.
We haven’t really seeing any meaningful deceleration or anything. Our TNA brand it is -- it seems to be resounding with our customers a little bit more than it has in the past and we're pretty excited about that. And then as well as what I mentioned and we've mentioned on several occasions some of the new brands have performed extremely well.
But we don’t see these large fluctuations typically in the brands, we see they are quite slow moving as far as the penetration and the composition goes at the brand, so we've seen nothing on the ordinary other than a nice little jump with our TNA product and the segment around our new brands have changed, but nothing has really slowed down, the composition remains fairly consistent which is great news actually.
What's the second part of the questions? Was there a second part of the question as well?
No, just on my next question then. And you sort of touched on this earlier. Since you are seeing great real estate opportunities now like you haven’t before, do you expect to see an improvement in the store unit economics going forward?
We are seeing great real estate opportunities. They are manifesting themselves in three different ways. First of all the locations themselves, both of the locations and the size of the locations and with that the nature of this strategic positioning of those locations is certainly better. Certainly, the terms and all the legal terms and things with the landlords are, I think the land lords are understanding the realities of the industry and the landscape out there and so I think there are probably coming -- in some cases coming off some of those.
This will all lead to and certainly some of the weakness in the industry is all going to lead to lower rental rates at some point in time, still the landlords are very long term view of the world than and very screwed business people. So it's not like they're folding their tents, right now on some of the rents and things. So they seem to be holding steadfast on lot of the rents and that's in locations we are chasing.
If we were a different type of retailer it would be a little bit different, we understand that it's from the C&D locations the landlords are having and have had to move meaningfully on rental rates and things, but we haven’t seen a ton of movement yet in the A center and A+ centers and the locations we're chasing, ironically in some cases we've seen a lot more vacancy, but the landlords sort of sit there and don’t really move very much on them. Sometimes they'd rather vacate then agree rent at a lower rate.
So we haven't seen a ton of movement there, but I suspect in time we will if trends continue.
The next question comes from Dylan Carden with William Blair. Please go ahead.
Just on some of the marketing or different marketing approaches you alluded to potentially in the back part of this year, any chance you can elaborate there or discuss sort of the need to maybe do that and I guess to follow-on, any sense of sort of how your awareness has grown in the U.S. over the past year?
As I say, we're not really doing anything different right now. We're working on -- one, we've been working on for six months, one initiative right now for fall, which I'm not at liberty to discuss. The one I am at liberty to discuss is our PR. We've had a -- we've continued to see fairly aggressive growth in our PR results and as far as dues and all the different measurements there we've seen some meaningful improvements there both in Canada and in the U.S. but particularly in the U.S. So we're going to be picked up a lot more and I think a lot of that has to do with from a PR perspective, we're innovating and doing a lot of great things both from the store and product perspective and on e-commerce.
And so, I think we're where others are sort of struggling and retrenching a little bit we're still pushing forward with innovations and things. So I think from a PR perspective we're getting picked up a little bit more and so that's really -- we have two things happening this year, one I'm not at liberty to discuss right now and the other is our PR and just the meaningful continuation of momentum we've had there as far as our exposure goes particularly in the United States.
And then are you seeing anymore pricing sort of pressure in the U.S. versus Canada at this point, just given all the promotional activity in the market? Are you able to sort of hold the similar prices that you've been able to historically? I get that you're not promoting more, but the initial marker up [ph]?
We don't spend a ton of time, truthfully chasing around what other retailers are doing from an off pricing perspective. We notice pressure, if our same store sales start dropping and things, which they haven't been doing. So we can only assume that our prices and everything else are pretty consistent -- are pretty competitive. And so we haven't seen any, we haven't been putting our prices up or down at this point in time in the United States either, so our pricing is the same as I mentioned earlier in the call our marked down strategies haven't changed as well nor have our timing of markdowns changed.
There is -- the market is -- certainly the industry is soft in the U.S. but I'm not sure there is any more promotional activity today than there was two-three years ago. I think this promotional activity comes because supply and demand get out of whack. I'm not sure a lot of retailers in the U.S. are buying too heavily right now. So we're not really seeing the supply and demand equation, [indiscernible] changed and even more so then it did two years ago when things started to slow, I would argue that maybe there was some retailers that probably were in worst inventory positions two years ago then they are today.
So, we're not seeing any more promotional activity than we have in the past and certainly -- but I'm -- just one a qualification there, I'm talking about our market and our customer and things like that; I’m not referring to the lower end customer or the higher end customer. I’m talking about our specific market. We’re not seeing any more.
There are no more questions at this time. This concludes the question-and-answer session. I’d now like to turn the conference back over to management for any closing remarks.
I’d like to thank everybody once again for today and their attention and as I’ve mentioned in our release, we’re super excited about our business. We've never seen opportunities like this that we're seeing out there in all sorts of areas, and we're going to continue to do, what we’ve always done, which is just continue to execute on our plan and our strategy and hopefully look forward to announcing great results for you, for many years to come.
So I appreciate everybody’s time and attention today and look forward to speaking to you in the future.
This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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