Aritzia Inc

TSX:ATZ

Earnings Call Transcript 2019-Q1

[Operator]

Welcome to Aritzia's First Quarter 2019 Earnings Call. [Operator Instructions] I will now turn the conference over to Catherine Tang. Please go ahead.

[Catherine Tang]

Thank you, operator. And thank you all for joining us for Aritzia's First Quarter 2019 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 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 material assumptions underlying such forward-looking statements, and certain material risk and factors that could affect our future performance and our ability to deliver on these forward-looking statements.The first quarter 2019 earnings release, the related financial statements, management's discussion and analysis and the annual information form are available on SEDAR, as well as the Investor Relations section of Aritzia's 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 Founder, CEO and Chairman, Brian Hill.

[Brian James Beaumont Hill, Founder, CEO & Chairman]

Thank you, Catherine. And thank you, everyone, for joining us today. We are extremely pleased to have started the year on an exceptional note, with double-digit growth in both comparable sales and EBITDA. Our consistent financial performance illustrates our ability to deliver beautiful products season after season, and our commitment to executing our powerful business model. We believe that to be successful in the fashion business one must be good at both fashion and business. We feel we are unique in that, we are good at both. This powerful business model has 3 fundamental functions: first, our differentiated global sourcing strategy, which enables us to elevate our product to increase the value to our customer and to grow our gross margin; second, our innovative creative development. Our creative development is expressed through the design of our products, stores, website, marketing and communications. It is what defines our brand and what our customer experiences; and third, our aspirational omnichannel shopping experience, both in our AAA real estate locations and on aritzia.com, that seamlessly connects our products with our customers. This three-dimensional competency is the exception in our industry. It is what makes us unique. This is all underpinned by our best-in-class infrastructure that supports these 3 functions. We attribute our consistent financial performance to first-rate execution of our model. And thanks to this methodical approach, Aritzia has had another tremendous quarter. We are extremely pleased to have delivered our 15th consecutive quarter of profitable comparable sales. Our 10.9% comp was driven by an enthusiastic response to our summer assortment of beautifully designed products, with strengths across both retail and eCommerce channels and in all markets, East and West, United States and Canada. We continue to delight our customers with an aspirational shopping experience, both online and in our stores. We opened 2 new stores this quarter. A Babaton location in Square One Center in the Greater Toronto Area, and an Aritzia store in CrossIron Mills north of Calgary. We expanded and repositioned our Southgate Centre store in Edmonton and our SoHo flagship in New York. All of these are coming in at or ahead of our expectations. Our SoHo flagship is an excellent example of how we are creating exceptional experiences for our customers and our customers are responding. We added an escalator to access our beautifully remodeled second level, where we believe we have the nicest fitting rooms in Manhattan along with a gorgeous dedicated lounge space and a café. Our flagship stores are both maximizing sales and propelling our brand through elevated and differentiated experiences. Our beautiful high-quality product continues to be a value driver for our customers. In addition to the enthusiastic response to our new styles for summer, we also enjoyed the most successful product launch in the history of Aritzia with our leather program. All our styles were very well received and we are expanding the program both in breadth and depth for the upcoming seasons. We recognize the importance of driving brand awareness particularly in the United States. With this in mind, we launched our redesigned Aritzia logo online in December, and it is now being rolled out to our stores. The updated logo is clean and modern and has a timeless quality that can endure for the foreseeable future. We are making enhancements to our marketing strategy to drive brand awareness. As part of this, we have been building on our PR efforts where our focus is on securing product placements in digital media. We've been focusing on unpaid and organic covers to date, consistent with the way we successfully grew our brand in Canada. In the first quarter, we secured media placements in top-tier outlets and continue to address a number of VIPs and leading celebrities. As a result of our relationship with Meghan Markle's stylist, she wore a beautiful Babaton tranche in April, this coat subsequently sold out in 6 hours. By all accounts, Meghan remains a huge fan of Aritzia. It seems Meghan's fashion sense is influencing the royal family as well. Princess Beatrice was recently photographed wearing one of our leather biker jackets. We've enjoyed these successes because of our focus on developing our people, processes and technology infrastructure to enable our long-term growth. I will turn the call over to Jennifer to speak to this part of the business, which she leads so skillfully. And then I will update you on the strategic growth initiatives underway.

[Jennifer Wong, President, COO, Corporate Secretary & Non]

Thank you, Brian. And good afternoon, everyone. I will begin by spending a few minutes to speak specifically to our eCommerce business, followed by an update on the infrastructure projects that are currently underway. Over the next 3 years, there are 5 key strategies supporting our target eCommerce penetration of 25% of total net revenue. Together, these strategies will ultimately increase brand awareness, drive site traffic and lead to higher conversion rates.First, we will increase digital marketing to drive customer acquisition and retention. Enhancements to our search engine optimization was identified as an immediate opportunity. And in Q1, upon retaining expertise in this area, we made a number of technical enhancements to our site architecture. We are already beginning to see positive results in improving the discoverability of Aritzia on Google for dozens of top fashion and apparel keywords. Second, we will improve the digital experience with greater precision on priority areas to ensure that it lives up to the exceptional customer experience for which we are well known. So this year, the strategy includes a variety of core site optimizations, including enhancing site search functionality, landing page templates and improving checkout. These are all relentlessly being optimized and refined as we continue to see incremental improvement with each iteration. Third, we will grow our clienteling program. This is a key strategy to drive not only the eCommerce business but will drive business in our retail stores as well. And it will specifically leverage personalization to allow us to tailor and experience specifics to a customer. Most of the work to date has been to lay the foundation to provide a 360-degree view of the customer and leverage the data that we are already collecting at point of sale in both channels.Fourth, we will develop our omnichannel fulfillment capabilities and are in the early stages of planning this work. Finally, our fifth strategy will be to enhance our international website and explore opportunities to expand our international online business such as international marketplaces. Turning to other key infrastructure investments, we continue to invest in talent across all areas of the business with meaningful investment in the areas of eCommerce, marketing and technology. When it comes to other investments, our overall approach to build scalable yet flexible infrastructure with methodical speed and simplicity continue to be guiding principles. We have always committed to putting in a solid foundation first, upon which we can continue to build, to grow in step and enable an omnichannel business beyond $1 billion.And in technology this past quarter, the team has worked very hard and made great progress in Phase 2 of the point-of-sale implementation. One of the most important enhancements in this phase is to implement an integrated payment solution, which will allow us to improve the customer experience at the cash desk and increase accuracy on the back end. We expect this phase will be live by fall. The project to select and implement a product life cycle management system continues to be well underway as we have an RFP out to a shortlist of vendors. And we will be evaluating and vetting solutions upon receipt of responses. Again, we expect to have a vendor selected by fall. And lastly, our new flagship distribution center in Vancouver is nearing completion. I visited the site last week to confirm with the team that we are all set for the first phase of relocation. A second Vancouver-based customer care team has already piloted the office space, and our supply chain logistics team is looking forward to moving into their new offices next week. And the entire facility, including a warehouse management system upgrade is on track to be completed and fully operational by fall. I am very excited to see this project so close to the finish line. And with that update, I will hand it back over to Brian to speak to our future growth strategies.

[Brian James Beaumont Hill, Founder, CEO & Chairman]

Thank you, Jennifer. Our future growth strategies include growing eCommerce, expanding our store network, driving product innovation, driving brand awareness and enhancing long-term profitability. We've had a tremendous growth over the past 5 years and our eCommerce in both Canada and in the U.S., and more recently, internationally. We are confident there is a meaningful opportunity to continue or even accelerate this growth in all 3 markets. We have incredible profitable stores. There's never been a better time for us to capitalize on this core competency than in this retail environment. Opening new stores not only allows us to create extremely strong profit centers, it's all part of their omnichannel experience, and helps us position and solidify our brand in the various markets. We will continue to add to our AAA real estate portfolio, reaching new markets and expanding stores in Canada and the United States. We intend to open 6 new stores in fiscal year 2019 and expand or reposition 5 others. In the second quarter, we expect to open new stores in San Diego, California and Waterloo, Ontario. And we are expending the MayFair store in Victoria BC. We are continuing to open pop-ups similar to the one we opened in Santana Row, San Jose, and are scheduled to open 2 additional pop-ups in August, one in Chicago, Illinois and another in Georgetown, D.C.There are 4 key strategic strategies that we are focused on to drive our exclusive brand and product innovation. The first is optimizing our vertically integrated supply base to ensure that we are always driving innovation with best-in-class partners. The second is driving efficiency in our manufacturing by co-locating our raw materials and finished goods. Examples of this include both expanding within Asia and extending to other centers of excellence, including Europe and South America. The third is utilizing duty-free arrangements where it makes sense to ensure we continue to make luxury accessible. And the fourth is creating value for our customers by reinvesting some of the savings realized through our sourcing strategy back into our product quality and innovation. For example, we are already enhancing the quality of our parkas. We are already using 100% responsibly sourced goose down, and are now elevating all our trims by adding wool cuffs, which aligns us with luxury brands and differentiates us from most of our competitors, whom -- many of which use polyester. We are pursuing a number of compelling strategies to supplement our brand-building efforts, including partnering with influencers in a more meaningful way than we have in the past. Enhancing social media initiatives and exploring collaborations with various brands. Our objective is to amplify and accelerate the word of mouth that has proven so impactful in building our authentic brand presence. I will close by saying we are very excited about the future. We have beautiful high-quality product and compelling value proposition for our customers. We have a loyal, passionate and growing client base. We have tremendous opportunity for expansion in both eCommerce and our store network. And we have the best-in-class infrastructure comprised of highly skilled dedicated team, proven processes and top-tier technology. In short, we are poised for growth and could not be more excited about the opportunities ahead of us. With that recap, I will hand it over to Todd to go over the detailed financials.

[Todd Ingledew, Chief Financial Officer]

Thank you, Brian. Good afternoon, everyone. We are excited to have started the year off with exceptional financial performance in the first quarter. Net revenue for the quarter increased by 15.1% to $167 million from $145 million in the first quarter last year. The revenue increase was driven by strong comparable sales growth of 10.9% as well as the addition of 6 new stores and 8 expanded or repositioned stores since the end of the first quarter last year. On a constant currency basis, net revenue growth would've increased by additional 160 basis points or $2.6 million. Our comparable sales continue to be driven by our product, which manifested itself in higher transactions, both online and in-stores. We have continued momentum in our eCommerce business and strong performance in our stores across all regions, particularly in the U.S., where we have enhanced our district level of management teams. Excluded from comparable sales this quarter are the same 8 stores that were impacted by the opening of the new expanded or repositioned store in the fourth quarter of fiscal 2018. These 8 locations again represented approximately 8% of net revenue in the first quarter. All of these locations will be reentering the comp base by the end of the third quarter this year.Gross profit margin for the quarter increased by 70 basis points to 40.4% from 39.7% in the first quarter last year.Gross profit margin benefited from the strengthening of the Canadian dollar and continued improvement in product cost related to ongoing sourcing initiatives. These improvements were partially offset by higher warehousing and distribution costs.Selling, general and administrative expenses increased by 15.1% in the quarter, in line with our revenue growth. SG&A as a percentage of net revenue was down 10 basis points to 28.1%, as we benefited from leverage of selling labor cost, partially offset by the impact of our continued investment in people.Adjusted EBITDA increased by 18.4% to $28.4 million or 17% of net revenue in the first quarter. Adjusted net income increased by 22.2% to $15.2 million or $0.13 per diluted share. Our balance sheet continues to strengthen with a cash balance at the end of the quarter of $122.3 million.On May 15, we [indiscernible] a normal course issuer bid to repurchase a portion of our subordinated voting shares. In the last 2 weeks of the quarter, we repurchased 52,100 shares at an average price of $13.65 for total cash consideration of $711,000.Subject to market conditions, we will continue repurchasing shares opportunistically, in part to offset the dilutions from the exercising of employee options.Subsequent to the end of the first quarter, we amended our credit facilities with our syndicate of lenders. The amendment agreement included a $43.7 million reduction of the term credit facility from $118.7 million to $75 million. And a $30 million increase of the revolving credit facility from $70 million to $100 million. The amended credit facilities have no amortization payments and mature in May of 2022.The facilities provided increased flexibility to manage our operating and investing cash flow requirements, while reducing financing and interest cost. These amended credit facilities, along with the loan repayment will result in annual financing and interest cost savings of approximately $1.2 million.Turning to our outlook, we are pleased with the strong start to the second quarter, driven by an enthusiastic response to our Spring/Summer product offering. Once again, we look forward to delivering our 16th consecutive quarter and 4 full years of comparable sales growth in Q2.For fiscal 2019, we continue to expect to deliver low to mid-teens revenue growth, and consistent adjusted EBITDA margin as compared to fiscal 2018.Gross profit margin is expected to benefit from reduced product costs related to ongoing sourcing initiatives. However, a reminder that in the second half of the year, we expect these product cost improvements to be offset by higher raw material costs for the Fall/Winter season.As discussed in the first quarter, we continue to expect SG&A to grow proportionally with revenue for fiscal 2019. The expected growth in SG&A is related to investments we are making in people, technology and infrastructure.Overall, we continue to make strong progress on our strategic initiatives and see continued strength in our business. We'll remain on track to meet or exceed our stated fiscal 2021 performance targets.With that, we will now welcome questions. Operator?

[Operator]

[Operator Instructions] Our first question comes from Mark Petrie from CIBC.

[Mark Robert Petrie]

I just wanted to ask about the drivers of the comp. And you guys gave some good color. But I'm just curious if you can sort of elaborate in terms of when you see a quarter like this one where the comp clearly accelerates from the trend you've had the last couple of quarters, what is it in the business that's outperforming? And I guess maybe specifically with regards to your efforts on search optimization and social media, how can you track the sort of response from those efforts?

[Todd Ingledew, Chief Financial Officer]

I'll answer the first question, Mark. And Jen will take the second one. So our product continues to be the main driver of our comp, as we've said in the last quarter. Our spring and summer assortments were well received by our customers and that manifested itself in higher traffic and higher transactions. And we're seeing it both online and in-stores. We are seeing a strong performance, again, across both channels and across all geographies. But in particular this quarter, our U.S. stores were performing extremely well.

[Jennifer Wong, President, COO, Corporate Secretary & Non]

And specifically to your question on SEO, Mark, we have put in some infrastructure to -- basically, it's Google Analytics and we are continuing to refine the analytics with an external party. And we can easily see the results quite immediately in terms of Google search, specifically SEO. So we have ways of tracking it.

[Mark Robert Petrie]

And so I guess, how far down the path are you on that? Do you feel like there's further room to kind of accelerate the benefits from that work?

[Jennifer Wong, President, COO, Corporate Secretary & Non]

Absolutely, yes.

[Mark Robert Petrie]

Okay. And then just back to the performance in the U.S., I guess, did that translate from both in-stores and online?

[Todd Ingledew, Chief Financial Officer]

Yes, and we continue to see a strong momentum, both online and in the stores.

[Brian James Beaumont Hill, Founder, CEO & Chairman]

But I'm going to wade in here. When we -- as Todd and everybody says here, when we have comps of that amount, generally everything's working.

[Mark Robert Petrie]

Okay. And could you just maybe give a little bit of context around the trajectory for Q2? I mean, you said it's off to a strong start and it's positive. But any more color in terms of the relative performance versus the Q1 trajectory or the Q4 trajectory -- Q4 result?

[Todd Ingledew, Chief Financial Officer]

Again, we're very happy with our comp performance in the first half of Q2. Our Spring/Summer product continues to resonate. And our inventory is well positioned for the remainder of the sale period. But we aren't providing any specifics.

[Operator]

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

[Irene Ora Nattel, Managing Director of Global Equity Research]

Just continuing discussion around the same-store sales, wondering the degree to which weather may have and continues to contribute to that? And also, whether there were any particular categories that you saw very strong? And perhaps maybe what kind of basket you saw in conjunction with the rollout of the leather?

[Brian James Beaumont Hill, Founder, CEO & Chairman]

I'll take the product. Irene, thank you for that. Our leather program, as we have a test and react strategy, our leather program was just the test phase of it. So we're selling out, I think, you even mentioned to me, we're selling out of our product fairly short order. Where we really start to leverage this is on our reorders and expanding the program and things. So although, we are extremely excited and had an incredible launch, a lot of it is not coming down to the bottom line yet and won't until this fall when all the reorders are coming in. So we're not seeing that affect our profits at this point in time in our revenues. As far as basket size, that has not changed. We just -- we have great product in our stores and are continuing to execute well on eCommerce and continue to execute well on our customer services. And through all that, we've just seen incremental growth coming from all regions across all departments and categories, generally everywhere. So there's nothing really that's been singled out. Everything seems to be performing well for us right now.

[Irene Ora Nattel, Managing Director of Global Equity Research]

Just continuing, I don't want you to beat the leather horse or cow, too strongly. But presumably, it's a very, very compelling price point. And as you roll out leather and sort of the way you tend to quickly position things, do you think that, that could give sort of a lift to your average transaction, bring in incremental customers?

[Brian James Beaumont Hill, Founder, CEO & Chairman]

Most certainly we do. We think it will the price point is high. Although, we think it is extremely well priced and well sourced. And truthfully, it's not any different than the rest of our product in that we think our whole -- all our product is well priced, and we think there's a value proposition there and leather is no different. It does appear, obviously, with a higher price point. It should affect our basket size and as it gains momentum, we should see that happen for sure. But we're kind of looking at the sales rather than increasing basket size as incremental baskets so to speak. And so that's how we're actually viewing it because it's a program that, although, we had sold leather in the past and the scheme of things, we hadn't really sold leather in the past. So we're looking at this as a whole another category that will be incremental. And we probably -- when we analyze our sales we'll probably look at the leather basket separately from the rest of the baskets and the rest of the baskets, so we can compare like-for-like in the future.

[Irene Ora Nattel, Managing Director of Global Equity Research]

That's really helpful. And just one final question, if I may. Coming back to sort of the enhanced data analytics and sort of the 360 view of the consumer and the whole concept of personalization. If we think about where you are today, so where is it that you want to be in 2, 3, 5 years? And how do you think that impacts sort of your -- the customer spend? And I guess, the efficiency of the promotional activity?

[Jennifer Wong, President, COO, Corporate Secretary & Non]

Irene, it's Jennifer. Right now, we're as you know, as I mentioned in my prepared remarks, we're building foundation to allow for the data and analytics, and this is with a customer analytic. I would say that we are in the phase of hindsight reporting, so we do know what's happening, we're collecting data where we actually have lots of transactional data on our customers. I would say the next step would be to gain insight from that data, so we're understanding more about the customer, and why the customers behaving the way she is. And then eventually, we'll get into foresight, which is the predictive analytics. And this is a roadmap that we see over the next 3 years. And we do plan to see benefits as we go along in terms of the hindsight, insight and foresight.

[Operator]

Our next question comes from Stephen MacLeod from BMO Capital Markets.

[Stephen MacLeod, Analyst]

I just wanted to take a quick look at the Q2 outlook. And you're crushing, a lot of confidence coming off of a strong Q1. And I'm just curious, how you view your visibility into the comp for the back half of the quarter? Like is there any reason to think that sales would -- the sales trends would sort of change dramatically as we get into the doldrums of the summer?

[Todd Ingledew, Chief Financial Officer]

Again, as you know that we're very pleased with the start, the first half of Q2. We do have our fall season, which starts in August, so that comes in, in the back half of the year. So we don't like to predict how that's going to perform. We manage our business in a prudent fashion. And therefore, for the rest of the year, we're expecting our comps and our revenue growth to be in line with our original expectations.

[Stephen MacLeod, Analyst]

Okay, that's helpful. You mentioned the pop-up stores and I'm just curious, is that -- is the one you have in Santana Row, is that a new initiative on -- for Aritzia? And can you talk a little bit about how that store performed? And maybe some learnings you have as you look to add 2 more pop-up stores in Chicago and Georgetown? How long do you typically keep these stores open?

[Brian James Beaumont Hill, Founder, CEO & Chairman]

Well, the leases all vary. And it depends on the vacancy and things. And the size is very comparate depending on availability and things like that. This store is performing meaningfully higher than we expected. Although, my Head of Real Estate or our Head of Real Estate would suggest it's exactly what she expected. So she is right, and I'm wrong. But it's all positive, and we're doing the pop-ups ironically, we have a store in -- right next-door in San Jose, right next-door in Valley Fair Mall, and so the purpose of this pop-up was to gain a little bit more square footage because we need square footage in that area. The Valley Fair is under construction right now, and so from that perspective, we wanted to make sure that we were protecting the business that we had there by adding another store here. By-product of that is the landlords of Valley Fair have gotten a little bit more anxious with the fact we're opening next-door. So that's been quite positive too. So as far as the other ones go, pop-ups, we're doing them in this case to protect the business we had right now, but also in some of the other ones we're exploring different markets before we sign long-term leases and just trying to get a feel for what the markets and the recognition of Aritzia in the brands. So we can understand the real estate strategy and help perform our real estate strategy really going forward, and make some money while we are at it. So rather than paying consultants to come tell us and inform us on the real estate strategy, we're actually taking in money, building our real estate strategy, which we think is quite clever actually.

[Stephen MacLeod, Analyst]

Yes, interesting. So would you expect that these pop-ups, you would use them in the future to dip your toe in the water into new markets so to speak?

[Brian James Beaumont Hill, Founder, CEO & Chairman]

Yes, I mean, it could be in a new market, it could just be in a new area in the market. The one in Chicago we're opening, we already have 4 stores in Chicago. So this is really testing out a shopping center to ensure that it is a place that we're prepared to sign a long-term lease and commit the capital to. So I mean, this is one of the by-products of that retail environment, it's out there right now. And years ago, you could open pop-up stores but they were extremely small, extremely temporary and/or in places you didn't want them in. Because of the retail environment out there right now, we're able to open up and try pop-up stores -- a pop-up shops in AAA locations that historically we weren't able to execute.

[Stephen MacLeod, Analyst]

Great. That's helpful. And then just finally, I just want to circle around on the omnichannel fulfillment, and can you just remind us sort of where you are in having full omnichannel fulfillment? And how that aligns with the new DC and Vancouver?

[Jennifer Wong, President, COO, Corporate Secretary & Non]

Yes. Well, right now, we are offering some -- in the preliminary form of omnichannel. So customers are able to buy online and return to store, and actually a majority of our returns do come back to our stores, which we love, because our sales associates see that as an opportunity to turn that return into an exchange or even upsell. As well customers who are in the store and cannot locate the specific item that they're looking for, we have the ability to locate it elsewhere in our network, store network, distribution center network and bring it back into the store or even ship directly to their home. So we've been doing that with great success and offering it as a customer service to our customers for quite some time now. And now with the new point-of-sale system in place, a foundational piece that allows us to give visibility into our inventory at a near real-time basis. That was the first basis is the visibility into the inventory. And so now we're building upon that to increase inventory accuracy. And then beyond that, we will be looking at buy online, pick up in store, or buy online to fill some store in a different permutation such as that. And certainly, with our new distribution center in Vancouver, it will allow us to fulfill -- quite frankly, it will allow us to fulfill within Canada, as well as the cross border. So one of the things that we are looking at is leveraging the distribution center in Vancouver on the West Coast to fulfill along the whole West Coast North and South.

[Operator]

Our next question comes from Meaghen Annett from TD Securities.

[Meaghen Annett, Analyst]

So I'm just building on the conversation on data analytics. Just curious as to how your leveraging customer loyalty? And how that's really changed overtime? And more specifically, as you touched on in the opening commentary, can you just talk to the evolution of the clienteling program? And what the future holds for that initiative in particular?

[Brian James Beaumont Hill, Founder, CEO & Chairman]

Thank you for that question. At this point in time, we weren't able, as we mentioned in the past with the POS system to really take advantage of the clienteling and the information we have with the old POS system. It was too cumbersome, and we weren't able to mine the data. We collected it but we weren't able to mine it and access it and leverage it whatsoever. We're just in the process, we have a big -- we had a big Clientele event in June. But we're stabilizing our POS system and focusing on our POS 2.0 versus 1.0, which we went live with -- which we're going to go live with shortly, our 2.0. And so at this point in time, we still haven't taken the opportunity to access and mine this data and put some programs in place. We're building some programs on the back end presently that we will when we're ready to press the button and go. As well as we're collecting much better data at the point-of-sale system as well from our clients. So we're doing all the work in the back but we haven't yet mobilized on any initiatives at this point in time. But we plan to start later this year, and then just really ramp it up in the following years.

[Operator]

Our next question comes from Camila -- Camilo Lyon from Canaccord Genuity.

[Camilo R. Lyon, MD & Head of US Consumer Research]

Just a few questions. First, I wanted to -- Brian, I wanted to get your thoughts on -- your updated thoughts on how the Denim program is progressing? I know that, that's something that you spoke about in the past, week 7 around launching your private brand, your own brand of Denim. And so it seems like there's a good trend that would support that launch. So I'm just trying to get your -- would love to get your thoughts on where that's progressing? How that's progressing? And what we can expect over the coming quarters from that program?

[Brian James Beaumont Hill, Founder, CEO & Chairman]

Yes, thanks for the question and nice hearing from you. Yes, the Denim program has progressed really well, obviously, we haven't gone live with it, we're going to go live with it towards the end of August. We've -- at this point in time, we have been in our factories, ensuring the quality of the product, the fit of the product, the finishing of the product is all executed to perfection. We have no reason to believe it is not, we're really confident that it is. We've done our photo shoots and things. I can maybe give you a sneak peek, if you like, on our photo shoots, they looked wonderful. And so we're all ready to go. We're launching it in 4 phases. I don't remember all 4 phases, the name's specifically. But there's teasers coming out and then some other phases that come out as well with the Denim program. It is a two-phase program, so first of all, we're launching with our Denim line. And the second phase, which we hope to have up mostly for spring 2019, is the integration as well of the existing Denim that we're manufacturing for all our other exclusive brands, because a lot of those brands have a Denim in them as well. So Phase 1 was launching our new line. Phase 2 is taking those products and -- existing and new products that we're going to develop into our existing exclusive brands, and ensuring that they've been shored up to the same high degree of quality that are existing and styling that our new Denim line will provide.

[Camilo R. Lyon, MD & Head of US Consumer Research]

Great. Shifting gears a little bit, you mentioned the success of the time with Meghan Markle, it's something that we noticed as well, and we definitely saw a spike in online search activity and the trench that she wore. I'm wondering a lot of the press that you got from that partnership was really third party. So I'm wondering, is there an opportunity that you've discussed? And is there a potential for there to be a more direct relationship, so that she becomes a more prominent figure as you go to market through your different seasons?

[Brian James Beaumont Hill, Founder, CEO & Chairman]

From what I understand, I've just spoken to her stylist today. She has an affinity to Aritzia because we've been supporting her for quite some time. And so there's a loyalty there to Aritzia. But I imagine, there's other pressures being in the royal family and living in the U.K. and supporting the designers there. So at this point in time, really, I don't think it's something we can push. I think it -- we have to be there and support her when she wants the support and help style her when that -- those opportunities present themselves, but I don't think we're in a position to start pushing that. That said, as we talked about with influencers and it's not just Meghan Markle, there's a lot of different people wearing our product these days, and we can hope and are confident actually that they'll continue to wear it, as well as we can start pushing on the paid piece from the -- for various channels as well in so much as influencers and things. So I think it's a combination of celebrities wearing our products. I think it's a combination of influencers wearing our product, and the combination of just people picking our product up and getting press for that. So I think it's a multipronged strategy, and we're pretty excited at the positioning. Now Megan wore our clothing, I think on 3 or 4 occasions. When she first went out in the polo match, she had our blazer on. And she was at the Invictus Game, she had a dress of our's on and a jacket she purchased from our stores. So she's worn our product many, many times. And they've all been successful.

[Camilo R. Lyon, MD & Head of US Consumer Research]

Great, and then my final question is -- will be on the product. You've been known for having on trend fashion, a great-looking assortment, really season-in and season-out. But it seems like there's been a heightened excitement around certainly the spring-summer launch. I'm wondering have the recent hires that you've made over the last year, has there been a change that they've now started contributing to the fashion that's in market so that's we can expect to see a continued elevation of what we're seeing in the marketplace in the forward seasons?

[Brian James Beaumont Hill, Founder, CEO & Chairman]

Most certainly, new people that have joined the team have contributed for sure. But we have a lot of people that have been here for a long time that are contributing as well. And so, it's a combination of the new people and the people that are -- been here a long time that are making and continuing to make meaningful contributions. I think realistically, we just did a better job with color and we did a better job with seasonality this season, and so that's something we think will be able to continue to capture going forward, and I think we just executed on that and it wasn't really a fashion thing. It was more just our attention on color and seasonality, and I think we've learned that we can, by focusing on both those areas, we will continue to drive our business, not adjustment summer but in the fall and winter and all the other seasons as well.

[Operator]

Our next question comes from Drew North from Baird.

[Andrew D. North, Junior Analyst]

I wanted to ask about the margin outlook. Wondering if you could provide some more specific detail around the puts and takes to the margins in the second half? More specifically, the potential magnitude of the sourcing benefits you're seeing as well as the pressure from higher raw material costs? And then the strategic priorities or strategies, I should say, you are pursuing to mitigate these raw material headwinds.

[Todd Ingledew, Chief Financial Officer]

Yes, I'll take that. As we said, in the back half that we do continue to expect to benefit from our sourcing initiatives. And we do expect that to be offset by the increased raw material costs. Leaving us in a position where we're expecting gross profit margin for the year to be flat. We don't provide the specific detail around the basis point expectations on the two, but we do expect them to be offsetting. As far as strategies go towards mitigation, we are looking at our pricing on certain items and may be considering strategies in order to mitigate, but that's for continued discussion.

[Andrew D. North, Junior Analyst]

Got it, that's helpful. And then just one more if I could. I thought it was encouraging to hear some of the website enhancements you're bringing on. I was wondering if you could speak to some of the trends you're seeing in eCommerce traffic? And maybe conversion as these enhancements have evolved? And then the opportunities you think you have to further improve conversion from here?

[Jennifer Wong, President, COO, Corporate Secretary & Non]

Well, we don't specifically disclose details around website metrics, like traffic and conversion. What I will say is that year-over-year, we see consistency on both, and if you put AOV in there as well, those are probably the three magic metrics. What we're seeing is no changes specifically within each of those. Of growth is driven largely by number of transactions and volume.

[Operator]

Our next question comes from Mark Petrie from CIBC.

[Mark Robert Petrie]

I just wanted to ask a question around how you think about the brand? And obviously, there's a ton of momentum in the business. And it sounds like to me over the last couple of years, you guys have become at least somewhat more aggressive in terms of how you're marketing the brand and some of the tools and tactics you're using. I just wanted to sort of ask if that kind of trend continues from here, and I know you've mentioned something like limited wholesaling as a potential way to sort of further market the brand, your thinking on that. And then I guess, related -- how that relates to the international opportunity and I know you've been at international shipping for almost 2 years now. Sort of your latest thinking about the international opportunity?

[Brian James Beaumont Hill, Founder, CEO & Chairman]

So what's your first question, again? Sorry, I got tied up thinking about the international opportunity.

[Todd Ingledew, Chief Financial Officer]

Marketing.

[Brian James Beaumont Hill, Founder, CEO & Chairman]

Yes, marketing. So I actually don't think we've done anything particularly different from a marketing perspective. Obviously, we have a social media presence and some other presence. But we haven't actually gone out and spent any money on paid advertising at this point in time, which is something we've never done in the past. Not to suggest that we might -- we're not looking at it right now because we are because the influencers and things like that, obviously, they're paid to play. But where we've been spending and focusing our marketing dollars, is just ensuring that the customer experience is continuing to be elevated. And that comes in the form of the marketing and communications in our stores, that comes in the form of our website, and making sure that it's easier to use, and more elevating and continuing to elevate the catalog and the photography, and the models, and the styling, and things like that. So that something we've always done in the past is really focused on spending those dollars on the presentation of what we're doing within those. Now that said, we're in the process, as we mentioned, and looking at our marketing and focusing on some different strategies and at that point in time, we may indeed decide to get more aggressive, but at this point in time, I wouldn't really suggest that we've been aggressive. We've just been investing in ourselves up to this point in time.

[Mark Robert Petrie]

Okay, thanks. And then any comment on international?

[Brian James Beaumont Hill, Founder, CEO & Chairman]

We're still pursuing international. I think that we're still seeing growth in international. I think, as we've mentioned in the past that focusing and launching Tmall is something that is important to us. It's not -- we haven't really put a stake in the ground as to when we're launching Tmall at this point in time. And the teams are busy working on it. And we hope to get it to launch this year, early next year. And we're going to sort of gather a lot of data from that at what point in time we'll see what the next steps on investing in international are.

[Operator]

Our next question comes from Patricia Baker from Scotiabank.

[Patricia A. Baker, Analyst]

Thank you very much. I know you, Jennifer, earlier, you talked about in your opening remarks that one of the enhancements that you -- one of the impacts of the enhanced online platform is that you will see increased conversion. I understand you don't want to get specific metrics around conversion, but I'm really curious if you can just address conversion as a topic and whether or not how large the gap is in your store conversion rate versus your online conversion rate, and then presumably, given the strength that you guys have had over time in your top line, I think, it would probably be right to assume that your conversion rates are better than industry averages. Can you address that as well?

[Jennifer Wong, President, COO, Corporate Secretary & Non]

Sure. I will maybe describe to you some of the enhancements that we're doing that I referred to on the site that we believe will positively impact conversion. So for instance, the digital experience, we do know that over 85% of our browsers land on 3 specific pages. And so knowing this, we are able to -- we're going to optimize these pages and continually optimize these pages and we can get the feedback from the analytics pretty much immediately in terms of how these refinements affect the user. And at the end of the day, it's about refining things. Such as that knowing where the browser is going to, the browser as in the user. And then achieving an increased conversion. So it's by identifying opportunities like that that we see and we think there are a number of straightforward opportunities, translate low hanging fruit that the team has identified and it's about capitalizing on all of these things, which in aggregate is what we're calling the core site optimization.

[Operator]

This concludes the question-and-answer session. I would now like to turn the conference back over to Brian Hill for any closing remarks.

[Todd Ingledew, Chief Financial Officer]

Maybe just before we close the call, we thought we should bring up the Trump announcement today on retaliatory tariffs against China. And our teams have reviewed the product categories and the only one -- well, there's no -- there is going to be no impact for us. The only category that potentially could have is leather. That's the only material that we would have been impacted by. Except we don't source our leather through China. So we are not at this point anticipating any impact from the announcement that came out late last night.

[Brian James Beaumont Hill, Founder, CEO & Chairman]

Thank you, Todd. And thank you everyone for joining us today. We apologize for the slight overlap with the sporting event that was going on. We appreciate the questions and support from all of you as we grow our exciting company. We look forward to speaking with you soon. Enjoy your summer. Thank you.

[Operator]

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