Aritzia Inc

TSX:ATZ

Earnings Call Transcript 2023-Q1

[Operator]

Thank you for standing by. This is the conference operator. Welcome to Aritzia's First Quarter of Fiscal Year 2023 Earnings Call. [Operator Instructions] The conference is being recorded. [Operator Instructions]

I will now turn the conference over to Beth Reed, Vice President, Investor Relations. Please go ahead.

[Beth Reed, executive]

Thank you, and thanks for joining Aritzia's First Quarter Fiscal 2023 Earnings Call. On the call today, I'm joined by Jennifer Wong, our Chief Executive Officer; Todd Ingledew, our Chief Financial Officer; and Brian Hill, our Founder and Executive Chair. Following management's discussion, we'll host a question-and-answer period open to analysts and investors.

Please note that remarks on this call may include our expectations, future plans and intentions that may constitute forward-looking statements. The uncertain and dynamic nature of the global COVID-19 pandemic and its ongoing impact could continue to materially alter our performance. We would refer you to our most recently filed management's discussion and analysis and our annual information form, which include a summary of the material assumptions as well as risks and factors that could affect our future performance and our ability to deliver on these forward-looking statements. Our earnings release, the related financial statements and the MD&A are available on SEDAR as well as the Investor Relations section of our website at aritzia.com.

I'll now turn the call over to Jennifer.

[Jennifer Wong, executive]

Good afternoon, everyone, and thank you for joining us today. Todd and I will share some prepared remarks, and Brian will join us for the Q&A. I'm excited to report our results for the first quarter of fiscal 2023 and our plan for continuing to capitalize on the many growth opportunities we see ahead.

We had a terrific start to the year. Demand for our much-loved Everyday Luxury experience from new and loyal clients has continued to exceed our highest expectations. In Q1, our business sustained its exceptional momentum as we saw strength in all geographies and all channels, particularly in the United States.

Propelling our business forward has not come without its challenges. Our team did a remarkable job this quarter. They continued to navigate the ongoing headwinds of the global landscape to deliver for our clients and our business. Aritzia has never been stronger or better positioned for the future.

While we're encouraged by the trends we're seeing in our data, we continue to remain vigilant as we monitor the ever-evolving macro backdrop. We are focused on driving long-term lasting growth through our strategic initiatives and, as always, investing in the infrastructure required to scale for years to come.

While Todd will provide you with our detailed financial results, I am pleased to share that we delivered net revenue of $408 million in Q1, an increase of 65% from last year, led by our business in the U.S., which continued to accelerate at a phenomenal pace, increasing 81% from last year.

In Canada, we grew by 52%, with outstanding comparable sales growth and the benefit of reopened boutiques in Eastern Canada. Our boutiques and the progress we made on our geographic expansion drove our exceptional performance and U.S. growth. In Q1, our retail business surpassed our expectations as it increased 101% from last year. We opened 3 new boutiques in the quarter to a tremendous client response, 2 of which were in new markets, Las Vegas and Miami. And we are pleased with the early results we're seeing in our new boutiques and our new markets. The success of our geographic expansion strategy builds on our already flourishing boutique portfolio and positions Aritzia for continued growth into the future.

In eCommerce, we saw our traffic grow further in Q1. The U.S. led that growth where traffic increased by almost 50% from last year. To maintain our momentum, we added new and improved features and functionalities to aritzia.com. We continue to focus on empowering our clients to shop with us wherever, whenever and however they want. This included improving our product discovery.

We were especially excited about launching our more sustainable styles page. We better enabled clients to effortlessly shop the 63% of our spring/summer collection made from certified organic or recycled materials.

While we continue to make our assortment more sustainable, we also delivered on 2 of our product expansion initiatives. In Q1, we launched our first-ever swim collection, and we extended our footwear offering through our first partnership with Vans. That said, we saw key programs and proven sellers continue to resonate with clients and drive our strong demand.

Selling in our professional and fashion assortment increased as our clients begin to return to the office, social events and travel, all while maintaining our momentum in lifestyle apparel. Our business model continues to enable us to provide our clients with beautiful products for all aspects of their life.

Combination of our geographic expansion and beautiful product collections continued to fuel our brand awareness and client acquisition. In Q1, we made progress on our path to getting famous in the U.S. Our client acquisition continued to accelerate, and this growth was on top of what we saw in Q4. As such, we finished the quarter with more clients than ever before. We have doubled our U.S. active client base compared to last year.

Like all global businesses, we continue to experience supply chain disruptions and logistics delays in Q1. We maximized the availability of our product and delivered a solid inventory position through strategic inventory management and expedited freight. This decision resulted in significantly higher freight costs, but we intentionally prioritized our accelerated momentum. This enabled us to capitalize on the vast majority of our client demand, grow wallet share and deliver exceptional results.

We continue to advance our data and analytics capabilities to empower our team to make informed data-driven decisions. In Q1, we reached the 50 people milestone on our data and analytics team. We also further developed our data warehouse and deepened our partnership with Tableau. Through this partnership, we will extend their analytics solution to our entire organization.

We also advanced our client and sales reporting this quarter, giving us a 360-degree view of our clients and their shopping behavior. This lays the foundation for more personalization and it forms the strategies we will employ to drive deeper loyalty with every client interaction.

In Q1, we advanced our channel reporting as well. We focused on enhancements to our eCommerce and Concierge dashboards. These dashboards deliver actionable insights that enable us to further optimize our operations and increasingly more value for our clients.

Moving to people. We continue to grow our team with world-class talent. We filled a multitude of key positions across all areas and levels of our business. And as always, we put our people first. This past quarter, we began offering jack.org mental health support and resources to all of our people in Canada and the U.S. We also made a donation to support jack.org's mission of providing these resources to young people across Canada.

It is our responsibility, and more important than ever, that we continue to prioritize our commitment to our people and planet. In Q1, we formed our Environmental and Social Board Committee to oversee how we can continue to accelerate the positive impact we are making through our operations, policies, programs and initiatives. And later this month, we will be publishing our second ESG report and first United Nations Global Compact Communication on progress.

We also continued to focus on uplifting and empowering our communities and all the people we serve. We deepened our partnership with the Stonewall Community Foundation. With them, we started a scholarship program to provide LGBTQ students with financial assistance, opportunities and access to education. We also partnered with Stonewall to launch our Proud Today, Pride For Ever Campaign. In this campaign, we shined a light on the stories of LGBTQ revolutionaries. We celebrated their heart, passion and fearlessness as they pave the way for future generation.

I will now pass the call over to Todd to share a more detailed look at our financials.

[Todd Ingledew, executive]

Thanks, Jennifer, and good afternoon, everyone. We delivered another quarter of exceptional financial results, again, exceeding our expectations, driven by stronger-than-anticipated demand, particularly in the United States as our brand continues to gain momentum.

For the first quarter, we generated net revenue of $408 million, an increase of 65% from last year. This outstanding growth in spite of macro headwinds was driven by the incredible demand for our product across all geographies and all channels. The continued momentum in the United States drove net revenue of $207 million in the quarter, an increase of 81% from last year. Our business in the United States accounted for 51% of net revenue in the first quarter compared to 46% last year. The sustained momentum is reflective of the significant acceleration in our U.S. client base, which has doubled in the last 12 months as more clients discover and become loyal to the Aritzia brand.

In addition, our retail revenue in the first quarter was $288 million, an increase of 101%. This was led by growth in the United States, where we saw exceptional comparable sales as well as outstanding performance of our new boutiques, which continue to exceed our sales and payback expectations.

In Canada, we also saw strong sales in our comparable boutiques and benefited from the contribution from the reopened boutiques in Eastern Canada that were closed for 2/3 of the first quarter last year.

Finally, our eCommerce net revenue was $120 million, an increase of 16%. We saw a strong eCommerce growth across all regions, except in Eastern Canada, where there was a channel shift to retail as the closed boutiques from last year were fully open this year. Excluding this region, eCommerce grew 25% in the quarter, reflecting growth in traffic from new and existing clients.

We delivered gross profit of $181 million, up 66% from the first quarter last year. Gross profit margin was 44.3% in the quarter, expanding 10 basis points from 44.2% last year. This improvement was achieved primarily from leverage on occupancy and warehousing costs that was amplified as we lapped the boutique closures from last year. This leverage more than offset approximately 500 basis points of erosion from the use of expedited freight as well as inflationary pressures.

SG&A expenses in the quarter were $120 million or 29.5% of net revenue compared to 28.5% last year. The 100 basis point increase reflects the elimination of subsidies year-over-year and ongoing investments in talent and technology to deliver our growth.

Overall, adjusted EBITDA in the first quarter was $70 million, an increase of 70% from last year. Adjusted EBITDA was 17.1% of net revenue compared to 16.6% of net revenue last year. These results are exceptional, demonstrating the strength of our business as we continue to drive ongoing momentum in the United States, and Canada returns to full strength, and all accomplished in spite of impacts from ongoing global supply chain disruptions and the challenging macro environment.

Inventory was $299 million at the end of the first quarter, up 81% from last year. This increase includes higher in-transit inventory due to the strategic decision to order and ship our fall product earlier. Our inventory buys are focused on our proven sellers, and we are confident we are on track to have the product to meet demand through the fall/winter season.

Our liquidity position remains strong with $179 million in cash and 0 drawn on our $175 million revolving credit facility. Since the implementation of our NCIB on January 12 and through yesterday, we've repurchased 1.46 million shares, returning $56.7 million to shareholders. Given current market conditions, we have increased our pace of planned repurchases. We will continue purchasing shares opportunistically throughout fiscal 2023.

Turning to our outlook. The strong momentum in our business has continued into the second quarter. As such, we expect net revenue for the second quarter to be in the range of $440 million to $460 million, representing an increase of approximately 26% to 31% compared to last year. This reflects continued strength in the United States in both retail and eCommerce as well as a strong recovery of our business in Canada.

For the full year, we have increased our net revenue expectations to a range of $1.875 billion to $1.9 billion from our previous outlook of $1.8 billion. The new expectations represent growth of 25% to 27% for the full year. We plan to open 8 to 10 boutiques with all but 1 in the United States and to expand or reposition 4 to 5 boutiques.

We now expect gross profit margin to decline up to an additional 50 basis points for the year to approximately 100 to 150 basis points down compared to last year, reflecting higher-than-expected inflationary pressure. Please note that due primarily to the timing of expedited freight this year versus last year, for the remainder of the year, we expect higher pressure on gross profit margins in the second quarter and for that pressure to subside partially in the third quarter with the opportunity for gross profit margin in the fourth quarter to be slightly positive as we lap elevated freight costs in the back half of last year.

SG&A as a percent of net revenue is expected to increase approximately 50 to 100 basis points compared to last year, reflecting continued investments in talent and technology to fuel our future growth. We expect capital expenditures in the range of $110 million to $120 million, comprised primarily of new and repositioned boutiques, our new distribution center in the Toronto area and the expansion of our support office.

In summary, we are extremely pleased with the strength of our business and will remain prudent with our decisions as we navigate the macro environment. We plan to continue to leverage our strong balance sheet to make strategic investments to drive sustained profitable growth into the future and deliver meaningful shareholder value. We look forward to sharing our long-term targets with you at our upcoming Investor Day.

With that, I'll now turn the call back to Jennifer.

[Jennifer Wong, executive]

Thanks, Todd. We're extremely pleased with our Q1 results and excited for the future. We have carried our strong momentum into Q2 and continue to lay the foundation for long-term lasting growth. Client demand is showing no signs of letting up across all geographies and all channels. We're continuing to deepen our presence in the U.S. In Q2, we're entering new markets. We already opened our first boutique in Orlando, and we'll be opening in Atlanta later this month. We're also expanding our presence in Palo Alto with a new boutique for the fall.

Our geographic expansion continues to be our most effective vehicle for propelling our brand and acquiring clients for all of our channels. That is why we are thrilled to announce our next global flagship on Michigan Avenue, on Chicago's Magnificent Mile. This will be our largest boutique yet at 45,000 square feet and bring Everyday Luxury to life in a whole new way.

We're focused on setting ourselves up for a successful fall launch with a healthy inventory position and are ready to deliver our first ever intimate collection.

We are cautiously optimistic about our outlook for the remainder of fiscal 2023. We're monitoring the challenges of supply chain, labor and inflationary pressures very closely. Maximizing our position to deliver Everyday Luxury for our clients today and tomorrow is our top priority.

Our sights are always set on the future. The enviable position we are in today is a result of our proven long-term view of the business. As we continue to respond to client demand and the challenges of the global landscape with flexibility, we are also investing in our business for the future. We're continuing to grow our boutique portfolio, expand our DCs, invest in infrastructure and build our team of world-class talent. We see extraordinary growth opportunities ahead, and we're excited to be sharing our multiyear strategic growth plan at Aritzia's Investor Day, the week of October 24.

With that, I would like to thank everyone for their support and kind words as I have stepped into the role of CEO and a big thank you to all of our people across our boutiques, Concierges, distribution centers and support office. I am truly privileged to have the opportunity to lead them. Their tireless hard work, dedication and resilience is unmatched and is what delivered another exceptional quarter. And of course, a thank you to our clients and shareholders for their enduring loyalty as we chart our path forward on this incredibly exciting road ahead. We're just getting started.

With that, Jos, please open up the line for questions.

[Operator]

[Operator Instructions] The first question is from Mark Petrie with CIBC.

[Mark Petrie, analyst]

I wanted to ask, I guess, just on the sort of price and promotional environment and sort of competitive environment. Clearly, you guys are feeling cost inflation and many of your competitors even more so with less revenue growth to be able to offset it. But I guess I just wanted to sort of ask about you've been able to move away from some of your promotions, especially in the U.S., and sort of structurally move higher on gross margin. So one, what are you seeing out there with regards to your competitors? And then secondarily, wondering how you -- how comfortable you feel about that elevation in gross margin? And what scenarios would have to play out to see some of those programs return or gross margins go back to prior levels?

[Jennifer Wong, executive]

Sorry, Mark. I think we're having some technical difficulties here. Brian was answering the question, but I don't know if we can hear him. He's talking.

Well, maybe I'll answer that. And then Todd or Brian, if you can get your audio going, we'll have you jump in. In terms of pricing and what we're seeing out there with inflation, we're getting this question a lot. And I think we've held firm in saying that we are -- we see no need at this time to increase or change our pricing. Right now, the positioning that we have in the marketplace with Everyday Luxury has positioned us given what might be coming down in terms of the environment and what we're seeing with competitors in that we see it being an opportunity. We see there being flexibility and perhaps some opportunity in that. We're positioned very nicely where we think that we might lose some customers at the bottom but we will certainly see some customers trading down.

So we're seeing it as an opportunity. And as we've mentioned in many calls and many Q&As, we're managing our supply chain costs and our product costs and all of the inflationary costs that we're seeing as tightly and as closely as possible. And while I know Todd has spoken about what our outlook is for gross margin for the rest of the fiscal year, we do see these being what we're calling transitory cost effects. And so we do see things returning to normal at some point over the course of this year and into next year.

So as I've been saying in my prepared remarks, we have a long-term view of the business. We do not knee-jerk-react to short-term pressures or transitory pressures and that's why we're holding firm in terms of our pricing strategy.

[Todd Ingledew, executive]

And can I add something there, too, please?

[Jennifer Wong, executive]

Yes.

[Todd Ingledew, executive]

We -- as you mentioned, we have less off-pricing going on. And we've seen less of a response -- we've seen less of a dip in our sales prior to going off-price, and we've actually seen less of a pickup since we've been off-price. We're really pleased with that. And so really, at the end of the day, we see our customers preparing to pay full price for a product, and we actually see our off-pricing, particularly in our stores, initiatives maybe -- continuing to decrease the off-pricing as it has not seemed to have affected our sales.

I had a friend call me who is in the business from -- in the U.S. to ask -- to say they had seen some softness for about 4 weeks. That was probably 2 weeks ago and asked if we had, and I was quite political in my response because we had not seen any decreases in our sales and our customer activity whatsoever. So we're thrilled with what the response is to our product and continues to be. And as Jen mentioned, we're going to monitor all the other aspects of this. But at this point in time, we're cautiously optimistic that we're going to continue on with the same track we've been on for quite some time now.

[Mark Petrie, analyst]

Okay. That's great to hear and very helpful. I also just wanted to ask a quick question, hopefully, about these flagships that you've announced. I guess there's 2, now Manhattan and now Chicago, and they're substantially larger than the stores that you typically build. So just sort of curious what that means for the business. Maybe you could just talk a little bit about how that space is going to be utilized. How much is for product versus other services, dressing rooms or cafes. And how much of it relates to sort of new categories versus just sort of giving more exposure to the existing assortment.

[Brian Hill, executive]

Yes, I'll take that. So I see this being obviously some opportunities for new categories. But at the same time we just don't think our stores are doing -- our size of our stores are doing our customers and Aritzia justice at this point in time, and I've been into some of our stores in the last sort of 4, 5 weeks, both in Manhattan and Chicago and other places and seeing lineups at the fitting rooms, seeing lineups at the cash registers, seeing lineups even in some cases to get into our stores. It is not the customer experience we want to in the elevated Everyday Luxury experience we want to translate to our customers. And so we think by opening these bigger stores and due to the economic environment out there in real estate, we're actually paying less or getting bigger stores and paying less rent than we were previously. So the economics work. We're getting good TI packages and everything else. They will require some capital, but we actually foresee our sales increasing.

So we're super excited with the experience. Yes, we're going to have a bit more food and beverage than we've had in the past because we think the experience for the customer, that's important. It's a journey through our experience. It's not just something one-dimensional experience for them.

And so we're super excited. We've been doing a lot of research on this, and we've recently gone on a big trip around all through Europe and United States looking at what others are doing. And we think we're pretty confident we're going to be able to elevate even more than we have already in the past and give our customer that experience and then draw increased top line dollars without adding sort of expenses and things because we think our rent -- we know our rents are actually going to be coming down on these. So we're pretty excited about the next few years of these flagships.

[Operator]

The next question is from Meaghen Annett with TD Securities.

[Meaghen Annett, analyst]

Can you just give a bit more color behind the change in the fiscal '23 gross margin guidance? And more specifically, how that change relates to what you're seeing in terms of challenges in the supply chain. Anything noteworthy in terms of shipping times, freight rates or even your use of expedited freight? And so we did talk a bit about some of the transitory impacts on the gross margin here. So just wondering if you can quantify the impact from expedited freights in fiscal '23, specifically?

[Todd Ingledew, executive]

Meaghen, I'll take that one. For the year, we are expecting between 250 and 300 basis points of pressure from expedited freight. I think the biggest difference is the timing this year. So where last year the majority of the air freight was in the back half of the year, this year the majority is in the first half, including partially into the third quarter.

So there's a large timing shift, which is what's causing the variability quarter-to-quarter. But from an increased perspective why we went from 100 to 150, we're just seeing higher inflationary pressure really across a lot of lines of the P&L and specifically as it relates to gross profit, product costs, logistics costs and even labor at our distribution centers. So that's why we've baked in that additional 50 basis points of pressure. And we are starting to see some easing on the logistics side from a sea freight and an air freight cost perspective and even a little bit on the timing, but it's not material at this point. We might be down 10% from the peak is what we're seeing. And so we're anticipating that, that may change over the back half. But right now, as of today, we haven't seen a material change from the peaks that we've been experiencing over the last 6 to 9 months.

[Meaghen Annett, analyst]

And just as a follow-up, I assume that, that impact from expedited freight would be incremental to last year. So if we're just thinking about how this might roll off going forward, what piece of that would you expect to [ stick ] going forward?

[Todd Ingledew, executive]

I mean I think that's a multimillion-dollar question. It's hard to predict at this point. Right now, we're just looking out to Q4. And what happens next year, I think we'll have a better visibility into over the next 3 to 6 months.

[Operator]

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

[Irene Nattel, analyst]

Really nice to see the strong momentum and the strong demand continuing. And also interesting Brian's comment about a friend who isn't seeing that. So I guess to what you attribute the ongoing really strong brand momentum, particularly in the U.S., where I think you said you had the double in the customer base. So if you could just talk a little bit about some of the attributes that you think should help Aritzia weather this rocky period?

[Jennifer Wong, executive]

Irene, it's Jennifer. I think you've heard us talk about this a lot. Strategically, it comes down to our business model. Product is at the center of everything that we do and ensuring we have the right product at the right place and at the right price, quite frankly, at the right time is key to everything that we do. And so what we're seeing in, for instance, with our product expansion is we have a wide offering that has a fantastic appeal to our customer, and they're responding well to what we're offering.

And so by covering many different categories across different brands and different occasion sets and different segments of our market, we have an offering that is resonating really well with our customer. And I think we've been doing this now for almost 4 decades, and there's been a number of different economic cycles in the last 4 decades.

And I think if we continue to execute like we've been doing and we've proven over like the last 3 years at how we can execute during very, very challenging times, we feel very confident that we are in a solid position to be able to continue to perform through another challenging period. And ultimately, what we're setting our sights on is ensuring that we keep our eye on the prize for the long-term opportunity.

We still see the U.S. as there's a lot of white space there and ensuring that we continue to build the foundation for getting famous and propelling our brand and providing that exceptional client service that we are known for, that's what will keep us in the game, so to speak. And I think that's proven. It's proven through Q1, and it's moving into Q2. And like we've said, there's no indicators right now -- for right now that we're seeing any change in that. Yes, we aren't seeing any change in that right now.

[Irene Nattel, analyst]

That's great. And based on your commentary, Jennifer, it sounds as though the line extensions, notably the swimwear, that the launch is going very well. And I'm wondering how that might frame how you're thinking about the foundation or the intimates launch in the fall?

[Jennifer Wong, executive]

I'm going to pass that over to Brian because it's a product question, if you don't mind. I mean I love this way more. I love what we're doing personally. I think it's great. And I know a lot of people are excited about it, but Brian can speak to you about that more in terms of the strategy and what...

[Brian Hill, executive]

Irene, I think we launched the Babaton and then we launched TNA, the sport portion of it, and now we relaunched Babaton with their second capsule. And I think that we're in it for the long game, as Jen mentioned. I mean these initiatives right now in the short term are not going to drive our sales. What's going to drive our sales and continue to -- what's been driving our sales and will continue to drive our sales are us executing on what we do every day. And these new categories are looking down the road and down in the future as we continue to expand.

So we're excited about them. The launches have gone extremely well. But at the same time, I don't think that we're depending on these launches for our sales and driving our growth over the next few years. As Jennifer mentioned, we're going to be looking into the U.S. We're going to be looking into eCommerce. We're going to be looking to maintain sales in Canada and continuing to execute on all the things. We've done such a good job to extend all the product expansion initiatives. So that's what we're looking at doing, and we're super excited about it. Our team is performing extremely well.

[Operator]

The next question is from Lorraine Hutchinson with Bank of America.

[Lorraine Maikis, analyst]

I just wanted to ask on the state of the consumer. Are you seeing any change in consumer behavior in Canada or the U.S., be it in basket size or categories? Is the consumer acting any differently around going out and where to work? Are you seeing any mix shift? Just wanted to get your overall thoughts on where we are -- where your customer is and how they're feeling?

[Jennifer Wong, executive]

Lorraine, that's a good question because we've had lots of internal dialogue about that. And while our business is exceptionally good and continues to be exceptionally good, we are, as I said, monitoring very closely for any signs. And like I said in the prepared remarks, we have not seen any indicator, sales being at the top line, but we have not seen any indicators whether it be traffic to our website or average transaction size or average selling price. We are not seeing indicators at this time. And we're very much aware of what other people are reporting. But so far, right now, we are not seeing any changes in consumer patterns or behaviors.

[Brian Hill, executive]

And if I could just add something there. It's Brian. Sorry, I would just add something. The only thing we've seen changing is the product they're purchasing based on the sort of changing face and realities of COVID and opening things up and travel and things. So we've seen some of the product that during COVID was not really registering with clients, we've seen that register quite a bit now and come roaring back for us. So we've seen the mix of what we're selling has changed dramatically, but the actual uptake has not changed whatsoever, as Jennifer mentioned.

[Operator]

The next question is from Patricia Baker with Scotiabank.

[Patricia Baker, analyst]

Just with the success and the very strong demand that you're having in the U.S. and with strong productivity from the new boutiques that you're building, is it changing your longer-term perspective on the U.S. market and just how big that could be for you, and maybe the potential number of boutiques that you might open there over the long run?

[Brian Hill, executive]

Yes, I'll take that again. I don't know if the boutiques themselves and the quantity is changing. What we're actually looking at is changing the footprints and increasing the footprints of the boutiques because we have such a long product -- broad product experience. And even our largest stores can only hold 50% of our product at this point in time. So we're looking at expanding these.

And these aren't just the flagships we're looking to expand. We're expanding. Our new stores are getting bigger. Obviously, sometimes real estate and the opportunities don't necessarily present the opportunity for a bigger store. But generally speaking, we changed the size of the stores that we're actually communicating to the landlords that we're after. And so we think rather than opening more stores and changing the target on those stores, we're actually [ making ] the bigger footprints to increase and improve the overall Everyday Luxury experience is what we're actually trying to do here, which is working out quite well because, as you know, there's a lot of retailers out there that are shedding bigger stores and everything else. But we just have not seen an erosion of our sales per square foot as we've increased the size of our stores. So we're going to continue to push and open stores.

So these aren't just flagship footprint increases. These are all our store footprint increases. And so we're looking at that. Now that said, as we continue to grow and continue -- our stores in the U.S. continue to grow on a sales per square foot basis, all of a sudden that does open up some opportunities down the road for secondary and tertiary stores within markets, which we're certainly going to be looking at, and that we have a lot of experience doing so in Canada.

[Patricia Baker, analyst]

And is there any opportunity in Canada in certain markets where you also think you should upsize the boutiques -- some of the boutiques?

[Brian Hill, executive]

I mean we've always talked about new boutiques and repositioned boutiques. Presently, we're repositioning 3 in Toronto from sort of 4,000, 5,000 feet up to 15,000, 20,000 feet. We have 1 in Winnipeg we're under construction on. So we've announced all those stores, and we're continuing to do that in Canada. But -- so we see some growth there. But in the scheme of our growth, it's really going to come down to the United States. That's where the big opportunity is and that's where we're really excited.

[Operator]

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

[Stephen MacLeod, analyst]

I just sort of -- lots of great ground you've covered so far. I just wanted to follow up on the gross margin expectation. And Todd, you gave some commentary around sort of the cadence of pressure as the year unfolds -- or the rest of the year unfolds. And I'm just curious like how much visibility do you have into those movements? And what are the biggest things that may cause gross margin to potentially come in better or worse than expected?

[Todd Ingledew, executive]

So the #1 thing, as I said, creating the movement quarter-to-quarter is the variance in expedited freight spend timing last year compared to this year. So we started, in Q3, spending significantly on expedited freight last year. And so therefore, obviously, the first half of this year, we're lapping a period where we didn't spend significantly.

And then we also have, in the second quarter, COVID relief subsidies and rent abatements that we received last year that are -- that obviously we're not going to get this year. And then the store closures from last year as well. In Q1, we were lapping 2 months of closures versus 1 month in Q2. And so that leverage that we saw from those stores in Q1 or the revenue that those stores then generated this year is coming off in Q2. So that's why we're planning on seeing the most pressure in Q2. And then that will begin to ease in Q3. And then as I said, in Q4, we're anticipating that we have the opportunity to move slightly positive from a gross profit perspective.

What could change? Potentially air freight prices could come down or expedited freight costs. And then we're obviously monitoring our usage as well. And then so there could be savings there. But as far as the other inflationary pressures, we're anticipating that those will remain for the rest of the year.

[Brian Hill, executive]

If I could add a little bit, we are seeing some -- we haven't seen it come through because the product hasn't arrived yet. But we are seeing pressure on costs and things like that, which we've seen over the last sort of 12 months. We're going to see that inflationary pressure on the products coming in. But we're actually anticipating that, that will subside when potentially some kind of recession of some form or another, how deep it is who knows -- but we actually think as business and demand peels off due to interest rate increases and things like that, that we actually think that, that inflationary pressure might actually ease itself.

We're hoping that we're also going to get margins and some little bit of leverage to offset some of those inflationary pressures as well. So there's a lot of moving parts here on the product, and I'm quite involved in on a daily basis and where there's just a lot of puts and takes and it will be pretty -- it's pretty hard to determine right now where this whole thing is going to shake out as far as and how that's going to affect gross margin over above the areas that Todd has outlined.

[Stephen MacLeod, analyst]

And then I just wanted to ask about, Jennifer, you mentioned the intimates launch that seems like it's intertwined with the Michigan Avenue flagship opening. And I know, Brian, you gave some color around the fact that these category extensions may not be needle movers. But I'm just curious, is that something that you would expect to roll out over the -- across the entire network? Or do you sort of start at the flagship and then go to eCommerce and then see how clients respond before offering it more broadly?

[Brian Hill, executive]

Yes. We're not even convinced at this point in time we're going to offer intimates and swim in our stores. I mean, our eCommerce channel, where we're doing more business in eCommerce now than we were when Aritzia went public 5 years ago. So part of the product expansion, some of these initiatives may be eCommerce only and there's a lot of pure-plays out there doing incredible business without any stores.

So we look at our channels, and we look at our -- both our -- all our channels, whether that be our Concierge and everything else as well. And the product doesn't necessarily need to go to all -- through all channels. And presently, we're not looking at -- we're looking at promoting our swim and things in our stores, for sure, intimates as well. But whether we're going to sell it now or not, that is yet to be concluded. And then so no, Michigan is not -- and the size of Michigan is not related to that. The size of Michigan is related to the success of our larger stores in Canada and the U.S. We have a 20,000 square foot store in Toronto that's exceeding our expectations. Our store in SoHo is half the size it should be at 20,000 feet. So we're looking at these expansions as necessary square footage just to fulfill the existing demand we have from our consumers.

[Operator]

The next question is from Dylan Carden with William Blair.

[Dylan Carden, analyst]

I was just hoping you could do a little more handholding on the inventory growth. How much relates to the closures last year or expedited freight? How it trends through the balance of the year and then sort of the current nature of the inventory? I noticed you mentioned it was sort of proven sellers, but how much of that is new category extensions? Just trying to sort of unpack that for people that might be concerned about it.

[Todd Ingledew, executive]

Dylan, I'll take the beginning of that. Yes, I'll take that. I think starting with last year is probably the right place to start when you look at the year-over-year growth. Last year, throughout the entire year, we were chasing -- our inventory levels were between 20% and 30% up over the prior year, but our sales were up 75%. So we were at an extremely low level last year.

And so what we're seeing now is getting ourselves back into a position where we feel comfortable with our inventory levels. And so while it looks like a larger increase over the prior year right now, if you take out some of the in-transit that I talked about, we would be down to a 54% increase. But even that -- I don't -- that's not how we're looking at it. It's really from a building our inventory to be able to meet the demand that we have today and ensuring that we're in the right product. And I think you've already heard Brian mention it that we are investing in our proven sellers that are going to drive our business in Q3 and Q4 and also potentially in Q1 of next year. So it's -- we feel extremely comfortable with where we're at right now. And frankly, we're still building from this point is how we are looking at it and making sure that we have the right levels of inventory to drive the sales.

[Brian Hill, executive]

Thank you, Todd. And once again, I'm in this every day, and Todd and I have been having the most meaningful discussions we've had on inventory probably ever and as well as Jennifer and the 3 of us have been having these discussions. As Todd mentioned, we were grossly under-inventoried last year and we think we left a lot of sales on the table. And then we want to not only catch up with that, but we're trying to get our inventory even higher to sort of alleviate the expedited freight, coupled with the ongoing rolling COVID closures in some of our supply chain as well.

And so rather than being sort of -- Todd, I can't remember what the numbers you just said, our sales were up around 70% and our inventory was up 20% or 30%, or whatever those numbers were. We don't just want to get up to 70%. We need to go beyond that because we don't want to be in a position where we're buying at 70%, expecting increases at 70% and all of a sudden we have some COVID shutdowns or there's some shipping delays and things like that. So we're trying to get ourselves in a position where we're actually even spending -- swinging the pendulum farther than the other direction.

That said, we are cognizant of sort of some potentially pending inflationary effects that are going to affect everybody and how much that affects us is yet to be seen, but we are cognizant of that. So we're balancing that. So we probably have been having more inventory-level discussions in the last sort of 3 to 4 months than we've had in the last decade, truthfully. So where we land, we don't know at this point in time. We're monitoring it on a daily basis. But both Jennifer, Todd, myself, and then obviously our product teams are weighing in on this where we're analyzing it and taking it on a day-by-day basis. But we're pretty confident that we're going to end up in a pretty good place here.

[Operator]

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