Aritzia Inc

TSX:ATZ

Earnings Call Analysis

Aritzia Q2 2024: Solid Revenue, Strategic Growth

Aritzia, amidst a tough retail landscape, posted a 2% increase in net revenue for Q2 2024 to $534 million, building on significant growth from the previous two years. U.S. sales rose by 6%, while Canadian sales saw a slight decline of 3%. Despite a 4.3% dip in comparable sales growth, the company's expansion strategy bore fruit with a 3% revenue bump in their retail channel, driven by new and expanded boutiques. E-commerce revenue fell by 1%, but Aritzia is advancing its online offerings and omni-channel services. Inventory levels were up 10%, while the efficient ramp up of a new Toronto distribution center is already hitting 90% of target KPIs.

Continued Revenue Growth Amidst a Challenging Environment

The company has reported a modest revenue increase of 2% to $534 million, marking a continuation of its growth trend while facing headwinds such as a decrease in comparable sales growth of 4.3% and challenges within both the U.S. and Canadian markets. Noteworthy is the impressive three-year compounded annual growth rate (CAGR) of 39%, signifying resilient performances despite softer consumer environments and a strategic emphasis on product development which is beginning to regain momentum.

Retail Expansion and E-commerce Evolution

The company's retail channel experienced a 3% rise in net revenue, attributed to a successful real estate strategy that resulted in better-than-expected payback periods for new and expanded boutiques. Even amidst a 1% decline in e-commerce net revenue, the company continues to improve the online customer journey with innovative digital experiences and is seeing positive initial results from omni-channel services like buy online pick up in-store.

Margin Pressure and Profitability Challenges

Gross profit margins have faced a significant decrease of 690 basis points to 35% due to a mix of heightened product costs, markdowns, and various operational expenses. Meanwhile, SG&A expenses rose by 16%, culminating in a margin decrease, as the company dealt with the effects of inflation, transitory costs, and investments made in labor and distribution center project costs from the prior year. An expected sequential margin improvement in the second half of the year is notable, pointing to a potential rebound.

Inventory Management and Capital Positioning

Inventory levels have increased by 10%, reflecting a move towards normalization, with substantial annualized run rate savings identified through smart spending initiatives. The company maintains a strong cash position and expects to repay the majority of its drawn credit facility soon, positioning itself for upcoming investments in digital strategies and distribution network expansion.

Outlook and Growth Trajectory

The company forecasts a flat to slight decrease in net revenue for the third quarter with ongoing efforts to improve gross profit margins and manage SG&A expenses. For fiscal 2024, there's an anticipation of revenue growth between 2% to 7% and efforts to improve gross profit margins by adapting pricing strategies and cost improvements. The focus on store expansion, digital innovation, and spending efficiencies is expected to drive future growth and margin improvement, especially heading into fiscal 2025 with a planned 20% expansion in store square footage and top-line momentum.

Strategic Adjustments and Future Prospects

The company is addressing digital channel opportunities through enhanced digital marketing, with an observed increase in average unit retail (AUR) compared to the previous year. As the brand's new styles continue to resonate with consumers and store productivity maintains robust performance, the company's strategic adjustments, including investing in talent and optimizing spending, have positioned it well for a rebound in the evolving macro environment.

Earnings Call Transcript 2024-Q2

[Operator]

Thank you for standing by. This is the conference operator. Welcome to Aritzia's Second Quarter 2024 Earnings Conference Call. [Operator Instructions] I will now turn the conference over to Beth Reed, Vice President, Investor Relations. Please go ahead.

[Beth Reed, executive]

Good afternoon, and thanks for joining Aritzia's Second Quarter Fiscal 2024 Earnings Call. On the call today, I'm joined by Jennifer Wong, our Chief Executive Officer; and Todd Ingledew, our Chief Financial Officer. Following prepared remarks, there will be an opportunity to ask questions. Please note that remarks on this call may include our expectations, future plans and intentions that may constitute forward-looking information. Such forward-looking information is based on estimates and assumptions made by management regarding, among other things, general economic and geopolitical conditions as well as the competitive environment.Actual results may differ materially from the conclusions, forecasts or projections expressed by the forward-looking information. We would refer you to our most recently filed Management Discussion and Analysis and our Annual Information form, which include a summary of the material assumptions as well as risks and factors that could affect our future performance and our ability to deliver on the forward-looking information. Our earnings release, the related financial statements and the MD&A are available on SEDAR as well as the Investor Relations section of our website.I'll now turn the call over to Jennifer.

[Jennifer Wong, executive]

Thanks, Beth. Good afternoon, everyone, and thank you for joining us today. In the face of a challenging retail environment and following unprecedented growth year-over-year for the second quarter of fiscal 2024, we delivered net revenue of $534 million, an increase of approximately 2%. This is on top of delivering outstanding revenue growth of 50% in the second quarter last fiscal year and 75% in the second quarter of fiscal 2022. We remain confident that the level of overall sales achieved in the last two years, including this recent quarter, is a strong base from which our future sales and operational efficiencies will meaningfully scale in the quarters and years ahead.Comparable sales growth decreased 4.3% in Q2 as we lapped a remarkable 28% comparison last year. In the U.S., our net revenue increased 6% on top of 80% growth in the second quarter last year, while in our Canadian market sales declined 3% as we lapped 29% growth in the second quarter of fiscal 2023. In addition to cycling two years of outstanding sales results, we believe our second quarter top line trend was impacted by the level of new styles in our product assortment as well as a mixed consumer environment. Now before I discuss the results of our sales channels, I want to first provide some color on our levels of new styles.Over the past two fiscal years, our primary focus was on maximizing sales growth by fueling the unprecedented demand for our products. While navigating a challenging supply chain environment, we focused our efforts on ensuring sufficient supply of the products that were most in demand, our client favorites and on developing newness to variations of these items. These actions are what drove sales growth of 74% in fiscal 2022 and 47% in fiscal 2023. The trade-off was that as we faced bandwidth constraints, our level of new style development was not optimal.Our proven strategy, which has served our client base exceedingly well for many years centers on our ability to create new styles to maintain freshness in our assortment over time. With a normalized supply chain and operating environment, we've now returned to our proven product development cadence. Our team is laser focused on our product pipeline. So far, we are encouraged that even for this fall, new seasonal styles are resonating extremely well with our clients, and we continue to expect to be in a strong position for spring-summer 2024, which begins to launch in February.Shifting back to our Q2 performance; net revenue in our retail channel increased 3% in the second quarter, driven by the progress we've made on our real estate expansion strategy. We opened one new boutique during the quarter, our third boutique in the State of Florida at International Plaza in Tampa, which is a new market for us. We also recently opened two expanded boutiques, Short Hills, New Jersey in July and Prudential in Boston at the end of August. In Q3, we plan to open two new boutiques, South Park in Charlotte and Fashion Mall at Keystone in Indianapolis both are new markets for Aritzia. The performance of our new and expanded boutiques remains strong and continues to result in better-than-expected payback periods.The new boutiques that we have opened in the past 12 months are all tracking to pay back in approximately one year or less ahead of our expectations for 12 to 18 months. As an example, our newest store in Tampa is generating better-than-planned sales results and currently tracking to pay back in approximately 10 months. Overall, our retail stores are supported by a world-class team of people that exemplify our core values. To ensure that we supported our employees during a period of unprecedented growth and heightened economic uncertainties as well as to attract and retain exceptional talent in new markets, we made significant investments in retail labor over the last couple of years.Having passionate, dedicated people in our boutiques is critical to delivering an exceptional client experience. After a sustained period of exceeding our own expectations, e-commerce net revenue decreased 1% in Q2, driven by softer traffic trends in line with a weaker retail environment. Conversion remains strong as we continue to execute our e-commerce 2.0 vision across our three value propositions: tailored product discovery, intuitive experiences and creative innovation. After launching multiple personalized recommendation experiences across our site in Q1 and Q2, we have continued to test, learn and refine our algorithms to provide the most curated recommendations for our clients.In Q2, we launched personalized product recommendations in the search panel and quick grab recommendations in bags. Additionally, we have made enhancements to our online checkout experience, which have improved checkout conversion. Now that our point-of-sale upgrade is complete, we have launched our pilot of additional omni-channel services, buy online pickup in store and ship from store earlier this month in Canada. We are pleased with the preliminary results with revenue in the initial weeks exceeding our expectations. In addition, our forecasted cost of implementation is tracking below budget. Next up is our rollout in the U.S., which is planned to begin after the holidays with completion in Q4.We believe one of our biggest opportunities arises from these additional services is to convert more single-channel clients to omni-channel. The strength of our current omni clients highlights the magnitude of this opportunity. Our omni client spend approximately 3x more than clients who shop exclusively in either our retail or our e-commerce channel. In addition, the retention rate for omni clients is substantially higher than for single channel clients. We also expect to benefit from inventory optimization. And from an inventory perspective, our position has continued to normalize. At the end of Q2, inventory was up 10% over last year, and we expect the year-over-year comparison to further moderate for the remainder of fiscal 2024.As expected, the overall markdown rate during our spring-summer sales period remained below pre-pandemic levels with no change to our promotional calendar in the quarter. Shifting to supply chain, I'm absolutely thrilled to announce that our new distribution center in the Toronto area went live at the end of August as scheduled. We seamlessly completed the transition out of our prior third-party operated facility without any disruption to the business. We've had a successful ramp-up period with productivity KPIs at roughly 90% of our corporate targets by week 5, and our fill rate is already in line with that of our existing distribution center on the West Coast and in line with top of industry metrics.We have already exited 3 of the 6 additional temporary off-site warehouse facilities and are working towards subleasing the remainder by the end of the year. This has resulted in a significant and immediate reduction in our inventory carrying costs, particularly with labor having accounted for more than half of the additional cost pressure. We also continue to make these strides in finding efficiencies to optimize for our increase in scale over the last two years and better allow us to scale in the future. Some of the areas in which we've already begun to realize benefits include vendor negotiations, process optimization and KPI improvement.And with that, I will now pass the call over to Todd.

[Todd Ingledew, executive]

Thanks, Jennifer, and good afternoon, everyone. In the second quarter of fiscal 2024, we generated net revenue of $534 million, representing an increase of approximately 2% from last year. This increase is on top of two years of extraordinary growth in the second quarter, 50% in fiscal 2023 and 75% in fiscal 2022, resulting in a 3-year CAGR of 39%. Comparable sales growth decreased 4.3%, following a remarkable increase of 28% last year. Net revenue in the United States was $279 million in the second quarter, an increase of 6% on top of a second quarter increase of 80% in fiscal 2023 and 152% in fiscal 2022.In Canada, net revenue decreased 3% to $255 million, on top of an increase of 29% for fiscal 2023 and 43% in fiscal 2022. Net revenue in our retail channel was $362 million, an increase of 3% from the second quarter last year. This was driven by the performance of our new and repositioned boutiques, which continue to generate better-than-expected payback periods, partially offset by softer comparable sales. In e-commerce, net revenue was $172 million, a decrease of 1%. The deceleration was driven by softer traffic trends in both countries following three years of unprecedented growth.While year-over-year revenue growth has been modest, up against exceedingly high comparables, we remain confident that we have achieved a sustainable sales base from which we will continue to scale our operations. We delivered gross profit of $187 million compared to $220 million in the second quarter last year. Gross profit margin was 35%, declining 690 basis points from 41.9% last year and marking the peak of our anticipated margin pressure for fiscal 2024. The decline was primarily due to the following headwinds: higher product costs, normalized markdowns, temporary warehousing costs and preopening lease amortization for flagship boutiques and our new distribution center. These pressures were partially offset by lower expedited freight costs.SG&A expenses were $171 million, up 16% from last year. SG&A as a percent of net revenue was 32%, representing an increase of 400 basis points compared to 28% last year. The increase in SG&A expenses was primarily driven by the annualization of investments in retail and support office labor from the back half of last year as well as distribution center project costs. Adjusted EBITDA in the second quarter was $21 million, a decrease of 74% from last year. Adjusted EBITDA was 4% of net revenue compared to 15.7% last year. This margin decrease primarily reflects three things: ongoing inflationary pressure, multiple transitory costs and the run rate from investments made in talent in the back half of last year.The second quarter reflects peak margin pressure in fiscal 2024, and we continue to expect sequential margin improvement in the second half of the year compared to the first half. At the end of the second quarter, inventory was $501 million, up 10% from the end of the second quarter last year. Our inventory balance continues to normalize, and we expect the year-over-year comparison to further moderate for the remainder of fiscal 2024. With a normalized supply chain environment, we have now returned to our proven inventory management methodologies. We had $77 million in cash at the end of the second quarter and $75 million available on our $175 million revolving credit facility.We expect the majority of the $100 million drawn on our facility to be repaid by the end of the third quarter. We remain focused on maintaining a strong balance sheet, which has served us well through time. Shifting to our outlook; based on quarter-to-date trends, net revenue in the third quarter is expected to be flat to slightly down from the prior year, again, on top of two years of exceptional growth, 50% in the third quarter last year and 75% two years ago.Following peak pressure in the second quarter, we expect gross profit margin in the third quarter to decline 200 basis points compared to the prior year, a meaningful sequential improvement, and we expect SG&A as a percent of net revenue to also improve sequentially in the third quarter, increasing by approximately 300 basis points compared to the prior year. Turning to the full year; for fiscal 2024, we continue to expect net revenue in the range of $2.25 billion to $2.35 billion, representing growth of 2% to 7% from fiscal 2023, including the 53rd week. This growth is on top of a 47% increase last year and 74% increase two years ago.We continue to expect gross profit margin for the year to decline by approximately 300 basis points compared to fiscal 2023. We expect sequential improvement in the back half of the year compared to the first half driven by improved IMUs due to selective pricing actions and cost improvements. In addition, temporary warehousing costs that are already beginning to subside with the opening of our new distribution center. And lastly, we will also be lapping the period in the back half of last year when markdowns began to normalize off of low levels from fiscal 2022. We continue to expect SG&A as a percent of net revenue for the year to increase by approximately 300 basis points compared to fiscal 2023.We expect sequential improvement in the back half of the year compared to the first half, which will be driven by the elimination of distribution center project costs as our new distribution center opened last month and the lapping of investments in support office and retail labor. In addition to factors I already discussed, we continue to expect that the merchant improvement in the second half and into fiscal 2025 will be partially driven by one of our key priorities for this year, smart spending. This cross-functional priority is driving meaningful results with approximately 150 opportunities identified across the business, with over half already complete.The estimated annualized run rate savings totaled over $60 million with approximately 50% of the benefits expected to be realized this fiscal year. We continue to expect capital expenditures for fiscal 2024 of approximately $220 million. This includes $120 million related to our new and expanded boutiques, which continue to pay back in approximately 12 months or less as well as $100 million primarily related to the expansion of our distribution center network and support office space. Looking ahead to fiscal 2025, we expect top line momentum to accelerate with the majority of the square footage growth for fiscal 2024 anticipated to occur in the fourth quarter, along with accelerated square footage growth of approximately 20% planned for fiscal 2025.Importantly, our new stores are our most consistent growth driver, delivering predictable revenue growth and propelling our brand. With continued investment in the client digital experience, we remain confident that both our e-commerce and retail channels will continue to fuel our growth in our omni-channel strategy. We continue to expect meaningful adjusted EBITDA margin improvement in fiscal 2025 with 500 basis points of expansion driven by IMU improvements, cost efficiencies, subsiding transitory cost pressures as well as leverage on fixed costs. In closing, I want to reiterate that the investments we've made are to support our tremendous growth over the last two years and to help drive our future growth.We expect sales to accelerate next year, driven by meaningful square footage expansion over the next 18 months as well as our improved product position and the execution of our e-commerce 2.0 strategy. We also expect that peak margin pressure is behind us and that the steps we're taking will ensure that our margins begin to normalize in the second half of this year with further improvement in fiscal 2025. We anticipate that our expected revenue acceleration and margin expansion will drive significant earnings growth next fiscal year and beyond.With that, I'll now turn the call back to Jennifer.

[Jennifer Wong, executive]

Thanks, Todd. As we look towards fiscal 2025, we are extremely optimistic about our prospects for renewed growth. First, as I said earlier, our new styles for fall are resonating extremely well with our clients, and we continue to expect the mix of our assortment to be in a strong position for spring-summer 2024, which begins to launch in less than 5 months. Second, we have an extraordinary pipeline of boutiques opening over the next 18 months.Our pace of store expansion is planned to accelerate to six new boutiques in the back half of this year, followed by roughly 20% square footage growth in fiscal 2025, including repositions of our three Manhattan flagship. This is compared to four new boutiques opened in the trailing 12 months. Third, we're continuing to execute against our e-commerce 2.0 road map, making significant strides on our personalized experience and investing in upgrading the technology stack that underpins our e-commerce 2.0 vision.Lastly, as Todd discussed, we believe our peak margin pressure is behind us. We expect to see a substantial improvement in the back half of this year, followed by a meaningful reacceleration in our adjusted EBITDA margin next year. For almost 40 years, our distinctive everyday luxury offerings have been thoughtfully and meticulously refined. Aritzia continues to prioritize design, quality, fit and construction and delivering an exceptional level of execution that's uniquely us. We remain extremely confident in our long runway for growth as we seek to deliver our unique value proposition, high-quality products at an attainable price point to more and more clients across North America.Operator, we're ready to now please open up the line for questions.

[Operator]

[Operator Instructions] The first question comes from Stephen MacLeod with BMO Capital Markets.

[Stephen MacLeod, analyst]

Just a couple of questions. Can you just talk a little bit maybe about what you're seeing in terms of Q3 to-date traffic trends considering you had a lot of positive commentary around customers' response to your fall winter collection? And I'm just curious if you can give a little bit of color around what you're seeing both in-store and online.

[Jennifer Wong, executive]

Hi Stephen, yes, traffic is softer. We are seeing softer traffic patterns. That said, what that tells us because it's broad-based, because it's across both channels, it's across both geographies. That does tell us that there is a macro environment impact for us. Certainly, as it relates to our digital traffic, we do see an opportunity in our digital traffic, where we -- our stores are -- like our stores are busy, where our stores are busy and our sales per square foot productivity is at $1,600 a square foot.The new stores are paying back in less than 12 months, but where we do see an opportunity is in our digital channel. And what I've noticed after the last few months is that we have an opportunity in digital marketing. So our brand is resonating. Our new styles are resonating, yes, I did say that, but we do see that there's an opportunity to drive traffic to our stores through incorporating digital marketing into our overall business strategy in addition to the new store openings, which has been up until now, our number one client acquisition tool and a primary driver to our e-commerce.

[Stephen MacLeod, analyst]

Okay. That's helpful. And then I just was just wondering -- I just wanted to clarify or just ask about the margin progression in the back half of the year and into fiscal 2025. Has anything evolved differently from how you thought it would when you think about your margin trajectory and progression in Q2 and then beyond into Q3 and into next year. And I'm wondering if you could also just provide like the buckets of fiscal '25 margin improvements.

[Todd Ingledew, executive]

Sure. So a lot to cover in that question, but maybe I'll just take a piece of it and then we can come back if there's other components. So as I said, we were slightly better than we had anticipated, both from a gross profit and an SG&A perspective, but we have maintained our annual guidance of 300 basis points of pressure in both gross profit and SG&A. And the benefits that we saw in the second quarter within gross profit were primarily related to improved freight costs. And then from an SG&A perspective, it was just benefits from retail wages and as so labor that helped us exceed our initial expectations for the quarter. But as I look forward there's no real change in what we're expecting as we roll through Q3 and Q4.And as we've said all along that we thought it would be a tale of two halves with meaningful pressure in the first half of the year and that pressure subsiding in the back half. And the benefits that we're expecting in Q3 from a gross profit perspective would be from the product cost improvements that we've talked about with select pricing actions and then the lapping of cost pressures from the back half of last year and then subsiding temporary warehousing costs. So obviously, and Jen mentioned it, but the new DC opening is critical to our margin improvement, both from a gross profit perspective and SG&A because the project costs are now done, which we're hitting SG&A and within gross profit, we're seeing the benefit obviously, from just the improved handling costs and the closing of all of the auxiliary facilities. So again, a lot to unpack in your question there. I haven't even hit the FY '25 part yet. But does that answer your question on this fiscal year before I move on to FY '25?

[Stephen MacLeod, analyst]

Yes, it does.

[Todd Ingledew, executive]

Okay, great. Yeah. So from an FY '25 perspective, no change there as well. We expect approximately 150 basis points of improvement from IMU, and that's from the select pricing actions and also product cost savings. We expect another 150 basis points to 200 basis points from our smart spending initiatives, which we've outlined and then 125 basis points from transitory cost subsiding. So obviously, the distribution center and some of the preopening lease amortization, etcetera.

[Operator]

The next question comes from Martin Landry with Stifel.

[Martin Landry, analyst]

As you've mentioned, you're entering into a period of rapid square footage expansion. And I was wondering if you could give us a bit of visibility into that, how that square footage growth is going to come about maybe a breakdown of square footage growth per quarter would be super helpful to help us better model your revenue growth on a quarterly basis?

[Todd Ingledew, executive]

Well, maybe I'll approach it from a store count perspective. So as Jennifer said, we have six stores for the remainder of this year. Two are planned for the second -- or the third quarter and four in the fourth quarter. And then the bulk of our stores next year are coming in both the second and the third quarter. And so we have four new stores planned for the second quarter of next year and then seven planned for the third quarter. And obviously, from a square footage perspective, the flagships are going to be a key component to that square footage growth. And a number of those say the Chicago one are actually repositioned and those will be happening in the back half of next year. So I don't know if that helps, but that gives you a bit of an idea of the cadence that we're expecting.

[Martin Landry, analyst]

Okay. Okay. That's helpful. Switching gears you're mentioning that you're in good position from a product standpoint for your spring-summer collection. And as you know, we like numbers. So I was wondering if you could give us maybe a proportion of your lineup next summer, spring-summer, that's going to be new products that you're introducing? And how does that compare to historical levels?

[Jennifer Wong, executive]

Well, it kind of depends -- it depends based on store side, it depends on region, geography. We have stores that range from 4,000 square feet to about 20,000 square feet, and it'll be bigger with the flagship stores. It depends if it's a suburban versus urban so it depends. What I would say is if you were to walk into a store at the beginning of the season and have a look at our assortment, when you walk in, you'll see that it's merchandise in a very balanced way between new styles and our clients' favorite. And in particular, it's merchandise in a way that when you first walk into the store, the assortment is engaging and inspirational for the client. And that's essentially what we do. So it depends on the situation.

[Martin Landry, analyst]

Okay. Is it -- is 2020 -- the spring-summer 2024? Is that going to be a bigger year in terms of new styles or an average year in terms of new sales?

[Jennifer Wong, executive]

We have targets that we hit. And as I said, in returning to normalized sort of a more normalized operating environment, we're just going back to our proven strategy, and it's essentially, we've talked about our test and react strategy in the past is essentially what it is. We're returning to normalized operations. We're returning to our normalized product development life cycle cadence.And so what you'll see, obviously, our assortment, we -- over the last few years, part of our growth strategy has been about product expansion, and I think we've done that very, very successfully. And so it's just a matter of making sure that we have the right product at the right price in the right place at the right time. And if we just stick back to our fundamentals, which is what has made us successful for the last 40 years, that's why we feel very confident about our position going into spring.

[Operator]

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

[Irene Nattel, analyst]

I just want to clarify something from your answer, Todd, to Martin, on the timing of the new stores next year. You said four in Q2 and seven in Q3. Is that correct? And does that seven new include the repositioning of the flagships?

[Todd Ingledew, executive]

No, it does not. So the four and the seven are the new stores and the repositions would be on top of that.

[Irene Nattel, analyst]

Okay. And Chicago, you said is H2 and the others are -- do you have the timing on those?

[Todd Ingledew, executive]

During the back half of the year.

[Irene Nattel, analyst]

Okay, got it. Coming back to the topic of newness. You did confirm that you are -- some of it is in the store for fall-winter. So can you give us an example of -- if we walk into the store today, what would we see in that kind of newness bucket that perhaps we wouldn't have seen a year ago?

[Jennifer Wong, executive]

So I can tell you what we're really excited about. We're really excited about our sweaters, our sweater program. We're really excited about our wool coats. We have a couple of new Super Puffs in the Super Puff franchise that we're excited about. So that should give you -- like it's across multiple categories, but those are probably some of the things to give you a flavor of what we're excited about.

[Irene Nattel, analyst]

That's helpful. And then just switching gears a little bit to consumer behavior. Can you talk a little bit about what you're seeing in terms of consumer sensitivity to promotions? When -- you said the traffic is down a little bit where people are in the store, are they gravitating to slightly lower unit price points? Like what are you actually seeing in terms of consumer behavior?

[Jennifer Wong, executive]

Well, in a nutshell, what we're seeing is -- well, I guess I'll relate to the traffic and the macro with what we can control, I think when people are being careful about spending their money, they're a bit more discerting about what they're choosing to buy. And so less money to spend means that for us, we have to make sure that we have the most appealing assortment that we possibly can offer. And so when the clients are shopping with us, what we are seeing is that the clients are shopping maybe less frequently with us, but when they are shopping with us, they are buying.And we're seeing no change to our average basket size. And we're seeing -- in fact, I think in the past quarter, it might have been a bit higher, and we're seeing no change in terms of the average selling price. So it's not so much about -- I think it's more about volume than actual like behavior in the store in terms of when they see something they like, they're buying it.

[Operator]

The next question comes from Luke Hannan with Canaccord Genuity.

[Luke Hannan, analyst]

Thanks. Jen, you had mentioned, I think, earlier in your prepared remarks that you're continuing to test and refine the algorithms when it comes to e-commerce. So I'm just curious if e-commerce, if there's any difference versus in-store when it comes to driving, we'll say, client engagement with newness versus client favorites? In other words, is it a better or worse channel for driving interest in newness versus your stores?

[Jennifer Wong, executive]

What's interesting about e-commerce is because we don't -- aren't limited by square footage size, we can offer everything. So we offer -- like pretty much everything is offered online. What we do see is that there is high engagement with newness and there's also high engagement with discontinued product, honestly. And so that's why the beauty of the personalization efforts and our partnership with Dynamic Yield, I think I mentioned is a platform we use really makes it so that depending on the customer and given our broad assortment, we can make sure that we're catering to their preferences in terms of what they're looking for.

[Luke Hannan, analyst]

Okay. And then when it comes to the competitive landscape, I appreciate your and Todd's commentary that the markdowns, level of markdowns that you have in your own assortment is still below pre-pandemic levels. Are you seeing any reaction from competitors being more or less promotional than you would have originally anticipated?

[Jennifer Wong, executive]

No. I'm not sure if I understand your question, are we seeing our competitors be more promotional? Certainly, we're not -- we don't go on sale to drive -- we don't go on sale to drive sales, which a lot of our competitors I know do so if that's sort of the root of the question. When we go on sale, when we go on sale, we go on sale to clear inventory to make room and start clean for the following season. That has always been how we've done it. That is how we did it last spring-summer sale. As I mentioned, we didn't have any changes to our promotional calendar. And so again, that's just a fundamental pillar of how we do business. And for us, that hasn't changed even despite the maybe more promotional environment around us.

[Luke Hannan, analyst]

Understood. Last one, and then I'll pass the line. Todd. In the past, you've shared what your total committed inventory position has been. I'm curious to know if you can share where that is either ending the quarter or as of today?

[Todd Ingledew, executive]

Yeah, absolutely. And frankly, that's one of the things that's giving us confidence in our current inventory position because now looking at it, when you do include on hand in transit and on order with the factories, our committed inventory is actually down 15%. So it's obviously a clear indication of where we're headed, and it's just now a matter of time where we'll be reporting inventory that's either flat or even down to the prior year.

[Operator]

Next question comes from Mark Petrie with CIBC.

[Mark Petrie, analyst]

I actually just have a few follow-ups to some previous comments. So maybe first, Jen, on the digital marketing topic, have your efforts on that started already or when do you expect that, that would sort of kick in? And I assume this is about like online advertising and paid search and those types of things.

[Jennifer Wong, executive]

Yes. It's -- we're just in the very beginning. As you know, we've done very little to no digital marketing in the past. I know you've asked me about that in prior years. And we are now -- we do have people on the team that are seasoned professionals in this area. And so it will start with paid search, then paid social and ensuring that we're getting into digital performance marketing specifically, I would say at all levels of the funnel, top, middle and bottom but in particular, converting into sales at the bottom of the funnel.

[Mark Petrie, analyst]

So is that something that you would expect to be having an impact in the second half of this year? Like is it going to be able to ramp that quickly?

[Jennifer Wong, executive]

We're just formulating our strategy now, and we're building the team now. As I said, we've started some initial paid search for sure. And we -- I do expect to see some effects in the back half of the year. But really what we're building is a strategy towards fiscal '25.

[Mark Petrie, analyst]

Yes. Understood. Okay. And Jen, when you were talking about the buy online pickup in store and also ship from store, having launched in Canada, you spoke about sort of the top line opportunity. I'm just curious if there's also a margin angle to that or not really?

[Jennifer Wong, executive]

There's slightly when we did our analysis, our analysis did indicate that there might be some savings with delivery costs for sure. But the big overarching sort of bottom line benefit is the optimization of our inventory. It makes our inventory available to both channels and then allows us to really optimize our inventory position.

[Operator]

The next question comes from Alex Yao with Bank of America.

[Jingyuan Xiao, analyst]

Can you talk more specifically about the components that will allow for the approximately 100 basis points of gross margin improvement that is currently implied in 4Q by your guidance? I know you touched a little bit upon the second half as a whole to Stephen's question. But in 4Q, in particular, how are you planning the markdown component? Are we assuming all preopening lease costs are gone; all the temporary warehousing costs are gone in 4Q?

[Todd Ingledew, executive]

Yeah. Thanks, Alice. You've hit on a number of the key components but starting with the temporary warehousing pressure that we've been experiencing in the first half of this year and actually also last year. Obviously, as Jennifer said, it's going excellent. Actually well ahead of our expectations, the implementation at the new DC, but it will still take some time to get out of the leases on the auxiliary buildings. So there is some pressure in the third quarter from those auxiliary buildings, and it does diminish into the fourth quarter to the point where we actually may see a benefit in the fourth quarter because of the labor optimization.So that's one of the dynamics that helps with the sequential improvement from Q3 to Q4. And then -- we also -- our smart spending initiatives that we have underway is ramping through the year, and we expect to benefit more in the fourth quarter from that than in the third quarter so again, also helping with the sequential improvement from Q3 to Q4. And from a -- you asked specifically about markdowns, we expect the pressure to be relatively consistent Q3 and Q4 on markdowns.

[Jingyuan Xiao, analyst]

That's super helpful. And then I have two quick follow-ups on your store opening plans. So a lot of retailers have guided to a very back half weighted store opening cadence this year. And I was wondering if you can help us understand a little bit why that is? And what gives you confidence that all the stores can be opened in the last weeks of 4Q that you have planned? And then are there any possibility of changes to the [indiscernible] cadence of square footage growth next year or is that pretty set in stone the current plan?

[Todd Ingledew, executive]

Yeah. I'll take that one. I guess, obviously, we're talking about construction. So it's never set in stone. So I don't -- I can't commit to that for certain. What I had communicated was our estimates as of today. That's our plan for those openings. But obviously, in some cases, we're as much as 12 months away. So there's a lot of things that can happen between now and then. And specifically for the fourth quarter and why the cadence for us, I mean, it's really just a matter of when these deals come to fruition and the timing of the design and then the build that follows once the deals are done.And obviously, availability of space comes into it too. So there's like a long list of factors of why stores would get delivered at a certain time. And I can't speak to others, but that would be the factors affecting us. So yeah, what I just described or outlined is our current thinking on the timing. And again, obviously, we're 12 months away in some cases. So there could be adjustments to that. But as of right now, that's what -- and we think those stores will be delivered.

[Jingyuan Xiao, analyst]

Got it. So is this ability to next year, it looks like it's going to be easier than this year to -- for new stores to come online. Is that right understanding?

[Todd Ingledew, executive]

No, I don't know that there would be a change in the environment. This is just win based on, again, like when we get possession and then when we were planning for occupancy, when they're all coming planned to come online is that the environment is not necessarily going to get easier.

[Operator]

The next question comes from Mauricio Serna with UBS.

[Mauricio Serna Vega, analyst]

First, I would like to ask about the Q3 sales guidance. How should we think about the implied comp sales, just given that there's like the total sales outlook implies a deceleration. I don't know that that has to do with less store openings on a last 12-month basis or how should we think about that? And then in slide Q4 SG&A dollar growth, I think it seems that looking at the model, I think it implies like the SG&A dollar growth will accelerate in Q4. So I just wanted to corroborate that, how [indiscernible]?

[Todd Ingledew, executive]

Yeah. Okay. The first question -- sorry, I got thinking about SG&A there. Your first question was on?

[Mauricio Serna Vega, analyst]

Implied comp sales.

[Todd Ingledew, executive]

All right. Thank you. So the implied comp within our guidance is effectively flat with what we were seeing in the second quarter. And so we've planned the rest of the fiscal year based on the trends that we saw in the second quarter and the trends that we're seeing quarter-to-date in the third quarter. There is implied benefit in the fourth quarter or increase, but it's not coming from comp. It's coming from the 53rd week in the fourth quarter as well as the new store openings that we've been discussing. But there isn't any incremental benefit in the third quarter compared to the second anyway, as it relates to new stores.

[Mauricio Serna Vega, analyst]

You have minus 4.3%. Is that right probably you're thinking about [indiscernible] income?

[Todd Ingledew, executive]

It's exactly in the sort of down mid-single digits. And then, yeah, in the fourth quarter, our SG&A, again, we expect it to sequentially improve from the 300 basis points of pressure in the third quarter. And the benefits are coming from lapping of investments we've been talking about that we made in the -- really the back half of last year in wages, both in support office, adding support office heads and as well from a retail perspective, we made investments in retail wages that we've been cycling on really for two quarters now, and that will be, for the most part, coming off in the fourth quarter. And then again, the scaling of our smart spending will help the sequential improvement in the fourth quarter on a margin basis.

[Mauricio Serna Vega, analyst]

Got it. And then just one last follow-up on inventory, it seems -- it's great to see that progress, both on a reported basis and the committed inventory. Maybe can you elaborate a little bit more on like that competition? Is it like -- how does that look when you think about proven sellers versus unit?

[Todd Ingledew, executive]

Yes. Our inventory continues to be heavily concentrated in proven sellers as it would be at any point and so that hasn't changed and is, again, providing us the confidence in that inventory.

[Operator]

The next question comes from Dylan Carden with William Blair.

[Dylan Carden, analyst]

Curious, Jennifer on the marketing comments. Is that incremental to prior thinking or just another way is the idea here that the ratio of marketing spend to sales would increase with flow through at a higher conversion at the online channel?

[Jennifer Wong, executive]

Well, as I've said, we've done very little to no digital marketing in the past, hasn't necessarily been a primary driver of our business. We grew quite well last year and year before without doing much of it. But what we have learned is that this is a huge opportunity for us, particularly if one of our primary growth levers overall for the next few years is about digital and just in the U.S. So yes, there will be incremental spend. It will be a new aspect of our overall business strategy.But it's specifically digital performance marketing, which does translate directly into results and sales results. And so I think that if we get the strategy together and go about it intelligently and smartly and as we do with everything that we do around here, I do think that the return on what we spend will definitely make sense. And the good news is we're building the team to do that. We're building a team and have a couple of people already who are as I said seasoned professionals in this space.

[Dylan Carden, analyst]

Great. And then on new markets, paying back within a year, you're opening up new markets go forward this year and next. Are volumes still kind of double broad strokes what they were pre-pandemic? And has there been any impact on new markets from kind of the hampered newness in the inventory position in some of these markets such that you might expect the volumes could be even greater? And I have a follow-up to that.

[Jennifer Wong, executive]

Generally speaking, the new store openings in new markets are consistent with the new stores we've opened in prior years. Like we're really pleased, like for instance, with the Tampa one that that it's performing better than we expected and paying back in 10 months, not even 12 months and its [ peer to the ] payback in 10 months. And volume-wise, they're performing exactly, if not better than what we projected before when we first lease the space. So we're really encouraged by the retail business.As I say, our everyday luxury value proposition really, really comes through in, in-person and in our stores, whether it's through our product, our store design, our exceptional client service, the locations that we choose. I think we're -- I continue to believe we're industry leaders in retail. As I said -- they're paying back in less than 12 months, and our expectation is it's 12 to 18 months. They're performing at $1,600 a square foot. We were very pleased with our retail performance. And so this really encourages us and gives us a lot of confidence to continue to open these stores that we have on the pipeline, and we're super-excited for the flagship stores that we're opening next year.

[Dylan Carden, analyst]

Okay. And then Todd, given that kind of shortened payback period where you should theoretically land the year from a gross margin standpoint, which isn't all that far off from some prior years. What's sort of the structural margin level here go-forward? Do we think sort of low 40s which you've achieved historically even pre-2016? Is there upside to that? I know you're not going to commit to a number per se, but just trying to sort of flow through the compressed payback period to an actual kind of structural gross margin? Anything you say there would be helpful.

[Todd Ingledew, executive]

Thanks, Dylan. So as I've described, the 500 basis points of improvement that we're expecting next year, majority of that will be within gross profit, save the portion of the smart spending initiatives that are from SG&A. And so that will be a step function return -- returning us to our normal gross profit margin or on the way to. But we do -- it will be sort of sequential year-on-year getting us back to where we expect to be by the end of our multiyear plan.And it's really driven one by opportunities in product costs. We think we have a multiyear product cost opportunity that will improve over time. And then I think we've talked about this. But as our business grows in the United States, we have a meaningful benefit to gross profit margin just because of the margin profile in the U.S. compared to within Canada. So again, sequentially, as our business grows in the United States and becomes a larger and larger portion of our overall business, we will see benefit within our gross profit.

[Dylan Carden, analyst]

And on the project margin side, remind us about a third of that, I think, was coming from selective price increases. Is that something we should expect to see more spring-summer '24 or have you all started feather some of that in?

[Todd Ingledew, executive]

The pricing improvement is being feathered in. It's already started now in fall-winter. So that we're seeing some of that benefit for the back half of the year. But from an IMU perspective for next year, we're expecting about 150 basis points of improvement. And the majority of next year's improvement will be coming from costs, so lower product costs.

[Dylan Carden, analyst]

But you've been successful in pushing to some pricing in the present period in time.

[Jennifer Wong, executive]

We've said in the past that, Dylan, that the pricing actions that we've taken have been on very selective, strategic choices on an item-by-item basis. On the grand scheme of things, it's affected very, very small portion, the vast minority of our overall product assortment. And the results that we're seeing so far is that there's -- it hasn't affected at all the unit sales of those items. So we're selling just as many of those items at the new prices we were at the old price.

[Operator]

The next question comes from Brian Morrison with TD Securities.

[Brian Morrison, analyst]

I apologize I joined the call quite late, so if I repeat some questions we can talk about it later. Just in terms of the Q3 guide, the 200 basis points of SG&A increase, Todd, I thought we were lapping the support staff and wage pressures. I understand in Q4, you're going to see a benefit. But why so large an increase in Q3 after you're only up 150 basis points in Q2?

[Todd Ingledew, executive]

We were up 400 basis points in the second quarter. So it is a sequential decline from 400 basis points to an increase of 300 basis points. So it is coming down in the third quarter. And then further, there will be a further sequential decline in the fourth quarter. Within the third quarter, though, to answer your question, I mean, we're still lapping the retail wage investments that we made as well as the support office, it's really not until the fourth quarter that we'll be lapping when the majority of those were introduced at least from a retail wage perspective. And then we just have a deleverage on higher fixed costs that we discussed. So we haven't changed our outlook for the year. We're still expecting the 300 basis points of pressure for the year. But again, we've gone from the 400 basis points in Q2 to 300 basis points in Q3, basically, as we were expecting.

[Brian Morrison, analyst]

I see that. I apologize. Okay. That makes sense. And then are you able to provide the rent expense that gets you from post-IFRS 16 to pre for Q3 and Q4 and into next year? I assume it's going to increase substantially.

[Todd Ingledew, executive]

Yeah. I mean I don't have the number in front of me to quote the exact number. But yeah, obviously, as we're adding all of these stores, there will be incremental rent. But actually, as the stores open, we potentially will have benefit from a percentage of rent cost, but that's obviously as they get open and ramp up, etcetera.

[Brian Morrison, analyst]

Okay. Last question. The NCIB, I think last quarter, you mentioned that you didn't plan on being active. You just covered your options. It looks like you were somewhat aggressive in the quarter. Maybe your go-forward plans with it.

[Todd Ingledew, executive]

Yeah. So we did. We've repurchased approximately 400,000 shares in the most recent quarter and had repurchased about 300,000 prior to that. So we have been a little more aggressive. I guess, again, you would have noted that we are $100 million drawn on our line of credit as of right now. So we will be paying that back by the majority of it back by the end of the third quarter. So again, as I've said all along, I think as we get into a stronger cash position, we will look at buying back more meaningfully, but we do have meaningful capital investments this year as well as next year. So it just -- that's obviously our primary focus and it continues to be so.

[Operator]

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

[Beth Reed, executive]

Thanks again to everyone for joining us this afternoon. We're available after the call to answer further questions. And we look forward to providing another update at the end of next quarter.

[Operator]

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