Aritzia Inc

TSX:ATZ

Earnings Call Analysis

Aritzia's Second Quarter 2025 Shows Strong U.S. Growth and Optimistic Guidance

In Q2 2025, Aritzia reported a 15% rise in net revenue to $616 million, fueled by a 24% sales leap in the U.S., while Canada grew just 6%. E-commerce surged 10% as new boutiques bolstered retail sales, contributing to a 33% increase in gross profit. The company expects Q3 revenue between $675 million and $700 million, up to 7% growth, with margins set to improve by 400 basis points. For the full year, revenue guidance was raised to $2.54-$2.6 billion, anticipating 9%-11% growth despite Canadian softening. A plan to open 12-13 new boutiques this year could drive 15%-20% growth in Q4.

Strong Revenue Growth in U.S. Market

In the second quarter of fiscal 2025, the company reported a remarkable 15% increase in net revenue, reaching $616 million. This growth was propelled predominantly by a 24% surge in U.S. sales, driven by a successful real estate expansion strategy, increased eCommerce activity, and strong comparable sales in existing boutiques. In total, U.S. contributions amounted to $345 million of net revenue, reinforcing the effectiveness of their growth strategies.

Challenges in the Canadian Market

While the Canadian market reflected a modest growth of only 6% in net revenue, this was notably influenced by a calendar shift due to the timing of the annual warehouse sale. Without this effect, Canadian growth was low single digits, signaling softer consumer sentiment. The company acknowledges this challenge but remains optimistic about maintaining engagement with their loyal Canadian customer base.

ECommerce rebound with Expanded Digital Investments

ECommerce generated $190 million, marking a 10% year-over-year increase. This growth stemmed from a rise in traffic, particularly in the U.S., coupled with a positive reception of new product launches. Investments in digital marketing are expected to continue improving sales momentum, aiming to leverage and accelerate growth within this channel.

Considerable Margin Expansion

The company's gross profit rose by 33%, reaching $247 million, with gross profit margin climbing 520 basis points to 40.2%. The boost in margin was leveraged by better-than-expected markdown performance, improved initial markup (IMU), and lower warehousing costs, despite some pressure from rising freight expenses.

Future Guidance for Third Quarter

Looking ahead to Q3 of fiscal 2025, net revenue expectations are set between $675 million and $700 million, translating to growth of 3% to 7%. Notably, this estimate factors out the previous year's revenue impacts from non-recurrent sales. If those factors are excluded, an anticipated growth of 7% to 11% appears more feasible, benefiting from ongoing U.S. expansion and momentum in eCommerce.

Strategic Investments Underway

The company is actively investing in infrastructure, with SG&A expenses up by 17%, reflecting ongoing digital marketing efforts and technology enhancements to support growth. SG&A as a percentage of net revenue rose slightly to 32.4%. These expenses are partially offset by fixed cost leverage achieved from higher-than-expected revenues, signaling efficient management amid growth.

Bold Opening Plans and Expected Revenue Boost

The company plans to open 12 to 13 new boutiques and reposition 3 to 4 boutiques in the fiscal year, including 5 new openings in Q3 and 4 to 5 new openings in Q4, expected to generate revenue growth of 15% to 20%. This expansion is anticipated to drive further acceleration in sales, especially in new markets.

Positive Long-term Outlook

Overall, the company is on track to meet its long-term financial goals, including an adjusted EBITDA margin projected to increase by 400 to 450 basis points. The expected full-year net revenue is anticipated to be between $2.54 billion to $2.6 billion, reflecting 9% to 11% growth in fiscal 2025. Management remains confident in the continued strength in the U.S. market and their strategic initiatives to capitalize on growth opportunities.

Earnings Call Transcript 2025-Q2

[Operator]

Thank you for standing by. This is the conference operator. Welcome to Aritzia's Second Quarter 2025 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 2025 Earnings Call. On the call today, I'm joined by Jennifer Wong, our Chief Executive Officer; and Todd Ingledew, our Chief Financial Officer.

As a reminder, 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 will 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]

Good afternoon, everyone, and thank you for joining us today. We are very pleased with our performance in the second quarter of fiscal 2025. We delivered a 15% increase in net revenue to $616 million. Comparable sales grew 6.5%. The momentum we saw in June and July accelerated in August, driving higher-than-expected net revenue in the quarter. Our growth was fueled by our business in the United States, which generated a 24% increase in sales in the second quarter. This was driven by our proven real estate expansion strategy, a meaningful acceleration in eCommerce growth and strong comp growth in our existing boutiques.

In Canada, we saw less momentum, which we believe is due to a softer consumer environment. Sales growth of 6% was driven by the benefit from a calendar shift, which Todd will discuss later. In our retail channel, we drove an increase of 18% in net revenue in the second quarter. This is primarily due to the progress we've made on our real estate expansion strategy. In Q2, we opened 2 additional boutiques in the state of Florida in Boca Raton and Jacksonville as well as our sixth boutique in Texas, north of Dallas. Thus far in Q3, we've opened 2 boutiques, 1 in San Diego and 1 in the Chicago area.

For the balance of the year, we plan to open an additional 9 to 10 new boutiques and 2 to 3 boutique repositions. This includes our new Chicago flagship and the repositions of our SoHo and Fifth Avenue flagship in Manhattan. Needless to say, we're super excited about this extraordinary pipeline of openings, the most we've ever had in a single year.

Our boutique openings have a consistent track record as our most predictable driver of top line growth. And it's clear they help drive brand awareness and client acquisition in both new and existing markets. At our Jacksonville location, which is in a new market for us, 60% of clients during the opening months were new to Aritzia. And in our newest Texas boutique, an existing market for us, 30% of clients during opening months were new to the brand.

Boutique repositions also continued to perform exceptionally well, driving top line growth and profitability while elevating the customer experience. Our newest reposition near Chicago is generating incremental net revenue of 60% and delivering meaningfully higher contribution.

Turning to eCommerce. We returned to double-digit growth in the second quarter as net revenue grew 10%. This was primarily driven by increased traffic in the U.S. as well as a strong response to our fall product. We are encouraged by the momentum in this channel. We continue to focus on a number of initiatives to drive future growth in eCommerce and enhance our clients' digital journey.

During Q2, we continued to make progress on enhancing aritzia.com, and we expect the improved site to go live in the back half of this fiscal year. Improved functionality across the site, such as one-page checkout and AI-driven search results, will offer clients an even more frictionless and easy shopping journey, helping to drive conversion. Foundational components will also enable the development of a mobile app, which we expect to launch next fiscal year.

In addition, we've kicked off a project to enhance our international eCommerce site and customer experience. By optimizing for features such as local currency and prepaid duties and taxes, we'll be able to drive higher conversion. These enhancements will not only fuel revenue growth, but are also expected to improve channel operating margin.

Last but not least, our investment in digital marketing this year has been successful, showing strong positive results across the business. We're excited to continue to optimize and build on our learning.

Turning now to product. We saw a strong start to the fall season, driven by both new styles and our client favorites. We've seen continued success in our well-known and loved categories like sweatfleece and suiting as well as exciting growth in newer collections like Home Stretch. New launches aimed at maximizing share closet resonated very well with our clients, indicating we have opportunity to expand in these offerings. Our focus on optimizing the quantity and composition of our inventory is reflected in our strong second quarter net revenue growth.

In addition, due to our improved inventory levels, we had a lower mix of markdown sales compared to the second quarter last year, which helped to drive more than 500 basis points of gross margin improvement. As part of our strategy to grow brand awareness, particularly in the U.S., we remain focused on amplifying our product and our much-loved Everyday Luxury experience, including the compelling value we offer to our clients.

We also continue to strengthen our cultural relevance and enhance awareness by partnering with brand propelling influencers and growing our roster of celebrity fans. In Q2, influencer Nora Smith, known for her meticulous and viral content on TikTok, starred in our Fall Sweatfleece campaign. Her attention to detail aligns wonderfully with our commitment to perfecting every aspect of Sweatfleece, from fit to fabric. In addition, the roster of celebrities wearing our product included Blake Lively in Sculpt Knit and Emily Ratajkowski in Sweatfleece, highlighting the best-in-class quality of our iconically Aritzia products.

It's important to me to see things firsthand and to stay connected to what's going on in our stores. In my boutique visits this quarter, I was particularly impressed with how well all of the beautiful products we have this season in merchandise, highlighting the differentiated styling and the excellent quality of our fabrics. It's elevated, and there's great balance across the assortment between print, solid, [ foreign ] fashion colors, tailored and casual styles.

I also visited our flagship under construction. There is still work to do, but I can tell you, no detail has been less unconsidered. They're stunning. They're aspirational. They offer amazing exposure, and I'm so excited for them to open in time for holiday. We have a long history of executing with excellence, and we intend for this to be no exception. We spent recent months hiring, developing and building our team, perfecting design elements and honing store operations to prepare for this level of retailing. We'll be able to offer an exceptional client experience and showcase our product in the most compelling and shoppable way. We're absolutely thrilled to provide this experience to Chicago and Manhattan and to all who may visit those locations. To celebrate the opening, we're planning some exciting activations in-store and in the community. Stay tuned.

Now let me turn the call over to Todd.

[Todd Ingledew, executive]

Great. Thanks, Jennifer, and good afternoon, everyone. We're very pleased with our performance for the second quarter of fiscal 2025, which exceeded both our top and bottom line expectations and continues our progress toward our fiscal 2027 targets. Top line trends accelerated in August, and we delivered substantial gross margin expansion, resulting in another meaningful improvement in our adjusted EBITDA margin.

Turning to the details of our performance. In the second quarter of fiscal 2025, we generated net revenue of $616 million, representing an increase of 15% from last year. Comparable sales grew 6.5%. We're particularly pleased with the strength we're seeing in the United States, where net revenue increased 24% to $345 million in the second quarter. Growth was relatively consistent across both channels. Our retail channel was driven by the contribution from 7 new and 3 repositioned boutiques in the last 12 months as well as strong comp growth in our existing boutiques. The accelerated performance in our eCommerce channel was primarily due to growing brand awareness and a positive response to our fall product.

In Canada, net revenue increased 6% from last year to $270 million. Our results benefited from a calendar shift, causing the week of our annual warehouse sale in Vancouver to fall in the second quarter of this year compared to the third quarter last year. Excluding this benefit, our growth in Canada was in the low single digits. Net revenue in our retail channel was $426 million, an increase of 18% from the second quarter last year. This was driven by the performance of our new and repositioned boutiques, as well as mid-single-digit comp growth in our existing boutiques.

In eCommerce, net revenue for the quarter was $190 million, an increase of 10% from last year. The increase was primarily driven by traffic growth in the United States, as strong response to our fall product and our investments in digital marketing. We're encouraged by the sequential improvement and a return to double-digit growth, and we continue to see opportunity to further drive momentum in this channel. We delivered gross profit of $247 million, an increase of 33% compared to the second quarter last year. Gross profit margin increased 520 basis points to 40.2% from 35% last year. We drove better-than-forecasted markdown and IMU improvements, resulting in gross profit margin exceeding our outlook.

We also benefited from lower warehousing costs and savings from our Smart Spending initiative. These tailwinds were partially offset by higher freight costs. SG&A expenses for the quarter were $200 million, up 17% from last year, driven by investments in digital marketing to help protect and propel our brands as well as infrastructure projects and technology initiatives to support our growth. SG&A as a percent of net revenue increased 40 basis points to 32.4% compared to 32% last year. The better-than-expected performance was driven by fixed cost leverage on higher-than-anticipated revenue. Adjusted EBITDA in the second quarter was $55 million, an increase of 161% from last year. Adjusted EBITDA as a percent of net revenue expanded 500 basis points to 9% compared to 4% last year.

Turning to the balance sheet. At the end of the second quarter, inventory was $483 million, down 4% from last year. We had $104 million in cash and 0 drawn on our $300 million revolving credit facility.

Shifting to our outlook. Net revenue in the third quarter of fiscal 2025 is expected to be in the range of $675 million to $700 million, representing growth of 3% to 7% compared to the third quarter last year. It is important to note that the third quarter last year benefited from 2 factors which contributed approximately $25 million in revenue. First, the Digital Archive Sale, which will not reoccur this year; and second, the fact that our Annual Warehouse Sale in Vancouver fell in the second quarter this year as opposed to the third last year. Excluding these factors, our expected net revenue in the third quarter represents growth of 7% to 11% compared to the third quarter last year.

We continue to expect gross profit margin in the third quarter to increase by approximately 400 basis points compared to the third quarter of fiscal 2024 despite absorbing meaningfully higher freight costs. We forecast SG&A as a percent of net revenue to increase by approximately 100 basis points in the third quarter compared to the third quarter of fiscal 2024. The increase is driven by additional spending related to key strategic initiatives to drive our growth.

For the full year of fiscal 2025, we now expect net revenue in the range of $2.54 billion to $2.6 billion, representing growth of 9% to 11% from fiscal 2024, or growth of 10% to 13%, excluding the 53rd week last year. Our net revenue outlook for the back half reflects softer trends in Canada, where we're navigating a more challenging macro environment. Importantly, we continue to see strength in the United States, driven by our boutique openings and ongoing momentum in our eCommerce business.

Despite changes in some opening dates, we remain on track to open 12 to 13 new boutiques and reposition 3 to 4 boutiques this fiscal year. We now expect to open 5 new boutiques and 1 reposition in the third quarter and 4 to 5 new boutiques and 1 to 2 repositions in the fourth quarter. Nearly 90% of our square footage growth for the year occurs in the third and fourth quarters. In the fourth quarter, these openings are expected to fuel an acceleration in revenue growth to 15% to 20%, excluding the 53rd week.

We're raising our outlook for gross profit margin for the year to approximately 450 basis points of expansion compared to fiscal 2024, given the strength in the first half of the year and despite absorbing meaningfully higher freight costs. We now expect SG&A as a percent of net revenue to be approximately flat to up 50 basis points compared to fiscal 2024. Always with a long-term view, we continue to invest in our future growth while working to deliver meaningful margin expansion over the near term. We expect adjusted EBITDA as a percent of net revenue in fiscal 2025 to increase approximately 400 to 450 basis points, reflecting the leverage across the range of our net revenue outlook.

In closing, the actions we've taken to improve the performance of our business fueled 24% net revenue growth in the United States and 500 basis points of adjusted EBITDA margin expansion in the second quarter. The record number of new and repositioned boutiques that we're opening in the back half of this year, along with our eCommerce initiatives, will drive accelerated revenue growth this year and next. Further, we expect to continue to drive margin improvement back towards our historical levels in the high teens. All of this keeps us on track to achieve our fiscal 2027 top and bottom line targets. With that, I'll now turn the call back to Jennifer.

[Jennifer Wong, executive]

Thanks, Todd. Our strength in the United States has continued into the third quarter. While our outlook for Q3 is impacted by the timing of boutique openings, we expect to fuel additional momentum in the back half of the year as we complete our real estate projects and make further progress on our eCommerce initiatives. In Canada, we have seen a slower start to the quarter as we navigate a softer consumer backdrop. That said, we have a large base of highly engaged and extremely loyal clients in Canada. And with our optimized inventory position, we are in a very well positioned situation to meet incremental demand as the environment improves.

Along with our growing brand awareness, the momentum we're seeing in both retail and eCommerce, particularly in the United States, keeps us on track to deliver on our long-term goals. First, our real estate expansion strategy continues to produce exceptional results. In addition to the record number of new boutiques this year, we have another strong pipeline of openings planned for fiscal 2026. This increased pace of opening is expected to fuel retail sales growth and drive incremental eCommerce sales as we expand into new markets.

In eCommerce, we started to generate accelerated sales growth driven by successful product launches, inventory optimization and digital marketing initiatives. We have a number of initiatives underway to fuel further acceleration in our eCommerce business, including the upcoming launch of our new and improved aritzia.com.

For 40 years, we've successfully run our business with a long-term view and a disciplined approach. We continue to make strategic investments to support our recent and future growth. The investments we're making today in real estate, digital, marketing and technology will help position us to generate profitable growth well into the future. With just 56 boutiques in the United States, we're only just getting started. The opportunity to grow our brand remains tremendous.

In conclusion, we have great momentum behind the brand, and we look forward to our bright future ahead, both in the very near term and over the long term. We're confident that our commitment to executing on our proven business model will drive value creation for all of our stakeholders for many years to come. Thank you. With that, let's please now open up the line for Q&A.

[Operator]

[Operator Instructions] The first question comes from Luke Hannan with Canaccord Genuity.

[Luke Hannan, analyst]

Maybe we'll start with the difference that you're seeing right now between the -- your Canadian clientele and then your U.S. clientele. So I think that's something that most folks on this call we're seeing that all across the consumer universe. So that's not really a surprise. But how exactly is that manifesting itself in your business? Is that just shying away from higher ticket items, for example? Is trip frequency a little bit different north of the border versus south of the border? Maybe just additional commentary on how exactly that's manifesting itself in your business?

[Jennifer Wong, executive]

Hi, Luke. Yes, ultimately, we saw -- started to see a bifurcation in the second quarter mainly due to the U.S. momentum. Our Canadian business between Q1 and Q2 was relatively balanced, relatively consistent between the quarters in Canada, but it was because of the U.S. momentum that we saw it falling apart from the U.S. business. Canada has been performing consistently until we entered into Q3, where we started to see a little more softness.

What we're seeing is no different in average order value, average selling price, units per transaction. They have remained consistent year-over-year in the quarter. It's really just volume. It's related to volume and traffic. So the shopper, when she's shopping, she's shopping less. But when she is shopping, she's more discerning and when she -- what we're seeing even just with the conversion on our eCommerce site, it's improving. So when she's come into the site, when she's coming to the store, she's buying, it's just she's shopping less frequently in Canada.

[Luke Hannan, analyst]

Okay. That's helpful. And maybe just to follow-up. I apologize if I missed this in your prepared remarks. But when it comes to the store level economics for those boutiques that you had opened during the quarter, is it fair to say that they are still tracking around that 12-month payback period or better? Or has that changed in the U.S. at all?

[Todd Ingledew, executive]

Yes. No, nothing has changed. Our new stores continue to perform exceedingly well. All of the new stores we're opening right now are in the United States. We do have one scheduled for Canada later in the year. But yes, we're extremely pleased, obviously, with the 24% growth in revenue that's being driven by all of those new stores. And the new stores contributed roughly 50% of our growth in the United States in the quarter. And so yes, we're excited about not only the stores we've been opening but obviously, the number of stores that we have from now through the end of the year.

[Luke Hannan, analyst]

Okay. Great. And then last question, and then I'll pass the line here. When it comes to the updated guidance, specifically the updated SG&A guidance, I know that there's different investments that you're making in the business right now. But can you give us a little bit more specificity on what exactly that is that's maybe changed from last quarter to this quarter? Is it more investments in some of the existing initiatives that you're going to have planned for? Is it an expansion in scope of those initiatives? Just any incremental detail there would be helpful.

[Jennifer Wong, executive]

We're continuing with a lot of the investments that we have mentioned in previous quarters. Some of the more notable ones are in place to fuel growth. For instance, our digital investments, including the replatforming of aritzia.com, that's been in the works now for a year. That's going to be launched in the back half of the year. We'll start to see improvement with our site experience. We'll be able to do more innovative, creative features on the site. And then that platform will be the underpinning for the mobile app that we started development on, which will come out next fiscal year.

These are all things that are related to our second growth lever of accelerating digital. The international eCommerce enhancements is in the same category. At the same time, we're making infrastructure investments as we always have for the last 4 years. We like to build our infrastructure lock in step with our growth. In particular, the last couple of years, we've had to invest in infrastructure to catch up with some of the extraordinary growth that we experienced coming out of the pandemic. And certainly, as our sites are set on further growth going forward, we're making investment in technology and some systems like merchandise planning as well as workforce planning and things of that nature.

[Operator]

The next question comes from Mark Petrie with CIBC.

[Mark Petrie, analyst]

Could you just clarify, for the Q3 trends to date, are you saying that the U.S. is stable and it's Canada that's decelerated?

[Jennifer Wong, executive]

Yes. What we're seeing is the momentum remains strong in the U.S. And it's dampened unfortunately, with what we're seeing starting Q3 in Canada.

[Mark Petrie, analyst]

Yes. Okay. Okay. And I wanted to just clarify, Jen, one of your comments around the digital marketing. I think you said your plan from here is to optimize and build. Does that imply that you expect overall investment to sort of be stable from here? Or are you still in a ramp-up phase?

[Jennifer Wong, executive]

Great. I'll let Todd speak to the specific numbers. But right now, what we have planned for the year, what we have shared with you have not changed. When I say optimizing, it's about getting more precise with our targeting, just more precise with the actual placement of the paid media spend. And we're learning -- I'll tell you, we're learning a lot, and we're very encouraged by the results, as I mentioned, it's very positive. It's incremental and accretive to both our top line and bottom line. So we're feeling really good about the overall concept of incorporating that into our overall strategy. And now it's about making sure it's most efficient. It's most efficient as we can possibly get it.

[Mark Petrie, analyst]

Okay. And if I could just ask one other one, which is just regards to sort of the consumer 10 trends and sort of shifts in taste. What categories or occasions or types of product they're sort of under or over indexing versus your expectations so far in fall/winter?

[Jennifer Wong, executive]

We continue to see that many of our items, both the existing client favorites as well as the new items that we introduce every season continues to be balanced in terms of how it's performing and we like how it's performing. And I think given what we've done in optimizing our product, that kind of shows in the results in Q2. And so it still remains relatively consistent across the categories, whether it's our beloved Sweatfleece and effortless pant collection. I mentioned on the call that newer programs like the Home Stretch, we're starting to see encouraging results. So really, again, it's across the entire range and assortment that we're offering. And nothing is really spiking. What we like to see is a balance across everything. And I think we're -- this season, we're really achieving that.

[Operator]

The next question comes from Martin Landry with Stifel.

[Martin Landry, analyst]

I was wondering if you can help us out just to clarify one thing. Did you delay some store openings into fiscal '26 or it's just the delay between Q3 and Q4?

[Todd Ingledew, executive]

Yes, I would say that. No, there's no change to our annual numbers for the new stores. We're expecting 12 to 13 new stores and 3 to 4 expansions and repositions. We have seen a shift from Q3 to Q4 for a couple of them. But as I outlined in my prepared remarks, we've opened 5 new stores year-to-date. We have 3 more scheduled to open in the third quarter. And then we have 4 to 5 new store openings planned for the fourth quarter.

And then from a reposition perspective, we've opened 1 year-to-date. We have 1 planned for the third quarter, which is our SoHo flagship location. And then we have 1 to 2 repositions planned for the fourth quarter. Keeping in mind that, as I said, I already started to say it in one of the last answers, but those stores, as I commented, delivered roughly 50% of the revenue growth in the second quarter in the United States. And in our outlook, we're expecting an acceleration in the fourth quarter with those -- all of that new square footage driving 15% to 20% growth in the fourth quarter. Again, as you've heard us say, 90% of the square feet -- square footage that we're opening is in the back half this year, and it's going to drive meaningful growth, not only in the fourth quarter, but also in next fiscal year.

[Martin Landry, analyst]

Yes. And that's a good segue into my next question. You opened up a little bit about saying that you're excited with your plans for fiscal '26 for your real estate. And I was wondering if you can give us a peek as to what that could look like in terms of store openings?

[Todd Ingledew, executive]

Yes. I mean, we won't have the exact number of new stores until -- we would typically communicate that in January. But our range of 8 to 10 new stores, obviously, were higher than that this year, and I would anticipate that we will likely be slightly above the top of the range for next year as well.

[Martin Landry, analyst]

Okay. That's helpful. And then maybe my last question for you, Todd. You actually reiterated your fiscal '27 goals. I think it's great to see. That includes, I think, an EBITDA margin that's near 19%, if I recall correctly. Wondering what's the path from here to there? Is this a straight line? Is this going to be back-end loaded in terms of gross margin -- EBITDA margin expansion? Just a little bit of color would be helpful for modeling purposes.

[Todd Ingledew, executive]

Yes. I mean, I don't want to particularly provide the exact target for next year. But I would say straight line is safe at this point from this fiscal year through to FY '27, but we'll communicate specifics when we provide our guidance for next year. But suffice it to say, I think I've reiterated this previously, but we're obviously making great strides this year in our margin improvement. The IMU that we're seeing this year is really a start, and we expect to see multiple years of IMU improvements. We have a number of smart spending initiatives that are still underway that will deliver further margin improvement at the flagship locations. And the rent that we're paying in both locations or amortizing in both locations for those stores will benefit us next year.

And then just the overall growth in our U.S. business is accretive to our margins. So with each year and literally each new store opening as the U.S. becomes a larger portion of our business, we have a lift from that as well. And we actually -- I mean, just to give a little bit more color, we have just gone through a bit of a planning exercise to evaluate the FY '27 target. And from a top and bottom line perspective, we still feel confident that we are on track to achieve those.

[Operator]

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

[Stephen MacLeod, analyst]

Just wanted to follow up on the SG&A guidance. I understand that there are investments that continue to be ongoing. But just -- was there anything incremental? Because the sales number, roughly -- guidance to the midpoint is unchanged, but SG&A as a percent of sales has changed a little bit. So I'm just curious what the incremental piece is in the SG&A that wasn't there 3 months ago?

[Todd Ingledew, executive]

Yes. The incremental investments are what Jennifer was describing, the investments in infrastructure projects and technology initiatives where we've effectively greenlit projects that we hadn't initially planned to start this year, and we've now started them. And then there was -- and Jen already ran through the list, but those projects as well as incremental marketing spend as we launch our flagship locations, we're obviously...

[Jennifer Wong, executive]

We're celebrating. We're celebrating. It's a historic milestone in our 40 years of business to be opening 3 flagships of those sizes in effectively a 1-month period. So we're really excited, as I mentioned. Hopefully, you can hear in my voice the excitement that I have for the flagship. They're iconic locations, they're going to get us famous in the U.S. They're going to ultimately be a beacon for Everyday Luxury, and we have some really exciting things planned. As I've mentioned, in-store activations, activations within the community, digital, PR, media, we're really -- this is a big deal. This is a very big deal for us.

[Stephen MacLeod, analyst]

Yes. That's great. Okay. So those are -- that's incremental spend that you expect to generate a return on it, just good to hear. Okay. That's great. And then I just wanted to clarify, you mentioned the number a couple of times, but just in terms of the new stores being weighted to Q4. You said that those stores are expected to deliver 15%, 20% growth in Q4. Is that -- are you talking in the U.S. alone? Or is that -- are you kind of giving guidance to what you think the top line consolidated number is?

[Todd Ingledew, executive]

Yes. That's the range for -- I mean, it's the implied range given the Q3 guide and the guide for the full year, it's the implied range for Q4 for total growth. The stores that we're opening will be supporting the acceleration of revenue in Q4 that's implied in the guidance.

[Stephen MacLeod, analyst]

Right. Okay. Okay. No, that's helpful. And then maybe just finally, you talked about some of those noncomparable items in Q3 -- fiscal Q3. Is it fair to say that comps maybe have decelerated a little bit, excluding those noncomparable items, just given the incremental weakness you've seen in Canada?

[Todd Ingledew, executive]

Yes. So the way we've modeled out comp for the third quarter is actually a slight acceleration in eCommerce if you exclude the impact of the Digital Archive Sale, so a slight increase from the 10%. So still low double digits. And then for the retail channel, there is a slight deceleration from the trends in Q2, but entirely driven by effectively what we've seen in Canada in the first month of the quarter. And we're continuing to see strong momentum in the United States, and that has not changed.

[Stephen MacLeod, analyst]

Yes. Okay. And then would the net of that be a somewhat similar type comp in Q3, what you saw in Q2?

[Todd Ingledew, executive]

Yes. It will be mid-single digits.

[Operator]

The next question comes from Mauricio Serna with UBS.

[Mauricio Serna Vega, analyst]

I just wanted to clarify the 2 factors that are impacting your third quarter sales guidance that you're lapping. Is that impact on both markets? Or is it more weighted to one? I just want to make sure from that regard that like one market is [indiscernible] than the other?

[Todd Ingledew, executive]

Yes. So the -- there are 2 factors that totaled $25 million. One is the Vancouver Warehouse Sale, which -- it still occurred in the same week, which is prior to Labor Day weekend in Vancouver, but it occurs in Vancouver, so it's in the Canadian results. But this year, it's in Q2. Last year, it was in Q3. So there's a benefit of roughly 200 basis points in the second quarter this year, and then Q3 will be impacted this year by not having it. And then the Digital Archive Sale was in both countries. So across eCommerce in both countries. So the impact is spread.

[Mauricio Serna Vega, analyst]

Got it. And then on -- just thinking about Q4, the implied comp sales guide, it's fair to assume also like a mid-single-digit comp sell guide? Or is it like some sort of acceleration there? Just trying to understand like what are you -- how are you thinking about your sales?

[Todd Ingledew, executive]

Yes, it would be slightly higher, but still mid-single digit. And the revenue acceleration, as I was saying, is driven by the new stores and the expansions and repositions that we're opening.

[Mauricio Serna Vega, analyst]

Got it. And then just last question on the gross margin. For the third quarter, the expansion of 400 basis points, could you give us like a sense of what are like the main drivers behind that?

[Todd Ingledew, executive]

Yes. It will continue to be the same drivers that have benefited us through the year, which is IMU improvement, lower markdowns, the warehousing costs being lower. Now that item is less of a benefit in Q3 and Q4 because we're lapping when we had the new distribution center opened last year. So we were already benefiting in Q3 and Q4 from the -- yes, synergies from the new DC. And then we have some smart spending initiatives as well that will benefit us in the third quarter. And I should say that we also continue to expect pressure from freight costs that are included within that 400 basis points.

[Mauricio Serna Vega, analyst]

And is that -- sorry, is that freight cost pressure kind of like -- did it get worse versus when we were like 3 months ago? Or is that like consistent with what you're seeing before?

[Todd Ingledew, executive]

I -- it's definitely higher than the beginning of the year. So when we originally provided our annual guidance, we weren't anticipating, one, a meaningful acceleration in air freight costs. And then two, this sea freight, we've had to -- due to the different strike situations, we've had to redirect some of our shipments from Vancouver. And that's been at a higher cost, but obviously, ensuring the timeliness of the deliveries. So yes, it is higher than what we were initially expecting.

[Operator]

[Operator Instructions] The next question comes from Brian Morrison with TD Cowen.

[Brian Morrison, analyst]

Going back to the SG&A, you mentioned the higher infrastructure costs and the marketing of the flagships. I assume that the marketing of the flagship was already planned in that number. So is the infrastructure, the SG&A spend, is that a pull forward? Or is that just incremental?

[Todd Ingledew, executive]

The infrastructure spend is incremental to this year. I mean, we were planning all of these projects in the coming fiscal years, the ones that Jen listed, but we've moved them forward and started them earlier. And then we are spending incrementally as well. Yes?

[Brian Morrison, analyst]

Is that because of the successes you're seeing to date from them?

[Todd Ingledew, executive]

No, it's the opportunity that we see. So the app is a meaningful opportunity as well as improving our international eCommerce site and the merged planning software that we already had planned, but we have increased spend on that because of all of the benefits we're expecting to get, and we're trying to accelerate those projects to receive the benefits quicker, obviously.

And then the marketing, it actually is -- there is incremental spend. We made the decision to increase the spend around the flagship locations from what we had originally planned.

[Jennifer Wong, executive]

With the timing of the flagships all opening close together, which was not necessarily originally our plan, we thought that this is a great opportunity to be, as I said, celebrate that we're opening between -- the square footage between the 3 of them was effectively -- I know it's not the same, but it's effectively like opening 10 in-line stores all at once.

So you can imagine the scale of what this means. And it's not just for the locations that they're opening in. This will be something that we can celebrate across our entire store base and in both countries because I think it will be a very big brand propelling opportunity. And as I said, it's a historic milestone in our 40 years of business.

As it relates to the eCommerce growth initiatives, the mobile app will be a digital flagship property that unlocks Everyday Luxury digitally. It will allow for omnichannel connections and integrate all of the touch points. It will drive frequency among our clients and compel loyalty. And of course, the international eComm site right now, international makes up just barely over 1% of our eCommerce sales right now. And with the enhancements to the eCommerce site, we think that will triple in the first year. So there are all reasons why.

[Brian Morrison, analyst]

Understood. So on the flagships, will they be open for Black Friday? How much is the incremental spend on that? And Todd, what will be the falloff of the pre-lease amortization associated with that?

[Todd Ingledew, executive]

The -- so we're currently planning for 2 of the flagships to fall within the third quarter, which -- Black Friday is extremely late in the third quarter. That's the Chicago and SoHo location. And then Fifth Avenue is planned for the first half of the fourth quarter. So that's the timing.

[Jennifer Wong, executive]

That said -- I just want to interject. These are big projects. I was there last month, and we want to get them right. And this is -- so we want to make sure that we get these flagships that will be with us for decades to come. We want to get them right. And there are inherent risks to time lines in construction. As you know, we always say that there's risks that we can't control.

I just want to share with you that the SoHo building we're in, it was built in 1883. It's over 140 years old. When we're opening up walls, we're opening up walls with the original lath and plaster. We're installing up and down escalators, cutting big holes in the floor. And the sheer amount of structural that's required is astounding. It was astounding to me when I saw it. The floor in some cases, are uneven by up to 7 inches from one end to the other.

So these things take time, and these are all on their individual cases, normal occurrences that arise in construction of these -- of this nature, and I do want to give a shout out to our teams who have done an extraordinary job masterfully managing all of these elements. But the sheer size and scale requires time to ensure things that are built. So right now, when we say that we're opening 5 stores in Q3 and 4 to 5 in Q4 and the reposition following suit, we're contemplating 2 of those flagships in Q3, but it will be towards the tail end. And things may slide into Q4, and we're giving you our best visibility into what's happening.

[Brian Morrison, analyst]

I actually poked my head in the Rockefeller new store last -- 3 weeks ago, and it looks brilliant. I agree with that. Can you quantify what that cost is on the flagship celebration and also the previous amortization?

[Todd Ingledew, executive]

The budget for the marketing is roughly $3 million, but we haven't -- it hasn't been 100% finalized. And then the -- so it could be less, I guess, is my point. The amortization benefit next fiscal year will be roughly 50 to -- let's call it, 50 basis points.

[Operator]

We have a follow-up question from Mauricio Serna with UBS.

[Mauricio Serna Vega, analyst]

Great. I just had a quick follow-up. Now that you're lapping the -- I mean, you would not be recurring on the Digital Archive Sale? Like, do you expect some sort of a gross margin benefit because of that? And could you quantify it, if possible?

[Todd Ingledew, executive]

We are expecting to see a benefit in the third quarter that is going to be offset by the freight. And then in the fourth quarter, we obviously won't have that benefit, and we're expecting the freight headwind to be less. So that's why we have 400 even across both quarters despite the fact that we do have a tailwind from the removal of both of those sales in the second -- or in the third quarter. Yes. And it -- the impact again, is roughly 50 basis points as well.

[Operator]

This concludes the question-and-answer session. I would now like to turn the call back over to Beth Reed for closing remarks. Please go ahead.

[Beth Reed, executive]

Thanks again, everyone, for joining us this afternoon. We're available after the call to answer any follow-ups. And we look forward to talking to you again next quarter. Have a good evening.

[Operator]

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