Aritzia Inc

TSX:ATZ

Earnings Call Transcript 2018-Q4

[Operator]

Welcome to Aritzia's Fourth Quarter 2018 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Catherine Tang. Please go ahead.

[Catherine Tang]

Thank you, operator. And thank you, all, for joining us for Aritzia's Fourth Quarter and Fiscal Year 2018 Earnings Conference Call.Joining me today for the results are Brian Hill, Founder, CEO and Chairman; Jennifer Wong, President and COO; and Todd Ingledew, CFO.We will begin today's call with management's discussion followed by a question-and-answer period open to analysts and investors. Please note that remarks on this conference call may provide certain information regarding our expectations, future plans and intentions that may constitute forward-looking statements. We would refer you to our most recently filed management's discussion and analysis, which includes a summary of the significant assumptions underlying such forward-looking statements and certain risks and factors that could affect our future performance and our ability to deliver on these forward-looking statements.The fourth quarter and fiscal year 2018 earnings release, the related financial statements, management's discussion and analysis and the annual information form are available on SEDAR as well as the Investor Relations section of Aritzia's website at aritzia.com. Finally, all figures discussed on this conference call are in Canadian dollars, unless otherwise noted.I will now turn the call over to founder, CEO and Chairman, Brian Hill.

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

Thank you, Catherine. And thank you, everyone, for joining us today. We're extremely pleased to have delivered record net revenue and adjusted EBITDA results for the fourth quarter and full year. Our performance clearly demonstrates the strength of our business model and our ability to execute. We attribute our outstanding track record of consistent financial performance to our first-rate execution of the 3 key fundamental components of our powerful business model. The first is our differentiated global sourcing strategy; second, our innovative approach to product creation and development; and third, our deep commitment to our customers that ensures an aspirational shopping experience both online and in stores. I'm extremely proud of our teams' work that has led to our impressive financial and strategic accomplishments in fiscal 2018. Turning to our fourth quarter results. We delivered net revenue growth of 11.9% compared to the fourth quarter of 2017 and achieved our 14th consecutive quarter of comparable sales growth. Our 6% comp increase was driven by the continued momentum in a our eCommerce business fueled by enthusiastic response to our assortment of innovative and beautifully designed products. Our strong revenue performance enabled us to achieve adjusted EBITDA growth of 18% and adjusted net income growth of 23% compared to the fourth quarter in 2017, ending this year on an extremely strong note. During the fourth quarter, we also continued to make excellent progress on our strategic growth initiatives, including enhancements to our eCommerce business, store openings, expansions and repositions in premier locations and ongoing strategic investments in a world-class team innovative technology and infrastructure. Starting with eCommerce, we continue to deliver strong double-digit growth, primarily as a result of higher traffic. We've enhanced our website to elevate the customer experience and executed on improvements to drive traffic and conversion rates. These include championing a mobile-first approach and focusing on optimizations to improve the customer experience, including faster check-out and search and navigation enhancements. The flawless implementation of our new point-of-sale system across all stores and our customer care center has laid the foundation for an enriched customer experience in both our digital channels and in store. We have optimized our digital customer journey through post-purchase improvements, including the implementation of a package tracking tool that has generated an additional 100,000 visits per month. In addition, we are extremely pleased with our store network expansion, particularly in the United States as this continues to be instrumental in building brand awareness in this market. We captured a second premier location in Southern California with our store opening in South Coast Plaza, a leading international shopping destination. We've also expanded or repositioned 2 locations, including our flagship store in San Francisco on Market Street and our location at Kingsway Mall in Edmonton. We are very pleased with the performance of these locations, which are all coming in at or above our expectations. Overall, we still have a long runway for growth in the United States market, and we look forward to building on our momentum as we further expand our presence and accelerate brand awareness. Another key part of supporting our business strategy is our continued investment in our infrastructure. We are on track to open our new distribution center in Vancouver this fall, which will provide increased efficiencies and help us to advance omnichannel efforts. This new distribution center will be key to supplying our West Coast stores and eCommerce customers both in Canada and in the United States. We are also in the process of upgrading our warehouse management system to enable greater omni- channel capabilities going forward. Jennifer will speak to some of the other infrastructure and technology investments we made and update you on what to expect in fiscal 2019 shortly. Summarizing fiscal 2018, we achieved net revenue growth of 11.4%, which reflects the comparable sales increase of 6.6%, led by growth in our eCommerce channel as well as the contribution from our 6 new stores and 7 expanded or repositioned locations. Our 3 flagship openings, all located in iconic fashion districts, including Century City in Los Angeles, Rush Street in Chicago and Market Street in San Francisco, continue to perform at or above expectations. We're excited to see our customer discovering and enjoying these brand propelling locations as they serve to expand Aritzia's brand awareness in the United States market where we continue to see significant growth opportunities. While in some retail circles, there is an ongoing debate about eCommerce versus stores. At Aritzia, we see consumers moving seamlessly between the 2. In fact, we see a synergistic effect of 1 channel on the other and so we embrace them both. We also drove adjusted EBITDA growth of 12.8% and adjusted net income growth of 17.5% in fiscal 2018, driven by sales growth as well as SG&A leverage. Overall, we are incredibly proud of our accomplishments in fiscal 2018. And as we look forward to 2019, we are more excited than ever about the growth opportunities in front of us. To that end, fiscal 2019 is off to an excellent start as we continue to delight our customers with our spring and summer collections. The strong sell-through of our merchandise demonstrates the outstanding design, excellent quality and balanced mix of new items and fashion essentials in our assortment, complementing the effectiveness of our demand-driven merchandise strategy. A highlight of our spring collection included our recently launched leather program, which was so well received that we are working quickly to restock and to meet the continued demand. In addition, the strong performance of our Sunday Best Collection, which has captured the attention of our youthful customer has met the threshold to now become part of the group of established and exclusive brands. Overall, we are extremely excited about the growing demand for the Aritzia brand as we see more women discover our product daily. We saw a wonderful example of this in a recent Harper's Bazaar piece discussing the future Princesses' affinity for our brand that said, "If you don't know Aritzia it's time to get familiar with this Meghan Markle approved Canadian brand". And according to a culture and celebrity piece last month in Elle Canada, we topped the list of their favorite Toronto spots, actually referring to Vancouver-based Aritzia being one of their ultimate favs. Now I will turn to our priorities for fiscal 2019. Beginning with our eCommerce business, we believe that the investments we're making to optimize the online experience will position us to continue to drive meaningful growth in this channel. As I mentioned earlier, we increasingly saw our customers shop both in-stores and online. In order to better serve them, we're building on our foundation to create a seamless customer experience through omni-channel capabilities and increased personalization. The alignment between our retail and eCommerce processes and systems will allow our customers to shop and receive their product in whichever channel they choose. They will enjoy the benefit of store inventory fulfillment and buy-online-pickup-in-store capabilities as well as additional visibility into inventory across our store base. As we look ahead, we will continue to build our eCommerce platform and infrastructure by investing in people, processes, technology and space to enable our growth for the long term. We will also enhance our brand presence through the continuous execution of our store expansion strategy in fiscal 2019. We planned to open 5 to 6 new stores and to expand or reposition 4 to 5 locations. We opened 2 locations thus far in the first quarter, a Babaton at Square One in Ontario and an Aritzia at CrossIron Mills in Calgary. We're also in the process of expanding our location in SoHo and repositioning our store in Southgate in Edmonton. Based on the strong performance of our U.S. stores, we are more excited than ever about the opportunity to acquire premier, real estate locations and plan to open a store in San Diego later this year. We have the opportunity to capitalize on a few highly desirable real estate locations in Canada that we have managed to secure for fiscal 2019. As a result, our openings will skew more to Canada this year. However, the pipeline for the coming years is much more heavily weighted in the United States. In addition to these openings, we have 3 pop-up stores planned in the U.S., 2 of which will be in new markets and one in an existing market. These stores will provide us with greater insight into these markets and valuable local knowledge as we finalize our store locations. Turning to product. As I said earlier, we saw excellent response to our Spring Collection with strength across our exclusive brands. The enthusiastic response to our products further illustrates our design talent, global sourcing expertise and proven demand-driven merchandise strategy. We will continue to elevate our exclusive brands through product innovations and deliver exceptional design and quality at attainable price points. In addition to leaning into the strengths of our Sunday Best brand and a successful leather program for the fall season, we're extremely excited about some of the additions to our product assortment. Some of you may know that I have particular passion for Denim. When I was a teenager, it was in fact my specialty as I worked in the Denim section of our family store. You may recall that we hired a Denim expert that comes from a long lineage of Denim expertise in San Francisco. It is with great excitement that we're launching of our own Denim brand to capitalize on the strong fashion trends in this category. We had our first look at the product a few weeks ago, and not surprisingly, we have a quite a few Denim fans who share my passion for the product. In conclusion, we have a proven track record of delivering consistent sales and earnings growth. We have great momentum behind the brand, and we're excited about multiple growth opportunities ahead of us. We believe with our commitment to executing on our powerful business model, combined with the strategic investments we are making, we are well poised to achieve or exceed our long-term revenue target of $1.1 billion to $1.2 billion by 2021. With that, I'll turn the call to Jennifer to provide an update on our operational activities.

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

Thank you, Brian, and good afternoon, everyone. As we continue to grow the business, we are focused on ensuring that we have the infrastructure, discipline and agility in place to capitalize on the opportunities ahead for Aritzia. As Brian mentioned, a key component of our growth is eCommerce, and we continue to invest in our omni-channel capabilities to ensure an aspirational shopping experience both online and in store. As the online space becomes a larger part of the business, and we continue to open stores in key locations, we are constantly striving to give customers the best experience no matter where they choose to shop our brands. The implementation of our new point-of-sale system is a critical part of this execution. Thanks to the many enhancements over the legacy system, we are now, more than ever before, able to leverage the best-in-class platforms, labor efficiencies, access to data and strong foundation for our omni-channel and clienteling initiative. With this system in place, we have been more efficiently managing our inventory and maximizing sales, as well as beginning to explore true omni-channel capabilities to give customers even more flexibility in how they shop and receive Aritzia products. Another key benefit of our new POS system is that our associates in the stores have more time to be present with our customers. Our associates are no longer calling other stores or manually tracking orders to locate and secure inventory for the customer, as this is now all automated. We have always prided ourselves on valuing our customers' time. We are also working to drive our digital strategy, which is creating additional opportunities throughout the organization as we use digital tools to heighten our customers' overall experience with the brand. Our focus on building our digital infrastructure impacts everything we do from support operations to product to our stores and eCommerce, the DC operations and ultimately to our customer interactions. In our view, digital is more than just our technology and eCommerce business. It runs through the entire business all the way from design to the wonderful service we deliver in stores. In product development, digital tools support strong product innovation in each brand throughout the season. Our next anchor project is the implementation of a product lifecycle management system. This transformational project for our business will allow us to create a single shared database of product information. By giving our product and design teams better and timelier access to this data, we expect to drive quality, reduce speed-to-market where appropriate and ultimately reduce costs in our manufacturing processes. The research and strategy phases of the project are nearly complete. Over the next 6 months, we will be moving into the planning phase, which involves the selection of a PLM technology. Automation in our DCs is helping us to increase efficiency, and in-store we will utilize our digital selling tools to put information about customer preferences and shopping behaviors at our associates fingertips. Across every function within Aritzia, our digital capabilities are enabling us to work more efficiently and effectively and positioning us well to achieve our long-term goals. While much of the infrastructure and technology is behind the scenes, it translates directly to an enhanced customer experience. For example, for the customer who saw and loved our new leather assortment on social but was unable to visit her local store in time to purchase her favorite piece, our staff can now, at touch of a finger, provide her with near real-time inventory information to help locate and secure her desired item. This allows us to maximize every sales opportunity and optimize our inventory across our entire network. At this stage, we have already increased visibility into our customers' preferences for personalization. Our digital evolution will enable us to predict our customers' needs and exceed her expectations. This has particular relevance for our clienteling program as we look to drive loyalty through increased personalization. We plan to leverage our data to better understand our customer and tailor recommendations to meet her needs. Finally, we can capitalize on digital marketing channels to engage our existing customers, acquire customers and drive further brand awareness. These include continued search engine optimization, refinement of our e-mail marketing and further leveraging of our social media channel. Digital will also be a strategic lever as we continue to explore the potential of our international eCommerce capabilities. Consistent with the way in which we have grown the Aritzia business, we will take a methodical and intentional approach to international growth. To that end, we are exploring international marketplaces such as Tmall. In addition, we remain on track with the construction and equipment installation at our new flagship distribution center in Vancouver as well as with the progress that we are making on our upgraded warehouse management system. We expect to have this facility completed and fully operational by the fall. We are excited to begin utilizing this 223,000 square-foot distribution center and look forward to leveraging the facility to gain additional operational efficiencies as we grow both our stores and eCommerce businesses. We recently shared some drone footage of our new facility with our staff. It was widely agreed that in addition to being a major step forward in scale to support our growth, in true Aritzia fashion, it may also be the most beautiful distribution center any of us have ever seen. We continue to invest in our talent across the organization as we leverage and celebrate our high-performing culture. Together, our people, processes, technology and space will ensure that we can operate at peak performance as we continue to build the business. I will echo Brian's comments around how proud I am of the team and what they have accomplished this year. These investments ensure that we are poised for the growth that we see over the long term. And with that, I will turn the call over to our CFO, Todd Ingledew, to review of our financial results in further detail.

[Todd Ingledew, Chief Financial Officer]

Thank you, Jennifer. Good afternoon, everyone. We are extremely pleased with our fourth quarter financial performance. Net revenue for the quarter increased by 11.9% to $219.8 million from $196.4 million in the same period last year. The weakening of the U.S. dollar year-over-year in the quarter negatively impacted net revenue growth by approximately 130 basis points or $2.8 million. The increase in our fourth quarter net revenue was driven by the addition of 6 new stores and the expansion or repositioning of 7 existing stores since the end of the fourth quarter last year as well as comparable sales growth of 6% following 12.3% comp in the fourth quarter last year. The increase in comparable sales was the result of continued momentum in our eCommerce business. In the fourth quarter, 8 of our 85 stores were impacted by the opening of a new, expanded or repositioned store and were excluded from our comparable sales calculation. For this quarter, these 8 locations represented 8% of net revenue. 7 of these stores are located in 3 shopping centers. Pacific Centre in Vancouver, Yorkdale Shopping Centre in Toronto and Eaton Centre in Toronto. In all of these centers, we have an Aritzia location as well as multiple banner stores, which offer product that was and still is available at the Aritzia location. Expanding our footprint in these highly productive centers allows us to deliver an aspirational shopping experience and address previously unmet demand while generating attractive returns for the center as a whole. As a reminder, stores that are temporarily impacted as customers discover our new locations, are removed from comparable sales until the new expanded or repositioned store has been opened for 57 weeks. Gross profit for the quarter increased 10.5% to $83.3 million compared to $75.4 million in the fourth quarter last year. Our gross profit margin decreased 50 basis points to 37.9%. This was due to increased occupancy cost in the quarter, including $500,000 related to the new Vancouver distribution center under construction. Gross profit margins benefited from the weakening of the U.S. dollar year-over-year as well as continued improvements in product costs related to ongoing sourcing initiatives. The improvements in product costs were offset by a slightly higher mix of end-of-season merchandise compared to last year. Selling, general and administrative expenses increased 2.6% to $50.7 million compared to $49.5 million in the fourth quarter last year. Adjusted EBITDA increased by 18% to $38.1 million or 17.3% of net revenue compared to $32.3 million or 16.4% of net revenue in the fourth quarter last year.Adjusted net income increased by 23% to $22.5 million or $0.19 per diluted share compared to $18.3 million or $0.16 per diluted share in the fourth quarter last year. Our balance sheet continues to strengthen with a cash balance at the end of the quarter of $112.5 million and a 0.9x total debt to LTM adjusted EBITDA ratio. During the quarter, we made our scheduled 2018 amortization payment of $15.3 million, reducing our total term loan to $118.7 million. We had 0 drawn on our revolving credit facility as of February 25, 2018. We are currently in the final stages of refinancing our debt. For fiscal 2018, net cash provided by operating activities was $105.4 million. Our extremely strong and consistent cash flow generation and our healthy balance sheet enables us to invest meaningfully in our growth. In addition to taking full advantage of value-creating investments in our business, we are pleased to be able to allocate excess cash to buying back our stock. We are excited about the multiple growth opportunities ahead of us, and believe our repurchase program is also a good opportunity to enhance shareholder value. As you saw in our press release, we announced the intention to proceed with a normal course issuer bid through the facilities of the TSX to repurchase up to 5.4 million of our subordinate and voting shares. We are very pleased to be starting another year off on a strong note. In our first quarter to date, we are seeing strong momentum in our business, which has resulted in comparable sales growth trending above the fourth quarter of fiscal 2018. Turning to our outlook for fiscal 2019. We expect to deliver low to mid-teens revenue growth and consistent adjusted EBITDA margin as compared to fiscal 2018. Our net revenue growth expectation reflects 5 to 6 new store openings and 4 to 5 expansions or repositions. Planned new store openings include 2 stores already opened in the quarter, the Babaton banner store in Square One Shopping Centre in Toronto and the Aritzia Store in CrossIron Mills in Calgary. We expect gross margin to continue to benefit from reduced product costs related to ongoing sourcing initiatives. However, we expect this to be offset by higher raw material costs for the fall/winter season We expect SG&A to grow proportionally with revenue in fiscal 2019. The expected growth in SG&A is related to investments we plan to make in people, technology and infrastructure, primarily to support accelerated eCommerce growth in fiscal 2019 and beyond. The majority of investments related to our eCommerce platform improvements are expensed within SG&A, impacting earnings in the fiscal year, while obviously capital investments in our stores are depreciated over the length of the lease. We plan to total capital expenditures to be in the range of $55 million to $60 million, which includes costs related to store openings and expansions and repositions in addition to certain technology and infrastructure investments. Overall, we are pleased to be on track to meet or exceed our stated fiscal 2021 performance targets. With that, we will now welcome questions. Operator?

[Operator]

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

[Mark Robert Petrie]

I just wanted to ask about the U.S. You highlighted the good results you're seeing with the new stores, but I wanted to ask more broadly about eCommerce penetration and how you're tracking with the consumer brand awareness? And how are you tracking that and then maybe if you could give us a sense of the eCommerce growth in the U.S. versus Canada.

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

It's Brian, I'll take that call. Great question. In eCommerce growth it depends on how one looks at eCommerce and the growth in Canada versus the U.S. Presently, because we have fewer stores in the U.S., it actually makes up a little bit higher percentage of eCommerce is done in the U.S. versus retail because we just don't have the store base there. We do see some growth in eCommerce in areas in Canada, probably faster in places than in the U.S. because we Canadians typically have been slower to adapt to eCommerce -- Canadians to eCommerce. So we are seeing some pick up and catch-up happening. So from an eCommerce perspective, it's sort of growing at the rate we kind of thought it would be, both in Canada and the U.S. As far as brand awareness, we've done a -- we've been getting a lot of press in the U.S. of late, with Meghan Markle who we talked about. But we've also had some other press with various big, big celebrities, and I think one was just yesterday. It was yesterday, was Kendall Jenner? Kendall Jenner was wearing one of our tops yesterday and then -- who was it in the soccer matches with -- I don't recall it was Gigi Hadid or somebody like that. No, Bella Hadid was wearing it at a soccer match over in Europe. So we've been getting a lot of big, big American celebrity press. But I don't think -- I think we still have a job ahead of us to get famous in the United States. And we've just been putting the -- we have been discussing it. We've been doing some things, but we really haven't completely put our final plan together on how we're going to do that. The debate is around whether -- there's a whole bunch of different ways to get famous and that's through various marketing channels, whether that be social or whatever -- what have you. We think by just opening more stores and accelerating store growth, it will get us more famous as well, continuing with our flagship initiatives. And truthfully on the table, too, there is always wholesale gets you famous as well, although that has -- would be a departure from our existing strategy. But certainly, by having distribution in various department stores, or what have you, in the U.S., that gets you famous, gets your brands famous as well. We're looking at all the different variables and the ROIs on those and putting the final plan together. And I suspect it will be a mixture of a few, not all, but a mixture of a few.

[Mark Robert Petrie]

And with regards to the wholesale opportunity. Are you thinking about the differently than you might have 2 years ago?

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

No, not, necessarily. We don't look at the wholesale opportunity necessarily to be a big profit driver. Although we can -- you can turn it into that. We're looking at in the context of a more of a getting famous marketing play there too versus a huge revenue. Well, it would be a revenue growth but huge bottom line growth mechanism.

[Mark Robert Petrie]

Yes. Understood. And then, just with regards to the store growth plan for fiscal '19. You mentioned that Canada would be greater than the U.S., but you also have substantial opportunities in the U.S. So is that just a matter of timing and sort of opportunity or why the delay and less openings?

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

No. It's really just timing more than anything. And where we are opening stores in the U.S, obviously -- or actually opening -- when you look at our store base, I believe we're opening a higher percentage of stores and expanding more in the U.S., certainly from a square footage perspective with the size of the units that we're opening in the U.S.. But it's really just a timing function more than anything else. We have a whole bunch of irons in the fire with stores in the U.S. And for all sort of reasons, mostly strategic, we haven't pulled the trigger on them at this point in time. But we have lots of opportunities, and we're going to see those shifting into the U.S. a lot more in the coming years.

[Mark Robert Petrie]

Okay. thanks And then one last one, if I could. Todd, you mentioned the flat margins -- or EBITDA margins in the outlook. Fiscal 2018 you got excellent leverage on SG&A, and you're investing in eCommerce through that period. And I acknowledge that you're investing to support further growth. But can you just give a bit more detail on the magnitude of the incremental spend versus what you were doing in fiscal '18?

[Todd Ingledew, Chief Financial Officer]

We've really been putting ourselves in a position to build out the team at this point. So we have senior leadership in place, and we'll be looking to build out the team in a greater fashion over the coming year. We have significant headcount in that regard, I think just about 30 people that we're planning to add to our eCommerce team. And we also have additional headcount in IT as well as marketing, which is all designed to invest in our eCommerce business. And obviously, we will see the benefits of that over the long term. But in this fiscal year, it will predominantly be a headwind as far as our SG&A -- or leveraging SG&A goes. We're making investments this year that will benefit us in -- partially this year, but predominantly in the long term.

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

And if I could add to that. It's just that we talked to -- we spoke about earlier it's just that traditionally before eCommerce came around, when we wanted to expand our revenues, we'd be capitalizing these investments, and now we're expensing them through our headcount additions. And as Todd pointed out, there is meaningful headcount additions. You just said what 30.

[Todd Ingledew, Chief Financial Officer]

That's in eCommerce, alone.

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

ECommerce alone but for every eCommerce head we're almost having to add another head, whether that be IT or marketing or somewhere else, support through HR to accommodate those heads. You could almost double that to get a total amount of heads we're investing in, in eCommerce, which is probably the biggest -- well it's not probably, it's the single biggest headcount talent initiative we have ever undertaken at Aritzia.

[Operator]

Our next question comes Mark Altschwager of Baird.

[Mark R. Altschwager, Senior Research Analyst]

Maybe just to follow up on that last question real quick from a SG&A perspective. To the extent that top line results come in ahead of your expectations for the year, would you expect to leverage SG&A in that scenario? Or are there variable expenses and other expense items that would potentially follow suit?

[Todd Ingledew, Chief Financial Officer]

Approximately 50% of our SG&A is variable. So in the scenario where we saw revenue higher than we're currently anticipating for the year, we would definitely see leverage on the other 50%, which is fixed in the short term. Basically, 50% is selling labor at the stores. And then, the other -- the majority of the remainder is labor here at the support office. And so in the short term that will be fixed.

[Mark R. Altschwager, Senior Research Analyst]

Got it. And then, just from a longer term perspective. I guess, looking at your results for fiscal '18, the 17.9% adjusted EBITDA margin puts you more or less right in the middle of the range that was implied in your original 5-year plan? So if we look over the next 3 years, are there additional levers or opportunities for margin expansion versus what you outlined a couple of years ago? I mean, it sounds like you're really pleased with the initial results of some of your infrastructure investments like the POS system, product lifecycle initiatives sounds promising. So could leverage from some of these investments yield some additional opportunity down the road? Or would you expect a lot of that to be reinvested in the business given some of the channel shifts that we're all seeing?

[Todd Ingledew, Chief Financial Officer]

We're continuing to invest as we said, this fiscal year, and are adding a significant number of headcount. So aren't anticipating leverage in this year. But we do anticipate over time that as our eCommerce grows, we will see increased leverage on our rent. We're continuing our sourcing initiatives, which while they will be muted this year due to higher raw material costs in the Fall/Winter. Over the long term, we expect to continue to see improvement from those initiatives. And we also do expect that our SO, support office growth in headcount -- the curve on that will diminish, and we will begin to see leverage.

[Mark R. Altschwager, Senior Research Analyst]

Thank you. One more brief one, if I may. I'm just kind of curious, as kind of a case study, I think at the time of the IPO you identified the Southern California market as a really strong eCommerce market without a store presence. Can you give us a sense of how your eCommerce business has trended as you've opened stores in Southern California over the past year? I was kind of looking, specifically for that market. How does that mix of store ecom compare to some of your more mature markets?

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

Yes. As you mentioned, we certainly see synergies within the eCommerce and the retail. South Coast Plaza hasn't really been opened very long. And when we look at Century City, although it's been open longer, the whole shopping center hasn't been open. And quite frankly, it still is in mid-leasing stage. So we don't really feel that we truly have a retail presence there. And because California, and specifically Los Angeles, is spread over such a vast area that one store doesn't really do justice and move the needle enough to -- particularly one in a shopping center that is still having -- undergoing leasing. So we don't really feel that we have enough stores there to actually look at the eCommerce sales and really see anything of consequence other than the fact when we have good days and bad days, and good releases and bad ones, obviously, everything is cyclical. We don't have that many bad ones obviously. But we haven't been able to see anything specific here out of the data as of yet. But we didn't really expect to, because we just don't really have a retail footprint in Los Angeles yet.

[Operator]

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

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

Just starting with the current quarter that we're in, Q1 F'19, I'm really happy to hear that the quarter starting off well given that weather really has not been your friend. Can you talk a little bit about a category performance? And really, how you're managing to do so well without the benefit of the tailwind of weather?

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

Irene, it's Brian. Yes, it's funny because you do a really good job of clearing out your winter goods -- Fall and Winter goods. And the next thing you know, it stays fall and winter for another month or 2, and everybody is wandering in asking you for [ tucs ] and coats and your kind of -- you're so excited that you got your product, your Fall/Winter cleared out, and your Spring/Summer rolled in. And everybody's wondering why you have all these bright sunshiny clothes in your stores. But I just think that we have great product in our stores right now. I don't know if you've been in them, but I think our colors bang on, I think our products are bang on. We have -- some of our new items are performing extremely well. Some of our items that we've had in the collection for some time that we developed on have been successful. We really think that our collection looks great right now. We think the merchandising looks great. And online too, we think our product is looking great right now online. And we're continuing to see growth online too. We've certainly -- we're certainly getting more momentum as the season goes on right now than we were in early March, that's for sure. But generally speaking, we're really pleased with the comp so far this quarter.

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

That's very helpful. And just turning to the brick-and-mortar stores versus eCommerce. I know that you're really looking at sort of a full omni- channel experience. But can you talk a little bit about what you're seeing in terms of traffic and traffic growth, or lack thereof, to the physical stores and traffic growth online?

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

We are continuing to see a shift online and seeing our traffic increase online, for sure, in our eCommerce business -- which is helping drive our eCommerce business as well as trying to work and increase our conversion as well. Our stores though are performing extremely well and continue to perform extremely well. And we think the actual experience in our stores, an experiential retail for our customers in our stores is fantastic. And so we're continuing to see very healthy traffic in our stores, very high conversions in our stores. We haven't really noticed a difference really in the stores. I do understand that the shopping centers have less traffic, but that doesn't seem to be affecting us.

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

That's great. And then just for a final question on this subject. I know it may be early days in terms of data collection using the new POS system. But have you been able to sort of glean any insights, or what insights have you gleaned around the degree to which you're customers are cross-shopping, the types of products that they're shopping for in-store versus online, the penetration of promotional sales in-store versus online. Any color really that you're getting on that?

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

I'll go backwards on this. We certainly still continue to see higher promotional sales happening online than we do in the stores. And I think that is just purely -- it's not because we have a sale customer online and we don't in our stores. It's just easier to navigate. You can just click on 30% to 40% off or 40% to 50% off or whatever the number is, and you're not having to navigate a store. In addition to that, during some of those peak periods, when you go on sales, it's certainly harder to get parking in places and access to the stores. So that pushes more people online as well. We are continuing to see that, but we don't really think we have a sale versus our online customer is a sale shopper the ones in the store. The customer coming into the store is a sale shopper. What was the first question -- What was the first part of that question, again?

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

The first part of the question really was around sort of what insights around the actual -- because now you can track your customer both in-store and online.

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

We are -- the one thing we are very surprised about is the opportunity we have to have an Omni channel customer. We still have a huge opportunity ahead of us. We've been extremely surprised with the -- how few customers are actually shopping both channels, particularly retail customers shopping eCommerce channels. It's shocking to us how few people still do -- shop eCommerce that are extremely good customers, retail. So we think we have a huge opportunity ahead of us. And so we're going to look to be capitalizing on that, turning single-channel customers into omni-channel customers. That's part of our whole marketing -- one of our marketing initiatives is to do just that.

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

Can you give us any insights into how you plan to do that?

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

There are several ways of doing it. And there's a whole bunch on the strategy table right now and at this point in time we haven't. It's not like we've decided and we're keeping it a secret. We actually haven't decided how we're doing that because we just haven't had the data long enough to be able to figure out -- we're still getting all the data and looking at it right now. So we actually have a bunch of various strategies we are putting in. I don't the list is complete right now, in my opinion. But I think we have a huge opportunity and we're really excited about what this is going to do to our business.

[Operator]

Our next question comes from Camilo Lyon of Canaccord Genuity.

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

I wanted to ask you guys and maybe, Brian, you can address this. And speaking about the Denim opportunity. It sounds like something you're very excited about. You have third party Denim in the stores right now that's probably -- my guess is that's a mid-single-digit representation of the mix. Can you maybe quantify or put some parameters around how big you think that business can be in the next 12 to 24 months? And I would assume since it's a -- effectively a private label brand that it's going to be margin accretive, certainly relative to the third-party brands you have in the stores. So maybe is there any sort of margin improvement that we could see from the category? And how the pricing of that offering would compare to what you have in the store?

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

Yes. I mean, from a margin perspective, the margins are certainly higher as a percentage, but the actual dollar margins probably aren't any higher because the price points are going to be lower. And that's one of the shifts that's happened in luxury Denim. A lot of people are -- have shifted out of luxury Denim into more mid-tier priced Denim because the quality of the product is equally as good in some cases with certain vendors. So that's our opportunity certainly is to offer great product at the price ranges our customers want to pay. And so, although we still are going to have luxury Denim -- although from a fashion perspective, luxury Denim brings a lot to the table as well, we think we can deliver a fantastic product -- at higher-margin percentages, but probably more equal margin dollars on those items. Yes, we are starting off. We're releasing a collection ourselves under a new brand, which I'm not going to disclose at this point in time, and then we're going to slowly work through by later this fiscal year, early next fiscal year incorporating our existing Denim, we're putting in our existing collections into the Denim mix. As far as the opportunity goes, when I hired our Denim expert, she suggested Denim will make up 50% of our business in the distant future because she is going to nail this thing. And I said if that's the case, you will be the new CEO. So you may actually get to meet her in person if she is able to achieve that. But I don't know about the opportunity is at this point in time. All I do know is that we're pretty excited about the product. I actually just came out of a fitting - another fitting. This morning I was popping in and we're just thrilled with the quality of the product we're able to produce and bring in both fit, wash, quality of the fabric. We're really excited about it.

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

Great. Shifting topics a little bit. I wanted to just connect some of the dots on some of the things that were said about the quarter. You're pretty clear that multiple times both in prepared remarks. [audio gap] that eCommerce was the driver of comp growth this quarter. Yet in response to another question, you said that you're not seeing any sort of traffic decline issues in your stores that maybe the mall[ audio gap ] were physical store's comps positive in the quarter?

[Todd Ingledew, Chief Financial Officer]

This is Todd. As you know we don't break out our comps between stores and eCommerce. But what I can say is, we are agnostic to where the customer shops. As we said, we have approximately the same margins in both channels. We're working very hard, as you heard, to deliver an ever improving omni-channel shopping experience. And the lines between eCommerce and stores are becoming increasingly blurred. Overall, though, we are very pleased, as Brian said, with the performance across both channels.

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

And once again we wouldn't be showing comps like this right now if we -- if eCommerce doesn't make up -- it's not meaningful enough of the whole mix that we're still seeing positive results in general. We're just really pleased with the traffic and conversion and everything in the retail stores and continue to be. And then by the way that's right across the board that's both in Canada, the United States, East Coast, West Coast, urban and suburban. We are pleased with our numbers everywhere. There is no cause for any concern on Aritzia's part as retail goes here.

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

Great. And then just, Todd, a clarifying question on the guidance with respect to gross margin. It looks like you're calling for a flat gross margin for the year. But you called out the higher -- the lower margin expectations around the Fall/Winter season. So maybe you could just give us a little bit of shape of the gross margin as the year progresses. It sounds like there are still some benefits that should unfold in the first half that will be offset by the back half pressures. Is that the right way to think about the...

[Todd Ingledew, Chief Financial Officer]

Yes. That's exactly right. In Q1 and Q2, we expect to see continued benefit from the sourcing initiative. But in the back half for our Fall/Winter season, we are experiencing higher raw material cost that will impact the gross margin in those quarters.

[Operator]

Our a next question comes from Meaghen Annett of TD Securities.

[Meaghen Annett, Analyst]

I'm just looking at the international opportunity for Aritzia. Can you talk about the strategy of using Tmall, and just what your thought process was there? And maybe any details on the timing of that potential launch?

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

Meaghen, it's Jennifer. I will start that off and then Brian can follow up with more detail. I just want to make it clear that we're still in very initial stages of research and strategy. It's not just specifically Tmall that we're looking at. We're exploring several international marketplaces, such as Tmall. There's another one jd.com and in Europe, there's Zalando. So right now what we set out this year was to begin our explorations of this initiative. And we have a team together now that where we can view it. We have had the international shipping site up and running for the better part of 1.5 year and we feel that we are now poised, as we set out about 18 months ago, to continue to leverage the data that we've learned to see where we can further capitalize in other parts of the world.

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

And I'll add. From an investment perspective with all these international investments, they do take some time to come to maturity. And so we don't look at this being any different for us as well.

[Meaghen Annett, Analyst]

And just a question on the guidance, similar to the question on gross margin. Can you give us any color just on the cadence of the investments that you expect throughout the year?

[Todd Ingledew, Chief Financial Officer]

The predominant investment that we're making is in people. And so that will likely ramp over the course of the year as we're hiring the staff.

[Operator]

Our next question comes from Dylan Carden of William Blair.

[Dylan Douglas Carden, Analyst]

Just a quick one, Todd, on the gross margin. I know just to bang this drum a little bit more, the D.C. coming back online, why is that not a greater kind of lift to overall margins? Or why should they not expected to be?

[Todd Ingledew, Chief Financial Officer]

D.C. coming online? You were saying -- it's coming online at the end of the year, so fall, and we're paying rent at the old DC till late this year. There will be savings from a rent perspective in Q4. But through the Q1 through Q3, we will still be experiencing the duplicate rent. We are starting to -- we're coming into the period where we will be lapping that in the prior -- from the prior year.

[Operator]

Our next question comes from Lorraine Hutchinson of Bank of America.

[Lorraine Corrine Maikis Hutchinson]

I was hoping you could help bridge the gap in sales growth. So you put up an 11.5% revenue growth in this year you just completed and you're guiding to low to mid-teens. Can you talk about the factors that go into that, including comp, FX, square footage? How you're getting to that target?

[Todd Ingledew, Chief Financial Officer]

The drivers of the revenue growth are very similar to what they were this year. We're planning to build 5 to 6 new stores, expand or relocate 4 to 5 existing locations, and then, obviously, continued momentum in our eCommerce business. Those are the primary drivers of the growth year-over-year.

[Lorraine Corrine Maikis Hutchinson]

And how are you planning FX?

[Todd Ingledew, Chief Financial Officer]

We planned at 1.3.

[Operator]

We have a follow-up question from Irene Nattel.

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

Just a quick question, if I might, on the NCIB. Do you actually plan to execute on the NCIB? And if so, what type of methodology and the cadence should we be expecting?

[Todd Ingledew, Chief Financial Officer]

Absolutely, we will be opportunistic with our purchases. We are planning to execute on it. Obviously, we're in an enviable cash position and we continue to have extremely strong cash flow generation. I think it's important to point out that our primary use and the top priority for our cash is to continue to invest in our growth. But after investing in our growth, we still have meaningful excess cash. And we feel confident in our business, and we are confident in our continued growth and therefore, we think it's a great use of that excess cash and we will be helping to return value to the shareholders.

[Operator]

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

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

Thank you for that and thanks, everyone, for participating in our call today. We're building a wonderful business. And we are happy to have the opportunity to share that with everybody during these calls. We look forward to speaking with you on our next call. I think it's pretty soon in mid-July highlighting our growing business. In the meantime, we will be at William Blair Conference in Chicago in June. And so we look forward to the opportunity in meeting people face-to-face and getting into any more details required about our business. Thank you for coming out today and see you all soon.

[Operator]

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