Aritzia Inc

TSX:ATZ

Earnings Call Transcript 2022-Q4

[Operator]

Thank you for standing by. This is the conference operator. Welcome to Aritzia's Fourth Quarter and Full Year Fiscal 2022 Earnings Call. [Operator Instructions]

I would now like to turn the conference over to Carly Bishop, Executive Manager, Office of the CEO. Please go ahead.

[Carly Bishop, executive]

[Technical Difficulty], Sachi. And thanks for joining Aritzia's Fourth Quarter and Full Year Fiscal 2022 Earnings Call. On the call today, I'm joined by Brian Hill, our Founder, Chief Executive Officer and Chairman; Jennifer Wong, President and Chief Operating Officer; and Todd Ingledew, our Chief Financial Officer. Following management's discussion, we'll host a question-and-answer period open to analysts and investors.

Please note that remarks on this call may include our expectations, future plans and intentions that may constitute forward-looking statements. Due to the material impact of COVID-19 on business operations in fiscal 2021, certain references to our prepandemic results in the fourth quarter of fiscal 2020 have been included where management deems to be a more meaningful measurement of performance. The uncertain and dynamic nature of COVID-19 and its ongoing impact could continue to materially alter our performance. We would refer you to our most recently filed management's discussion and analysis and our annual information form, which include a summary of the material assumptions as well as risks and factors that could affect our future performance and our ability to deliver on these forward-looking statements.

Our earnings release, the related financial statements and MD&A are available on SEDAR and the Investor Relations section of our website at aritzia.com. I will now turn the call over to Brian.

[Brian Hill, executive]

Thank you, Carly. Thank you, everyone, for joining us today. Together alongside Jennifer and Todd, I'm excited to report on our Q4 and year-end results and share our outlook for the incredible year ahead. Our team did a fabulous job in Q4, capping off a tremendous fiscal 2022 where our business accelerated beyond our highest expectations. Our exceptional performance continued across all geographies and all channels as our boutiques once again surpassed prepandemic productivity levels by double digits, and our business in the United States sustained its unprecedented growth, all accomplished despite the multitude of headwinds from the evolving global landscape.

In fiscal 2022, we brought our everyday luxury experience to significantly more clients than ever before with our active client base in the United States more than doubling. We also meaningfully expanded our boutique portfolio in the United States. This investment is continuing to pay off as these new boutiques are quickly becoming some of our top-performing locations. In product, we expanded our assortment across depth, breadth and new categories and completed our first ever acquisition and foray into menswear with Reigning Champ. We also bolstered our digital experience with investments in our -- into our e-commerce and omnichannel capabilities, all this whilst continuing to invest in the infrastructure required to scale for years to come.

Looking back on fiscal 2022 and everything we accomplished makes me even more excited for the road ahead. We have never been better-positioned to continue capitalizing on the incredible opportunities being presented to us. While Todd will provide you with the details of our Q4 and year-end financial results, I'm extremely pleased to share our performance highlights. In the fourth quarter of fiscal 2022, we delivered net revenue of $444 million, an increase of 66% from last year and 61% from 2 years ago. Our exceptional top line growth was only outpaced by our bottom line growth as we delivered adjusted EBITDA of $66 million or 15% of net revenue, an increase of 88% from last year and 57% from 2 years ago.

We continue to make significant progress on our path to getting famous in the United States as our sales growth sustained its unprecedented base. Net revenue grew to CAD 217 million, an increase of 109% from last year and 128% from 2 years ago. The United States accounted for 49% of our net revenues, almost half of our total business in Q4 compared to 39% last year and 35% 2 years ago.

Our e-commerce business sustained its strong momentum as net revenue grew to $182 million, an increase of 21% from last year, and 120% 2 years ago. E-commerce accounted for 41% of net revenues in the quarter. Our retail business continued to surge as net revenue grew to $262 million, an increase of 123% from last year and 36% from 2 years ago with comparable sales growing 60% from last year, up 13% from pre-pandemic levels. For the full year of fiscal 2022, we delivered net revenue of $1.5 billion, an increase of 74% from fiscal 2021 and 52% from fiscal 2020. This manifested itself into extraordinary adjusted EBITDA improvement, which grew to $289 million or 19% of net revenue, an increase of 277% from last year and 68% from 2 years ago. Our United States business net revenue grew to CAD 676 million, an increase of 132% from last year and 100% from 2 years ago. The United States accounted for 45% of net revenues in fiscal 2022.

Our e-commerce business net revenues grew to $564 million, an increase of 33% from last year and 150% from 2 years ago. E-commerce accounted for 38% of net revenues for the full fiscal 2022. Our retail business net revenue grew to $930 million, an increase of 116% from last year and 23% from 2 years ago. Driving this exceptional performance is our continued investment in our sales channels. In Q4, we focused on sustaining our e-commerce growth by elevating our everyday luxury experience digitally. We enhanced aritzia.com with new and improved features and functionalities across personalization and product discovery. In retail, our business continued to exceed our highest expectations across all geographies, particularly in the United States, where we opened 7 new boutiques this past year, most recently, Tysons in Virginia and Easton Town Center in Columbus, Ohio.

Turning to product. In Q4 we launched our spring collection to an outstanding client response. Despite experiencing continued production challenges and logistic delays resulting in inventory pressures over the quarter, our use of strategic inventory management and expedited freight allowed us to somewhat mitigate the impact to our selection. Additionally, we were able to offset both revenue and margin pressure without raising our prices as we continue to grow our full-price selling business.

In marketing, we continue to reach new and loyal clients through our captivated communications. This quarter, we delivered brand, feature and trend-inspired campaigns that translated seamlessly across all our channels. In short, I'm proud of what our entire team accomplished as we closed yet another challenging yet successful quarter and year while we deliver everyday luxury to significantly more clients than ever before. I will now turn the call over to Jennifer to give you an update on some of the key areas of our business.

[Jennifer Wong, executive]

Thanks, Brian, and good afternoon, everyone. Just as Brian mentioned earlier in the call, I am also incredibly proud of our team's unwavering dedication and ability to adapt and successfully deliver results that continue to propel us forward at a phenomenal pace. I'd like to give a shout out to the Aritzia frontline team who kept us fully operational during the holiday season despite the impact caused by the Omicron variant. There was 1 day during one of the busiest weeks of our entire year where we had 1,200 people unable to work due to illness or exposure. The teams responded immediately, pivoted and maneuvered to ensure continuity in our operations, preventing us from having to close a single store during our busiest period, unlike many of our peers. Kudos to the team for ensuring the last quarter was successful.

We continue to make considerable progress on our long-term strategies. Today, I will provide an update on the 4 areas of focus within operations this quarter. First, our supply chain and distribution center; second, our infrastructure investments in data and analytics; third, the integration of Reigning Champ; and fourth, our continued commitment to our communities. Our products and supply chain teams did a phenomenal job to fuel the surging demand throughout the fiscal year and especially in this quarter. They have been managing the situation exceptionally well, and we have worked hard to maximize the availability of our product, which is reflected in our sales results. However, it has been difficult and will continue to affect time lines and will require us to continue using expedited freight.

We have been asked about the recent roving lockdowns in China, and I can confirm they have not materially impacted our production. That said, the local trucking services has, and this has added more pressure to our freight time lines. We have been building our inventory and are confident we are on track to be well-positioned through the fall season.

In the distribution centers, the strength of our teams and the network itself have unequivocally bolstered our outstanding results. We continue to invest in this critical infrastructure to ensure we have the network to support our ongoing growth. Last month, I had the opportunity to spend some time with the landlord developing our new facility.

I am pleased to report that our new Toronto-area DC is on track for completion in the spring of 2023. This is now our largest infrastructure investment to date and is a clear indicator of our continued success and growth. The new 550,000 square foot DC will replace our existing 150,000 square foot facility. The site also affords us the option to build out an additional 200,000 square feet in the future. The facility is designed to support several years of growth and will service retail and e-commerce for Eastern Canada and will fulfill e-commerce orders for the Eastern United States. In the coming months, we will be hiring hundreds of positions to support the new DC, which will feature world-class amenities, including a fitness facility and our signature [ A-Ok Commissary ].

With our current growth trajectory, we also anticipate expanding our distribution footprint on the West Coast over the next 2 years. Data and analytics have always played a critical role in our decision-making. And over the last year, we have significantly invested in our data and analytics infrastructure and more than doubled the size of our team. This increased depth of talent has resulted in continued progress in several key areas in the business, including client, sales and concierge. Our client dashboard provides us with timely insights into the drivers of our business performance as it relates to the client. We had previously shared that our omniclients spend and shop approximately 3x more than clients who shop exclusively in one channel. Insights like this inform the strategies used to maintain our accelerated client growth and increased client loyalty.

Our detailed sales analytics provides us with a 360-degree view of our clients and their shopping behaviors. For example, we are tracking when a client checks an item's availability online and subsequently purchase the item in a boutique. With this data, we can adapt our strategies to enhance client experience across all channels and increase client transaction frequency and conversion. We conducted an overhaul of our concierge reporting and created dashboards that have increased the efficiency of our operations. The reporting allows us to optimize concierge staffing and scheduling to deliver our world-class everyday luxury service. In turn, this deepens our client loyalty while maximizing client value.

We continue to move forward with our integration of Reigning Champ. We are working with the Reigning Champ team to formalize both the product and the marketing strategies to accelerate brand growth as we scale the business. From an operations standpoint, we are working diligently to award a seamless integration of our back-office infrastructure. We look forward to including further details about our men's product expansion through Reigning Champ when we share our long-range strategic plan in the fall.

To deliver everyday luxury for today and tomorrow, we continue to strengthen our environmental and social efforts that amplify the positive impact we're making across our value chain. Over the last several years, we have used the Higg Facility Environmental Module to measure the environmental performance of finished goods facilities and strategic fabric suppliers. We have also increased the assortment of our products that respect the boundaries of our planet. As of this season, 63% of our products are now made with more sustainable attributes and fabrics, up from 40% in 2021.

And last but not least, we have developed a new program that expands our social impact audits. And over the next year, we will include Tier 2 fabric and trims facilities into our supplier monitoring program. Finally, we were incredibly proud to continue our support of women and girls through our International Women's Day campaign this year. We collaborated with artist Lea Colombo to create a limited edition collection. All proceeds were donated to UN Women to help women of Ukraine find peace and security during the ongoing humanitarian crisis. These remain incredibly difficult times for many and our thoughts are with everyone impacted.

It has been an absolutely exceptional year. Every earnings call, I commend our team for their outstanding contributions to our business performance, and this call is certainly no different. It has been a historic year for Aritzia in so many ways, experiencing challenges and growth in ways we have not experienced before. As our business continues to accelerate beyond our own high expectations, I am deeply grateful for the support of our people. It is their dedication to excellence year-over-year and particularly this year that enables us to continue to grow at such a phenomenal pace.

I'll now turn the call over to Todd to discuss our financial results.

[Todd Ingledew, executive]

Thanks, Jennifer, and good afternoon, everyone. We delivered another quarter of exceptional results, even exceeding our own high expectations. We generated net revenue of $444 million, an increase of 66% from last year and 61% from 2 years ago. This outstanding growth was the result of several factors. First, we continue to see unprecedented growth in the United States with net revenue in USD of USD 170 million in the quarter, growing 109% versus last year and 136% versus 2 years ago.

Our business in the United States comprised 49% of net revenue, up significantly from 39% in the fourth quarter last year. The sustained momentum in our U.S. business is reflective of the significant acceleration in our U.S. client base, which has more than doubled in the last 12 months as more clients discover and become loyal to the Aritzia brand. Second, our e-commerce business remains robust and delivered another strong quarter with net revenue of $182 million, an increase of 21% on top of 81% last year. E-commerce penetration increased to 41% from 30% in the fourth quarter 2 years ago.

Third, retail revenue in the fourth quarter was $262 million, an increase of 123%. This growth was driven by comparable store sales and new boutiques in the United States as well as the recovery to pre-pandemic levels in Canada despite restrictions from Omnicom wave during our peak holiday selling period. We delivered gross profit of $180 million, up 74% from the fourth quarter last year. Gross profit margin was 40.4% in the quarter, expanding 190 basis points from 38.5% last year. This improvement was achieved even with approximately 400 basis points of erosion from the use of expedited freight in the quarter. When compared to fiscal 2020, our gross profit margin expanded 310 basis points. This was the result of lower markdowns, leverage on occupancy costs and the strengthening of the Canadian dollar, also partially offset by the impact from the higher expedited freight.

SG&A expenses in the quarter were $120 million or 27.1% of net revenue compared to 27% last year. This reflects ongoing investments in talent and technology to fuel our growth. Overall, adjusted EBITDA in the fourth quarter was $66 million, an increase of 88% from last year and [indiscernible] from 2 years ago. The outstanding performance in the fourth quarter capped off a record year of both top- and bottom-line results. The momentum in our business reflects both growing brand awareness and affinity for Aritzia in the United States and the strength in our e-commerce channel. What makes the results for the year so remarkable is that they were accomplished in spite of ongoing impacts from pandemic-related restrictions and closures as well as escalating global supply chain disruptions throughout the year.

For the full year, net revenue was $1.5 billion, an increase of 74% from last year and 52% from 2 years ago. This remarkable growth was led by an unprecedented 144% acceleration of sales in the United States, with Canada delivering 45% increase in sales compared to last year. Our e-commerce business delivered revenue growth of 33% on top of an 88% increase last year. And e-commerce now comprises 38% of net revenue, up from 23% in fiscal 2020, prepandemic. We delivered gross profit of $655 million, up 110% from last year. Gross profit margin was 43.8%, expanding 730 basis points from 36.5% last year and 270 basis points from 41.1% in fiscal 2020. These improvements were in spite of approximately 250 basis points of erosion from the use of expedited freight in the year.

SG&A expenses were $393 million or 26.3% of net revenue compared to 29.2% last year. The 290 basis point improvement was primarily driven by leverage from increased revenue. Adjusted EBITDA was $289 million, up 277% compared to $77 million last year and up 68% compared to $173 million in fiscal 2020. Adjusted EBITDA was 19.4% of net revenue, expanding from 9% last year and 17.6% 2 years ago. The expansion in adjusted EBITDA margin is a testament to the strength of our business and our ability to drive a profitable growth in spite of significant macro headwinds.

At the end of the fiscal year, inventory was $208 million, up 21% from last year. Our team has done an incredible job of managing our inventory to deliver our revenue growth in light of the global supply chain disruptions. As Jennifer noted, we continue to build our inventory position and are confident we are on track to have the product to meet demand through the fall. We ended the year with a cash balance of $265 million, a 78% increase compared to $149 million last year. During the year, we repaid our $75 million term loan and funded the $33 million initial payment for the CYC acquisition. We continue to generate significant cash flow and have a strong balance sheet.

Since the implementation of our NCIB on January 12 and through the end of the fourth quarter, we repurchased 164,000 shares, returning $9 million to shareholders. We plan to continue purchasing shares opportunistically throughout fiscal 2023 to offset the dilution of option exercises.

Turning to our outlook, the momentum in our business has continued into the first quarter of fiscal 2023. As such, we expect net revenue for the first quarter to be approximately $375 million, representing just over a 50% increase compared to last year. This reflects continued strength in the United States in both retail and e-commerce, as well as a strong recovery of our business in Canada. Please note that 50% of our Canadian boutiques were closed for approximately 2/3 of the first quarter last year. For the full year, we expect net revenue to be approximately $1.8 billion, representing growth of approximately 20% from fiscal 2022. We plan to open 8 to 10 boutiques with all but one in the United States and to expand or reposition 4 to 5 boutiques.

We expect gross profit margins to decline by approximately 100 basis points compared to last year, reflecting ongoing impacts from global supply chain disruptions, inflationary pressure and discontinued COVID relief subsidies. SG&A as a percent of net revenue is expected to increase approximately 50 to 100 basis points compared to last year, reflecting continued investments in talent and technology to fuel our future growth. We expect capital expenditures in the range of $110 million to $120 million, comprised primarily of new and repositioned boutiques, our new distribution center in the Toronto area and the expansion of our support office.

In summary, our consistent growth reflects the strength of our business model and our proven ability to execute across the organization. We still have a long runway in front of us, and we continue to leverage our strong balance sheet to make strategic investments that will support continued growth in our business. We are confident we are well-positioned to maximize on the opportunities ahead and to drive profitable growth and deliver meaningful shareholder value.

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

[Brian Hill, executive]

Thanks, Todd. We are incredibly pleased with our Q4 and year-end results, but even more excited for the road ahead. As we are now well into Q1 of fiscal 2023, we are seeing the strong momentum we generated in fiscal 2022 continue across all geographies and all channels, continuing to be led by the United States and focus on sustaining our accelerated growth. And as Todd mentioned, we are on track to deliver net revenue of $375 million in the first quarter, representing a 50% increase from last year.

We kicked off the 2023 fiscal year by continuing to deliver on our exciting new growth-driving initiatives. Of particular note, we launched our first-ever swim collection and deepened our presence in the United States through new boutique openings in Las Vegas and Miami both so far surpassing our expectations. We are continuing to capitalize on the extraordinary opportunities we see in the United States, and I'm excited to announce that we recently signed our next global flagship on Fifth Avenue in Manhattan. Although we remain cautiously optimistic as we continue to monitor and navigate persistent global pressures, we could not be more excited for the future. Today, we are better-positioned than ever to capitalize on this extraordinary growth opportunities being presented to us as we continue to deliver everyday luxury experiences for our new and loyal clients.

Whenever we look to the future, I'd like to reflect on what we started and how far we've come. In my 38 years with Aritzia, I've not only gained valuable perspective on our business, but more so an incredible appreciation for our people and the contributions each of them have made to our tremendous success, no one more so than Jennifer Wong. Without her, we would not be in the enviable position we are in today.

Jennifer and I began our partnership 35 years ago. She knows our business inside and out. Over those 35 years, Jennifer has run most all departments within the organization. She has been instrumental to our accelerated growth and have delivered many of the milestones that we have shared with you on these calls over the years. Jennifer's unparalleled leadership style and dedication to excellence exemplifies our values, which she had was integral in developing and deeply resonates and inspires our people. That is why I'm thrilled to announce that Jennifer Wong will be taking over as our next CEO. There is no better time and no one better to lead Aritzia. With her long-term lasting approach to strategic growth, Jennifer is perfect for leading us into the future. This transition will be seamless as Jennifer has taken on more and more CEO responsibilities over the years. Today, we simply recognize her for all the incredible work she has already done and know she will continue to do.

With Jennifer stepping into the role of CEO, I will become our Executive Chair. I will continue to contribute to Aritzia's long-term growth and maintain my full-time leadership role in the areas where I bring the most value: product, marketing, real estate development and business development. I'm just as dedicated to and passionate about Aritzia as I was 38 years ago, and I could not be more excited to continue to participate in driving our growth and supporting Jennifer and our team into the future. Everyone, please join me in congratulating Jennifer and our exciting future ahead. Thank you.

[Jennifer Wong, executive]

Brian, a heartfelt thank you. I am truly honored to lead Aritzia and our people into the future with you and our senior leadership team. I am looking forward to building on the foundation of an extraordinary business we have built over decades. And I want everyone on the call to know that for 35 years, I have had the privilege of working alongside Brian. I have seen firsthand his commitment to Aritzia's values, our people, clients and the communities we serve. I would like to thank our dedicated team who have been pivotal to our success, and our Board who have diligently laid the foundation for a seamless transition. And of course, thank you to Brian for his ongoing mentorship and trust. I am excited to continue advancing Aritzia's business and delivering on the incredible growth opportunities we see ahead.

Thank you, everyone, for joining the call this afternoon. I will now turn the call over to the operator to take questions.

[Operator]

[Operator Instructions] The first question is from Lorraine Hutchinson from Bank of America.

[Jingyuan Xiao, analyst]

This is Alice Xiao on for Lorraine. Our first question is for Jennifer. What aspects of the business are you most excited about for this upcoming fiscal '23? And what challenges do you anticipate to navigate? And secondly, a quick one on e-commerce. Do you have a long-term penetration target? And how soon do you see normalization to it? And is there a difference in the e-commerce penetration in the U.S. versus in Canada?

[Jennifer Wong, executive]

Okay. All right. Let me see if I can start at the top. Well, first of all, I have a fantastic portfolio as it is in what we call business support, a fantastic team there who have done an incredible job executing on our operations as our results can attest to. And certainly I'll just echo what Brian has said as well as what Todd has said about the future, and I'm most excited about e-commerce growth and in particular our USA growth in both retail and e-commerce. And so I look forward to working with the team and continuing to grow in those areas. And I can't remember your last question, but -- I can't remember your last question. Penetration.

[Brian Hill, executive]

I can take that. Yes, we haven't provided a specific e-commerce penetration target. But I think over time we expect that it will likely become over 50% of our business. And that's over multiple years. But we were 23% prepandemic, 50% penetration during the pandemic. And then this last year we were at 38% in an environment where we had most of our stores opened. There we still had a period in Canada where our stores were closed at the beginning of the year. So we likely expect that we'll be in that range again for this year in the high 30s. But over time, as we look at our long-range plan, we expect to grow to, e-commerce to grow to over 50% of our business.

[Operator]

The next question is from Mark Petrie from CIBC.

[Mark Petrie, analyst]

First, congratulations, Jennifer, on being the new CEO. It's clearly extraordinarily well-deserved and wish you all the best. I guess my first question is just with regards to the guidance on the revenue growth. And the implication for sort of Q2 to Q4 is kind of mid-teens revenue growth. And obviously not trying to minimize that as an accomplishment, but clearly a deceleration from your recent momentum and even what you were doing prepandemic. I know you take a conservative approach to guidance, but maybe can you give us some context about your assumptions to get to that number?

[Brian Hill, executive]

Thanks, Mark. I mean, first off, obviously, we're extremely pleased with the momentum that we've seen in the first 2 months of the year and what we're expecting for Q1. But as I noted in my prepared remarks, we did have 50% of our Canadian stores closed for 2/3 of the quarter in Q1 of last year. So obviously we're lapping that currently. And if you look back over last year, the compare in Q2, Q3 and Q4 is obviously tougher once all of our stores were open. And so therefore, we just decided that it was prudent to take a conservative approach to our guidance. And we'd be extremely pleased to deliver $1.8 billion of revenue on top of the 74% growth, getting us to $1.5 billion last year.

[Mark Petrie, analyst]

Okay. Understood. And then, I guess, maybe just a higher-level question with regards to store economics. I know this has been an evolving topic, but wondering if you could just talk specifically about how the U.S. store economics have changed sort of and what they're looking like kind of coming out of the pandemic. Maybe some historical context would be helpful. But where is that sitting today in terms of costs, what you're seeing with regards to TIs and then ramp up and payback?

[Brian Hill, executive]

I'll take that. So what we're seeing is, on one side we're getting it's costing more to build our stores in the United States. And I think building, as you know, building costs have increased everywhere in every sector right across North America and from what I understand more or less the world. So we're not immune to that, so it's costing more money. On the other hand, our sales are higher than they -- meaningfully higher than they were when we were opening stores 2, 3, 4, 5 years ago. Our rent because of the COVID and then also with some sort of adjustments happening with retail prior to COVID, rents are less than they used to be.

And then the third thing with our performance and everything, we're getting and seeing a lot of better locations and -- which is certainly helping, and shapes and sizes and everything else, which is certainly helping our real estate rollout. So the net of it always is our paybacks have come back down significantly from where they were when we went public 5 years ago. And so we're super-thrilled, and that's why we're continuing to open new stores and continuing to, quite frankly, make them even bigger. And we announced the store on Fifth Avenue, which I believe is a 35,000 square foot location, which will be our biggest for that -- for the time being. But at the end of the day, the rent is less than the existing stores out there right now. So we're feeling pretty good about what's going on in the paybacks and the opportunities we have to drive our business in a more profitable manner from a retail perspective, particularly in the United States.

[Mark Petrie, analyst]

Okay. And when does that flagship open, Brian…

[Brian Hill, executive]

No, not opening for a few years. We've signed the deal. It's not opening for a few years. It's a big location. It's going to take us probably close to a year to build, whereas our typical store takes us more or less 4 months to build. And New York has lot of permitting and other processes we have to work our way through. We have an existing store on Fifth Avenue, which we're now closing for another 2, 3 years anyway. So we expect 0 loss continuity from sales, but we see a big opportunity to increase our sales, and not just sales but our brand and our brand positioning and recognition. We're so excited about this location there. And I think we have more to come that we'll share with everybody on coming calls, hopefully.

[Operator]

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

[Stephen MacLeod, analyst]

Jennifer, I also wanted to extend huge congrats for your new appointment. My first set of questions was just around Brian, your CEO succession plan. Just curious, can you give a little bit color around your thought process and why now? And then maybe secondly, you did say that you would continue to have leadership of those key areas where you can add value: product marketing, real estate development, business development. Can you just talk, is there potentially a plan to transition those areas as well? Or will you continue to be overseeing those for a number of years or at least some period of time?

[Brian Hill, executive]

Thank you for that. Well, as we mentioned in the call, Jennifer is already running a meaningful amount of the company. And whether it be IT -- in key areas of the company and support divisions and everything that is -- that we build our whole company on. So she's running all the support, whether it be IT, HR, and she can discuss with you what she runs, but IT, HR, finance, everything she runs. What we're doing here is she's taking on the sales channels, which is e-com and retail. We're going to do it in a constructive manner over the next period of time.

And I'm not truthfully planning on working any less at this point in time, and I have no plans to give up real estate product or these other marketing and these other areas in the imminent future. I enjoy doing it. Where I think I add the most value is on all the brand customer-facing departments. And it's what I enjoy the most. And the way I looked at it was some of these other divisions, I think Jennifer can do a better job than I am in running them. And then I can kind of selfishly do what I really like to do and what I think moves the needle for Aritzia where I can move the needle for Aritzia. So I think this is a bit of a no-brainer truthfully. And for now, well, business is good, and we've got a lot of momentum, and Jennifer is ready, and I'm healthy.

And we're going to work together, and there's no sort of knee-jerk or anything here. This will be a transition. And we're going to work together. We partnered for 35 years, and, hopefully, we'll be able to partner for another maybe not 35 years, but for the foreseeable future. So on a personal note, I have 2 kids, and my second child is going off to university. So I'm going to need something to do, and so I'm going to be hanging around here for the foreseeable future.

[Stephen MacLeod, analyst]

Right. Okay. Well, that's great. That's good to hear. And then maybe just with respect to the outlook. On the gross margins, obviously some pressure there with gross margin expected to be down 100 basis points. Just curious what your visibility is into that from where you sit today in terms of potentially being above that level or things that might swing you potentially below that level?

[Todd Ingledew, executive]

Yes. Hi, Steve, we are continuing to spend meaningfully on expedited freight. And so that is not changing from last year. And that's obviously continuing to put pressure on [indiscernible]. And we also have -- just COVID subsidies, for example, that are discontinued now that we benefited from 70 basis points last year, that's not continuing. And there's a lot of puts and takes. And obviously, inflation is impacting our product, our underlying product cost. So when we look at it, given all those pressures, 100 basis points, we feel like we're managing it very well. And I think if you look out longer term, which is important, obviously we will have lower expedited freight at some point next year, hopefully. And we also, as we grow our business in the United States, we have a natural improvement in gross profit that we're benefiting, frankly, from that today in our numbers and that will continue over time. So if you look out longer term, we see sort of sequential growth in our gross profit. But for this coming year, there's still pressures from external environment.

[Operator]

The next question is from Derek Dley from Canaccord.

[Derek Dley, analyst]

And again, I also echo my congratulations to Jennifer on your new appointment. Very, very well-deserved. When we think about inflation, can you just comment on areas, whether it's inflation or disruption where you're sort of seeing the most impact? You've been hearing from a few other companies that have reported that the distribution and trucking side has been a big bottleneck. I think you mentioned it in your prepared remarks. But are there other areas where you're seeing it really flow through?

[Todd Ingledew, executive]

There's some pressure on our product costs. But I would say from an inflation perspective, I hate to keep going back to expedited freight, but it's really, the expedited freight this coming year is going to be at similar or higher levels than last year, not because we're using exactly the same amount, but because it's costing 2 or 3x more even than it did last year. So there's meaningful inflation in that, as you mentioned, in those freight costs. So that's likely the highest impact today. And we're also -- all of the global supply chain disruptions are meaning that we're having to air even our raw materials where we typically would have sent them by sea. And so that's causing inflation for us in what we're spending. And then just -- so I would say we haven't necessarily seen significant inflation in our wages, but there is pressure from higher wages for our support office, higher wages in the field. Those would be the key areas that we're…

[Brian Hill, executive]

Yes. I think that -- yes, I'd echo what Todd is said. I mean we were paying our distribution center people more money, we're paying retail more money. And we want to be the first choice of people and employees when they come, when they want to get in the workforce. And so we have to not only provide an incredible environment, but we have to make sure we're paying uber-competitive wages. The supply chain, we are seeing inflation on raw materials and things, and as Todd mentioned, expedited freight. I mean, it just doesn't end though for us. I mean, the other day, last week, we had -- YKK had a huge fire in one of their factories, one of their main factories. It's completely taken off.

And so we're going to have zipper pulls, not even the zippers, zipper pulls are going to affect over 1 million units of product for us and timing of it. So it just -- it never ceases whether it be the rolling shutdowns of factories or mills, whether it be the freight costs and delays and things like that, and then you're dealing with fires and stuff. It is just, we're just scratching our head looking. We could only laugh as to what else could they throw at us now. So we're just seeing it. And it all manifests itself for delays. And as Todd was saying, then we have to expedite freight, and it's expensive right now.

[Derek Dley, analyst]

Yes. Great. No, I understand that. But from an inventory perspective, looking forward, it sounds like you guys are well bought out through the fall and maybe this is a bit too far in advance. But when do you start purchasing for the holiday sales period. Does that happen now? Or does that happen later in the year?

[Brian Hill, executive]

All those orders are being placed. Particularly, they would have been placed already anyway, but they -- some of them have been placed for quite some time now due to everything taking so much longer. And the only thing that's going to happen with inventory is that what we're going to see is we don't know when we're going to get inventory. Before we get a cut off at the end of September, end of October, and we kind of know, look, if they're late, they're going to be a week late.

We've been getting, sorry, it's going to be 6 weeks late, it's going to be 8 weeks late. And then if you add in the freight and the shipping and everything else, rather than taking 3 weeks by sea, it's going to take 12 weeks by sea. And so there's all these things. So we're having -- the one thing we are going to see is we're having to buy a little bit more inventory than we normally have bought, obviously, to fuel these accelerating sales, but also to ensure that we have the inventory as well because if there's delays and cancellations and all sorts of things like that, we need to make sure we have enough inventory. So we're finding ourselves in a position where we're actually erring on the side of buying a little bit more inventory than we previously have historically.

[Derek Dley, analyst]

Right. And I suppose the plan there is making sure you're fully stocked, and if others aren't, then you don't have to put it on promos, so you can maintain that extra margin.

[Brian Hill, executive]

Yes, hopefully. Yes.

[Operator]

The next question is from Patricia Baker from Scotiabank.

[Patricia Baker, analyst]

My questions have been asked and well answered. But I thought I'd jump on any way to also offer my congratulations to you, Jennifer. I certainly agree with Brian's comments that there's no better person to taking over the CEO role, so congratulations.

[Jennifer Wong, executive]

Thank you, Patricia.

[Operator]

The next question is from Meaghen Annett from TD Securities.

[Meaghen Annett, analyst]

And I'll echo my congratulations to Jennifer on your appointment, wish you continued success. My first question is related to the guidance. Can you just talk about how you're approaching price increases in fiscal '23 and if there's anything factored in that's meaningfully related to price or growth in average unit selling prices and also maybe how you're thinking about markdown rates relative to last year?

[Brian Hill, executive]

Since I'm still running product, I'll take that. So we are seeing cost inflation. Because of our mix into the U.S. though and how our pricing works, we're getting automatic built-in price increases as our product mix becomes more and more in USD versus Canadian dollars. We have the recent acceleration from sort of 25% of our business a couple of years ago to almost 50% of our business now. We found that those price -- the currency mix could offset any price increases we were seeing.

We are now seeing, though, as our business continues to grow, we are seeing different, that acceleration in the U.S., the mixture itself isn't having quite the same effect as when it was doubled. So we are seeing a bit of pressure -- we're seeing pressure on costs, obviously, over and above the expedited freight. And so we've been looking at some of the new items and new programs, but we have still been able to and will continue to try to maintain all our pricing on our core carryover items. So we're going to continue to do that and hopefully not have to pass on any price increases to our consumers. And we are not planning on doing so yet, but that may change in the future. But as of now, we're maintaining our pricing.

[Meaghen Annett, analyst]

And then on the product side, could you talk about the customer response to the swimwear launch? Seems to have been quite positive. And also provide a bit of context around the size of that initial launch. And any plans for that category for upcoming seasons?

[Brian Hill, executive]

Yes. So we had our swimwear launch. It launched very well. But in the scheme of the size of our business, it's not moving the needle and will not move the needle for us in the short term. So we launched the Babaton collection. We're in the midst of launching a TNA collection. We're going to be launching a Wilfred collection, swim collection. The first orders and launches were tests, for testing, making sure we have the right silhouette, the right sizes, the right fit, the right colors. So everything we do at Aritzia, we do it slowly and methodically, and we're going to continue to, I wouldn't say slowly, but we certainly do it methodically. So Swim is no different. So our objective is to have Swim a meaningful part of our business 3 to 5 years from now, and we're not going to force it to try to make it move the needle for us in the next 6 to 12 months. As you can see from our sales going from $850 million to $1.5 billion, which we did without Swim, that was plenty of growth for us to try and manage. And so we're just going to continue driving what's actually moving the needle for us.

[Operator]

The next question is from Mark Petrie from CIBC.

[Mark Petrie, analyst]

Yes. I wanted to ask about the website. I know there's a ton of effort and investment placed on the functionality of the website. And I'm hoping you could just talk a little bit about sort of the payoff of that work. I know you don't give specifics, but maybe some context on some of the performance metrics would be helpful.

[Brian Hill, executive]

So I'll take this for the last time, and Jen is going to be running, answering these questions, Mark, so. I can't really get into the performance metrics too much other than the fact that they haven't really changed. Our conversion hasn't changed. Our average purchase hasn't changed. None of these things have changed that much. What has changed is our traffic. Our traffic has changed meaningfully. And so we're getting a lot more traffic as we're becoming more and more famous.

And so that has changed. But Jennifer has a whole strategy, she's been working on, and she hasn't sort of launched it yet, but a whole strategy around e-commerce and what we're planning on doing in a roadmap for the next 3 years. So she's going to be sharing that with us over the coming months. And we're looking forward to seeing our website and all the different features evolve. But our website and our e-commerce business continues to grow, and we're super-excited about it, and we'll continue to grow for the coming years. And so we're just going to keep on investing in it. It's a high-returning channel for us, particularly in the U.S. And so we're going to continue to drive investment into our e-commerce site.

[Operator]

This concludes the question-and-answer session. I'd like to turn the call back over to Carly Bishop for closing comments.

[Carly Bishop, executive]

Thank you, Sachi, and thanks again to everyone for joining us this afternoon. We will be available after the call to answer any questions you may have. We look forward to speaking with you again soon.

[Operator]

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