Aritzia Inc

TSX:ATZ

Earnings Call Transcript 2024-Q4

[Operator]

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

[Beth Reed, executive]

Good afternoon, and thanks for joining Aritzia's fourth quarter fiscal 2024 earnings call. On the call today, I'm joined by Jennifer Wong, our Chief Executive Officer; and Todd Ingledew, our Chief Financial Officer.As a reminder, please note that remarks on this call may include our expectations, future plans, and intentions, that may constitute forward-looking information. Such forward-looking information is based on estimates and assumptions made by management regarding, among other things, general economic and geopolitical conditions as well as the competitive environment. Actual results may differ materially from the conclusions, forecasts, or projections expressed by the forward-looking information.We would refer you to our most recently filed management's discussion and analysis in our annual information form, which include a summary of the materials assumptions as well as risks and factors that could affect our future performance and our ability to deliver on the forward-looking information.Our earnings release, the related financial statements, and the MD&A are available on SEDAR Plus as well as the Investor Relations section of our website.I will now turn the call over to Jennifer.

[Jennifer Wong, executive]

Thanks, Beth. Good afternoon, everyone, and thank you for joining us today. For the fourth quarter of fiscal 2024, we delivered net revenue of $682 million, an increase of 7% compared to the fourth quarter of fiscal 2023. This is on top of delivering outstanding revenue growth of 44% in the fourth quarter last year. It's also on top of 66% growth in the fourth quarter of fiscal 2022.All financial metrics discussed today are inclusive of the 53rd week in fiscal 2024, except for comparable sales. Comparable sales declined 3% for the quarter as we cycled a remarkable 32% increase in Q4 last year. In the U.S., our net revenue increased 9% for the quarter, while sales grew 4% in Canada.In our retail [ channel ], net revenue increased in the fourth quarter by 15%. This was driven by the progress we've made on our real estate expansion strategy. During the quarter, we opened 3 new boutiques, Indianapolis, Indiana, Corte Madera, California, and Roseville, California. We also opened a newly repositioned location in Skokie, Illinois. Thus far in Q1, we've completed the reposition of our Oak Brook, Illinois boutique. We also opened a Reigning Champ pop-up at Yorkdale in Toronto.Finally, we plan to open a new boutique in Boca Raton later this month, our fourth boutique in the state of Florida. This is significant because boutique openings have been our most consistent, predictable driver of top-line growth.The performance of our new boutiques remains strong, beyond our expectations. The cohort of 6 new boutique openings in fiscal 2024 is tracking to pay back in under 12 months. This beats our own projections of 12 to 18 months. But it's not just the new boutiques that are performing very well and driving our top line growth. Our boutique repositions are delivering as well. Repositions elevate the customer experience and drive increased revenue and profitability.From fiscal 2022 to 2024, we completed 6 repositions in the U.S. Collectively, we more than doubled the square footage of these boutiques and drove an even higher increase in sales. This resulted in a mid-single digit lift in sales per square foot.Turning to e-commerce, net revenue decreased by 3% in the fourth quarter. This was driven by a lower volume of markdown sales compared to the fourth quarter last year. The tremendous opportunity we see in e-commerce is far greater than our recent performance. But we also recognize we're coming off 3 years of unprecedented growth, delivering 4-year e-commerce net revenue CAGR of 34%. We're confident that as we continue to optimize the composition of our product, trends will reaccelerate.In addition to optimizing our product, we're focusing on 3 areas to further support growth in e-commerce. One, we're investing in digital performance marketing. This will help amplify our product franchises, grow brand awareness in the U. S. and drive customer engagement.Two, we're making good progress on upgrading the technology that underpins our e-commerce platform. We have bold creative plans for delivering an outstanding customer experience on aritzia.com. This latest technology will allow us to reach these goals.And three, we're optimizing our omni capabilities. As a reminder, in Q3 in Canada, we completed the rollout of buy online, ship from store and continued piloting buy online, pick up in store.In Q4, we launched omnichannel capabilities in the U. S. Early results are encouraging and we look forward to ramping up buy online, pick up in store to more than 100 boutiques this quarter. Omnichannel services optimize our inventory and lower our distribution costs. In addition, we believe omnichannel will ultimately drive incremental low to mid-single digit e-commerce sales growth.Turning now to product. One of our primary goals continues to be improving the composition of our product, both online and in our boutiques and that's exactly what we're doing. We've achieved a much better balance of newness and client favorites and our composition has continued to improve in Q1. Furthermore, our new styles have been well received, which is a positive indicator for future seasons.We're pleased with the progress we made on our inventory position. We successfully cleared through our fall-winter inventory ending Q4 with inventory down 27% compared to last year.In March, we launched Golden. Golden is an expansion of the athletic assortment we offered under our TNA brand and allows us to address even more of our clients' activewear needs. Golden is designed for the athletes who love all things refined. It features luxuriously crafted essentials made with high performing fabrics and next level details. This represents beauty and sport, something we call the aesthetics of athletics.In marketing, our spring Sweatfleece campaign featured international supermodel and ongoing brand fan, Irina Shayk, establishing cultural relevance and fastened credibility. Alongside the campaign, more than 100 aspirational influencers highlighted the stunning versatility of Sweatfleece by showing their audience how they were #spottedinsweatfleece.We also continued growing our community of celebrity fans, including Blake Lively in Babaton at the Super Bowl and Meghan Markle in the Super Puff.In addition to propelling brand awareness and driving client engagement, we also see a tremendous opportunity in marketing to amplify our product franchises. Over the last 40 years, Aritzia has become the creator and purveyor of everyday luxury. Our clients know and love the Aritzia brand, which has inspired us to offer more of our sales under the Aritzia name. This enables us to focus and augment the brand as we continue to increase awareness, particularly in the U. S.Of course, our multi brand strategy is one of our key competitive advantages. So we will continue to create, design and evolve our collection of exclusive brands that cater to the lifestyles of our clients.During the quarter, we continued to optimize our distribution network. The ramp up of our new Ontario distribution center has gone extremely well. Productivity KPIs continue to beat our expectations. Pick and pass metrics have increased by more than 70% compared to the prior third-party facility. E-commerce fixed specifically has increased by more than 90%. Per unit labor costs are down meaningfully and we have now exited all of our temporary off-site facilities resulting in a significant reduction in our inventory management costs.Now, I'll turn the call over to Todd.

[Todd Ingledew, executive]

Thanks, Jennifer, and good afternoon, everyone. Before I begin, note that all financial metrics discussed today are inclusive of the 53rd week, except for comparable sales.I'll now take you through the results. Net revenue for the fourth quarter was in line with our outlook and as expected we delivered further margin improvement, continued to optimize our inventory and completed and progressed multiple infrastructure projects to support our future growth.In the fourth quarter, we generated net revenue of $682 million representing an increase of 7% from last year. This increase is on top of 2 years of extraordinary growth in the fourth quarter, 44% in fiscal 2023 and 66% in fiscal 2022, resulting in a 3-year CAGR of 37%. As expected, we saw an approximate $32 million benefit from the 53rd week.Following a remarkable increase of 32% last year, our comparable sales for the quarter declined 3%. Due to our improved inventory position, our comparable sales performance was impacted by a lower volume of markdown sales in the fourth quarter compared to last year.Net revenue in the United States increased 9% to $369 million, on top of an increase in the fourth quarter last year of 56% and 109% in fiscal 2022.In Canada, net revenue increased 4% to $313 million, on top of an increase of 32% in fiscal 2023 and 39% in fiscal 2022. Comparable sales results were similar across geographies, as we saw consistent shopping behavior on both sides of the border.Net revenue in our retail channel was $416 million, an increase of 15% from the fourth quarter last year. This was driven by the performance of our new and repositioned boutiques, which continue to generate better than expected payback periods. Comparable sales growth in our boutiques was positive.In e-commerce, net revenue for the quarter was $266 million, a decrease of 3% from last year. E-commerce was impacted more heavily by the lower volume of markdown sales.We delivered gross profit of $261 million, an increase of 8% compared to the fourth quarter last year. As expected, gross profit margin reflected positively, increasing 30 basis points to 38.3% from 38% last year. The increase was primarily driven by select pricing adjustments and lower warehousing and distribution costs, partially offset by inflation and product costs and preopening lease amortization for flagship boutiques.SG&A expenses for the quarter were $197 million, up 15% from last year. SG&A as a percent of net revenue was slightly better than our expectations, up 200 basis points to 28.9% compared to 26.9% last year. This was driven by investments in talent made through the end of fiscal 2023 as well as digital marketing initiatives to protect and propel our brand and technology to enhance our e-commerce platform.Adjusted EBITDA in the fourth quarter was $73 million, a decrease of 9% from last year. Adjusted EBITDA was 10.6% of net revenue compared to 12.4% last year, representing further sequential improvement.At the end of the fourth quarter, inventory was $340 million, down 27% from the end of the fourth quarter last year. We are pleased with our improved inventory position and continue to optimize the composition.During the fourth quarter, we generated $23 million in free cash flow and ended the quarter with $163 million in cash and 0 drawn on our $300 million revolving credit facility. We remain focused on maintaining a strong balance sheet and expect to see meaningful free cash flow generation starting in the back half of fiscal 2025 as we finish our major capital projects.I will now shift to our outlook for the first quarter and fiscal year 2025. Based on quarter-to-date trends, net revenue in the first quarter of fiscal 2025 and is expected to be in the range of $475 million to $495 million, representing an increase of 3% to 7% compared to the first quarter last year.We expect gross profit margin in the first quarter to increase by approximately 450 basis points compared to the first quarter of fiscal 2024. Driven by IMU improvements, lower warehousing costs, lower markdowns and savings from our smart spending initiative.We forecast SG&A as a percent of net revenue to increase by approximately 250 basis points in the first quarter, driven by investments in digital marketing and technology initiatives.For the full year, we currently expect net revenue in the range of $2.52 billion to $2.62 billion. This outlook represents growth for the year of 8% to 12% from fiscal 2024. Excluding the 53rd week in fiscal 2024, this represents growth of 10% to 14%.Our fiscal 2025 net revenue outlook reflects the anticipated cadence of our boutique openings and accommodates for a range of macroeconomic scenarios.In fiscal 2025, we plan to open 11 to 13 new boutiques, including our Chicago flagship, and to reposition 3 to 4 boutiques, including 2 of our Manhattan flagships. Other than 1 new boutique and 1 reposition in Canada, all openings and repositions are in the United States.We anticipate total square footage growth of approximately 20% to 25%. I can't emphasize enough that our new stores are our most consistent growth driver, delivering predictable revenue growth and attractive payback periods. In addition to building brand awareness, driving significant client acquisition and fueling e-commerce sales.We forecast meaningful gross profit margin expansion for the year, an increase of approximately 400 to 450 basis points compared to last year. This reflects IMU improvements, lower warehousing costs, lower markdowns and savings from our smart spending initiative.SG&A as a percent of net revenue is expected to be approximately flat to down 50 basis points compared to fiscal 2024, driven by savings from our smart spending initiative and leverage on fixed costs offset by investments in digital marketing.Further, we expect depreciation and amortization of approximately $80 million compared to $65 million in fiscal 2024. We expect our adjusted EBITDA margin to expand by approximately 400 to 500 basis points, reflecting the leverage across the range of potential net revenue outcomes. The expansion is primarily driven by improvements in gross margin.We expect capital expenditures for fiscal 2025 of approximately $230 million. This includes approximately $190 million related to investments in new and repositioned boutiques for fiscal 2025 and the start of construction for boutiques opening in early fiscal 2026. We continue to see our most recent new boutiques tracking to pay back in approximately 1 year or less, exceeding our projections for 12 to 18 months.Our CapEx spend also includes approximately $40 million, primarily related to the expansion of our distribution center network. This includes a portion of the cost for our new facility in the Vancouver area, which is planned to open in fiscal 2026, and investments in our expanded distribution center in Columbus, Ohio.Throughout fiscal 2025, we plan to use our NCIB to purchase shares opportunistically to offset the dilution of option exercises. We anticipate that our buying this fiscal year will be concentrated during open trading windows.In closing, we expect sales growth to increase this year, driven by an improvement in the composition of our inventory, total square footage growth of 20% to 25% and momentum in e-commerce. In addition, we expect meaningful gross profit margin expansion for the year and modest improvements in SG&A leverage. For the fiscal year, the combination of the revenue acceleration and margin expansion will nearly double our earnings.With that, I'll now turn the call back to Jennifer.

[Jennifer Wong, executive]

Thanks, Todd. After 2 years of exceptional growth in our business, 74% in fiscal 2022 and 47% in fiscal 2023. Fiscal 2024 was a year of building infrastructure and rightsizing our inventory while continuing to service our clients. Following our unprecedented growth, it was absolutely critical that we right size our infrastructure and optimize our operations.We made substantial progress in 5 key areas. We expanded our distribution center network to accommodate record volume, including the addition of our new 550,000 square foot facility in Ontario. We improved our inventory position, including the composition of our product and enhanced our proven operating model which has served us well for decades.We executed on our smart spending initiative, resulting in annualized run rate savings of more than $60 million. We developed a pipeline of boutique openings in premier locations, including 4 brand propelling flagship projects. And last but not least, we kicked off the process of integrating our digital channel from driving traffic through to optimizing our omnichannel services.Our focus on investing in the scalability of our business throughout this past year set the stage for our next phase of expected growth, helping to ensure we can expand at a consistent, measured pace moving forward.Q1 is off to a good start and we're pleased with our clients response to our product. We expect the composition of our product to continue to improve throughout the quarter and be further optimized for fall.The performance of our new boutiques continues to beat our own expectations. We have an extraordinary pipeline of boutiques opening this year representing total square footage growth of 20% to 25% with the vast majority in the U.S. The increased pace of openings is expected to fuel retail sales growth and drive incremental e-commerce sales, as we expand into 5 new markets.In e-commerce, we believe our revenue growth will reaccelerate as we continue to optimize the composition of our product. And additionally, our strategic focus on digital marketing, technology, and omnichannel further supports growth in our digital business.In closing, our brand is strong, our financial position is solid, and we have a tremendous multi-year runway for growth in the U.S. To all of our people, thank you for your hard work and unwavering commitment to Aritzia's future, particularly throughout the last year. During that time, we solidified our platform for the next phase of growth. I'm very optimistic about all of the opportunities on deck for fiscal 2025 and beyond as we continue to plan and bring everyday luxury to more and more clients than ever before. Thank you.

[Beth Reed, executive]

All right, and with that, we're ready to open up the line for Q&A.

[Operator]

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

[Mark Petrie, analyst]

Yes. Maybe just first on the SG&A guide. Can you just help sort of bridge the pieces there? I recall 150 to 200 basis points of cost efficiencies from the smart spend initiatives and the majority of that in SG&A. So could you just talk about, what other pieces are going on in SG&A?

[Todd Ingledew, executive]

Yes, absolutely, Mark. And it was approximately 60% of the benefits we were expecting from the smart spending to hit in SG&A. So as a reminder for the full year, we're expecting to be flat to down 50 basis points. So an improvement of 50 basis points. And that's driven by, as you're suggesting, the spend management initiatives which are offset by investments in the digital marketing. So effectively that's why you're seeing pressure in the first quarter. And then we're expecting that to improve modestly in the second quarter, and then we're expecting expansion in the third and fourth quarter in SG&A as the revenue growth begins to accelerate and we're lapping the improvements. And basically, to further focus on the first quarter, we have digital marketing this year where we didn't in the first quarter last year. And then we have technology initiatives that we made in the back half as well as higher spend in the first quarter this year on projects. So there is -- it's really a cadence thing with pressure in the first quarter that dissipates in the second and then turns to a positive for the third and fourth quarter.

[Mark Petrie, analyst]

And if I could just follow-up then on that digital marketing spend, it has been ramping up. And I'm just curious if you can speak quantitatively or even just qualitatively about the payoffs and the returns that you're seeing from that. And then related, if you're able to quantify the impact of the lesser availability of clear out goods on either comp sales or the e-comm sales specifically.

[Jennifer Wong, executive]

I'll take both of those. I'll take the last one first. To quantify the lower volume of markdown sales in Q4, it's about $15 million. We are especially pleased though because inventory was down 27%. So I think that's the important thing to note here is we're in a better inventory position despite the lower volume of markdown sales.On the performance marketing, I want to ground us all on the fact that we have done 0 performance marketing to date. We've just started up the digital marketing and we believe we need a baseline level if we're going to be a player in the digital space, we need a baseline level of digital marketing. The majority of that is to protect and propel our brand and our product franchises and of course, overall to drive traffic and conversion. We're really only about 6 weeks into it. We just signed on with a digital agency at the beginning of this year. We're wrapping them up. We're taking a crawl, walk, run approach. The early indicators, if you look at it, apples to apples against the industry, is that what we're doing right now, we are focused on the bottom of the funnel, particularly on conversion is we're performing at industry, if not better than industry, when we are compared to many in our peer set. So I find that to be quite encouraging. And we'll continue to monitor and assess it. And as long as it's adding incrementally to our business, we'll continue with it and adjust as necessary.

[Operator]

The next question comes from Dylan Carden with William Blair.

[Dylan Carden, analyst]

Just a point of clarification on the gross margin guide, or I guess, taking a step back, the 500 basis points that you kind of previously spoken to on total EBITDA expansion that kind of embedded the current guide on the sort of 400 to 450. There's no change there, right?

[Todd Ingledew, executive]

Exactly. There's no change. We're still targeting the 500 basis points. Yes, 100%. The range that we provided is simply based on the variance in the fixed cost leverage, right, from the top of the range to the bottom.

[Dylan Carden, analyst]

Well, I guess to that point, can you kind of just sort of mention a range of macro outcomes? Anything you can kind of speak to is where your consumer is at present to get greedy, maybe even by jurisdiction, and kind of what the top and bottom end of the guidance kind of envisions as far as how that trends?

[Jennifer Wong, executive]

Yes, we're impacted the same as a lot of others are observing right now. Our customers impacted by macro challenges that are out of our control. Nothing's really changed quarter-over-quarter. We just see that our consumer is shopping, but when she's shopping, she is discerning with her spend. So this is just showing up in terms of volume overall. But we still have a customer that is shopping with us, and basically our basket size and average order value can continues to be consistent.

[Dylan Carden, analyst]

And then on the digital marketing front, was there a certain virality of the brand that sort of happened organically over the last 2 or so years that you're kind of seeing a lull in before you really start ramping this digital spend? Is that sort of a hole you need to fill? Or is it more that you're sort of going from 0 and there's sort of incremental demand, you think you can drive through that spend?

[Jennifer Wong, executive]

I understand your question. We've grown with no digital marketing included in our overall digital playbook, we've experienced phenomenal growth in e-commerce coming out of COVID, we've spoken a lot about that. I think what's happened coming out of COVID when they're -- everybody was digital is that the space is noisier. It's noisier. There is -- everyone is doing some form of digital marketing and more and more of it. And so, for us to ensure that we remain top of mind and continue to have share of mind and attention of the customer, we are going to participate and have at least a baseline level of digital marketing. And to be clear, it's only a component of our overall e-commerce digital playbook. At the end of the day, the key driver of our business is our product. That we've always said that regardless of both channels, the key driver is our product. So digital marketing, there's a lot of focus on digital marketing because we haven't done it before and we're just introducing it as of late. And as I said 1 minute ago, the early indicators is that it is contributing and it is incrementally positive for us, but it's only a component of our overall playbook. At the end of the day, we see e-commerce will reaccelerate and get back to more of the same level that we saw in our organic growth when our product is optimized.

[Operator]

The next question comes from Luke Hannan with Canaccord Genuity.

[Luke Hannan, analyst]

Jen, you mentioned that you were pretty happy with the rollout of buy online, pick up in store, and ship from store so far in the U.S. I'm just wondering if we can get a little bit more granularity on what, I guess, either quantitatively or qualitatively that you're pleased with. Are you able to convert more, we'll call it more casual clientele into more repeat purchasers of Aritzia product, or just anything else that you can share there would be helpful?

[Jennifer Wong, executive]

Yes. What it's really, underlying all of that, what it's done is it's opened up the availability of our, pretty much our full inventory to the online customer. Whereas before, when the inventory for the online customer was just what was in our distribution centers and we had items that were in the stores, they wouldn't be able to purchase it. So it opens up. So when I say it optimizes our inventory, it opens up so much more availability to that online customer. And then on top of it, she has a choice of picking it up in store, which means she can get it even sooner. And the customer experience is fantastic. And then [ when ] she's in the store, and when a style advisor is assisting her, there's a lift. There can be a lift there, too. So what we love about it, first and foremost, is that it optimizes our inventory, it makes it more efficient. And then ultimately, for those items that are in the stores and not in the distribution center that might not otherwise be in the stores, it lowers our distribution costs at the end of the day. And all is to say that it does add incremental sales to the ecommerce channel.

[Luke Hannan, analyst]

And then my follow-up here is just on the cadence of comparable sales growth for the balance of the year, recognizing that there will be positive contributions from this investment in digital. But then I imagine going up against tougher comps when it comes to markdown sales as we get closer to Q2 and Q3. So I would love to hear your thoughts there.

[Todd Ingledew, executive]

Yes. From a revenue cadence perspective, obviously the growth is more heavily weighted in the back half of the year. And we have -- we're -- as I said, if you exclude the 53rd week, we're expecting 10% to 14% revenue growth for the year. And then within the first quarter, that growth is expected to be 3% to 7%. And that's compared to growth of 13% in Q1 last year. So actually, the compares get easier as we move through the fiscal year. And so therefore, with the combination of our new stores opening in the back half of the year and easier compares and all of the initiatives underway within e-commerce and the product positioning, we expect that we will see sort of revenue acceleration quarter-on-quarter through the year, and that will be both for non-comp and comp.

[Operator]

The next question comes from Martin Landry with Stifel.

[Martin Landry, analyst]

I'd like to talk about a little bit the cadence of EBITDA margin improvement. Todd, you mentioned that you're going to have some SG&A leverage that's going to kick in a little later this year. How is going to be -- can you give us a bit of color on the cadence of the EBITDA margin improvement throughout the year? And what could the exit rate look like?

[Todd Ingledew, executive]

Yes, 100%. So I've already laid out the SG&A cadence with increases again in the back half and pressure in the first half. And so obviously going along with that is the gross margin expansion that we're expecting, which obviously is significant at 400 to 450 basis points of improvement. And the cadence of that that we're expecting is that roughly near the top of that range in Q1 and Q2, and near the lower end of that range in Q3 and Q4. And that's really driven by, or one of the components of benefit we're seeing in gross profit is our distribution center costs. And we were already benefiting in the back half of last year from the opening of our new DC. So we don't expect -- we won't see as much year-over-year benefit in the back part. That's why there's a cadence there. But obviously, in the back half of the year, if you take the 400 basis points, call it at the bottom end of the range for gross profit, plus roughly 100 basis points of leverage in SG&A, which is what we're expecting in the back half. If you model it out, you'll get that exit point of roughly 500 basis points of improvement in the back half of the year.

[Martin Landry, analyst]

And can you just talk a little bit about your aspirational goal of bringing EBITDA margins towards 19%? Is this still a goal that you can -- you think you can achieve in the coming years? And what would be the moving parts to get there?

[Todd Ingledew, executive]

Yes, we're still targeting the high teens EBITDA margin. Obviously, we're taking a meaningful step this year. And then next year, we would expect another jump in our EBITDA margin as we, one, benefit from the revenue from all of the stores that we're adding this year and further leverage from new stores next year. But also, from the rent that will be coming off as we open our new flagship locations. We've talked about the pressure that we're seeing today. So that will drive improvement in FY '26. As well as what we think is a multi-year IMU improvement opportunity will be part of the building blocks. And potentially, lower markdowns as well as we work through FY '26 and '27, both from an IMU and markdown perspective.And then also as we continue to say, as our mix shifts towards the United States and that becomes a larger and larger portion of our business, there's an underlying benefit that will help support margin expansion right away through FY '27 and beyond, frankly.

[Operator]

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

[Irene Nattel, analyst]

Most of my questions have been answered, but just a couple of more housekeeping items. You're very helpful at the Q3 call provided the timing of the new store openings in F '25. I believe in your comments you said that they're largely unchanged, but can you please confirm the quarterly cadence?

[Todd Ingledew, executive]

Yes, of course, Irene. So we're -- right now, we're expecting 1 new boutique and 1 reposition, which is already open in the first quarter. 3 new boutiques in the second quarter. And then 9 new boutiques and 2 repositions which include the Chicago flagship as well as the Soho and Fifth Avenue flagships in the back half of the year. And those should be weighted more towards the end of the third quarter.

[Irene Nattel, analyst]

And then can you give us a little bit more color around, basket composition? And how you're seeing consumers -- your customers shopping? You noted that there's great response to the newness. If you can give us some examples of that. And also, how you feel about newness? And what we should be seeing in the stores as we move really into the heart of spring, summer, says Irene, in the single digits in Montreal still.

[Jennifer Wong, executive]

I'll take the second question first. As I said, we've made great progress in our product composition, and we have a much better balance now. Going into spring, we made tremendous progress. It'll get even better for summer, and we'll largely be where we need to be for fall. So it's the progressive. It's sort of a progressive optimization here.As far as newness is concerned, when you walk into the store and what you see merchandise, I think we're hitting our targets and our goals of having half the store merchandise in newness and the other 50% merchandise in our client favorites. We've never, ever had a problem with fashion. So all of our items, all of the styles, the whole entire assortment are excellent pieces. And it really is just what we're working on right now is getting the right composition between the 2.As far as what we're seeing trending, as I mentioned, Golden was extremely well received, and I personally love Golden. It's amazing. We had a fantastic campaign around it as well. Our Aritzia's Sweatfleece is performing well. Really, as always, we've had items pretty much in every department performing, whether it be shirts, sweaters, pants, even accessories. So we're pleased with getting back on track with our product playbook, and we're seeing the response now early in Q1. And I'm super optimistic, and more than optimistic. I feel very, very confident that this trend will continue as we progress through the year.

[Irene Nattel, analyst]

And then just, just 1 last question, if I might, around Swim. Because on the site, it looks like there's a lot of discounting going on. So just kind of wondering how Swim has performed relative to expectations?

[Jennifer Wong, executive]

Swim? We don't -- we -- did you say Swim?

[Irene Nattel, analyst]

Well, yes.

[Jennifer Wong, executive]

[ indiscernible ] we've continued with -- there's a bit of background noise there. We did not continued with Swim into the collection going into this spring or summer. So I'm not quite sure what you're talking about. As far as discounting goes, I think we've kind of given you commentary in terms of the markdown sales and how that was quite markedly reduced in Q4 of fiscal 2024. So given where our inventory levels are, we're feeling again like we're getting back on track to our more historical levels of at that. I will add that for Q4, despite the lower -- Well, actually, yes, I'll say, for Q4, our markdown levels were although slightly higher than last year, they're still below pre pandemic levels. If that's what you're wondering about.

[Operator]

The next question comes from Brian Morrison with TD Securities.

[Brian Morrison, analyst]

On your comment with respect to the new products, you say that they're having great progress and being well received. You gave examples of Golden and then your Sweatfleece. But I just want to know, like, are the -- are you hitting your sales targets with respect to your new products?

[Jennifer Wong, executive]

Yes, absolutely.

[Brian Morrison, analyst]

And then, Todd, I got cut off on the call a bit, but just in terms of your margin progression, the 500 basis points, the items within your control, whether it be the transitory costs, the smart spend, the IMUs, are there any that are underperforming or outperforming with respect to the results that you've seen so far to date?

[Todd Ingledew, executive]

No. And that's -- we saw the 30 basis point improvement in the fourth quarter, which is what we were anticipating and already can have, obviously, good visibility into the IMU for the first quarter and for spring. The warehousing costs, that has already happened. As I said, the benefits, we're receiving those benefits and we were in the fourth quarter, so we expect to receive them in the first and second. And then obviously the improved markdowns, while there's some benefit in the first quarter because we're lapping some runoff sales and markdown sales last Q1. But that will predominantly be seeing those, obviously, during our sale periods, the benefit of that in the second and the fourth quarter. But no, we're -- we have great visibility into the gross profit margin expansion for the year and are already seeing those benefits today.

[Brian Morrison, analyst]

So in terms of those 4 key buckets, is it fair to say they're all between 125 basis points and 150 basis points, and then there'll be a slight offset with respect to the growth in the rent expense?

[Todd Ingledew, executive]

The IMU, they would go in the order of IMU, then the warehousing and distribution center costs, the lower markdowns, and then spend management. And they kind of, one is slightly bigger than the other.

[Operator]

The next question comes from Michael Glen with Raymond James.

[Michael Glen, analyst]

Maybe just, can you just speak to how we should think about e-commerce sales trending in Q1 on a year-over-year basis?

[Todd Ingledew, executive]

Yes. Our e-commerce sales in the first quarter are trending within that 4% or the 3% to 7% range that we laid out.

[Michael Glen, analyst]

So no -- we shouldn't expect any meaningful variance between retail and e-commerce growth in Q1?

[Todd Ingledew, executive]

I think we would continue to anticipate that the retail growth will be slightly higher than our e-commerce growth driven by the new stores.

[Michael Glen, analyst]

And then when -- I know you've spent a lot of time talking about customer activity when you open new stores. Are you still seeing the same level of customer response when you've opened new stores relative to the past? Or has there been a change? Have you seen any slowdown in terms of the traffic experience when you open new stores?

[Jennifer Wong, executive]

No, we have overwhelming response when we open new stores. I think that's proven in terms of some of the metrics that we shared with you on the call with the opening remarks. When we open a new store, they perform extremely well. And I might add, for e-commerce, when we open a new store in a new market, we see a 70% halo e-commerce lift. So the new store openings, as we said in the opening remarks, are proven consistent, most predictable driver of sales.

[Michael Glen, analyst]

And any changes at all in terms of how you -- have you seen any slowing on the paybacks for new stores that you've referenced in the past?

[Todd Ingledew, executive]

No. No, we have not. We continue to see, as we, we've said, better than our expectations of 12 months to 18 months, we consider to continue to see paybacks beating that. So we have not seen any slowdown.

[Operator]

The next question comes from Mauricio Serna with UBS.

[Mauricio Serna Vega, analyst]

I just wanted to get a better sense on how are you thinking about the comp sales for the year? Maybe you could provide -- I mean, I understand from like the total sales will accelerate because of the boutique openings, but from a comp sales standpoint, how are you thinking about that starting Q1 and as the quarters progress?And then maybe, I guess just wanted to make sure like from a digital, sorry, from the adjusted EBITDA margin, like the big change relative to like the previous outlook of 500 basis points to now, this range is essentially some of the -- you're reinvesting some of the gains into digital marketing. Is that the right way to think about it?

[Todd Ingledew, executive]

Yes, I mean, I'll take the first one or the second one first and that's that we are still targeting 500 basis points at the top of the range. And the range provided simply reflects again, the deleverage that we would experience with the decline to the bottom of the range. And so that's the gap. And yes, we are -- I think, as we had said last quarter when we reported that we would be investing in digital marketing and that is offsetting some of the benefits that we had within the spend management, within SG&A. But we're still targeting the 500 basis points at the top of the range.And then from a -- to answer your first question, from a cadence of the comp or maybe composition of the revenue, again, we're forecasting for a 10% to 14% growth if you exclude the benefit of the 53rd week in FY '24. And that is broken down into 2 components, non-comp and comp. And the non-comp component, which is obviously the new and repositioned boutiques, is approximately 60% of the revenue. And that component we expect to be relatively consistent through the range. And the range is really the comp component, which is made up of both retail comp and e-commerce, and obviously the e-commerce being the majority of that comp growth. And so the range that we have outlines or reflects different scenarios for our comp growth. And that's how we're looking at that revenue growth. So if you flex the comp using that $100 million range, that's how we're looking at it. And obviously the comp growth, we're expecting to be lower in the first quarter and then grow in the second, third and fourth.

[Operator]

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

[Stephen MacLeod, analyst]

Lots of my questions have already been answered, so I just had a couple of -- just a couple of clarifying questions. Just on the new store timing, it sounded like it was slightly different than what it was before. I just wondering, Todd, if you can run through those -- through the timing of those new stores and repositionings and then when the flagships come online as well.

[Todd Ingledew, executive]

Yes. So there hasn't been any material change in the timing. Again, 1 new boutique and 1 reposition in Q1. 3 new boutiques in Q2. And then the majority of the stores in the back half are planned for close to the end of the third quarter. But I guess, I just want to caution against putting them early in the third quarter, we have 9 new boutiques that are coming online. So those will be coming in, effectively majority in that October November timeframe. Some could bleed into December and January. So it's just, obviously, with construction. It's hard to pin exactly when they're going to open. And we have major projects going on right now with our Chicago flagship, Soho and Fifth, and we expect the Chicago flagship to open first in the back half, then Soho and followed by Fifth. And those, again, those projects are large, and so there could be some movement from our expectations. But we do feel confident that by the end of the back half of the year. And likely by December, we will have the vast majority of those stores open in the back out.

[Stephen MacLeod, analyst]

And then just in terms of the Q1 guide. Did you say that comps are like, embedded in that total growth of 3% to 7%? Did you say that comps are expected to be positive in Q1?

[Todd Ingledew, executive]

No, I said. Well, yes, I mean, what I said was that our revenues in the 3% to 7% range and e-commerce would land within that. Retail growth, total retail growth will likely be slightly over, like slightly higher than e-commerce.

[Stephen MacLeod, analyst]

And then maybe just finally, just, I just have just a modeling question with respect to just the IFRS-16 adjustments related to the depreciation and interest. Are you able to talk a little bit about how those are going to expected to grow through 2025 and 2026? Because I know that sometimes impacts the margins and EBITDA.

[Todd Ingledew, executive]

Well, the depreciation amortization, we're expecting to be roughly $80 million. I provided that in my commentary. And yes, that's the expectation.

[Stephen MacLeod, analyst]

What about the IFRS-16 piece depreciation on ROU assets and the interest expense on lease liabilities?

[Todd Ingledew, executive]

Yes, I can follow-up with you on that exact number.

[Operator]

[Operator Instructions] The next question comes from Mauricio Serna with UBS.

[Mauricio Serna Vega, analyst]

I just had a quick follow-up because when you were answering the question about the comp sales and the growth, I just want to make sure I got -- I heard right, that it's the non-comp is -- 50% of the revenue growth is coming from the non-comp? I just want to make sure I heard that right.

[Todd Ingledew, executive]

[ No ], it's roughly 60%. So if you take the midpoint of our range and then remove the 53rd week from last year, so you get $2.3 billion. The difference there, roughly 60% of that is expected to be coming from the stores, the new stores and would be classified as non-comp. And then the other 40% would be expected to come from comp sales, which are majority e-commerce.

[Operator]

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

[Beth Reed, executive]

Yes. Thanks again to everyone for joining us this afternoon. We're available after the call to answer further questions, and we look forward to providing another update next quarter. Have a great evening.

[Operator]

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