Roots Corp

TSX:ROOT

Earnings Call Transcript 2020-Q1

[Operator]

Good morning. My name is Lisa, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Roots Fiscal 2019 First Quarter Conference Call. [Operator Instructions] On the call today, we have Jim Gabel, President and Chief Executive Officer; Jim Rudyk, Chief Financial Officer; and Kristen Davies, Head of Investor Relations for Roots.Before the call begins, the company would like to remind listeners that the call, including the Q&A portion, may include forward-looking statements about current and future plans, expectations and intentions, results, levels of activities, performance goals or achievements, or any other future events or development. This information is based on management's reasonable assumption and beliefs in light of information currently available to Roots, and listeners are cautioned not to place undue reliance on such information. Each forward-looking statement is subject to risks and uncertainties that could cause actual results to differ materially from those projected. The company refers listeners to its first quarter management's discussion and analysis and/or its annual information form dated April 2, 2019, for a summary of the significant assumptions underlying forward-looking statements and certain risks and factors that could affect the company's future performance and ability to deliver on these statements. Roots undertakes no obligation to update or revise any forward-looking statements made on this call. The fiscal 2019 first quarter earnings release, the related financial statements and the management's discussions and analysis are available on SEDAR as well as on Roots' Investor Relations website at www.investors.roots.com. Finally, please also note that all figures discussed on this conference call are in Canadian dollars unless otherwise stated. Thank you. Ms. Davies, you may begin your conference.

[Kristen Davies - Head of Investor Relations]

Thank you, operator. Good morning, everyone, and thank you for joining us. Jim Gabel, our Chief Executive Officer, will begin today's call by discussing our fiscal 2019 first quarter highlights followed by our strategic outlook. Then, he will turn the call over to Jim Rudyk, our Chief Financial Officer, who will review our financial results for the quarter in greater detail. After that, we'll open up the line for questions. I will now turn the call over to Jim.

[James Alan Gabel, President, CEO & Director]

Thank you, Kristen, and good morning, everyone. Hopefully, you have all had an opportunity to review the financial results release we issued earlier this morning.In looking at our Q1 2019 results, our sales growth for the quarter reflects our strength as a seamless omnichannel retailer, the continued success of our renovation and relocation strategy, as well as growth in Asia via our partner. Total sales were up 6.5%, largely as a result of our 5.5% improvement in direct-to-consumer sales. Comparable sales growth for the quarter was 1.5% or 8.3% on a 2-year stacked basis driven predominantly by increases in traffic and conversion. Even with the challenges we continue to face with store traffic in certain regions, we saw more people across North America experience the brand in the quarter given our strong e-commerce traffic. While still early days, we believe our brand campaign played a valuable role in the year-over-year pickup in traffic. Since launch, we have seen double-digit increases in online traffic and new buyers. Our digitally led brand campaign, True to Our Nature, went live on April 22. We launched on Twitter followed by all other social platforms the next day with many of our engagement measures outpacing industry standards.We aired the 30-second spot in more than 30 theaters across the GTA during the opening weekend of The Avengers. We also transformed transit shelters into mini cabins in the city, complete with TTC wraps that created the illusion of canoes traveling through the Downtown Toronto core. And this is just the start. You'll continue to see this brand messaging in equally innovative and engaging ways as we move throughout the year. As we discussed last quarter, an important focus for Q1 was improving our overall inventory position, using higher, deeper discounts to achieve 2 goals: one, to prepare for our transition to our new distribution center; and two, move through our aged seasonal inventory. We are pleased with the meaningful progress we made in the quarter. We ended Q1 with inventory up 15% year-over-year compared to the end of Q4 when inventory was up 40% year-over-year. However, to sell through the product, we incurred some short-term pressure on DTC gross margin and also realized increased e-commerce fulfillment costs. We will continue to focus on improving our inventory position as we move through Q2, but we don't expect to see the same degree of margin pressure on full year DTC results. With the deeper discounting in the quarter, we recognize we incented some consumers to purchase our products in some instances. However, we saw wins in many of our growth categories as a result of new product introductions. Woven pants were up more than 50%, driven largely by our new Essential Jogger and pant. Outerwear was up more than 70%, fueled by the ongoing success of our Hybrid Jacket. We introduced the Hybrid Jacket in Q4, and then expanded the series in Q1 by adding a hoodless and kids version. Footwear is up double digits versus Q1 2018. With an earlier delivery this year, we merchandised our summer sandals on the floor and online almost a month earlier than last year, which, as we expected, positively impacted footwear sales.In leather, the newness we have introduced is playing an important role and resonating very well with our consumers. Currently, 5 of our top 10 selling women's bags are new releases that we've introduced over the last 6 months, including new styles, colors and materials.Our Canadian store count remained constant with Q4 at 114 with us renovating 2 stores and relocating and expanding 1 store in the quarter. At 7, our U.S. store count at quarter end was consistent with Q4, 2018. We continue to work on initiatives to drive increased traffic to our stores in the U.S. However, it's important to note that our overall U.S. business is growing. More American consumers are engaging with our brand, be it in-store or online, emphasizing that our omnichannel expansion strategy for the U.S. is the right approach. Just a few weeks ago, we opened our eighth U.S. location. We opened our most immersive Roots store to-date on Chicago's famed Michigan Avenue, one of the top high street shopping locations in the world. An estimated 55 million people shop the street per year, including locals from Chicago and tourists from all over the United States, an exciting opportunity for us as an omnichannel retailer.Roots Chicago is an important project for us, and we're excited with the initial response we've received. To bring Roots' 45-year history in cabin-meets-city style to life, we applied learnings from our award-winning brand activation center we had in Boston and our other U.S. projects. The outdoor lifestyle-inspired Chicago store showcases our distinct character, heritage and iconic products. In addition, with a focus on exceptional service and creating engaging consumer experiences, the store has a richer connection to local community and is performing well. On the international front, our partner opened 3 new locations, bringing the store count in China to 39. They also expanded into Hong Kong with a retail location and a virtual store on leading online marketplace, ZALORA. For Taiwan, the store count was 115 at quarter end. As we move through the remainder of the year, we continue to execute against our strategy that drives us towards our fiscal 2019 financial targets that supports our longer-term North American omnichannel growth plans and strengthens our position as an iconic global brand for the long term. To these ends, we continue to strengthen our position in Canada. We opened a premium mall location to Edmonton in late May with the target of 1 to 2 stores in Canada by year-end. And with 2 renovations and 1 relocation already complete, we are well on our way to achieving our target of 5 to 7 renovations by the end of this fiscal year.In the U.S., we continue to grow our presence and build our brand. In opening our Chicago store, we've expanded into another major market with a store that, because of its prime location and our omnichannel capabilities, enables our broader U.S. population to engage with Roots. Further, with plans to open another store in the fall, in Tysons Corners, we will solidify our position in the Washington, D.C., area and will have reached our 2019 new U.S. store target.With the expectation of increasing online traction from both Canada and United States, we are well positioned to sustain our accelerated e-commerce growth momentum. We continue to believe that e-commerce will reach 17% to 19% of total DTC sales by year-end. To better support our long-term North American sales growth expectations, we're opening our integrated distribution center in Q2. Our new DC will also enable us to more effectively manage inventory across stores and e-commerce, reducing working capital and driving down cost premium savings over the long term. In terms of marketing and product, we will build increasing excitement as we move throughout the year. We will continue to deliver heightened brand and product stories while also maintaining the cadence of one or more meaningful product launches each quarter.We welcomed our new Chief Merchant to the team on May 13, and we're looking forward to benefiting from her deep industry knowledge and wealth of global experience. In addition, having tested numerous footwear styles throughout 2018, we are poised to accelerate growth as we move into our larger quarters. Finally, on the international front, there continues to be long-term opportunities to further develop existing and new markets in Asia. On that note, I'll pass the line to Jim.

[James D. Rudyk, Chief Financial Officer]

Thanks, JG, and good morning, everyone. As JG noted, total sales growth was driven by year-over-year improvements in both our DTC and partners and other business segments, recording total sales for the quarter of $54.4 million, which was an increase of 6.5% over Q1 2018. For our Direct-to-Consumer segment, sales were $46.6 million, up 5.5% over Q1 2018. The year-over-year improvement reflects comparable sales growth of 1.5%, driven by increased traffic, higher conversion, positive consumer response to new products and benefits from store renovations and relocations. We have renovated 5 stores as well as relocated and expanded 7 stores since Q1 2018. Our DTC sales also reflect the opening of 1 net new corporate retail store since Q1 2018. At $7.7 million for the quarter, sales in our Partners and Other segment, which includes wholesale and royalty revenue generated from the sale of Roots-branded products by our international partner, licensees and wholesale customers, increased 12.8%. The year-over-year improvement was predominantly a result of sales growth in Asia, including the opening of a Roots store in Hong Kong and online store launch on ZALORA as well as the net addition of 3 new partner-operated stores in Taiwan and 9 in China since Q1 2018.Turning now to gross margin. As JG discussed, our DTC gross margin for the quarter reflects deeper discounts to improve our overall inventory position. Our Q1 2019 DTC gross margin was 54.7%, down from 59.1% in Q1 2018. However, I want to reinforce that this downward pressure on DTC gross margin is something we see as short term. We will execute plans to further improve our inventory position during the second quarter but do not expect to see the same magnitude of impact on full year DTC gross margin as we saw in Q1. Over the long term, we will remain focused on delivering strong gross margins. In terms of selling, general and administrative expenses, they were $38.2 million for the quarter, up 8.1% compared to $35.3 million in Q1 2018. In addition to an increase in expenses related to supporting a larger retail store footprint and strategic investment in the business, there were 2 other areas that significantly impacted SG&A for the quarter. First, our costs resulting from higher omnichannel sales. With our new distribution center coming online soon, this is one of the areas where we are poised to capture efficiencies over the long term. Second, our transition costs related to our new distribution center. And so reflecting the short-term decline in adjusted DTC gross margin as well as our increased investments in the business, we recorded a Q1 2019 adjusted EBITDA loss of $6.2 million compared to a loss of $3.1 million in Q1 2018. Our adjusted net loss for the quarter was $7.2 million or $0.17 per share compared to an adjusted net loss of $4.5 million or $0.11 per share in Q1 2018. Note that while we adopted IFRS 16 as of this quarter, both adjusted EBITDA and adjusted net loss exclude the impact of IFRS 16.Now turning to our balance sheet. As we discussed last quarter, we entered Q1 with higher inventory levels. However, as JG noted, we made meaningful progress in improving our overall position. At the end of the quarter, our inventory balance was $45.4 million compared to $39.3 million at the end of Q1 2018. Q1 2019 inventory levels factor in an 8% increase in overall retail square footage as well as inventory and preparation for the May openings of our new Edmonton and Chicago stores.In terms of debt for the quarter, it was up year-over-year. Total outstanding on our credit facilities net of deferred financing costs was $103.8 million at quarter end compared to $93.4 million as at Q1 2018. This reflects the higher number of projects we have undertaken in the last 12 months as well as investments in our new distribution center. With the DC transition nearing completion and having largely moved through the capital project pipeline we set out at the time of our IPO, the capital requirements of the business lessened significantly as we move through the remainder of fiscal 2019 and into 2020.To conclude today's prepared remarks, when looking at the remainder of fiscal 2019, we're confident we are on track to achieve our financial targets. As a reminder, this includes sales between $358 million and $375 million, adjusted EBITDA between $46 million and $50 million and adjusted net income between $20 million and $24 million. Roots is an incredible brand that has been building strength, reach and a brand community for over 4 decades. There are exciting long-term growth prospects in terms of markets, products and brand resonance that well position the company to gain increasing traction on an international scale.And with that, I'll turn the call back to the operator to open the line to questions.

[Operator]

[Operator Instructions] And our first question comes from the line of Patricia Baker from Scotiabank.

[Patricia A. Baker, Analyst]

Just -- I want to circle back on the SG&A, Jim. You mentioned that there were 2 factors in there, higher omnichannel costs and then transition costs related to the new DC. So can you quantify for us what the transition costs were? And then secondly, with respect to the higher omnichannel fulfillment costs, is that simply just on higher volume? There was nothing unusual there, just that you had higher volume in the quarter?

[James D. Rudyk, Chief Financial Officer]

Yes. So I'll take the second part first. So yes, in terms of our sales for the quarter, a higher percentage of the sales were driven through e-comm, which have higher variable costs, so it's just a volume-related reason for why SG&A would be higher from the e-comm portion. Remember, we used a third party to fulfill those costs and they run through SG&A. And then the second part -- or the first part I guess of your question was on our costs related to the transition to our new DC, approximately $600,000. It's quantified in the MD&A if you want the further breakdown of it.

[Patricia A. Baker, Analyst]

And my follow-up question is just on the inventory. Looks like you did a pretty good job of clearing a lot of the inventory in advance of opening the DC. So do you feel pretty confident by the time the DC -- you're opening the DC sometime in Q2, you may well have gotten that inventory where you really need it to be?

[James Alan Gabel, President, CEO & Director]

Patricia, it's Jim Gabel. So you're right, we did make meaningful progress in our inventory, bringing down a couple of things. One, not just the overall amount of inventory from 40%, where we are 40% higher at the end of Q4 to 15% at the end of Q1, but the quality of the inventory. So while our sales in the quarter -- DTC sales were up 5.5%, we actually sold 21% more units. So a big part of that was us making sure with the third-party DC and our existing DC that we were not moving across units that were dated units and setting up all pick phases in the new DC. So it was a significant move in terms of the amount of units that we needed to move through so that by the end of the second quarter that we would not be setting up all pick phases and that the new facility will be well set up to fulfill both stores and online. So we can expect to see that activity continue through the second quarter but not nearly to the same level that we had in the first quarter.

[Operator]

Our next question comes from the line of Stephen MacLeod from BMO Capital Markets.

[Stephen MacLeod, Analyst]

I just wanted to just follow up quickly on the inventory question. Is there any way to quantify like how much of the aged inventory you're through? If you started at 100, where would you be now and how much would you have left?

[James Alan Gabel, President, CEO & Director]

Well, our general aged inventory, Stephen, is around 15%, as a -- an overall benchmark. As you know, we have really 3 parts to our line. We've got enduring icons, which are products that we carry throughout the year. We have then got perennial favorites that are products that come in throughout the major seasons. And then we've got 30% of our range, which is a truly seasonal product that we bring in. Obviously, on the seasonal side, we would have a bit more aged inventory because, as you move through the season, that becomes aged product. So to my earlier comment with Patricia, the age of the inventory really is a function of 2 things: it's the amount of units that we have with the physical number of SKUs that we needed to move through in preparation for the new DC.

[Stephen MacLeod, Analyst]

Okay, okay. And then just on the gross margin, I just wanted to clarify just kind of the wording of the outlook. So it sounds as though you expect gross margin pressure again in Q2, and it sounds like, based on the wording, you would expect gross margins to be also down for the full year. Is that the correct way to think about it?

[James D. Rudyk, Chief Financial Officer]

They'll be slightly down but won't -- nowhere near the extent of what you'll see -- what you've seen in Q1 and then slightly more in Q2 as well. We've -- so the discounting is what's the impact as we move through the inventory. We're still -- they'll continue to see cost improvements from the results of the initiatives in our sourcing team as we move to consolidate suppliers as well. So we're still seeing those benefits go through. The other thing to note in gross margin is FX. And so FX is a wildcard, but we do have that hedging program where we hedge on a rolling 12-month basis. We will see -- in Q1, we saw a slight benefit of FX. We'll see that continue in Q2 slightly, but then Q3 and Q4, we expect that trend to reverse based on current FX rates and our hedging strategy. So that'll be a bit of a headwind in Q3 and Q4. But overall, we see the gross margins for the year coming back up.

[Operator]

Our next question comes from the line of Vishal Shreedhar from National Bank.

[Vishal Shreedhar, Analyst]

In the past few quarters, and you can correct me if I'm not -- if I got this wrong, but management talked about how -- they didn't feel the brand voice in Canada was resonating due to actions in the U.S. and other actions. Just wondering how management feels about its marketing initiatives and if the brand voice is where it needs to be?

[James Alan Gabel, President, CEO & Director]

I think that we made a meaningful progress in the quarter and as we move into the second quarter in terms of reestablishing the brand voice through the true to nature that we launched in April and some of the other initiatives that have been unfolding especially in our focused markets. The Greater Toronto Area, which has more than 50% of our store base, you've seen us heavy up in that marketplace. We are encouraged by the brand voice that we've established in a short period of time in Chicago. So as you know with brand voice, it's not something you can turn on and turn off. It is a long-term direction. But with the launch of our campaign and the subsequent investments we're making, I think we're on the right path to having a more meaningful brand voice.

[Vishal Shreedhar, Analyst]

Okay. And just trying to understand the cadence of same-store sales growth from Q4 to Q1. Q4 had a tougher year-over-year comp and then Q1 still tough comp but a little bit easier than Q4. Just wondering why the little bit of sequential slowing? And did discounting have an impact on that?

[James Alan Gabel, President, CEO & Director]

Well, if I look at the major drivers of overall comp, conversion was up for us. UPT was up for us. Overall traffic, when considering all of our channels, was up. AUR was down and not surprisingly, AUR was down as a result of the heavy discounting we did to move through aged inventory and to right size the inventory. So that's probably the number one thing that would bring comp down is when you're driving AUR down, then that's going to have a negative impact on comps.

[Vishal Shreedhar, Analyst]

And AUR stands for?

[James Alan Gabel, President, CEO & Director]

Sorry, average unit retail.

[Vishal Shreedhar, Analyst]

Okay. So that impact from the AUR should show up a little bit in Q2, and then we shouldn't have that AUR issue in Q3 and Q4?

[James Alan Gabel, President, CEO & Director]

That's correct. As we move through the inventory right through the end of the second quarter as we move into the third quarter and fourth quarter, AUR for us generally starts climbing. And based on the products that we're introducing in the marketplace, we would see that trend continue.

[Vishal Shreedhar, Analyst]

Okay. And SG&A continues to grow at a rapid rate, and I know there was the DC initiatives in there in Q1. But I'm wondering if -- on the whole, if management is satisfied with its SG&A base and if there's opportunity for efficiency initiatives to maybe take a little bit of pressure away from the EBITDA margin trends?

[James Alan Gabel, President, CEO & Director]

Yes, so we're continually reviewing our entire cost base on a regular basis to make sure we're as efficient as possible. For the full year, though, we may have talked about this last quarter as well, but we expect SG&A to be up certainly on a dollar basis. But we do expect improvements as a percentage of revenue. We are taking on more square footage from a retail footprint, our marketing costs will increase to climb to 4% of revenue. Of course, depreciation costs will increase and e-comm costs will increase as the business grows. But we will see improvements in efficiencies in our store wages certainly as a percentage of sales. And remember, we've made a lot of the investments a few years ago on our infrastructure, and we're growing into those investments now.

[Operator]

Our next question comes from the line of Brian Morgan -- Morrison from TD Securities.

[Brian Morrison, Research Analyst]

JR, can you just go back to the gross margin. Sorry to circle back here, but I want to get some color on how we should think about it in the second half of the year. Because the one thing that I've thought I understood is that you're also going to have an impact as you move into the new DC as there's some transition between costs and gross margin and SG&A. So can you just maybe clarify that for me how we should think about the second half? And then perhaps as we're getting closer to move into the new DC, could you just review for us detail of the savings both qualitatively? And if there is any potential to quantify that for us, that would be appreciated.

[James D. Rudyk, Chief Financial Officer]

Yes. So a good point. On the -- we currently use a third party for our e-comm fulfillment costs. Those are recorded in SG&A right now. As we move into our new distribution center, those costs, like our regular store fulfillment costs, move up into gross margin. And so you will see a shift between SG&A and gross margin slightly. It's not a -- it won't be a material amount, but you will see that shift. And we'll call that out as we -- as the transition is complete. So we're ripe -- so in Q3 and Q4, we'll identify those amounts for you. But what that means from a full year gross margin perspective is you'll see a slight downtick, because of that shift, but not materially. I wouldn't focus on that as a material item in the gross margin estimate for the rest of the year. The gross margin will rebound naturally as the disc -- the head -- the level of discounting subsides as we roll through the excess inventory through Q2. So Q3 and Q4, you should start to see those back to normal levels. In terms of your other question on the new distribution center, we're going through the transition right now. We expect to be fully operational by the end of Q2, and we expect a number of benefits. Most importantly, we think is the benefit to our consumers as they search online for our inventory and having inventory available for them that resides with us they can have better visibility and better access to inventory, which means I can get it to them faster. And when they view online for items, they'll see more availability of items online. In terms of savings of costs, we are making this move to most importantly enable us to handle our growth and our capacity for the next few years, but we'll also benefit from fairly significant cost savings as a result of us moving in-house our fulfillment of our e-comm orders. Right now, we use a third party. Those costs are relative to what it will cost us in-house are approximately 2/3 higher on a per-transaction basis, and that's just for the e-comm orders portion of our business.

[Brian Morrison, Research Analyst]

Can you -- magnitude of dollars on an annual basis?

[James D. Rudyk, Chief Financial Officer]

Dollars, so I don't give that -- we don't give that specific items there. But -- so our e-comm business as we ramp up to 17% to 19% of our business, those transactional costs, I know you may have some stats in terms of what others may have in terms of cost to fulfill an order. And so for those that are doing it in-house, we'll move towards those. We're currently spending about 60% more on those costs right now.

[Brian Morrison, Research Analyst]

Okay. And then maybe a housekeeping question, JR. This year, we'll be at 4% of sales on advertising. Is that correct? And then JG, maybe just the initial reception in Hong Kong and other potential international opportunities, how that's progressing?

[James D. Rudyk, Chief Financial Officer]

Yes, this year, we'll be 4% for the full year by the end of the year, Brian.

[James Alan Gabel, President, CEO & Director]

So I was -- yes, I was in Hong Kong in April for the store opening. It's in Harbour City, which is a preeminent shopping district in Hong Kong. Very encouraged by how the consumer responded to the physical presence and also the virtual presence on ZALORA. You might recall that with our Asian partner, we actually achieved our new growth -- or new stores a year ahead of schedule. So we continue to be, long term, bullish on our ability to grow that part of the marketplace.

[Operator]

Our next question comes from the line of Sabahat Khan from RBC Capital Markets.

[Sabahat Khan, Analyst]

E-comm [Technical Difficulty]

[James Alan Gabel, President, CEO & Director]

Sabahat, it's hard to hear you.

[Sabahat Khan, Analyst]

[Technical Difficulty] but I guess generally online [Technical Difficulty] in addition to...

[James Alan Gabel, President, CEO & Director]

Sorry, Sabahat, we can't hear your question.

[James D. Rudyk, Chief Financial Officer]

Sorry, Sabahat, we missed that. We could not hear it.

[Sabahat Khan, Analyst]

Sorry, I'll try again.

[James Alan Gabel, President, CEO & Director]

There we go. Now you're good.

[Sabahat Khan, Analyst]

So just on -- yes, great. So just on the e-comm side. As that becomes a bigger part of the business and typically, I presume, the AURs there can be somewhat lower than the brick-and-mortar side. In addition to the fulfillment costs, are there other areas across the business you've identified that can help you maybe sustain or improve margins over time as online becomes a bigger part of your mix?

[James D. Rudyk, Chief Financial Officer]

Well, the fulfillment cost is a big factor, right? And the other -- that will be a big benefit once we move into our new distribution center. The other thing that happens with e-comm and also a result of our new distribution center, not just the costs being lower, but all -- right now, what happens when you place an order, let's say you order 4 items, our omnichannel solution searches the network to find the items. If they're not at one facility, they'll go out to all the other places, stores included, to find them and ship them to you. And so it could result in you getting 2 or 3 shipments. With our new distribution center coming online and more consolidated inventory there, we'll -- that will reduce the number of shipments. So our freight costs will also be lower, not just the cost to fulfill it. So those will be 2 areas of savings that we'll identify.

[James Alan Gabel, President, CEO & Director]

The other -- a part of the new distribution center is, I look at the fourth quarter, for example, of last year or actually pretty much every year but last year being our biggest fourth quarter is, is that we physically did not have the space to house all the goods in a DC that was 45 years old. So what we had to do was, we shipped the products out to the store in the fourth quarter. And as you know, you generally want to keep all of your inventory at least as much of your inventory in one central location and be able to then feed the locations that are selling through the fastest and also be able to ship directly to the consumers from that one location. And when you've got it spread across a third party, an aging DC and then a store base, as JR said, you incur additional costs to transact with the consumer. By having one central DC, we then have the ability to have majority of the orders fulfilled from that and the ability for us to feed the stores or the retail destinations that are selling through the fastest.

[Sabahat Khan, Analyst]

Okay. Great. And then just a quick one on the e-comm. I guess, as we look beyond this year, I know you have the target for this year, but what do you see as a long-term potential for online as a percent of sales for the total Roots business, if we think 3, 5 years out?

[James Alan Gabel, President, CEO & Director]

Yes. We haven't projected that through. I think that we continue to be encouraged by the growth that we see from e-commerce. It is the fastest growing part of our business. As you said, we are confident in our ability to reach out to 17% to 19% of our total sales. So as our sales grow, we think that e-commerce will continue to be the fastest-growing part of our business through the next number of years.

[Sabahat Khan, Analyst]

Okay and then just on the mechanizing side. You've talked over the last few quarters a little bit about introducing more end-season merchandise or more fashion oriented. I guess how much of a focus is that going to be over the long run? Historically, we've thought as the staples being a bigger part of the mix. Is this on a trial basis? Or do you want to maybe, over the long run, shift the brand to have more end season or fashionable products rather a bit more staplish?

[James Alan Gabel, President, CEO & Director]

No, I think that our overall architecture for our product won't change demonstrably from the 20 -- 50, 30 that we've talked about. But as we've seen in the first quarter, in the seasonal products that we introduced, we saw great growth in our women's woven pant business up more than 50% with the 2 new styles. We saw our outerwear business up more than 70%. So newness does drive ongoing interest from our customers, whether it be in-store or online. So I expect that the newness will continue to resonate on a seasonal basis, and we'll even reinterpret some of our core products or enduring icons to make sure they stay relevant in terms of styling and materials and colors.

[Sabahat Khan, Analyst]

Okay. And then one last one from me. Perhaps you can give us an update on how the U.S. business is trending. If - are there any updated thoughts on when the profitability there will be in line with Canada? Just the traction across the different cities and how some of your stores that opened first are moving or progressing?

[James Alan Gabel, President, CEO & Director]

Sure. Well, first of all, I need to reinforce that our U.S. business is profitable. In terms of trending, as you know, we've got a very vibrant U.S. e-commerce business that continues to grow smartly. We've got an established base of 3 stores that continue to service those consumers in the local markets as they have for years, and they are certainly successful. We've got 4 new stores in Chicago and Washington. And as we've talked about, that is a slow build for us in terms of building traffic and building community around those stores. And we work on that on a weekly basis. And then our newest store that we introduced in Chicago, which is our largest venture in the United States, while we're only 3 weeks into it, we are certainly encouraged and excited by how that store is performing, how the e-commerce is performing around that store or in the Illinois marketplace and how the consumer is finding that store in terms of the experience and the assortment of products that they're buying from them. I said I might add those products are not on sale. They're at full price. So that's -- If I look at the U.S. business, I look at it in 4 different ways: e-commerce; our existing store base; the 4 new stores that we're working on diligently in Boston and Washington; and then our largest experience store that just opened in Chicago.

[Operator]

Our next question comes from the line of Janine Stichter from Jefferies.

[Janine M. Stichter, Equity Associate]

Just wanted to dig in a little bit more around the product assortments. I know you brought in new merchant about a month ago. I know it's still early, but as she sizes up the current assortments, can you just talk about some of the product categories or maybe others where she sees the most opportunity?

[James Alan Gabel, President, CEO & Director]

You're right, Nancy joined us about a month ago. Certainly encouraged by the first impressions she's made across organization. She brings a wealth of experience in the North American and global marketplace. As she has looked across our product range, she's enthused by the depth of core products that we are fortunate to have in our range, whether it be in sweats or leather products or accessories. But even within those, she thinks there's an opportunity for us in our sweats to bring in a higher element of style and color to our sweats, believes that our international business will benefit from her experience in making sure that our colors and our fit especially is the right fit for other parts of the market outside of North America. You will and should expect that as we move into the first half of 2020 that she will already have had her stamp on that product in terms of making sure we accelerate the big stories like cabin and Park Plaid and some of the things that are perennial favorites for the brand.

[Janine M. Stichter, Equity Associate]

Great. And then just going back to last year. I think in the summer months, you identified an opportunity that was referenced earlier about having more seasonal products, more seasonally relevant items. Can you just let us know where you are in terms of that initiative this year? How should we think about how you're feeling about the current assortments in terms of just having a balance of kind of your staples and then more seasonal products?

[James Alan Gabel, President, CEO & Director]

Absolutely. So if we actually get some seasonal weather, that would be helpful because weather has been an interesting challenge, I think, across the industry and really having a seasonal change that encourages the consumer to buy their summer or camp-based products. But if you walk our store or go online, you would see a greater assortment of women's dresses and very encouraged by core dresses that we've added more color or new styles of lightweight dresses. The same thing if you look at our short assortment, you're seeing a much greater assortment of color, and the consumer is voting for that. You saw where our footwear business is up double digits, and that is, one, the product hitting the floor almost a month earlier, but a greater assortment of sandals and -- in Q1 product. So I think you're -- as you shop our stores, you see a couple things: greater assortment of color; and more seasonally appropriate products for that person that is either shopping for camp or going to the cabin or outside in the city.

[Operator]

Our next question comes from the line of Matt Bank from CIBC.

[Matt Bank, Associate]

I just want to follow up a little bit on those last comments on products. So first, can you just talk a bit more about how footwear is doing versus your expectations as you guys came into this sort of relaunch product -- project a couple years ago? And I know there was a staff training element there as well, so can you just talk about where you are in terms of your readiness to sell? And also the stock, the in-store stock levels versus[Audio Gap]

[James Alan Gabel, President, CEO & Director]

Sure. So each season, I'm pleased with the progression that we've made on footwear. Footwear is a long-term build for the brand, but we are seeing improved sales results. We are at an inventory level that I think is now appropriate in our stores to make sure that we're not sizing out and then we can service the consumer appropriately. Our training of our staff continues to be a primary focus. We, actually, in the first quarter, implemented a new app under a company called Nudge, which gives us the ability to instantaneously talk to our 2,000 associates in terms of gamification of categories like footwear to make sure that they're getting the top selling points and can compete with other sales associates in terms of sales results. So we are making, I think, meaningful progress on our footwear business. And I expect that in the fall, we'll make another step forward as we introduce some of our iconic products back into the marketplace like the Tuff Boot.

[Matt Bank, Associate]

Okay. And then in terms of the fall/winter product, I mean, with the first half being a little bit tougher on profitability and looking at your guidance, you need pretty strong earnings growth in the second half of the year. So just wondering if you can talk about your confidence in the fall/winter product for the year? And anything sort of due and notable that'll be a significant driver?

[James Alan Gabel, President, CEO & Director]

Well, we had -- as you saw in the fourth quarter last year, the fourth quarter last year was comprised of some perennial favorites but also us testing a number of new categories. So sleep, for example, or cozy cabinets, we refer to it, was a test category for us last year. It performed exceptionally well. And therefore, that is a much bigger initiative for us as we move into the fourth quarter. Our Park Plaid assortment, we introduced outerwear into that in the fourth quarter last year. And it sold -- we had a 99% sell-through on the Seymour Jacket at full price. So that is a bigger assortment for us as we build into this year. So I look at the tests that we did in late Q3 and Q4 and the success that we had with those tests and our ability now to have a bigger story around those is being new catalyst for us or new categories of business in some ways. So I think we feel very good about the third quarter in terms of product assortment, and then it gets stronger as you move into the fourth quarter.

[Operator]

Our next question comes from the line of Michael Binetti from Credit Suisse.

[Michael Charles Binetti, Research Analyst]

I just wanted to ask you on the near-term outlook. I'm trying to think if first quarter is going to be the low point for same-store sales for the year. Obviously, you've you got a little boost with some clearance activity there, but it sounds like you brought in some warm weather product early. You mentioned sandals, but you also commented similar to what we've heard from other retailers that weather hasn't been helpful here lately. Maybe your confidence that you're getting the kind of traffic into the stores in 2Q that total same-store sales can be positive in the quarter.

[James Alan Gabel, President, CEO & Director]

Yes, I think that the macro headwinds that others have talked about, we are not immune to those. And while we have seen positive traffic trends in a few markets, overall, we still have a number of markets that are not having positive traffic within our store base. And so until we see that turn or change, I think that we will continue to have muted expectations on our comps because it -- the marketplace really is soft. But I think that we're confident our overall direction of the business is right. And as we move through into the third and fourth quarter, then we project to have certainly positive comp sales.

[Michael Charles Binetti, Research Analyst]

Okay. And is that -- are you -- you're seeing varying results by region, and you're -- that's what's informing your comment? Do you think it's weather? You're seeing the weather affect regions or where you're seeing that variability?

[James Alan Gabel, President, CEO & Director]

Yes, we are.

[Michael Charles Binetti, Research Analyst]

Okay. And then just -- I guess looking out a little bit on the gross margin as well. I know you've been answering a lot of questions on this, I really appreciate it. But historically, we don't have a long number of years of history here. But historically, 2Q is a seasonal low point and the lowest gross margin percent of the year but maybe the clearance activity in the first quarter changes that this year. You commented that you're going to continue to clear some inventory in the second quarter. Is your expectation, I guess that, that clearance will happen online in the second quarter the same way it did in the first quarter? And then I guess is there a way that we can think about what gross margin would have been in the first quarter excluding that clearance, just so we can think about what the underlying run rate is, and how much it should improve by in 2Q just because the first quarter or second quarter gross margin dynamics are so unusual versus prior years?

[James Alan Gabel, President, CEO & Director]

So first of all, you're right. Traditionally, the second quarter for us is a lower-margin quarter. Our margins in the second quarter will continue to come under some pressure as we move through the inventories we talked about. There's 3 parts as we've indicated previously that drive our margin. One is product input costs, and we continue to see a favorable product input costs through Q2 and the balance of the year. Based on the work we did around the United Brand Range, JR gave some commentary around FX that, that is -- as you move through the year, even with our hedging program in place, we expect a slight headwind. It really comes down to the level of discounting that we have, and that discounting will continue into the second quarter. But as we start moving into the third and fourth quarter, we expect that discounting to be at levels that we've had in previous years and, therefore, the margins to return to those type of levels.

[Operator]

Our final question today will come from the line of Camilo Lyon from Canaccord Genuity.

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

I appreciate all the color as well. JR, I was hoping that you could just remind us where the profitability differs between your e-commerce business and your stores and what that gap should narrow to with the transition to the new DC?

[James D. Rudyk, Chief Financial Officer]

Yes, generally speaking, right now, our business composition between -- and the volume between stores and e-comm results in us having similar profitability or contribution margin with our stores and our e-comm channels. However, as you know, stores have more fixed costs. So when I say fixed costs, I mean rent and also, to a large extent, some of the store wages aren't entirely variable. Some of them are fixed. And so as you run more volume through stores, the profitability of the stores can be higher than e-comm. Now having said that though, as we move into our new distribution center and benefit from the savings, particularly on a fulfillment basis and then shipping costs, we expect that profitability of our e-comm business to also improve. And so we think we have a really nice mix of being able to fulfill our orders to customers either in-stores or through online and have similar profitabilities.

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

Okay. So you'll be truly agnostic as to where that fulfillment occurs?

[James D. Rudyk, Chief Financial Officer]

Absolutely.

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

Okay. Great. And then, Jim, you were giving some hints as to some of the product introductions that you have planned. Sounds like for the back half, you're expanding some of the programs that you introduced last year. In the context of what you saw in the first quarter, the good response to some of the new innovation and many of those probably a little bit more muddied by the discounting that was surrounding all that. Can you give us some insight into how you feel about -- what are the new introductions that you might see -- that we might see the floor sets in the back half that could drive incremental excitement around the stores and the brand? And if you can take what you've learned from Q1 and apply that to the receptivity that you saw in Q1 on those new introductions and apply that to what we might see in Q3 and 4, how should we think about the progression of that with respect to the back half comp outlook that you just talked about on an earlier question?

[James Alan Gabel, President, CEO & Director]

Sure. So I -- the products that have performed exceptionally well in Q1 around our woven pants or outerwear, those have really given us confidence to expand those assortments as we move into late Q3 and certainly Q4. So, for example, our Hybrid Jacket is a product that you'll see us continue to expand that assortment. We added a hoodie -- hoodless version in Q1. We added a kids version. Both of those performed exceptionally well. So our outerwear business, and that's very encouraging for me because we've always have been in outerwear, but I would say that, that has not been a large business for us online or even on the floor, and as you walk into our stores in October, you will see a meaningful progress in terms of us being a really good outerwear brand that really connects the cabin to the city and that consumer journey. I look at 2 of our major foundations to the business, which are cabin and Park Plaid, and how we have expanded those products, and I think really encouraging, we'll expand cabin even further into the summer of 2020 with having a summer version of cabin. So the categories that we're expanding into are categories that we've tested and now with confidence are expanding into all-store programs or into larger voices that we have in the marketplace.

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

Great. And how should that affect the comp cadence just based on applying the receptivity that you've seen already in those categories? I know you've got -- you've clearly got that easy comparison in the third quarter. Just trying to kind of gauge the magnitude and if we should think about the 2-year trend as the right trend to think about? Or if there are other factors that we should consider?

[James Alan Gabel, President, CEO & Director]

I think all of those new products are going to give reason to the consumers to not just buy our core products but experience some of the new products. And that I think is -- as we look at the composition of our business moving through the balance of this year, comps are going to be driven by us doing a better job of telling our core stories and by exciting customers with new products. So as we plan forward our comps, if we were just relying on, for example, core products to constantly drive our comps, I think that, that's a difficult strategy to follow and have success with. I think that, based on the newness that we're driving along with the strength of our core products, those factors give us confidence to say that we remain on track for our full year guidance.

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

Okay. And then just on that -- my last question is just on that core product commentary. Is there any way to think about how much core product was purchased, if any, during this discounting period in Q1 such that it might affect core product purchasing in the back half?

[James Alan Gabel, President, CEO & Director]

Yes, that's a really good question because we don't want to take consumers out of the marketplace on core products in our leather or sweats or some of the other categories. So if you look at how we executed our discounting, it was on products that were seasonal or aged products. That's where the heaviest discounting took place. And as to my earlier comments with Patricia, we drove significant units in those items to make sure that we were not setting up old SKUs or styles into new distribution centers. So the heaviest discounting took place on items that were not going forward, and we had certainly lesser discounts or promotions on what are considered to be iconic products.

[Operator]

I'll now turn the call back to our presenters for closing remarks.

[James Alan Gabel, President, CEO & Director]

Thank you, operator, and, thank you, everyone, for joining us. As this will be Jim Rudyk's last earnings call with us, I want to take a moment to thank JR for his many contributions to the business and wish him and his family certainly good health and much success.

[James D. Rudyk, Chief Financial Officer]

Thanks, JG.

[James Alan Gabel, President, CEO & Director]

That concludes today's call. Thank you again, everyone, for joining us. We look forward to updating you on our progress when we report our Q2 fiscal 2019 results. Have a great day, and go, Raptors, go.

[Operator]

Thank you. This concludes today's conference call. You may now disconnect.