Roots Corp

TSX:ROOT

Earnings Call Transcript 2019-Q4

[Operator]

Good morning. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Roots Fiscal 2018 Fourth Quarter and Year-end 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 developments. This information is based on the 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 fourth quarter and year-end 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 2018 fourth quarter and year-end earnings release, the related financial statements and the management's discussion and analysis are available on SEDAR as well as on the 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, 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 2018 fourth quarter and year-end highlights. He will also provide 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 and the year along with our fiscal 2019 targets. After that, we will open up the call for questions. On that note, I will turn the call over to Jim.

[James Gabel;President, CEO & Director]

Thank you, Kristen, and good morning, everyone. Hopefully, you have all had an opportunity to review our financial results release that we issued earlier this morning as well as see the exciting news of our new store and online presence in Hong Kong. Roots resonates incredibly well with consumers during the holiday season, and that continued to be the case in Q4 2018. As a result, we delivered comparable sales growth of 3.1% for the quarter or 18.3% on a 2-year stock basis. We performed well during peak selling periods in the quarter, such as Black Friday and Cyber Monday. The investments we've been making in the business, such as our HRS and increased training in combination with our abilities to operate as a seamless omnichannel retailer, enabled us to effectively support the higher level of shopping activity. This was particularly evident with our success in overcoming the challenges of the Canada post strike. Compared to Q3, we saw improving traffic trends in the quarter, with some regions performing better than others. While store traffic was still down year-over-year, this was offset by strong e-commerce traffic. The fourth quarter is an important one for our perennial product favorites, and this holiday season was no exception. Sales of our Park Plaid shirts were up approximately 30%. We also expanded Park Plaid into women's outerwear with our Seymour Jacket, which, while a small buy, delivered a 99% full price sell through. Our packable jackets continue to be strong performers, with sales up more than 50% compared to Q4 last year. And our Cabin Collection continues to play an important role over the holidays as we had double-digit year-over-year sales growth in the quarter. We also saw encouraging consumer response to new product introductions. In most cases, these were fairly modest investments as we were testing the products in market. In the quarter, we launched our Hybrid Jacket, which is the perfect combination of classic sweats and popular packable jacket, and we saw good initial traction. The sales momentum in the hybrid jacket has continued into Q1, where we've expanded the series to include kids as well as a hoodless version and a vest. Another success in the quarter was our Cozy Cabin, Root's version of sleepwear, identifying an area we believe we can further expand in 2019. We also had wins in leather. Our new Made in Canada women's Mont Royal bag, which was inspired by our Grace bag, was our #1 selling bag in the quarter. We also realized a 30% increase in our men's bag sales, largely driven by the introduction of a new laptop and weekender bag. At year-end, we had 114 stores in Canada. During fiscal 2018, we opened 6 new stores in Canada, renovated 4 stores and relocated and expanded 6 stores. In addition, with our continued focus on optimizing our Canadian retail footprint, we opted not to renew leases for 8 stores, 4 of which were closed in the latest fourth quarter. In the U.S., we entered the year with 7 stores. It continues to be an investment market for us as we need to build traffic during the week with the local communities around our stores. However, we are encouraged by the sequential improvement in our performance, which highlights the strength of how our brand shows up during the holidays. In addition to our ability to ship to 50 states, we are confident that our strategy of expanding with 2 to 3 stores in each of our targeted cities, supported by our seamless omnichannel capabilities, is the right approach. We plan to add more stores in U.S., and as previously announced, Chicago will open late spring. As we work to further build brand awareness in our U.S. markets, we expect to see our U.S. business gain momentum. On the international front, we continue to see our brand gain further strength in our partner-operated markets. We exited the quarter with a total partner-operated store count of 117 stores in Taiwan and 37 in China. Our partner opened 2 new locations in Taiwan and 4 in China in the quarter, bringing us to 10 new store openings in Taiwan and 11 new store openings in China for the year. We've entered fiscal 2019 with a defined market position as a premium outdoor lifestyle brand. We unite the best of Cabin and City through unmistakable style with uncompromising comfort and quality. During fiscal 2019, we will continue to execute on our growth strategy with a greater focus on implementing large-scale brand building marketing campaigns and introducing new innovative and transitional seasonal products. We are preparing to launch 2 exciting, digitally driven campaigns, one later this month and one in the fall. Through enhanced marketing, you will see us showcase new products on a quarterly basis in a more impactful and inspirational way. These heightened brand and product stories will best come to life through our network of experienced stores that serve as brand beacons in the major markets in which we operate. You will also see us celebrate a larger number of brand-specific energy moments throughout the year. For example, in Q4, we released our Shawn Mendes capsule collection, and we partnered with Air Canada to celebrate international sweat pants day. Then just a few weeks ago, we welcomed the first day of spring, with the cabin-meets-city themed art installation in the heart of Downtown Toronto that we amplified through media and social channels. In terms of products, our world-famous sweats will continue to evolve as we introduce new progressive styling and materials. You can also expect that in each of the quarters, we'll have at least one meaningful product launch. For example, the women's essential jogger and pant that we introduced this quarter is already a top seller for us. Throughout fiscal 2019, we will continue to work to leverage our operational investments to drive efficiencies within the business, while also benefiting from the talent and expertise that we've added to our team. We will also work to expand our North American omnichannel footprint, strategically growing our store network in Canada, continuing to renovate and expand high-performing Canadian stores, regionally expanding our store network in the U.S. and sustaining our rapid e-commerce growth momentum. On the international front, we will work with our partner to expand our footprint in Asia, in Taiwan and China as well as new markets, as you saw with our announcement this morning regarding Hong Kong. Our partner has expanded their team, adding a wealth of executive experience in additional depth of industry and market expertise. We are enthused about working with the expanded team to realize our full potential in this region. They've already made great progress with the opening of a new store in Hong Kong's premier shopping center, Harbour City, and Roots' launched on ZALORA, the leading name in online fashion shopping in Hong Kong. And lastly, with more than 60 of our stores equipped to sell footwear and having tested numerous styles throughout 2018, we are poised to deepen our offering in footwear and accelerate our growth as fiscal 2019 progresses. Before passing the line to JR to discuss the financials in greater detail, I want to take this moment to thank the entire Roots team for their hard work and dedication throughout fiscal 2018. While we faced headwinds that created near-term challenges for us, the numerous projects we undertook and the relentless focus on best serving our consumers have strengthened our position for the long term. We are an iconic brand with more than 4 decade history of delighting our consumers with great products and engaging experiences. We are confident that our strategy continues to be the right one, with a more focused approach in fiscal 2019, our strong capabilities as a seamless omnichannel retailer in North America and our growing international presence. We are on track to build on our record revenue in 2018 and deliver on our fiscal 2019 financial targets. On that note, I'll pass the line over to Jim.

[James Rudyk;Chief Financial Officer]

Thanks, JG, and good morning, everyone. Now looking at our fiscal 2018 Q4 and year-end financial results in greater detail, starting with our sales. As JG noted, our brand and products continue to resonate well with consumers during the holiday season. As a result, total Q4 2018 sales of $130.8 million were up 3.1% year-over-year when excluding the additional week in Q4 2017. For full year fiscal 2018, improved direct-to-consumer performance in Q4 and overall sales growth in the first half of the year offset the impact of a softer Q3, resulting in total sales of $329 million, which represented a 1.9% improvement year-over-year when excluding the additional week in 2017. For our direct-to-consumer segment, we recorded $120.7 million in sales in the quarter, a 3.4% increase when excluding the additional week in Q4 2017. The year-over-year improvement reflects the net addition of 2 stores, having opened 10 and closed 8, the benefits of store renovations, the strong performance of major product franchisees and successful new product introductions. Our fiscal 2018 direct-to-consumer sales were $283.9 million, a 1% improvement year-over-year when excluding the additional week in fiscal 2017. At $10.1 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 international partner, licensees and wholesale customers, were down just shy of 1% compared to Q4 2017. As we discussed last quarter, we delivered certain orders to our operating partner in Asia in Q3, which was earlier than our initially planned Q4 2018 time line. This led to the slight year-over-year decline in sales in Q4, the impact of which was partially offset by an approximately $0.4 million foreign exchange benefit relative to Q4 2017. For the year, sales in our Partners and Other segment were $45.2 million, a 7.7% increase from $41.9 million in fiscal 2017. The year-over-year improvement was primarily a result of sales growth in Asia, including the net addition of 7 new partner-operated stores in Taiwan and 5 in China. We also realized a $0.7 million foreign exchange benefit relative to fiscal 2017. Turning now to gross margin. We have consistently delivered direct-to-consumer gross margin improvement. Q4 2018 was no exception, with a direct-to-consumer gross margin of 61.8%, up 190 basis points over our Q4 2017 direct-to-consumer growth margin of 59.9%. Our year-over-year gross margin improvements for the quarter reflect improved product costing and favorable foreign exchange rates on goods purchased in U.S. dollars, the benefits of which were partially offset by an increased number of markdowns in the quarter to sell-through higher levels of seasonal inventory. Our fiscal 2018 direct-to-consumer gross margin of 61.2% improved 220 basis points from a fiscal 2017 direct-to-consumer gross margin of 59%. It also increased 390 basis points from a 2016 adjusted direct-to-consumer gross margin of 57.3%, which is well in excess of the 300 basis point improvement in direct-to-consumer gross margin that we were targeting to achieve by the end of fiscal 2019. We will continue to look to improve product costing. However, we expect to see offsetting FX headwinds impact direct-to-consumer gross margins in fiscal 2019. In terms of selling, general and administrative expenses, they were $51.8 million for the quarter, up 12.9% compared to $45.9 million in Q4 2017. And they were $166.8 million for the year, up 9.8% compared to $151.9 million in fiscal 2017. The year-over-year increase for both Q4 and full year 2018 was primarily driven by incremental cost to support a larger retail store footprint, higher omnichannel sales, including an additional $0.6 million in Q4 2018 shipping costs as a result of the Canada post strike as well as strategic investments to drive the long-term growth of the business. We incurred transition costs related to our new distribution center of $0.6 million in the quarter and $1.3 million for the year, which once up and running, will enable us to more effectively manage inventory and drive cost per unit savings over the long term. We also increased our investment in marketing as planned, which was up $0.9 million for the quarter and $3.1 million for the year. Other year-over-year expense increases of note include: the impact of the minimum wage increase across our store network in Ontario and Alberta, which accounted for an additional $0.5 million and $1.9 million for Q4 and fiscal 2018, respectively; and public company costs, which were an incremental $0.4 million and $1.8 million for Q4 and fiscal 2018, respectively. For 2019, we will anniversary both the minimum wage increase and incremental public company costs as of Q1. However, you will continue to see us grow our strategic investments in the business as we expand our retail footprint, amplify our brand voice and operate our much larger distribution center, including related depreciation. While we expect SG&A to grow year-over-year, it will be at a slower rate than 2018. And so reflecting our increased strategic investments in the business, we recorded Q4 adjusted EBITDA of $34.8 million and fiscal 2018 adjusted EBITDA of $41.9 million, which was down from $36.7 million and $52.6 million for the same periods in fiscal 2017. In terms of adjusted net income, we recorded Q4 adjusted net income of $22.3 million or $0.53 per share compared to an adjusted net income of $24.6 million or $0.59 per share in Q4 2017. For the year, adjusted net income was $20.2 million or $0.48 per share compared to $29.1 million or $0.69 per share in fiscal 2017. Now turning to our balance sheet. Given our softer Q3, we entered Q4 with higher inventory levels. Our end of year balance was up $14.1 million compared to year-end fiscal 2017. However, that includes a $5.7 million increase in in-transit goods, which was predominantly a result of earlier orders due to Chinese New Year landing earlier in 2019. Moving into Q1 2019, we plan to continue to move through our surplus seasonal inventory and prepare for our transition to our new distribution center with heightened markdowns on aged products across our store and online channels. In terms of debt for the quarter, it was relatively flat year-over-year. Total outstanding on our credit facilities, net of deferred financing cost, was $85 million at year-end compared to $84.5 million at the end of fiscal 2017, reflecting the higher number of projects we undertook in 2018 as well as investments in our new distribution center. Looking ahead to fiscal 2019, based on our Q4 results and a positive start to Q1 2019, we believe we are on track to achieve our fiscal 2019 targets of: 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. The key underlying assumptions built into our fiscal 2019 financial targets include 5 to 7 renovations and expansions, 1 to 2 Canadian store openings and 1 to 2 U.S. store openings. We expect e-commerce to reach between 17% and 19% of direct-to-consumer sales. And in terms of international expansion, we expect to add stores in Taiwan and China, we will explore entry into new markets like we announced with our partner today and grow our international e-commerce business. And with that, I'll turn the call back to the operator to open the line to questions.

[Operator]

[Operator Instructions] Your first question comes from Patricia Baker from Scotiabank.

[Patricia A. Baker, Analyst]

My first question is just -- I want to just come back to, Jim, maybe just reiterated the guidance and saying that you had a positive start to Q1. Just want to ask a very quick question on that. And you gave us that guidance with Q3, are you more confident as we sit here in April that you'll reach that guidance [indiscernible] when you initially gave it to us back in the fall?

[James Gabel;President, CEO & Director]

Patricia, you were breaking up a bit there. Is your question just about are we -- our confidence level in the guidance for 2019?

[Patricia A. Baker, Analyst]

Yes. Are you more confident now than when you initially gave the guidance?

[James Gabel;President, CEO & Director]

I think that, as you know, the first quarter of 2019 is our smallest quarter. And as JR said in his remarks, we were off to a positive start. I think that the guidance that we gave back in early fourth quarter, we continue to be pleased with how we are performing in the marketplace and confidence in that guidance.

[Patricia A. Baker, Analyst]

Okay. And then secondly, if I just -- you indicated that you decided not to renew 8 store leases in Canada. Is there anything particular about those stores? Was it the location? Was it the size? Was it the market? Were their consistent performance across the 8 that may do you -- led you to that decision?

[James Gabel;President, CEO & Director]

I think that it's a variety of all those things that you mentioned there. Some were not strong performers for us. And in other cases, we felt that by either renovating or expanding a store that was in the region or potentially looking down the road at a new project that may open up, that it didn't make sense for us to renew that lease. So I think that's what our team does a really good job of is constantly evaluating our real estate portfolio and setting a long-term direction for the type of footprint we want to have in the marketplace. And so I think while we are expanding our square footage, it's also prudent for us to be managing every store and making sure that it's contributing.

[Patricia A. Baker, Analyst]

Okay. Fair enough. And then you indicated that in Q4, you had particular success with new products. So can you just give some indication of what the outlook is like for 2019? Do you have a lot of new product in the pipeline for every season?

[James Gabel;President, CEO & Director]

We do actually. And as you said, Patricia, very encouraged by the fact that our perennial favorites performed to a high level in the fourth quarter, but we also had a number of new introductions that I talked about in my opening remarks. And you can expect to see each quarter a major release of new products from us as we progress throughout the year. So we're off to an encouraging start with the women's Essential Pants and Essential Jogger, which has already risen to one of our top-performing pants in the company's history.

[Operator]

Your next question comes from Brian Morrison from TD Securities.

[Brian Morrison, Research Analyst]

JG, just a couple of high-level questions here. There's obviously a host of reasons in your control or outside of weather to drive the growth in fiscal 2019. But can you just dive down in terms of magnitude, what the key drivers are in terms of whether it's your marketing campaign to connect with consumers, renos, the maturation of new stores or product line, e-commerce, like what really needs to happen? Or where is your focus to really drive the fiscal 2019 results and hit your numbers?

[James Gabel;President, CEO & Director]

Well, I think it's a number of things, Brian. First of all, it is doing less things that we -- as we've talked about. Last year, 2018 was an extremely ambitious plan in terms of new stores, new store openings and renovations. And we need to see those projects start to realize their full potential as we flow through 2019. So we're pleased with our store base as well. Our e-comm platform is performing at a high level. So then it really comes down to our ability to continue to produce compelling product. I think we're off to a nice start with some of the early wins we've had in late Q4, they're falling into Q1. We need to keep that product engine moving with that same sense of urgency and consumer focus. And then it is our ability to amplify those stories through compelling marketing, and we've talked a lot about the fact that we are increasing our marketing investment to be able to tell those stories through brand campaigns, and you'll see those starting to come to life later this month. We've talked, as you said, Brian, there's some things that are outside of our control. But I think that we've done a better job as we prepare for 2019 and making sure that that if weather becomes unpredictable during the year, that we have got product on the floor that is exciting the consumer to buy now, wear now and be relevant for any climates that may be hitting the Canadian public or the U.S. for that matter.

[Brian Morrison, Research Analyst]

Okay. And just you mentioned marketing. And obviously, a stronger brand voice is one of your key campaigns this year. Can you maybe just elaborate on the stronger brand voice in terms of allocation to marketing dollars to products and markets and social media? Maybe just dive in a little bit more on that.

[James Gabel;President, CEO & Director]

Sure. So you saw a couple of energy moments is what we refer to them where the brand socially comes to life. And I think we entertain the consumer and bring them into our brands in a compelling way, and we saw that with the Shawn Mendes back in December as well as the celebration of something that will be an annual celebration for us, which is International Sweat Pants Day. As we progress into April, you'll see us launch the brand campaign in the latter part of this month. We are delighted with the work that the team's done on it, and we think the consumer will resonate very much with this campaign will be [ shared ]. In North America and really with our partner who run Asia. It will be digitally led. There will be out-of-home elements to it in some of the markets. But as you might expect, it is rich in content, and it really is designed to position the brand as a premium outdoor lifestyle brand and then draw a specific attention to key products that we want to excite the consumer with. So it is a much different platform. As we've been talking about for a while now versus where we were in 2018, which is a very tactical plan centered around new store openings.

[Brian Morrison, Research Analyst]

Okay. And then last question, if I can just squeeze it in. Can you maybe just in terms of maturation of your U.S. stores and your footwear initiatives, just update us on the ongoing progress on those fronts?

[James Gabel;President, CEO & Director]

Sure. Well, in our U.S. stores, I'm going to talk more about the 4 new U.S. stores versus our 3 legacy stores. Those stores, we saw encouraging progression as we move through the fourth quarter. And that on the weekends, where the malls were filled with people, our stores performed to a higher level. The weekdays, when you've got local community around the stores, our stores were not as robust as we might see in some of our markets in Canada, but that's to be expected. We've built community around our stores in Canada, and we're making those same investments to do so in the United States. So what we were really encouraged by was some of the key metrics like our UPTs and our average selling price in the U.S. was on par with Canada, in some cases, a bit higher, which tells us that people are certainly excited by perennial favorites and our enduring icons and some of those products that are staples to our brand. With regards to footwear, I think we've made a number of nice advancements, really with the idea of climaxing our footwear presence as we move into the back-to-school period. So we have our visual presentation now in our stores. You're seeing our spring collection coming to the stores, 60 days ahead of where it was last year. And our fall collection has not only been deeply wear tested, but it has a really strong heritage element to it, and that's taken us probably 18 months to get that in place with our maker overseas.

[Operator]

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

[Stephen MacLeod, Analyst]

I just wanted to circle around on some of the new marketing campaigns that you have in the pipeline. I mean, I know one of the things you cited with Q3 was lack of impact in the [indiscernible] lack of sort of broader macro Roots campaign. Can you just talk a little bit about what you have in the pipeline? I feel like -- I seem to remember you saying that the first major campaign was going to come through beginning in April with something -- with some follow-on in the year.

[James Gabel;President, CEO & Director]

So that's correct. Actually, it will be the latter part of this month, only because there is a unique opportunity in the first half of this month that we wanted to make sure that we gave appropriate airtime to. And you'll actually see us talk about that in the next couple of days. So I don't want to steal our team's thunder because we'll have an appropriate release around that. So the first half of this month, I think, is an element that will excite the consumer. It is very on brand for us, and then we move into the latter part of April with really our first phase of the brand campaign. I think that, as I said, our marketing team and our customer experience team have done a really nice job of understanding how that will come to life digitally, socially and in our stores.

[Stephen MacLeod, Analyst]

Okay. And then when you go look out beyond April, do you have other sort of macro brand campaigns on the timetable as well?

[James Gabel;President, CEO & Director]

Exactly. I think that we -- having just 1 campaign is not going to create the connection with the consumer that you would expect from a brand like ours throughout the year. So as we flow into May, we've got a full calendar in May. Very excited by how our back-to-school lines up in terms of the message around key products. As we move into the latter part of third quarter, you'll see the second phase of our brand campaign. So we have got a rich calendar that is designed to, I think, resonate extremely well with that consumer to a level that we haven't seen since 2017 when we had a very successful nice campaign that was integrated and well-executed in the market.

[Stephen MacLeod, Analyst]

Okay. That's great. And then I just wanted to circle back on some commentary around the gross margin from JR. Did I hear correctly that you expect to see increased markdowns in Q1?

[James Rudyk;Chief Financial Officer]

Yes. So as we talked about the success that we had in benefiting from cost improvements with our suppliers over the last couple of years have been phenomenal, we're well ahead of our schedule. However, as we go into this year, Q1, probably through Q2 as well, you'll see a little bit of pressure on gross margins for 2 reasons. One is the excess inventory that we have that we'll be selling through the Q1 and Q2 time periods. And then secondly, what we're seeing is some FX headwinds. As you know, we do a rolling 12-month hedging program. And so as those hedges come online or were purchased towards -- in last year at higher rates, you'll see us versus last year have a little bit of headwind on FX.

[James Gabel;President, CEO & Director]

The other thing on that, too, is that, as you know, we are in the final stages of the largest capital project in our company's history and transitioning the distribution center. So that move is happening. It actually has started, and we'll go through the next 3 months. So as part of that, we want to make sure that we are moving through some seasonal goods. So we are not setting them up and moving them to a new facility and setting them up from a SKU perspective. So that certainly is a onetime occurrence that we want to make sure that we're smart in moving through that so that we set the efficiency of the DC appropriately.

[Stephen MacLeod, Analyst]

Okay. So would you expect gross margin to actually be down year-over-year in Q1 and Q2?

[James Rudyk;Chief Financial Officer]

It could be. It's a little early right now to conclude on that, but yes, it could be.

[James Gabel;President, CEO & Director]

I think, though, that Stephen, you saw us in the fourth quarter selling through some seasonal products with more elevated markdowns as we move through the quarter. Our margins were up 190 basis points. You guys have the strong mix with our perennial favorites and our enduring icon. So it really comes down to a mixed scenario in each of the quarters. But as JR said, we want to make sure that we're prudent in moving through the seasonal goods. Fortunately, as you know, our product mix is maybe different than some other brands, where 70% of our product mix is both enduring icons and perennial favorites. So we're really talking about 30% of the range that is seasonal. So we want to make sure that we are prudent in moving through that.

[Stephen MacLeod, Analyst]

Right. And so you would experience lower margins on your seasonal product generally?

[James Gabel;President, CEO & Director]

Only if we are marking it down. And if I look at a product that was originally part of our seasonal range, which is the Essential Pants and Essential Jogger, we are not marking that down, that's for sure because it is a terrific product for us. So it really -- I think our merchandising team did a very good job of pinpointing those products that are appropriate for markdowns, and we will escalate that as we move through the quarter, so that we make sure the DC transition happens as planned.

[Stephen MacLeod, Analyst]

Yes. Okay. That's helpful. And then could you just give a little bit more color around your -- the geographic variances that you cited at the beginning of the call?

[James Gabel;President, CEO & Director]

So I'm guessing where you're going with that, Stephen, is on traffic patterns, is that correct?

[Stephen MacLeod, Analyst]

Yes. Yes.

[James Gabel;President, CEO & Director]

Okay. Yes. So we -- unlike in the third quarter, where we saw traffic patterns that were consistently down across the country, as we move into the fourth quarter and as we've progressed in this quarter, we're encouraged by some positive trends that we see in some of the markets and even within some of our stores. So we continue to have very strong traffic on web and e-commerce. So until we see across the board track improvements, we'll be a bit more muted. But we think with the compelling product that we've got forthcoming and also the brand marketing, those are going to be 2 strong drivers for improving our traffic across all stores.

[Stephen MacLeod, Analyst]

Right. Okay. So was overall foot traffic in stores down in Q4?

[James Gabel;President, CEO & Director]

Yes, it was.

[Stephen MacLeod, Analyst]

Yes. And you've seen that continue into Q1, I guess?

[James Gabel;President, CEO & Director]

We see positive trends in some markets and some stores. But overall, if you add up all the foot traffic, yes, it would be down.

[Operator]

Your next question will come from Sabahat Khan from RBC Capital Markets.

[Sabahat Khan, Analyst]

Just a question sort of around the guidance. It looks like the guidance for renovations and expansions and store openings in the U.S. was taken down. I just kind of want to understand the thought process behind that. And then since you left your sales and EBITDA guidance intact, I guess, were more of those renovations and store openings expected to contribute maybe later in the year, so they won't be meaningful to your guidance. I just want to get some thoughts around that.

[James Rudyk;Chief Financial Officer]

Hi, Sabahat, it's JR here. The guidance that we issued at the end of Q3 stays the same. So -- but you are right. In that guidance, we did update for the number of renovations and relocations through the end of 2019 as well as new store openings. That was just along the approach of ensuring that we focus more on the marketing and the product areas of our business. In terms of the contribution that they have to our results, they continue to be accelerate our growth, particularly the renovations and relocations. It will be an area that we continue to invest in. Through 2019, you expect us to do between 5 and 7 renos and relos.

[Sabahat Khan, Analyst]

Okay. Perfect. And then on the commentary just earlier around the traffic and so forth, I guess. So like, is it fair to assume that the online during Q4 ends up being a much larger contributor, I guess, sales? And if you could also update on how the online penetration is coming along versus your 2019 guidance.

[James Gabel;President, CEO & Director]

That is accurate that traditionally, our online business is stronger in the third and the fourth quarter, and we certainly saw that in the fourth quarter this year. And we feel comfortable with the guidance that our online business will be 17% to 19% by the end of 2019. I think what we were particularly pleased with, Sabahat, is how well our omnichannel performed during the Canada Post strike. The Canada Post strike was something that obviously was unexpected and could have deep ramifications for many retailers. Our omnichannel performed at a high level in our ability to make sure that consumers were serviced to a high level, whether it be through our stores, our ability to get products through a network that did not have Canada Post, which coming into that holiday period, Canada Post was the backbone of our transportation network.

[Operator]

Your next question will come from Matt Bank from CIBC.

[Matt Bank, Associate]

First, on the store network in Canada. So this was touched on, but just want to get more detail. So you closed more stores than you opened in Canada in 2018. So can you just give sort of a 2019 but maybe even a longer-term view on how you see the size of your Canadian physical network evolving as e-commerce penetration increases?

[James Gabel;President, CEO & Director]

I think, Matt, you're right. We will always be looking at the individual store performance and making the prudent decision on whether that store should be part of the long-term network. We will continue to add square footage in Canada. Because we believe that physical presence is important. But that square footage may come through either new store openings or expansions and renovations. And you've seen us perform at a very high level with regards to our expansion and renovations in projects like Yorkdale and some of the others. So we're not as focused on how many stores we add or how many stores we don't move forward with, but it's about getting the optimal bricks-and-mortar footprint in Canada. Sometimes it takes a few years to get to that point. If I look at a market like Alberta, we are very well set with our strong 6 stores in that marketplace in terms of our long-term footprint.

[Matt Bank, Associate]

Okay. And then can you share what your advertising was as a percentage of sales in 2018?

[James Rudyk;Chief Financial Officer]

We don't break it out separately, but we are marching up to the 4% in 2019, which is where it will be at. So you will see incremental investments made in 2019 in marketing. But we're getting close to the 4% in 2018, and we'll be there in 2019.

[Matt Bank, Associate]

Okay. And then just a follow-up a bit. Are you able to give any guidance in terms of SG&A as a percentage of sales in 2019? I knew -- I know that you said it would be higher, just wondering if you expect that to grow faster or slower than sales?

[James Rudyk;Chief Financial Officer]

Yes. So SG&A will be up slightly in terms of total dollars, but it will be improved as a percentage of revenue slightly. There will be some increases. Rent, certainly marketing we mentioned, depreciation is an area, particularly with our investment in our new DC that will run through SG&A, e-commerce costs will increase as that area of the business grows at a faster pace but there will be some improvements as well. Store wages, in particular, as a percentage of sales will improve. And we're also growing into all the infrastructure investments that we've made over the years. But overall, you'll see SG&A improve as a percentage of revenue slightly.

[Matt Bank, Associate]

Okay. And then last one for me. Just in terms of the increased markdown, so there's some in Q4 and then coming up in Q1 and Q2. I know there's some onetime noise in there that you touched on. Just wondering, overall, has your view on marketing -- or sorry, markdown and promotional strategy changed at all?

[James Gabel;President, CEO & Director]

No. Our promotional strategy in the fourth quarter was very similar year-over-year, and you would expect to see that from us as we move through 2019. So those are preplanned events. And those are -- so it does have a role to play in our business, but we don't plan on accelerating those. And then on the markdown side, we already talked about that on seasonal goods as it relates to our distribution center move, we will continue to advance those through this quarter and into next quarter.

[Operator]

Your next question will come from Vishal Shreedhar from National Bank.

[Ryan Li, Associate]

This is actually Ryan for Vishal. I just had a couple questions. In terms of weather for Q4, was there any impact from the warmer weather in December and the colder weather in early January?

[James Gabel;President, CEO & Director]

No, there wasn't.

[Ryan Li, Associate]

Okay. And in terms of the marketing SG&A, should we expect that to be front-end loaded on the year, building into Q3 and Q4?

[James Gabel;President, CEO & Director]

No. You'll see that unfold. Almost as our business unfolds on a quarterly basis. There is some upfront investments that we're incurring in the first quarter to really set the platform in place for the brand. But as we move through Q2 and Q3 and Q4, you can expect it to match very similar to our sales momentum.

[Ryan Li, Associate]

Okay. Okay. That's good to know. And in terms of -- I know at one point, the target for renovated stores, about 29 to 33 for F '19. It's probably going to trend lower than that. Do you guys have a longer-term target of where you're going for the renovations? And obviously, there's still benefits from doing them, right?

[James Rudyk;Chief Financial Officer]

Yes. It will be -- so it's just as part of our discipline, as we review our store portfolio on a regular basis. We look at trends, we look at changing demographics and psychographic patterns in the area. And where opportunities present themselves, we will be opportunistic and invest in the renovation or relocation as required. And so they'll -- if you think about our fleet in North America, 120 stores, call it, about, on average, 10-year leases, so you have about 10 to 14 coming due each year for lease renewal. And those are the ones that you take a harder look in terms of what to do. Not that we wouldn't in advance of a -- of leases coming due, do a renovation or relocation. But it is a very attractive way and an excellent strategy for us to continue to pursue to take advantage of the changing patterns of consumers buying behavior around our regions.

[Ryan Li, Associate]

Okay. Okay. And then lastly, just a question about [ UBR ]. It's largely done. And I think there was some commentary about shifting focus to progress on your product vision at a faster rate. So is -- are you guys still going to be cognizant of that SKU count going forward? Is it going to be a moving process as you go? Or will you have to revisit this at some point? What's going on with the UBR initiative?

[James Gabel;President, CEO & Director]

Sure. So as JR indicated, we achieved the target that we set, in fact surpassed it in terms of margin improvements through the UBR. I think one of the last thing benefits of is how we approach each of our seasonal initiatives and how we set our product assortment and how we look at our manufacturer base. So all of those disciplines that were really part of or were the foundation of the UBR over the past 2.5 years are now learned processes for all of us in the company. And those will benefit us as we set each of our quarters product ranges. So we will continue to rationalize our maker network, make sure we were dealing with the best possible makers. We'll make sure that every SKU that's in our assortment matters and is consumer-focused and that we continue where we can to improve margins without pricing ourselves out of the marketplace. So those are lasting benefits. And our team in the merchandise group has done a phenomenal job of achieving our plan well ahead of schedule.

[Operator]

You next question will come from Michael Binetti from Crédit Suisse.

[Michael Charles Binetti, Research Analyst]

I guess just to continue that thinking -- I guess, longer term, I haven't heard you change your original range on the gross margin from the time line of the IPO. I think it was just over 57% at that time. And that metric has tracked pretty well to your targets over the last 2 years. How should we think now on a multiyear basis about where you see the opportunity for gross margin for the business?

[James Rudyk;Chief Financial Officer]

Yes. So Michael, we'll continue to regularly find cost improvements. I think we've put in place, as JG just alluded to, a very good discipline and process within our teams here. And as we continue to expand in North America and outside of North America with the increased volume, incremental volume will be benefiting in terms of lower costs. However, the margin trends that we saw over the last 2.5 years, we don't expect to continue, obviously, going forward, indefinitely. We will see cost improvement, but you'll be -- we'll need to use those improvements to manage at least in 2019 with pressure on some of the excess inventory and the markdowns that we'll need to do in the early part of the year as well as any FX noise. So certainly through 2019, we don't expect to see the continued trend. But on a go-forward basis long term, we're comfortable with the margins we're at. We'll obviously push for cost increases, but there is definitely opportunities. There's a number of factors, our new distribution center, as it comes online middle of this year, it will allow us to distribute goods on a much more efficient basis, which we'll expect to see benefits beginning in 2020 and beyond. In addition to that, as we -- the product line continues to get stronger, the markdown rates will improve. And so that's another area of opportunity on a go-forward basis.

[Michael Charles Binetti, Research Analyst]

Okay. And then moving back to the top line. Can you help us think through some of the building blocks for sales in a little more detail for 2019? And I'm thinking about same-store sales in particular. And you mentioned where traffic is. I know that's a metric that's a little bit out of your control, given the trends in the marketplace, but maybe we could think about how do we think about same-store sales for the year? And within that AUR, if traffic were to stay negative, can you talk us through what you think about as far as the puts and takes on AUR this year and how you're planning for that?

[James Gabel;President, CEO & Director]

Sure. Well, if you look at the guidance that we've given in terms of a sales range of $3.58 to $3.75, that would certainly tell you that we expect to have positive comps during the year. We're fortunate that we're not dependent on one particular region, product or category to drive our business. And we are seeing -- and that's probably what was most encouraging for us as we saw our performance in the fourth quarter that we saw consumers embraced our perennial favorites and our enduring icons that are staples for our product -- for our brands. But also just the emergence of the consumers' acceptance of goods on our women's apparel side, our men's apparel side and our leather products. And so our growth will really be predicated on that type of balanced portfolio where we're not dependent on one particular product. And those products will really come to life through large-scale storytelling as well as through our omnichannel. I think our store experience will continue to get better. What we did see, while traffic was down in the quarter, the measurements of UPTs and average selling price were up in the quarter. And so that's certainly within our control. If traffic is softer, our ability for our sales professionals to convert to a higher level and make sure that we are selling more items when they're in the store or online with us and that the consumer is voting for some of our best items when they're making those purchases.

[Michael Charles Binetti, Research Analyst]

Okay. And then I guess just one last one for me is just -- it seems like there's quite a bit of noise in the inventory number at year-end. But it was a touch higher than you've seen ending the quarter relative to where the sales are. Could you just help us orient where you think inventories will be on a year-over-year basis as we get to the end of first quarter?

[James Gabel;President, CEO & Director]

So I'll tackle the first part and then JR, maybe you can have some comments here about where it will be at the end of the year. Just want to draw your attention to, as I mentioned earlier on that if you look at the mix of our products, 20% of it is enduring icons and 50% is -- sorry, 50% is peroneal favorites, 20% enduring icon and the balance is seasonal. So as we look at those 3 categories of inventory, on the enduring icons, it's about flowing the goods. So we have brought in goods, our ability to flow those through our channel is something that we're currently doing to make sure that the inventory levels are appropriate. Likewise, with our perennial favorites, if we've got an item as it goes through the selling cycle this quarter, we may, on occasion, pack that item up because it would then be a great contributor to our range next fall. So it really is about 30% of our product range that we are looking at, making sure that, that is in place where we want to be by the end of the second quarter.

[James Rudyk;Chief Financial Officer]

And in terms of where we expect to end up, Michael, if you look at our total inventory balance, about $6 million of the incremental amount is related to just a flowing of goods from our factories overseas, the in-transit amount being higher than it normally should be. So $6 million, you would not expect to repeat next year. And then if you work through the other incremental amounts, we are taking steps to adjust our purchases going forward, particularly for the perennial and the iconic products that we have in excess of, so that we don't expect to carry incremental amounts of that at the end of next year. So what you'll see is our inventory levels drop down to a more normal level, which would be significantly lower than where we ended this year and closer, slightly higher given our higher footprint than 2017 number.

[Operator]

And our final question for today will come from Camilo Lyon from Canaccord Genuity.

[Pallav Saini, Associate]

This is Pallav Saini on for Camilo. Good job on the quarter. It's good to see a rebound in comp growth. My first question is on U.S. Jim, how should we think about the long-term store opportunity in the U.S.? And given the moderation in your plan for store openings in '19, how are you thinking about driving growth in your e-commerce business there as new store openings typically result in a boost in e-commerce sales as well?

[James Gabel;President, CEO & Director]

Yes. That's a great question. And that's exactly what we are seeing happening in the markets of Massachusetts and in Virginia. We have seen our e-commerce platform and business accelerating in those markets. So they do go hand-in-hand between having a compelling physical experience and then a vibrant e-commerce platform. As you know, we ship to all 50 states. And actually, our U.S. e-commerce business is the fastest-growing part of our company right now. So we will, as we move through a full year with the new stores and as we bring on Chicago, we want to make sure that all of our resources in the U.S., and we've actually hired a new and dedicated district and business manager for the U.S. who resides in U.S. that will manage all of our store base. So we are making sure that those 5 stores that we've got open perform at the same high levels that our legacy stores do. And once we see those trends continue to mature, then we continue to see the U.S. as a strong growth market for us long term.

[Pallav Saini, Associate]

And my second question is on your spring product. It's still early, but can you provide some color on how your spring assortment or spring offering is performing, especially the categories that you expanded this year, like dresses, polos and sandals? Any color there would be helpful.

[James Gabel;President, CEO & Director]

Yes, certainly, like you said, it is early. But initial indications for dress is that will be a larger undertaking for us as we move through Q2 and Q3. We're encouraged by how those are performing. Footwear, as I said, we have it in the market 60 days earlier than last year. So we were on plan with when people are making those spring purchases. So you would expect to see that those products are performing better. And then if we look at polos and shorts and those things really kind of start coming to life as we come into Mother's Day and Father's Day and some of those early parts of the summer season.

[Operator]

I have no further questions. I give the call back over to the presenters for closing remarks.

[James Gabel;President, CEO & Director]

Thank you, operator, and thank you, everyone, for joining us today. We look forward to updating you on the progress when we report our Q1 fiscal 2019 results. Have a great day.

[Operator]

This will conclude today's conference call. You may now disconnect.