Aritzia Inc
TSX:ATZ
Earnings Call Analysis
Q3-2024 Analysis
Aritzia Inc
In a robust earnings period, the company saw its net revenue grow to $654 million, marking a 5% increase from the previous year. This growth comes on the heels of two outstanding years, achieving a compounded annual growth rate (CAGR) of 33% over three years. Notably, comparable sales modestly increased by 0.5%, set against a previous year's impressive 23% surge. In the United States alone, revenues climbed 4% to $327 million, while Canadian revenues rose 5% to an equivalent $327 million. The quarter concluded with record-breaking sales events, hinting at the success of the company's Black Fiveday event.
The company's retail operations, buoyed by new and revamped boutiques, amassed $441 million, signaling a 4% year-over-year gain. E-commerce, a standout with nearly 40% CAGR over four years, advanced with a 6% increase to $212 million in revenue. However, gross profit margins retracted slightly to 41.5%, approximately 180 basis points less than last year, largely due to increased markdowns for inventory optimization and costs associated with new flagship boutiques.
Selling, General, and Administrative (SG&A) expenses soared to $187 million, a notable 14% rise from the previous year driven by growth investments. This hike, albeit beyond expectations, raised SG&A to 28.7% of net revenue. Reflecting these expense dynamics, the Adjusted EBITDA for the quarter reached $92 million, down 23% from the previous year, which corresponds to a contraction in Adjusted EBITDA margin.
Inventory levels decreased by 22%, signaling decisive efforts toward optimization. In alignment with this, the company repurchased 1.1 million subordinate voting shares, funneling $30 million back to shareholders, revealing a strategy to balance shareholder returns and capital allocations.
The company generated $172 million in free cash flow, finished the quarter with $141 million in cash, and cleared a $100 million revolve. The enhanced revolving credit to $300 million, effective until 2026, exemplifies a strategic priority on maintaining robust financial foundations. Upcoming revenue for the fourth quarter is projected to nestle between $670 million and $690 million, indicating an increase of 5% to 8%. This reflects a steady continuation atop two years of exceptional growth, aiming for a yearly revenue target between $2.32 billion and $2.34 billion, which translates to a growth of approximately 6% to 7%.
Capital expenditures are revised to around $180 million, including aggressive boutique development and distribution network expansions. The company's strategy is forthright, focusing on scaling up physical footprint and e-commerce capabilities to boost overall growth. A pointed emphasis is placed on the significance of new boutiques — a reliable driver of predictable revenue enhancements.
With upcoming expansions, including the opening of the Chicago flagship, and multiple boutique renovations, the company is set for an anticipated square footage growth of 20% to 25%. Executives project accelerated sales, improved product lines, and successful eCommerce strategies to considerably uplift earnings in fiscal 2025.
Management expressed confidence in the brand's trajectory, pointing to consistent investments in the scalability of their business model. There's tangible excitement for the spring collection and an ongoing pledge to enhance the customer experience with 'Everyday Luxury' offerings. The tone is unabashedly optimistic, with a clear outline of the roadmap for Aritzia's sustainable growth and expansion.
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Thank you for standing by. This is the conference operator. Welcome to Aritzia's Third Quarter 2024 Earnings Conference Call. [Operator Instructions] and the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Beth Reed, Vice President Investor Relations. Please go ahead.
Thanks, Asia, and thank you everyone for joining Aritzia's Third Quarter Fiscal 2024 Earnings Call. On the call today, I'm joined by Jennifer Wong, our Chief Executive Officer; and Todd Ingledew, our Chief Financial Officer. As a reminder, please note that remarks on this call may include our expectations, future plans and intentions that may constitute forward-looking information. Such forward-looking information is based on estimates and assumptions made by management regarding, among other things, general economic and geopolitical conditions as well as the competitive environment. Actual results may differ materially from the conclusions, forecasts or projections expressed by the forward-looking information. We would refer you to our most recently filed management's discussion and analysis and our annual information form, which include a summary of the material assumptions as well as risks and factors that could affect our future performance and our ability to deliver on the forward-looking information. Our earnings release, the related financial statements and the MD&A are available on CR as well as the Investor Relations section of our website. Following prepared remarks in order to give everyone the opportunity to have their questions addressed, please limit yourself to one question and a related follow-up. I'll now turn the call over to Jennifer.
Thanks, Beth. Good afternoon, everyone. Happy New Year, and thank you for joining us today. For the third quarter of fiscal 2024, we delivered net revenue of $654 million, an increase of 5% compared to the third quarter of fiscal 2023. This is on top of delivering outstanding revenue growth of 38% in the third quarter last year and 63% in the third quarter of fiscal 2022. Comparable sales growth increased 0.5% for the quarter on top of a remarkable 23% comparison last year. In the U.S., our net revenue increased 4% for the quarter on top of 58% growth in the third quarter last year. While in our Canadian market, sales grew 5% as we lapped 22% growth in the third quarter of fiscal 2023. In our retail channel, net revenue increased 4% in the third quarter, driven by the progress we've made on our real estate expansion strategy. During Q3, we opened one new boutique in Charlotte, North Carolina as well as our newly expanded prudential location in Boston. In Q4 so far, we have opened new boutiques in Indianapolis, Indiana; Corte Madera, California; and one boutique expansion in Skokie, Illinois. Next month, we plan to open another new boutique in Roseville, California, representing three new boutiques in the fourth quarter. The performance of our new boutiques remains strong and continues to result in better-than-expected payback periods. Our most recent new boutiques remain on track to pay back in approximately 1 year or less, ahead of our expectations for 12 to 18 months. The new Charlotte boutique we opened in November is generating better-than-planned sales results and tracking to pay back in just 10 months. Our boutique expansions also continued to perform well, elevating the customer experience as well as driving increased revenue and profitability. The expanded boutique [ wheels as in ] Boston last August is generating incremental sales growth of [ 48% ] and rent has increased by only 25%, delivering a meaningfully higher contribution. Turning to eCommerce. The net revenue increased by 6% in the third quarter, following 3 years of extremely strong growth and resulting in a 4-year CAGR of nearly 40%. That said, we believe the potential growth in our eCommerce channel is greater than our recent performance. And with that, I'm extremely pleased to announce that we have added a Chief Digital Officer to our senior leadership team. The Chief Digital Officer has oversight of the digital customer journey and is responsible for bringing Everyday Luxury to life online. This individual has a proven track record of delivering impressive top line and bottom line results through successfully building and scaling best-in-class digital businesses. We've also increased our level of digital marketing. The natural next step in our influential strategy and a complement to our boutique opening, we believe digital marketing will help grow our brand awareness in the U.S., protect our product franchises and position us to acquire even more new customers. We're also in the process of upgrading our technology stack, which is a major milestone in the eCommerce 2.0 journey and will help unlock all future customer-facing experiences online, ultimately positioning us to realize our eCommerce 2.0 vision across our three value propositions, tailored product discovery, intuitive experiences and creative innovation. Throughout the quarter, we continued our pilot of additional omnichannel services, buy online, pick up in store and ship from store. We completed our ship from store rollout in Canada with revenue exceeding our expectations. At a minimum, we believe the incremental contribution of our omnichannel services could ultimately drive a low- to mid-single-digit percentage of eCommerce sales. We're very encouraged with our early omnichannel results and look forward to beginning our rollout in the U.S. next month. In product, our assortment of new styles resonated well with our clients during Q3, and we saw a strong start to the outerwear season across puffers and wool coats. We continue to expect our assortment to improve with a higher proportion of new styles for spring 2024, which begins to launch at the end of this month. From an inventory perspective, we're very pleased with the progress we've made in continuing to optimize our position. At the end of Q3, inventory was down 22% over last year. We were able to clear through our inventory and have less product at the end of the season compared to last year, and we, therefore, expect to sell more new products and client favorites for spring. During the quarter, we had our first ever digital archive sale, building on the success of our annual physical warehouse sale here in Vancouver. The event went better than planned, allowing us to profitably clear more product early in the season and to test additional inventory clearing strategies as we grow. To date, we have not seen any material cannibalization to regular price or seasonal sales as a result of the archive sale. And to be clear, our promotional strategy has not changed. We run a full-price retail model with markdowns [ used to ] clear items that we no longer plan to sell in the future. Throughout the fourth quarter, we expect our inventory position to continue to improve, and we look forward to starting spring 2024 with a more optimized product assortment. In marketing, as I mentioned earlier, we have increased our level of digital marketing to propel brand awareness in the U.S., including paid-search and paid social and successfully launched our affiliate marketing program. Early results have been positive, and we are expanding our social and affiliate programs to help ensure our brand is top of mind, drive client acquisition and drive conversion. Our Super Puff campaign this year featured a cast of high-profile influencers and celebrities, including Emma Chamberlain, Chef [ and model ], Gabriel [ Bester ], NASCAR driver, Toni Breidinger, [indiscernible] and a musician named Maria Zardoya. We strategically partnered with a wide range of athletes and fashion and cultural icon to connect our Super Puff with the whole of our client base. Our puffers is designed for anyone and everyone. Already well-known for its style. -- this year, we highlighted its superior technical quality, positioning the Super Puff as the most versatile puffer in the marketplace. Turning to supply chain. This was our first Black Fiveday and Cyber Monday utilizing our new Ontario distribution center, and it was a tremendous success. After coming online, just 3 months earlier, the new facility ramped up smoothly to accommodate volumes higher than we've ever experienced and it operated as our primary distribution center packing 3x the number of orders compared to the peak day of our outsourced Ontario distribution center last year. Our already exceptional click-to-door improved meaningfully in both countries and by 45% or more than an entire day in Canada as the in-sourced facility is both more productive than our prior facility and able to handle all of our East Coast volumes. Needless to say, we're extremely pleased with the ramp-up of our new facility where productivity KPIs continue to exceed our expectations. In addition, we've exited all but one of the temporary off-site warehouse facilities, which has resulted in a significant reduction in our inventory management costs. Our community remains a key priority for Aritzia and this year marks the second year Aritzia created an orange T-shirts in recognition of Orange Shirt Day. We partnered with indigenous artists, Alanah Morningstar Jewell to create a specially designed T-shirt for our people and clients, which sold out in a matter of hours and enabled us to make our largest donation to date to this organization. In addition, this holiday season marked our fourth annual warm coat donation where we gifted 4,000 winter coats to our Aritzia community partners all across North America. With that, I will now pass the call over to Todd.
Thanks, Jennifer, and good afternoon, everyone. Our revenue for the third quarter of fiscal 2024 was better than our expectations, and we drove meaningful sequential margin improvement compared to the first half of the year. Let me take you through the results for the quarter. In the third quarter, we generated net revenue of $654 million, representing an increase of 5% from last year. This increase is on top of 2 years of extraordinary growth in the third quarter, 38% in fiscal 2023 and 63% in fiscal 2022, resulting in a 3-year CAGR of 33%. Comparable sales growth for the quarter increased 0.5% following a remarkable increase of 23% last year. Net revenue in the United States was $327 million in the third quarter, an increase of 4% on top of the third quarter increase of 58% in fiscal 2023 and 115% in fiscal 2022. In Canada, net revenue increased 5% to $327 million on top of an increase of 22% in fiscal 2023 and 37% in fiscal 2022. In both countries, trends improved sequentially throughout the quarter, which ended with our Black Fiveday event that broke several records. Net revenue in our retail channel was $441 million, an increase of 4% from the third quarter last year. This was driven by the performance of our new and repositioned boutiques, which continue to generate better-than-expected payback periods. In eCommerce, net revenue was $212 million, an increase of 6% from last year as we lapped 3 years of unprecedented growth in this channel, resulting in a 4-year CAGR of nearly 40%. We continue to see significant opportunity in our eCommerce business, particularly in the United States, where we expect new boutique openings and increased marketing to generate accelerated traffic trends in fiscal 2025. We delivered gross profit of $271 million, roughly flat compared to the third quarter last year. Gross profit margin was 41.5%, declining approximately 180 basis points from 43.3% last year and representing a meaningful sequential improvement compared to the first half of this year. The margin decline in the quarter was primarily driven by higher markdowns to support the optimization of our inventory position and preopening lease amortization costs for our flagship boutiques. These impacts were partially offset by lower warehousing and freight costs. SG&A expenses were $187 million, up 14% from last year. SG&A as a percent of net revenue was 28.7%, representing an increase of 250 basis points compared to 26.2% last year, better than our expectations. The increase in SG&A expenses was driven by investments in talent made through the end of fiscal 2023, marketing initiatives and support office expansion, all to support our growth. Adjusted EBITDA in the third quarter was $92 million, a decrease of 23% from last year. Adjusted EBITDA was 14% of net revenue compared to 19.2% last year. The decline in adjusted EBITDA margin primarily reflects 2 things: higher markdowns to support the optimization of our inventory position and investments made to support our growth.At the end of the third quarter, inventory was $397 million, down 22% from the end of the third quarter last year. We are pleased with the progress we've made as we continue to optimize both the quantity and composition of our inventory. Since the implementation of our current normal course issuer bid on January 20, 2023, we have repurchased 1.1 million subordinate voting shares, returning $30 million to shareholders. Subsequent to the end of our current NCIB, we anticipate commencing another for a 1-year period, which we will use to offset the dilution of option exercises over time and purchase shares opportunistically. During the third quarter, we generated $172 million in free cash flow and ended the quarter with $141 million in cash. We also fully repaid the $100 million drawn on our revolving credit facility. In addition, given our growth, we extended our revolving credit facility to October 2026 and increased the availability from $175 million to $300 million. We remain focused on maintaining a strong balance sheet, which has served us well through time. Shifting to our outlook. Based on quarter-to-date trends, net revenue in the fourth quarter is expected to be in the range of $670 million to $690 million, representing an increase of approximately 5% to 8%. This increase includes the benefit of approximately $30 million from the extra week in the fourth quarter this year. This net revenue expectation is on top of 2 years of exceptional growth, 44% in fiscal 2023 and 66% in fiscal 2022. We expect gross profit margin in the fourth quarter to be flat to slightly up compared to the prior year. This represents a continued sequential improvement, primarily driven by the ongoing reduction in our warehousing costs. And we expect SG&A as a percent of net revenue to be up approximately 250 basis points compared to the prior year. For the full year, we currently expect net revenue in the range of $2.32 billion to $2.34 billion compared to our previous outlook of $2.25 billion to $2.35 billion. This outlook now represents growth for the year of approximately 6% to 7% from fiscal 2023 on top of a 47% increase last year and a 74% increase in fiscal 2022. In addition to the five new boutiques and three expanded boutiques already opened year-to-date, we plan to open one additional new boutique and one additional boutique expansion late in the fourth quarter. The timing of two of our boutique openings, including our Chicago flagship have shifted from the fourth quarter in the next fiscal year. We continue to expect gross profit margin to decrease approximately 300 basis points in fiscal 2024 and for SG&A as a percentage of net revenue to increase approximately 300 basis points compared to last year. We now expect capital expenditures for fiscal 2024 of approximately $180 million. This includes $100 million related to our new and expanded boutiques where we continue to see our most recent new boutiques tracking to pay back in approximately 1 year or less, ahead of our expectations for 12 to 18 months as well as $80 million primarily related to the expansion of our distribution center network and support office space. The $40 million reduction compared to our prior guidance primarily reflects the timing shift from fiscal 2024 to fiscal 2025 of improvements to our distribution center in Columbus, Ohio and certain store openings. Looking to fiscal 2025, we expect top line momentum to accelerate, supported by square footage growth of approximately 20% to 25%. This is driven by 11 to 13 new boutiques next year, including our Chicago flagship and 4 to 5 newly expanded boutiques, including 2 of our Manhattan flagships. Importantly, our new stores are our most consistent growth driver, historically delivering predictable revenue growth and propelling our brand. With continued investment in both our digital experience and digital marketing, we remain confident that both our eCommerce and retail channels will fuel growth of our omnichannel business. We continue to expect meaningful adjusted EBITDA margin improvement in fiscal 2025 with 500 basis points of expansion, driven by IMU improvements, our smart spending initiatives, subsiding transitory cost pressures as well as leverage on fixed costs. In closing, we expect sales to accelerate next year, driven by the 20% to 25% square footage growth as well as an improved product position and the execution of our eCommerce 2.0 strategy. Compared to the first half of this year, we have already seen our margins begin to normalize with further improvement expected in fiscal 2025. We continue to anticipate that our expected revenue acceleration and margin expansion will drive significant earnings growth next fiscal year and beyond. With that, I'll now turn the call back to Jennifer.
Thanks, Todd. As you can see, Aritzia delivered meaningful sequential improvement in the third quarter, and we remain extremely optimistic about our prospects for accelerated growth. In Q4, as we continue to anniversary 2 years of unprecedented sales results, we remain focused on investing in the scalability of our business to set the stage for our next level of growth and help ensure that we can expand in an agile pace. We are pleased overall with the holiday season, which started off with a record-breaking Black Fiveday event, and we've seen a solid start to the fall and winter sale period. We're encouraged by the strong response to our assortment of new styles, and we expect the mix of our assortment to be further improved for spring 2024, which launches at the end of this month. Our real estate strategy continues to deliver better-than-expected results, and we have an extraordinary pipeline of boutiques opening in fiscal 2025, representing annual square footage growth of 20% to 25%. In addition to fueling accelerated retail sales [Technical Difficulty]. In addition to accelerating retail sales trend, we expect the increased pace of boutique openings to drive incremental eCommerce sales as we expand into five new markets next year. In addition to geographic expansion, we see a huge opportunity to accelerate our eCommerce trends through a strategic focus on leadership, digital marketing, technology and creative innovation. In closing, I would like to thank all of our people across Canada and the U.S. for their dedication and hard work, particularly during our busiest time of year as we delivered another successful holiday season. I'm extremely honored to lead this team into the next phase of Aritzia's growth. Last but not least, I'm also very excited for our spring collection to hit the store, and I look forward to introducing Everyday Luxury to more and more clients as we head into fiscal '25. All right. And with that, let's please open up the lines for questions.
[Operator Instructions] The first question comes from Brian Morrison with [ TD Con ].
Congratulations on a big quarter. Todd, I wanted to ask about the 500 basis points for fiscal 2025. It seems like all the buckets remain unchanged, but you also commented about a step forward with respect to paid search and digital marketing. I'm wondering if you can maybe go into detail if that is factored into your guidance and what steps you have taken? And what approach you'll be taking with that?
Well, Brian, I can answer from an overall 500 basis point impact perspective and what we're expecting for the margin, but maybe I'll let Jen answer the second part of your question.
I'll touch on the digital marketing part of the question. We have a significant opportunity in the U.S. eCommerce space, and we see digital marketing as being a key driver. So to just give you some color, we increased our digital marketing spend this past quarter compared to last quarter, which is essentially 0. As you know, we spent little to no dollars on digital marketing. And we will increase our digital marketing spend over time. But given the base that we're starting from, it will remain at very low single-digit percentage of revenue. And this is to primarily drive our U.S. eCommerce, which is our most profitable channel.
Yes. And then from an impact to margin perspective, we've considered that in our guide of the 500 basis point improvement. So they're obviously with the additional marketing will come additional revenue that will leverage other areas. So while potentially marketing will be a higher percentage of revenue, we will see leverage in other areas that will offset that expenditure.
Okay. Great. And then a follow-up. In terms of product newness, Jen, you sound very excited about what's going to hit the stores in spring and fall of next year. Maybe you can just give us some examples of not necessarily hurdle rates, but examples of why you're excited in terms of the [ seeding ] that took place this year and what we should expect.
Absolutely. Super excited for the spring launch this month. In a nutshell, the proportion of the new in our overall assortment will increase for spring. And I would say we're most of the way there in terms of where we want to be, essentially expect our assortment to be much more in line with our historical balance. So what does that mean? That means when you walk into the store, let's say, you walk store at the beginning of the season next month once we're fully launched, roughly half the store will be merchandised with new products, and the other half will be merchandised with client favorites that makes our boutique a destination. And so knowing that we're getting back to our original playbook, if you will, is what had me excited because that's essentially what has driven our success among other things, but it's been the center of the product driving success for almost nearly 40 years.
And respect and the seeding that you've done, examples of why you're excited about that?
Because what I do know is our merchandising strategy and our assortment strategy, allocation strategy is a proven strategy for us. That is what's driven our success for years. And so we got away from that in the last few years coming out of COVID. During COVID, there was no playbook sort of [ through ] the playbook [indiscernible] talk about that. And coming out of COVID and emerging out of COVID, what was needed to do was get back to this original playbook. So getting in line with where we have been historically and knowing that when we introduce newness and showcase that to our clients. And then in turn, portions of that become client favorites in and of themselves is what fuels our product strategy.
The next question comes from Luke Hannan with Canaccord Genuity.
Yes, I just wanted to ask about the success of the archive sale. Jen, it sounds like you're pretty positive on what you're able to see there. Is the expectation that going forward, you may look to clear more product earlier in the season than maybe you have in years past? Or maybe you can just give us some thoughts on the success of the archive sale and maybe the learnings from it?
Absolutely. The first archive sale definitely went better than we planned. As you said, it's allowed us to clear more product, and I will say, profitably clear more product earlier in the season. This is something that we thought we would try this season, given the elevated levels of inventory. We're not making any changes to our promotional strategy per se. But this gives us an additional tool or channel, shall I say, that as we grow and scale and expand into geographies, it's something that can augment our physical warehouse sale that we have annually here in Vancouver. So we think that this will be something that we could use in the future. Although at this time, we have no plans to have a digital archive sale. We will continue to have our annual physical warehouse sale here in Vancouver.
Got it. And then my second question here is just on maybe where markdown levels or rates are as of today and where that sets up versus pre-pandemic levels and maybe what the expectations are what you're seeing so far in Q4 and your expectations moving forward into fiscal '25 as well?
Yes. Sure. I'll take that one. So we're pleased with obviously the improvement in our inventory levels, which were down 22% in the quarter. And we did still achieve our gross margin guidance. But the normalized markdowns were slightly higher than pre-pandemic levels in Q3. But for the year, we still expect that our markdowns will continue to be below pre-pandemic levels and expect that next year will be the same.
The next question comes from Irene Nattel with RBC Capital Markets.
As you know, the store opening is obviously a big driver of the revenue growth that you're anticipating in F '25. Can you please give us an update of the timing within F '25 now that we've seen kind of that slippage from late Q4 into next year.
Yes, Irene. It's relatively consistent with what I provided last quarter. So the concentration of the new stores is in the second and third quarter. But I can give you more specifically. We're expecting 1 new store in Q1 and then 4 in the second quarter, 7 in the third quarter and 1 in the fourth quarter. And then I think importantly to note that the expansions, which will primarily be at least the largest of which will be our two Manhattan expansions are scheduled for the back half of next year.
Understood. So if we think through sort of the timing of all of this, Todd, if we're looking at 20% to 25% square footage growth, if we were to think maybe half of that on a run rate on revenue growth or a little bit more than half, does that be kind of reasonable given the timing?
I mean, on the retail revenue, I would say a little bit less than that given the heavy weighting in the back half of the 8 stores, 8 new stores in the back half and then there's three expansions, but the two largest are the Manhattan ones. So it would be a little less than that, that we would benefit from next year.
Okay. That's really helpful. And then just shifting topic slightly. In terms of the retail revenue, or the revenue growth, let's call it, mid-single digits. What's your sort of data telling you around spend per client versus new spend particular or new clients, particularly as you're increasing the digital marketing spend? And to what degree is extending your customer base a key element of that strategy.
Quarter-over-quarter, what we're seeing with new clients and existing clients is that the average basket size is generally consistent. What happens is with the new -- when the new clients come board and they become returning clients, we see the frequency of their visits increase. And so that's what we're looking to do is acquire clients and then also retain and cultivate a loyal client base. We have a very loyal clientele in Canada, and our objective is to achieve that same level in the U.S. So we see that -- we still -- we expect to see client growth continue. That's what we're aiming for. And as far as overall spend, we believe that, that will remain consistent across time, over time and between two groups.
The next question comes from Martin Landry with Stifel.
I wanted to touch on your two main markets, the U.S. and Canada. Your revenues in the U.S. were up 4.2% year-over-year. It's a slower pace than what you've generated in Canada despite the fact that most of your store openings were in the U.S. in last year. So I was wondering, is there anything that could explain why Canada outperformed the U.S. in terms of revenue growth during the quarter?
Overall, as we said, what we see is there is macroeconomic pressure on the consumer across the board, across both geographies across both channels. There may be some country differences between the 2 countries overall, that's what we're seeing. What I will say in Canada with our very loyal clientele, we do have a very, very loyal following. We're very well known and loved in Canada. And we are getting more famous in the U.S. But what we're seeing is that our new client growth did moderate over the period and existing clients were shopping less. So we see that we were -- there's a period where things have moderated. And what we see is that this is likely reflected from the macroeconomic pressure on the consumer.
Okay. And do you expect that trend to continue into Q4 for the U.S?
It's Todd here. No, what we're seeing actually is a bit of a pickup in the fourth quarter in trends in the United States. And I think you could also look at just the lapping the U.S. had meaningful comps over the last 2 years. And so that's also making it even tougher compare. But we actually have seen those trends start to turn in the fourth quarter.
The next question comes from Mark Petrie with CIBC.
I know it won't be until next month where you're back to sort of normal levels on new items, but you did call it out as a benefit in Q3. I'm just hoping you can expand on that a little bit, specifically how the performance varied, if at all, between Canada and the U.S. as well as across categories and brands?
Definitely. I wouldn't say that there was a notable difference between the two countries. But what we did see this quarter is that compared to last year, if you look at it in terms of the contribution to overall sales, newness doubled from last year – same time last year.
Yes. Okay. Perfect. And then following up on Irene's question. Obviously, the flagship stores are a big part of the square footage growth for fiscal '25. I know you secured attractive rent deals and that goes a long way in terms of supporting the financials for those locations. But how are you thinking about the sales productivity of that space versus your prototypical store?
These flagships, there's a very important brand propelling factor with these flagships. Where they're located, as we shared are some of the best real estate in the U.S. is arguably North America. So the positioning and the actual physical location of these stores is very important to our overall marketing and brand awareness campaign, if you will, as we expand in the U.S. In terms of actual productivity, I would point to what our existing expansion so far have indicated, which is – when we expand a store like the one we did in Boston, we see that the overall contribution increases as a result of the increased square footage because it allows us to showcase more product in a very elevated Everyday Luxury fashion. It improves the shopping and client experience because there's more space, we can have more [ seating ] rooms, we could have this is generally a nicer client experience. And then with -- I got to give a shot out to the leasing team that negotiates a great leases for us that allows us to have an overall higher contribution on the bottom line between the total productivity of the stores and the lower rent per square foot, it just is meaningful contribution. So we know that our boutique expansion is a meaningful contribution to our overall sales.
Okay. That's very helpful. If I could ask one more, I guess, for Todd. What was the impact of the efficiency work in Q3? And how should we think about the benefit flowing through in Q4 and then in fiscal '25?
Sorry, Mark, I missed -- you said efficiencies and then of something. It was inaudible, what you said.
Well, just -- yes, sorry, I mean you guys have been working on a whole host of projects regarding efficiency, and I think you quantified it. And how much of that flowed through in Q3? How should we think about the benefit in Q4 and next year?
Yes. So for next year, which would be inclusive of things we're seeing this year is $60 million is the benefit we're expecting, but it won't be completely incremental because we're expecting about $30 million of the benefit this year. And so that's coming primarily in the third and fourth quarter. So you can think of that as approximately $15 million of benefit in Q3 and $15 million in Q4. And then the remaining $30 million will come next year and then potentially some additional.
The next question comes from Stephen MacLeod with BMO Capital Markets.
Just wanted to ask a question about SG&A. When you think about the Q4 guidance that you've laid out, I would have expected to see a bit more SG&A leverage. So I'm just curious if there's anything that you can point to that's happening in Q3 -- or sorry, Q4 on the SG&A side?
Yes. So specifically as we said, we are expecting 250 basis points of pressure in the fourth quarter, which is consistent with the third quarter. It's really from the same items, which is investments in retail and support office talent, digital marketing initiatives and support office expansion. And we have lapped the guidance for the year at 300 basis points up. So I think that's what you're driving at, given the improvement that we saw in Q3 against our guide. But I think we just felt from a conservatism perspective that it made sense not to flow through that benefit into the full year. But it will be the same pressures in the fourth quarter that we saw in the third. That's how we're planning for it.
Yes. Okay. Great. And just in terms of the sales by channel, you gave some color on sort of what you saw in Q3. And I'm just wondering if you can give some color on what you're seeing on a quarter-to-date basis in Q4 in terms of by geography and channel. Like are you seeing that sort of positive same-store sales growth trend continuing into Q4?
Yes. Our trends in Q4 have continued. The momentum has continued effectively from the third quarter. So we're pleased with that and happy with the start to the quarter. Obviously, still a lot of weeks to go, especially with the additional week, but we're very pleased with what we're seeing right now.
Yes. Are you able to comment just around what you're seeing by -- specifically by channel and geography?
We think we'll get into that detail when we report the quarter.
But it is consistent from the third quarter leading into the fourth. There's been no [ marked ] changes all of a sudden going from one quarter to the next.
Yes, save a little bit of pickup in the United States. [ That's what ] we said.
The next question comes from Michael Glen with Raymond James.
Just going back on the 500 basis points for fiscal '25. Have you provided or give an indication about how to think about bucket that between gross margin expansion and SG&A leverage.
Yes. A lot of the components hit gross profit. So if you walk through them, 150 basis points from IMU improvement, obviously, that's all within gross profit. The 150 to 200 basis points in our smart spending initiatives, that's about 60% SG&A, 40% gross profit. And then the 125 basis points pickup from transitory cost of siding is effectively our distribution center in Toronto as that ramps, and we have -- our temporary warehousing costs [ fall off ], which sits within gross product COGS, so it affects the gross profit line. And then our preopening lease amortization is the other transitory cost. So that's also an improvement to the gross profit line. So the majority of the [ $500 million ] is hitting the gross profit line.
But you would expect to be able to leverage SG&A next year? Is that a fair assumption?
Yes. There is some improvement from SG&A related to the smart spending initiative as well as leverage from our higher revenue. So there is, obviously, this is all contingent on the revenue levels that we achieved next year.
Okay. And then what kind of commentary can you provide around the competitive environment that you're seeing? Are you seeing increased competition in your core markets? Like how things evolved over the past year?
Yes. My comments on the competitive landscape is essentially, we still continue to see no one that can compete with us on the breadth of our products or on the quality, care and attention that go into our products to our boutique. We have operated since -- for decades, right? We've always operated in a competitive environment. And while as we become more well-known and get more famous in the U.S., certainly, we are coming up on competitors' radars. And I just see this as an opportunity to double down on our marketing and communicating effectively to ensure that our Everyday Luxury value proposition is as well understood by the U.S. and prospective clients alike, as it is with our existing loyal clientele.
[Operator Instructions] The next question comes from Alice Xiao with Bank of America.
Can you give an update about how much outerwear is as a percent of total sales? And what percentage of that is the Super Puff franchise? And also how outerwear sales have trended versus last year given the recent warmer weather in both U.S. and Canada?
Well, I won't tell you exactly how much outerwear makes up as a percentage of our sales. We never share how our categories stack up. But what I will say is, overall, outerwear sales were positive year-over-year. Certainly, this is driven by the Super Puff. That is a product franchise of ours. But as mentioned, our wool coats received a lot of attention just given their high luxurious quality and attainable price point. So we're super pleased that the Super Puff continues to perform well for us. And as I said, that we always -- we still saw a strong demand for our wool coat. That said, outerwear across the board performed very well. And I'll remind you that no one brand, including the Super Puff, accounts for more than 10% of our annual sales, generally speaking.
And if I may one more. Just can you also talk a little bit about the sales trends by month? And if Black [ Friday ] was stronger than Christmas and also if certain categories and sub-brands did better than others.
During the quarter, we had sequential improvement, I guess, I would say, throughout the quarter, with November being our best month. What we're finding with our holiday period essentially now starting, starting with Black Fiveday. Things have kind of even out between the Black Fiveday period versus Boxing Week, which historically is still very big in Canada, but historically was our equivalent of Black Friday. But things have kind of what I would say is it sort of -- we thought it smooth out a little bit and not be so peak and valley, if you will, as we've seen it in the past. Certainly, we broke a lot of records. As Todd mentioned in his prepared remarks, we broke a lot of records on Black Friday, including it being some of our top sales days in our retail stores ever that includes even in Canada as well in a couple of cases. So we just kind of continue to see Black Fiveday be a big event, and it's just being an extended long period between November into December.
Thank you. This concludes the question-and-answer session. I would now like to turn the conference back over to Beth Reed for any closing remarks.
Thanks again to everyone for joining us this afternoon. We're available after the call to answer further questions, and we look forward to providing another update at the end of next quarter.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.