Aritzia Inc. says its “operational pivot” to move all fulfillment of U.S. orders to its expanded distribution center in Ohio prepares it to handle the U.S. lifting its de minimis rule, which occurred just two days before the end of the Canadian retailer’s second quarter.
The loophole, which ended on August 29, was advantageous for international e-commerce companies because it allowed duty-free shipping to the United States for packages valued at less than $800.
“Despite headwinds from the removal of de minimis and higher reciprocal tariff rates for Vietnam and Cambodia, our proactive mitigation strategies and strong revenue growth have positioned us very well,” Aritzia CEO Jennifer Wong said in an earnings call with analysts.
“Previously, under the de minimis exemption, we used our existing supply chain network in Canada to fulfill a portion of U.S. e-commerce orders.”
The Vancouver-based retailer had already expanded its Ohio distribution center to 560,000 square feet, more than double its previous size, before the trade war began, which it said will allow it to handle U.S. order volumes over the next two years.
Chief Financial Officer Todd Ingledew said headwinds related to the minimums and tariffs led Aritzia to forecast a gross margin decline of 280 basis points for the full fiscal year, although its adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) forecast for the fiscal year remains unchanged at 15.5 percent to 16.5 percent.
He said the company expects to “fully offset” tariff and de minimis pressures based on the strength of its business and actions such as cost-sharing with suppliers, reducing the percentage of products coming from China to mid-single digits, and its ongoing multi-year “smart spending” and initial margin improvement (IMU) cost savings initiative.
For the quarter ending Aug. 31, Aritzia said year-over-year net revenue grew 32 percent to $812 million due to broad-based growth across its retail and e-commerce operations and across geographies.
Aritzia said its U.S. business continues to deliver results, with net revenue growing 40 percent year-over-year to $486 million, just under 60 percent of its overall net revenue. Half of Aritzia’s retail space is now south of the border, as are 68 of its 134 stores.
The company previously identified the potential to have up to 150 stores in the United States, but Wong said it could be closer to 180 to 200 in the long term.
“We still see that there is a lot of runway there, a lot of white space, and our strategy is clearly proven and solid,” he said. “The good news is that we have a portfolio of stores identified and we see that this is something we can really take advantage of in the coming years.”
Net revenue in Canada rose 20 percent to $326 million, an “impressive performance in a mature market,” Martin Landry, an analyst at Stifel Nicolaus Canada Inc., said in a note.
Ingledew said investments in digital marketing, strong traffic growth and the “halo effect” of new store openings helped e-commerce net revenue rise 26 percent to $240 million.
The Aritzia mobile app will become the retailer’s “digital flagship” when it launches at the end of the month, Wong said. The company also debuted an international e-commerce website in August that “significantly exceeded” expectations in the first six weeks after its launch.
“We are confident that we will achieve our goal of tripling sales in two years or less,” Wong said.
Aritzia’s real estate expansion strategy and new stores “are the most predictable driver of revenue growth,” he said, as retail net revenue rose 34 percent to $571 million. Comparable sales, a metric that measures performance at existing stores, grew 22 percent.
“The acceleration of international website contribution, the launch of the digital app in late October and the opening of several new stores, including the Flatiron NYC flagship store ahead of Black Friday, should support the sales growth momentum,” CIBC Capital Markets analyst Mark Petrie said in a note.
Aritzia said it had strong liquidity at the end of the second quarter, with $352 million in cash, no debt and no money drawn on its $300 million revolving credit facility.
Based on continued outperformance in the U.S. and the strength of its business in Canada, Aritzia updated its net income guidance to between $3.3 billion and $3.5 billion for the full fiscal year, up from the $3.1 billion to $3.25 billion it forecast during its first-quarter earnings report in July.
“We continue to navigate macroeconomic developments from a position of strength,” Wong said. “The fact that we continue to grow our margins this year despite these developments speaks to our ability and ability to execute with excellence.”
• Email: jswitzer@postmedia.com
