Aritzia Inc’s (ATZAF) CEO Brian Hill on Q4 2020 Results – Earnings Call Transcript

Aritzia Inc’s (ATZAF) CEO Brian Hill on Q4 2020…

Aritzia Inc. (OTC:ATZAF) Q4 2020 Earnings Conference Call May 28, 2020 4:30 PM ET

Company Participants

Helen Kelly – Vice President, Investor Relations

Brian Hill – Founder, Chief Executive Officer and Chairman

Jennifer Wong – President, Chief Operating Officer and Corporate Secretary

Todd Ingledew – Chief Financial Officer

Conference Call Participants

Mark Altschwager – Baird

Mark Petrie – CIBC

Irene Nattel – RBC Capital Markets

Stephen MacLeod – BMO Capital Markets

Brian Morrison – TD Securities

Operator

Thank you for standing by. This is the conference operator. Welcome to Aritzia’s Fourth Quarter 2020 Conference Call. As a reminder all participants are in listen-only mode and the conference is being recorded. [Operator Instructions]

I would now like to turn the conference over to Helen Kelly, Vice President of Investor Relations. Please go ahead.

Helen Kelly

Thank you, Anastasia. And thank you all for joining us for Aritzia’s fourth quarter fiscal 2020 earnings conference call. On the call today we have Brian Hill, our Founder, CEO and Chairman; Jennifer Wong, President and Chief Operating Officer; and Todd Ingledew, our Chief Financial Officer. Following management’s discussion we will host a question-and-answer period open to analysts and investors.

Please note that remarks on this conference call may include our expectations, future plans and intentions that may constitute forward-looking statements in particular COVID-19 continues to have a significant impact on our sales and operations. The uncertain and dynamic nature of current conditions and its ongoing impact could continue to materially alter performance. We would refer you to our most recently filed management’s discussion and analysis and our annual information form, which includes a summary of the material assumptions as well as certain material risks and factors that could affect our future performance and our ability to deliver on these forward-looking statements. Our earnings release, the related financial statements and the MD&A are available on SEDAR as well as the Investor Relations section of our website at aritzia.com.

I will now turn the call over to Brian.

Brian Hill

Thank you, Helen, and thank you for joining us this afternoon. Like all of you, we at Aritzia extend our deepest sympathy to the many people who have been directly or indirectly affected by COVID-19. As you all know the impact to the economy and the retail industry is without precedent. While there is great uncertainty as to how this crisis will unfold, Aritzia’s strong financial position and the affinity for our brand provides a firm foundation from which we’re weathering the storm.

Looking way back to the fourth quarter, net revenue grew 6.3% to $275 million excluding the extra week in the prior year. Normalized fourth quarter net revenue increased by 11.6%, revenue growth was driven by an 8.9% increase in comparable sales. Our 22nd consecutive quarter a positive comparable sales growth included also the contribution from our five new and four reposition boutiques.

Our performance reflected strong momentum in our ecommerce business with double-digit growth across both Canada and the United States. In line with the five-year plan we set out for ourselves at the time of the IPO ecommerce penetration for fiscal 2020 was 23% of net revenues. Toward the end of February, we began to see impact of COVID-19 on our business. Over the past few months our teams have worked tirelessly in response to the dynamic nature of the pandemic.

Our strategy from the beginning of this crisis has been to both be responsive and responsible. As we prioritize the health, safety and financial continuity of our people and our businesses, while supporting our communities. We made the decision to temporarily close all 96 of our retail locations on March 16. The retail comprising 77% of our almost $1 billion fiscal 2020, this financial impact was significant.

Throughout this period, we work to keep our ecommerce channel operational and optimized. This was critical to maintain our financial viability as we continue to provide our clients with beautiful product and exceptional shopping experience online. Accompanying the shift to work from home we re-orientated our aritzia.com to lead with product that was relevant to the new stay at home measures. This resulted in a meaningful increase to our sales online. In addition, removed our minimums for free shipping, relaxed our return policy, launched our incredibly successful Thanks to You Sale in late March and extended the duration of our spring sale in April.

Overall we are encouraged by the exceptional response from our loyal clients. Even though our overall business was down significantly as a result of boutique closures. Our ecommerce revenue growth has been an excess of 150% compared to last year. Importantly, the strength of our ecommerce business has enabled us to support our people while maintaining our solid financial position. Up to this point in time, we have not laid off or furloughed any of our team due to COVID-19. To-date we have paid out more than $14 million through our Aritzia Community Relief Fund which was established to provide financial continuity. We’re proud that we’re able to support our people many whom have been with us from years and have been instrumental to our past and will be to our future success. The loyalty we have built with our teams and our clients through this initiative will be invaluable as we go forward.

Levering the strength of our brand and our people initiatives. Our style advisers quickly became highly effective brand ambassadors through their own social media channels whilst driving their clients to aritzia.com. Due to the closure of our photo studio, we modified our photography strategy to ensure all our new items are posted online in a timely manner. The relevancy of this strategy to our customers had an overwhelming response as evidenced by our strong ecommerce sales.

Furthermore, we wanted to do our part to support our frontline healthcare heroes. By suspending most of our planned marketing spend. We were able to create and launch the Aritzia Community Care Program in early May. The initiative in collaboration with the medical community gives over 100,000 frontline healthcare workers with custom designed clothing packages. There has been an overwhelming response from the healthcare community and to-date we had gifted over 60,000 relief packages.

The challenging COVID-19 environment has truly brought out the very best in our teams including some of the most creative and engaging marketing we had done to-date. Our efforts were rewarded with deepened customer loyalty, meaningful growth in our ecommerce channel as well as broad positive coverage from The Global and Mail, Financial Post, Global, CNN and other news media outlets.

Turning to inventory, we were in optimal position at the end of the fourth quarter which saw our inventory down 16.2% compared to last year. After the closure of our boutiques, we took immediate action to calibrate our existing inventory and planned deliveries to maximize sales opportunities while minimizing any future exposure. To-date, we have been successful in our efforts to mitigate the impact of delays and disruptions to our supply chain since early April all of our partnered factories have largely returned to normal business operations. We will continue to collaborate with our supply chain partners to maximize our agility while mitigating potential disruptions.

While we entered this period of uncertainty with a reasonably strong cash position. We have focused on carefully managing our cost. In addition to inventory management, we conducted a thorough review of all our expenditures where possible we minimize our expenses, reduced our cancelled services, took advantage of government business support programs and have continued negotiations with our suppliers, vendors and landlords for price concessions.

With the end of our first quarter only three days away, we want to provide you with an overview of our preliminary figures. Given the material impact COVID-19 has had on our business performance. We currently expect the first quarter fiscal 2021 net revenues in the range of $105 million to $110 million. A reduction of approximately 45% in the first quarter of last year. This reflects two weeks of decelerating retail revenues in March prior to our boutiques closures and this is well offset by strong ecommerce revenues for the quarter.

While navigating the past few months has unquestionably been challenging, it has highlighted the strength of our operating model and demonstrated that our approach to business steadfast, apart and can sustain us through the worst of times. I’m incredibly proud of the team I’ve had the privilege the work with throughout this crisis, our team has acted with courage and heart. I’m grateful for their impressive resilience and creative solutions to unconventional challenges as they invest countless hours of tireless work to safeguard our business.

I’m confident that the steps we’ve undertaken and continue to take, combined with our talented people, best-in-class infrastructure will allow us to emerge from this period and even stronger and more resilient company, ready to capitalize on all the opportunities ahead of us.

I will now turn the call over to Jennifer to give you an update on our operations as well as some of the areas in which we’re focusing our efforts as we navigate this period of uncertainty.

Jennifer Wong

Thanks Brian and good afternoon, everyone. I would like to echo Brian’s comments [indiscernible] impacted by this pandemic. To say that COVID-19 has challenged our business in the last few months is an understatement. Like Brian I’m incredibly proud of the dedicating, resilience and agility our people have demonstrated in the rapidly changing landscape.

During the closure of the our boutique we worked to keep all three of our distribution centers open to support our ecommerce channel while we took early and decisive steps to implement precautionary measures across the business, we reengineered our distribution operations and put in place industry leading measures to provide the utmost confidence in ensuring the health and safety of our people.

Our team took on the enormous task of re-sequencing the entire workflow of our 223,000 square foot distribution center in Vancouver. We staggered shift and implemented both pod structures and designated work zone, we reorganized almost every aspect of how we fulfill. From the single point of entry to receiving, picking and packing. Our efforts were successful in keeping our people safe and our business running without impacting productivity or efficiency.

I’m proud to say, that as a direct result of these measures we’ve not had a single case of COVID-19 to-date knock on wood and we’ll continue the strict health and safety protocols to the foreseeable future. In order to accommodate the significant surge in ecommerce units we mobilized nearly 400 of our retail and support office employees in a highly accelerated timeframe to complement our existing team. Trained in under three hours, these employees were held to the same high standard as our tenured distribution employee and they delivered. Without their help it would have been challenge to effectively manage the increase in ecommerce units while maintaining delivery time to meet or exceed our client’s expectation.

In addition to supporting our distribution operations, 175 retail and support office employees were also redeployed across the country to reinforce our concierge team who were experiencing a significant increase in inbound inquiries as a result of the strong performance in our ecommerce channel. In British Columbia, we consider ourselves very fortunate with our healthcare leadership and the corresponding relative wellbeing of our community. As a result, starting June 1, our support office team who have largely been working offsite since mid-March will gradually return on a voluntary basis to our Vancouver support office under stringent health and safety precaution.

As Brian touched on earlier, we’ve not laid off or furloughed any of our employees to-date due to COVID-19. Not only is this the right decision by our people, it is also in keeping with Aritzia’s operating philosophy to manage for the long-term. By keeping our people employed and actively engaged we’ve retained our key talent and put ourselves in a strategic position to reopen each of our boutique within days’ notice once we’ve determined the time is right. While we expect to right size our infrastructure once clarity on a new normal emerges, we continue to opportunistically acquire key talent. The strength of our business model and the measures we’ve undertaken to care for our people positions us as an attractive employer in our pursuit of top candidate in this environment.

Looking beyond the crisis, we are positioning ourselves for opportunity. To support our ecommerce channel and advance our omnichannel capabilities we prioritized our investment in digital selling tool. Also known as the Clientele app, we’ve been piloting this new selling tool since May 11. This exciting new tool allows our style advisers to deliver highly personalized service to their clients anywhere, anytime. The initial app launch features, functionality such as the ability to view client profiles and purchase history, product catalog and inventory data. The means to interact by call, text or email and the ability to curate looks and share styles with clients all driving traffic and sales to aritzia.com.

With an initial pilot group of 25 stylists connecting with their top clients through the Clientele app we’ve already seen some encouraging early results. It is incredibly impressive that our teams have been able to pivot and get this capability up and running in record speed. Based on the early success we’re in the process of expanding our pilot group. As we continue to use the tool and gain valuable feedback from our stylist, we will further enrich its capabilities. We expect the tool to increasingly contribute to top line growth with the expansion of stylist group and as our clients increasingly appreciate both the convenience and the quality of the personalized experience. Despite the challenging environment, we continue to invest in people and the critical infrastructure to support our business as we’ve always done throughout Aritzia’s history. We expect these initiatives will strengthen our culture and have a meaningful, positive impact on our business and our long-term growth strategies.

I will now turn the call over to Todd to discuss our financial results.

Todd Ingledew

Thank you, Jennifer. Good afternoon, everyone. I hope you and your families are staying healthy and managing through these times. In response to the COVID-19 outbreak we acted quickly to safeguard our business by enhancing liquidity, managing expenses and protecting cash. Before I provide more details on the actions, we’ve taken I will share few highlights from the fourth quarter and for the full year fiscal 2020. My financial review will be focused on the comparative figures which exclude the impact of IFRS 16.

The strong momentum in our business continued into the fourth quarter with comparable sales growth of 8.9% excluding the extra week last year net revenue grew 11.6%. Gross profit margin in the fourth quarter was 35.3% down 90 basis points from last year primarily from the expected higher raw material cost and the impact from the new US tariffs as well as slightly higher mark downs and increased warehousing and distribution center cost. These impacts were partially offset by the appreciation of the Canadian Dollar in the fourth quarter versus last year.

SG&A expenses increased by 8.6% to $64 million. SG&A expenses were 23.4% of net revenue compared to 22.9% last year. The increase was primarily attributable to $2 million of investment in our new customer program excluding this investment SG&A would have seen a 20 basis point improvement over last year. These factors resulted in adjusted EBITDA that was essentially flat to the fourth quarter last year which benefited from the extra week.

Inventory at the end of the fourth quarter $94 million, a 16.2% decrease compared to $112.2 million at the end of the fourth quarter last year. The decrease reflects a lower initial buy for the spring summer season as well as early receipt of inventory in the same period last year. As Brian touched on earlier, fiscal 2020 reflected continued momentum for Aritzia. We delivered net revenue growth of 12.2% to $981 million for the full year normalizing for the 53rd week in the prior year net revenue increased 13.7%. In particular, we’re pleased with the acceleration of our business in the United States with revenue growth of 29.4% driven by both strong ecommerce and boutique performance.

Adjusted EBITDA grew 7.2% to $173 million or 17.6% of net revenue compared to 18.4% last year. Adjusted EBITDA was impacted by $7.3 million investment in our customer program as well as $4.8 million reduction in other income year-over-year. Excluding these amounts adjusted EBITDA would have increased by 14.7%. Overall we ended the year in a solid financial position with a cash balance of $118 million.

Turning to our performance in the first quarter of fiscal 2021, we saw rapid deceleration of our business in the first two weeks of March as the pandemic spread across North America. With the closure of our boutiques on March 16, we immediately directed our efforts to drive ecommerce revenue in addition to generating cash, this enabled us to continue to sell through our inventory. Furthermore, we took swift action to enhance liquidity, manage expenditures and preserve our solid cash position.

Some of the initiatives included drawing down $100 million from revolving credit facility, suspending share repurchases under NCIB, leveraging applicable government business support programs for COVID-19, delaying capital expenditures related to boutique construction, accelerating infrastructure investments related to ecommerce and omnichannel projects, reducing and/or eliminating any outstanding spring summer orders, driving cost reductions by minimizing non-essential operating cost as well as ongoing negotiations with our suppliers, vendors and landlords for concessions. Extending net payment terms where possible and temporarily reducing pay for the senior leadership team by 25% and the forfeiture by the Board of Directors of the cash portion of their fees.

Looking forward we expect first quarter fiscal 2021 net revenues to be in the range of $105 million to $110 million compared to $196.7 million in the first quarter last year. Again this reflects two weeks of decelerating boutique revenue in March prior to boutique closures and exceptional ecommerce revenues. For contacts, in the first quarter last year our boutiques contributed nearly 80% of our total net revenue.

We anticipate an adjusted EBITDA loss in the range negative $24 million to negative $28 million compared to positive adjusted EBITDA of $34 million in the first quarter last year. This reflects the closure of our boutiques for the majority of the quarter and the associated deleverage from occupancy and other fixed costs. In addition, higher mark downs from the promotional environment and increased warehouse and distribution cost due to the significant growth in ecommerce are impacting our results.

We’re pleased with our current inventory position due to the strength of our ecommerce business and the substantial sell through of mark down product in the first quarter. We initiated our spring summer sales event in the third week of May which has helped us continue to work through inventory as our boutiques begin to reopen. In addition, our ability to carry forward our non-seasonal proven sellers into the fall season enabled us to reduce our initial fall winter orders. Despite plans to enter the fall season with the lower initial buy, we’re confident in our abilities in season to replenish our product to meet client demand.

Our measures to protect cash have resulted in a cash balance that has remained relatively stable since our boutique closures. As of May 27th, our net cash totaled $102 million excluding $100 million drawn from our revolving credit facility. Prior to COVID-19 we were on track to exceed our fiscal 2021 targets related to the five-year plan we set out at the time of our IPO. Due to the dynamic nature of COVID-19 and short to medium-term effects on the consumer landscape we’re withdrawing our performance targets for fiscal 2021 and will now be providing annual guidance at this time.

Despite the challenging backdrop, we were able to accelerate our ecommerce revenues, manage expenditures and preserve our strong cash position in the first quarter to successfully safeguard our business. We expect to end the first quarter in a solid inventory and cash position as we continue to navigate the current environment.

With that, I’ll turn the call back to Brian.

Brian Hill

Thank you, Todd. Throughout these highly uncertain times we’ve remained true to our commitment to everyday luxury. Through our beautiful, high quality products, our unique personalized services to clients, an aspirational shopping environment whether that be online or in our boutiques and engaging communications to captivate our customers imaginations. The challenging environment and corresponding boutique closures have had and will continue to have a material adverse impact on our fiscal 2021 performance. However what gives us tremendous confidence is the strength of our business model and in particular, the strong momentum in our ecommerce channel.

We fully expect that a portion of our retail business will permanently shift online. As Jennifer outlined earlier, we continue to invest in digital selling tools and expanding our omnichannel capabilities to better position Aritzia to serve our clients in this evolving retail landscape. As of May 7, we began a phased reopening of our boutiques. As of this coming Sunday, which marks the end of our first quarter we expect to have reopened approximately 30 of our 96 boutiques. While initial results from the reopening process are encouraging in light of the current environment. We expect an extended ramp to a new normal.

Our decisions on reopening are based on a number of criteria including the guidance of local health authorities, the reopening status of shopping centers and most importantly our own state of readiness to provide the highest standards of health and safety. To that end, we have put in place comprehensive measures design to protect and instill confidence with our people and our clients.

Our teams are anxiously awaiting to welcome back our loyal, passionate Aritzia clients. For the reopening of the remainder of our boutiques over the coming weeks. Due to the crisis, we paused our imminent and future boutique schedule. However since resumed having a surprisingly successful new boutique opening in British Columbia yesterday. We currently have five to six additional new boutiques and three to four repositioning in our pipeline. However due to ongoing disruptions, we could potentially see some delays.

Given our measured approach and the status of the various lease negotiations. We’ve managed to mitigate almost all of the risk of the aforementioned commitments. Although it’s too early to predict when and how much traffic will return to retail, we continue to be presented with premier locations at financially attractive business terms. We’re evaluating these on a case-by-case basis as this crisis continue.

Notwithstanding my prior comments regarding our inventory levels. Our product team has been operating both in the office and remotely to support our seasonal design and production lifecycle, minimizing impacts to future seasons. As mentioned, we’ve taken a methodical approach to ensure our fall inventory levels and assortment are well balanced. While we have reduced the breadth of our assortment, the offering has been carefully curated to provide freshness to our customers as they emerge from a long period of isolation. While I expect the lingering effects of an elevated promotional environment to last through the remainder of the spring summer season. We will be reverting to our successful full price calendar for fall winter and will take a disciplined approach to how we manage promotions in the future.

This marks our fourth year end report to the public company. Almost four years ago we set out some five-year targets around ecommerce penetration, store openings, revenue and EBITDA growth. It is particularly disappointing as we’re well on our way to exceeding these targets prior to COVID-19. Although the retail landscape for the remainder of the year and possibly the beginning of next is uncertain. The recent acceleration of our ecommerce growth. Our boutiques in the midst of reopening, building on our existing world class team of top talent hiring opportunities and our ability to deepen our relationship with our clients makes for an existing future. I can think of no better team than the one we have at Aritzia to capitalize on the opportunities ahead.

I look forward to sharing our new long-term outlook with you once the new normal has been established. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] our first question comes from Mark Altschwager with Baird. Please go ahead.

Todd Ingledew

Mark, we can’t hear you if you’re talking. Operator, why don’t you go to the next person in the queue?

Operator

Our next question is from Mark Altschwager with Baird, please go ahead.

Todd Ingledew

I think that’s who we were just trying.

Mark Altschwager

Yes, Todd. Can you hear me?

Todd Ingledew

Okay, yes. We can now.

Mark Altschwager

Okay, I don’t know what was going on there. I wanted to ask about the reopening process, so just any further detail you can provide on the level of productivity you’re seeing in your stores as the first wave have opened and more detail on – how many stores you expect to have open by the end of June and July respectively. And also, what the digital has looked like as stores have reopened has that moderated at all? Thanks.

Brian Hill

Mark, its Brian. We’ve put a very high bar in all of the precautions we’re in opening up our stores and I think the customers have felt really comfortable in our stores. We have limited amount of people in stores and we have a criterion that we’ve ruled across all our stores, some of the stores we’ve had more or less continued line ups at since we’ve opened. But you know like everything we’ve with this pandemic it seemed to be affecting, everybody and every places differently than others. And so, we’re expecting to see different responses from our customers depending on where they are. Where we’re situated in British Columbia, we’ve had very little effects of this disease compared to places like New York and particularly Eastern Canada specifically Quebec.

We’ve only really opened up pockets of stores primarily Western Canada at this point in time which has not been affected and so the response has been very, very surprisingly really great for opening stores. But we still don’t know when we’ll be able to open up bulk of our stores in Ontario – huge obviously business in Manhattan, New York. We don’t know when those will open. So we don’t know when they’re going to be opening. But all I can assure is that, we will be opening very quickly once we get the green light and that they’ll be opened under the most stringent health and safety precautions, when they’re opened.

Mark Altschwager

That’s very helpful. Thank you. And if I could follow-up. How did the store level economics change if the new normal is stock function lower and store productivity stock function higher in digital? In along those lines, I’m wondering if there’s any color you can provide on the conversations, you’re having with landlords relative or whether in respect to renegotiating some of your existing leases or how you’re looking to approach rent terms on the new boutique openings moving forward?

Brian Hill

There’s lot of questions there. I’ll try and answer a few of them in no particular order. We had ongoing discussions with our landlords. This has been a difficult period for the landlords as well and so we certainly understand they’re in a difficult position. So we’ve been working closely with the landlords. We haven’t come to any conclusions yet really with any of the big landlords some of the more independent landlords it’s been easier. But [indiscernible] both our parts some kind of resolution on rent and it’s been varied. But the big landlords in both in Canada and United States it’s been difficult for them and difficult for us and we haven’t really concluded on where we’re going to net out here and so we’ve just been working closely. We’ve been on calls with them almost daily, working through those.

As far as numbers go, we have extremely high productive stores and so we’re pretty confident that even with some new normal that is in at the same levels that we had before, we will still have extremely profitable stores and the round out the omni experience for us. So we don’t really see – close any stores they’re all extremely profitable, high contributing stores and so we look forward to continuing that and as we mentioned in the call. We’re going to continue to push our ecommerce. We think we’re best in class at this right now and our numbers show it and our customers are saying. So we’re going to continue to invest and push in ecommerce. So at the end of the day, we think we got a great future ahead of us regardless of what the store outcome and what happens with the return to new normal is in retail.

Mark Altschwager

That’s great. Thanks for all the color and best of the luck with reopening.

Operator

Our next question is from Mark Petrie with CIBC. Please go ahead.

Mark Petrie

Obviously appreciate that it’s very difficult to give an outlook given all of the uncertainty. But wondering if you can just give a bit more granularity in terms of Q1 since we’re there in that period basically complete. Just in terms of gross margin and OpEx and then any outlook you can provide in terms of how you expect your operating cost to be able to flex through the rest of the fiscal 2021?

Todd Ingledew

Mark, its Todd. We will continue to see a decline in our profit in Q1 and for the rest of the year. Given the promotional environment we continue to expect pressure from higher than normal mark down levels. We are also seeing pressure from the weakness in the Canadian Dollar and then the continued deleverage from rent and we have a portion of our boutiques that are open now. But the majority is still closed. And we do expect lower productivity at the reopen at least in the short-term. And then we will also continue to see higher warehousing and distribution cost as we’re driving more sales through the ecommerce channel. So, there are numerous pressures on gross profit in Q1 that are driving the outlook that we provided and then going forward, we do expect in the short to medium term the majority of those pressures to continue. It’s little early and just we aren’t in a position right now to provide an outlook going forward beyond that. We’re expecting again a ramp as we open the stores. But it’s too difficult given the environment to predict exactly what the remainder of the year will look like at this point.

Brian Hill

Can I add to that a little bit and thanks for that Todd? I’ll just one thing because I look after the product division. So, we obviously didn’t predict COVID and we purchase a lot of product for a normalized spring and summer season that takes us through the first and second quarter. So, we’re extremely happy with where we started and we talked about on the call. We started with less inventory this year beginning in the first quarter and in the second – and we’re extremely pleased with where we’re netting out right now. We actually have less discontinued merchandize right now than we did this time last year when we [indiscernible] with 10 weeks. Our teams have done such a good job. That said, we’ve used promotional activity to get ourselves in that position and we’ve always had the philosophy at Aritzia to start new seasons with clean stock as possible and ideally 100% clean stock, so not having any inventory left over to start the carry the new season and that has not changed. So, we’re doing whatever we can do.

The difference with Q1 and Q2 versus Q3 and Q4 is Q3 and Q4 would being able to affect not all our Q3 deliveries but certainly quite a few of them and we can certainly be able to add at our Q4 delivery. So, we think that our gross margin due to all the mark down activities, due to the fact we had so much merchandized purchased in Q1 and Q2 where it’s going to be – it’s not going to be that pretty but we believe that Q3 and Q4 will actually be better now. Where it actually nets out, we don’t know yet at this point in time because it’s been so difficult to predict where our business is going to be and how much inventory we’re going to need. So that’s being sort of more of an organic situation whereas Q1 and Q2 we know exactly what we’re dealing with here – we’re doing whatever it is to get through our inventory.

Mark Petrie

Okay, no that’s very helpful commentary. Appreciated. I guess maybe just back to the SG&A. I don’t know if it’s possible to sort of quantify some of the elevated cost of operating through the course of the pandemic maybe specifically with in terms of ecommerce fulfilment or the DCs and – or if you can quantify the impact of the government support programs that you participated in.

Todd Ingledew

Yes, we’re expecting to receive approximately $6 million for each month that we qualify from the government support programs, that’s both in Canada and the US. So that is obviously a major contributor to supporting our decline in expenses in SG&A. but we have again significant increases in other areas. So, it’s – we’re really too early in the game to exactly know the pressure going forward from the additional measures that we’re putting in place for the stores. It will be primarily from increased labor and then increased cleaning and protective equipment, but primarily labor. So again, and Mark I apologize that we don’t have specific guidance to provide just to say that we have meaningful pressure from the normal that we’ll be operating under going forward from an SG&A perspective.

Brian Hill

Brian here, I could add to that too. We are receiving some government support but the purpose of the government support was to ensure the people stayed employed and that’s exactly what’s happened at Aritzia. It’s giving us the ability to keep all our people employed and that’s why, that was the intent of the government support, it’s working, we got the federal government support but with labor it’s working, as per at Aritzia.

Mark Petrie

Okay, thanks and then just last. I’ m wondering if you could just provide some additional sort of color or commentary about any differences in behavioral or sort of consumer patterns you’re seeing in the US versus Canada. And just sort of curious, if there’s a difference just given the difference that where you are in terms of brand equity and also sort of new customer potential.

Brian Hill

Sorry, can you clarify that? Can you repeat that question please?

Mark Petrie

Yes, I’m just wondering if you’re seeing any difference in terms of how the customers are reacting to the different levels of promotion and how you adjusted the assortment between US and Canada understanding that, it’s just a different level of brand equity, different level of brand awareness and obviously in the US there’s a huge opportunity to build new customers whereas in Canada it’s more about selling more to the people you already sell to.

Brian Hill

We’ve been very encouraged that we’re building lot of new customers in both in Canada and in the US and we expect a few more in the US. But when we’ve been building new customers previously have not shopped online with us before. We’re sure they’ve shopped in our stores but previously haven’t shopped online with us and as you know, customers who’ve used both channels or multiple channels are better customers and spend more money and are more engaged are the ones that use a singular channel. So that’s been extremely encouraging for us. We haven’t noticed as much of a difference in Canada versus US as we very seldom do in our business. It’s mostly east coast to west coast and with this pandemic it depends where people are being hit the hardest is where we’ve found that sales have been affected differently. And then really with the product perspective. The products that are being purchased so different.

People are at home. They’re not going out and so all our products that are more lifestyle based, comfort based, athletic based are being – have had lot more attention than ones that are being dresses and things like that. People have been going out and professional wear, for people going to work in the office so that’s all changed a little bit. But we’re seeing a shift now that some of the isolations are being relaxed a little bit. We’re seeing a little bit. We’re seeing that change again here. So, we’re seeing a bit of mix in our products that we’re selling unfortunately through our product mix we appeal to a lot of different people. We offer lot of different types of products and that’s done well source and played into our strengths here.

Mark Petrie

Appreciate all the comments, all the best.

Operator

Our next question is from Irene Nattel with RBC Capital Markets. Please go ahead.

Irene Nattel

I want to really, really thank you for all the color around the performance and congratulate on your performance through this year in a challenging period. I actually wanted to start if you don’t mind as a follow-up shift to the last answer by it. You do have this very broad offering as you thought through your fall and winter mix. Did you make any adjustments for what’s likely going to be an extended period of work at home and maybe some different purchasing patterns?

Brian Hill

Irene, thank you for the comments and thank you for joining us. It’s been interesting because in one hand we think everybody shifted indoors and therefore we should have more of that product. But then one could argue everybody bought all that product and as people want to go outdoors now and start going out and being in restaurant and things like that in the fall as things are being relaxed. We’re thinking maybe people because they haven’t purchased and with other products might want to kind of purchase these other products. So, we’ve been having internal debate. Are people going to be buying more things for the stay at home because they’re spending more time at home or is that all they bought and so they actually want some freshness to their closet [ph] on going out?

So, we haven’t really drawn a conclusion as I mentioned fortunately, we’re able to do both. So, we’re continuing on doing both and making sure that we’re balanced. But as Todd laid out is that, we’re being very conservative in our inventory purchases and shortfall in winter where we can haven’t committed and then we’re going to scramble as sales continue to grow and as assuming normal as we’re closer and closer on the ramp up. So, we’re really, really comfortable with our inventory positions right now and we’re looking to following winter obviously the business climate is challenging and we’re not thrilled with that. but it is – that’s the card we’re all being dealt with right now and so we’re making the best of it and I’m pretty comfortable with what the team’s done to get us in that position here.

And as I say, I don’t have a read right now on whether people are going to be purchasing more in home or not. I mean my sense is, if they’re ordering online and they’re purchasing more from their home. But if they’re actually out and in the stores, it means that the confidence in areas that are fairing a little bit better and my sense is, that they’re going to be at shell [ph] buying those kinds of clothing. So, it’s hard to say what we’re going to net out right now and all I can say is we’re covered for both scenarios.

Irene Nattel

That’s very helpful. Thank you. Wish we all had a crystal ball. As you think through – in which the impacts were have been felt. Since it change it all you’re thinking around store size maybe a little bit bigger so that you can accommodate greater styles distancing in the stores. Do you think about mall versus street scape [ph] at little bit differently as you’re now looking at some of the real estate opportunities?

Brian Hill

That’s a great question and we’ve been discussing same thing in our office with more people working from home does that mean, we need more office or less office space because people will also want to have a little bit space for themselves and little bit more room? The good news with the stores are, is that we’ve been opening a nice comfortable amount of stores forever it seems and we’re not all of sudden in a position of being over there and I would argue we’re still under stored at Aritzia. We still have lots of opportunities. I think with the new retail – if we thought that we’re in an enviable position, in ability to open up stores prior to this crisis we certainly are even more so now going forward because we’re going to be one of the few companies that’s out still looking at opening stores.

So, we’re going to be taking one day at a time. We don’t know what this new normal is and we’re going to wait to see this before we really commit to anything and we’re going to start to know here. It seems forever because we’ve been cooped up indoors but at the end of the day it’s really only being three months here that just over two months that we’ve been operating like this. So, come the fall and we’ll see what’s happening with the retail landscape. We’ll have a far better read. As I mentioned, we only have 30 stores. The majority of those have only been open in the last week or so 10 days. So, we’re going to have a fairly good read next time we speak to everybody three months from now and exactly what it is that we’re dealing with then. We’ll probably have a far more solidified plan at that point in time.

Irene Nattel

That’s great. Thank you.

Operator

Our next question is from Derek Dley with Canaccord Genuity. Please go ahead.

Unidentified Participant

This is Luke, on for Derek. One thing I was curious about as you sort of work through getting over Q1 here. Obviously, ecommerce is at 23% of all of sales in fiscal 2020. I’m just curios where that sort of penetration has trended through the quarter to-date.

Todd Ingledew

Obviously, our stores are being closed for the majority of the quarter. This Q1 started beginning of March and is ending on Sunday so the majority of our sales in the quarter are coming from ecommerce.

Unidentified Participant

Right with we’re your distribution centers, where they’re at now? and as you think about maybe that permanent shift towards having customers who are buying online as oppose to instore, are you sort of comfortable with the capacity or the throughput that you’re able to pull those distribution centers or are you thinking that there might need to be sort of expansions or something of that like moving forward?

Jennifer Wong

Luke its Jennifer. On some of the previous calls I have spoken to distribution center expansions we recently expanded the square footage in the Columbus distribution center as well the Gaga [ph] distribution center and as you know we moved into Boeing [ph] just a couple of years ago. When we were doing our numbers in, we were anticipating growth in our business and so at least for the time being we believe that we have enough space. But I do think we will looking at as I mentioned we reengineered pretty much our workflow and our processes is that we will have to make some redesign, tweaks and changes within the building to accommodate for what we’re putting through the building as well as for the new normal of social distancing and so on and so forth.

Unidentified Participant

Understood and then so last one for me. Just I guess thinking about ecommerce and as far as maybe some metrics as regarding maybe new customer conversions, retention or any metrics like that to maybe show the performance of ecommerce sort of pre-COVID related shutdowns versus sort of where that performance in ecommerce is as of today.

Todd Ingledew

Well I think as Brian mentioned in his prepared remarks, we have seen a significant acceleration in our ecommerce business since the store closures up over 150%. So, we’re very pleased with where that’s been pacing and also extremely pleased with the teams and the way that our distribution center and our call center staff have been able to handle the additional volume. So, we went from in beginning of March a period that is somewhat a slower period let’s call it for ecommerce to effectively the play offs, Black Friday type renew or sales season type revenue and our teams managed it flawlessly. So that’s what’s been happening with ecommerce it’s increased dramatically since the store closure.

Unidentified Participant

Okay, thanks. Appreciate the color.

Operator

Our next question is from Stephen MacLeod with BMO Capital Markets. Please go ahead.

Stephen MacLeod

I just wanted to talk a little bit about the store openings. You mentioned that could you just shed some color and the stores have also been encouraging. So that would be the first question. Maybe how that’s trending. And then you talk about planning for an extended ramp and I’m just wondering if you can give us a little bit of color on you’re planning in terms of that ramp to work?

Brian Hill

Thank you, Stephen. When [ph] I go in reverse order. So, we don’t know what this ramp is going to look like, we’re just preparing for a long slow ramp and there’s two portions to that ramp one is how slow the ramp is and over what period of time. So is this going to be – are we going to see this ramping up right through to September or October and to some people in various places in North America are obviously and deservingly so pretty shook up by this. So, are they going to be jumping and going out to stores at the same level they were before? Probably not. And will they eventually? I don’t know and so we’re going to see this ramp. We were predicting this ramp to be end of this year and as I mentioned in our remarks probably in the first quarter of next year as well so we’re preparing for a long slow ramp to the new normal.

And then the second part of that is, the new normal what that’s going to look like? And we don’t know what that’s going to look like either. I mean are we going to ramp to 70% to our previous sales in stores, 80%, 90%, 100%. I don’t know. And so, we’re prepared in whatever scenario we see and we’ll go from there. But the good news is, as mentioned with the last question is that, we’re having robust ecommerce business that we think if regardless of whether that equilibrium is tilted one way or the other. We have a very good presence in both those scenarios. What was the second part of your question?

Stephen MacLeod

The second part was just with respect to what you’re seeing in terms of initial results from new openings?

Brian Hill

It’s hard to tell. We found our street front stores are probably being a little bit busier than our shopping center or mall stores. We found that the places that are being affected less have had a little bit more and uptick than the ones that are being affected more. And there’s obviously limitations in the store themselves as far as capacity goes and lines up and fits and things like that. So, it’s going to take us a while to figure this out if I say some of the stores have been opened 10 days and because the outdoor stores have had a little bit more pick up than otherwise, they being weather dependent. So, on a bright sunny day, our outdoor [indiscernible] street and some of our outdoor stores have been extremely busy and the days its raining gets affected by it seems a lot of those are the ones that are open. We’ve seen a little bit of mix here and there.

So all I’m saying that overall we’re being very encouraged by the response both from our customers and our teams as far as stepping up and making sure that everybody is safe in the stores and we’ve been pleased with the sales and reaction to-date and we’ll continue to monitor that and as I mentioned on the next call. We’ll probably have a far better idea what that is going to look like.

Stephen MacLeod

Yes, okay that’s great. Thank you. And then maybe I just wanted to clarify on the fall and winter orders. Can you just talk about kind of where you are in terms of your selling season and your ordering season?

Brian Hill

Specifically, well our selling season we consider fall to start of the beginning August. It has a slow uptick because parts of Canada and places it’s always starting to get warm in some cases. But that’s when our fall starts and but that ordering season what’s happening, we had already committed to fabrications and raw materials and things like prior to COVID even hitting here. So, we were able to probably effect 50% maybe somewhere between 25% or 50% of our fall orders. But we were fully in effect for our winter orders. So, we’re going to probably – if we can do this all over again, we probably slightly tweak orders on where we are right now. But at the end of the day we’re pretty confident with fall, winter.

As I mentioned we started ordering in fall, raw materials back in January, February but we were able to catch a lot of them because it was fairly what has happened to us in March and we reacted extremely quickly to adjusting those orders as best we can, setting new sales targets and whether that time we still need to know, if our stores would be open. We need to know at that point beginning in March, two-month, three-month, six-month closure. We were running. We even had a closure 12-month closure store. So, we are running all those. So, it was pretty difficult. We put hold on those March orders. But the ones we weren’t able to affect we already committed to, we’re stuck with and then the ones, we just had hold onto them, until we got a bit of a clear picture which we’ve been getting over the last almost on a daily basis but particularly over the last three or four weeks.

Stephen MacLeod

Right and then in terms of winter. You will have time to adjust your winter orders as necessary.

Brian Hill

We’ve kind of adjusted them now. We placed them most of – lot of our winter orders now and so we adjusted them. So, we’ve been quite very conservative on those buys and then we’re going to scramble the businesses meaningfully better which we hope it is and we predicted. So, we’re not going to go in some guess for being overstocked for fall, winter. I think spring, summer we had a legitimate reason. Fall and winter I’m not sure we do. So, we’re marking sure that fall and winter we have a nice base of inventory both in [indiscernible] inventories as well as new items to delight our customers and new trends and things like that and so we’re doing that and then we’ll adjust as when you see it. On a weekly, monthly basis as the time goes on here.

Stephen MacLeod

Okay, that’s great. That’s it from me. Thank you for all the color you’ve provided and best of luck.

Operator

Our next question is from Brian Morrison with TD Securities. Please go ahead.

Brian Morrison

I just have a few housekeeping items. Just in terms of the stores, the new stores that you’re going to opening in fiscal 2021 are remainder of those in the US? And that your current store base, how many of those are in closed malls?

Todd Ingledew

We’re planning to open again five to six new stores through the rest of the year, so that will be six to seven in total new stores for the year. Five of those are in the US, two of them are in the first half of the year and we just opened one yesterday and then the remainder of the new stores are all in the back half of the year. From an expansion perspective we’re planning to open four expanded locations. One in the US and three in Canada and one to two of those will be in the first half and then the remainder in the back half.

Brian Morrison

And as far as indoor, outdoor. I think it was kind of where you were driving there, was it not?

Brian Hill

So, the one we opened yesterday is an outdoor shopping center, I believe we have Todd. Do you have a count on indoor, outdoor? I know we have one in the East Coast that’s outdoor as well.

Brian Morrison

Brian, I’m talking about your current store base.

Brian Hill

Off the existing store base, how many are shopping centers versus outdoor?

Brian Morrison

Correct.

Brian Hill

I believe it’s about 15 that are street based and the rest are – no I think we’re lot higher than Todd because our store in LA is – we don’t have that number at this point in time. But if you want, we can share it offline with you.

Brian Morrison

Yes, that’s no problem.

Brian Hill

Because some of them are street base. But we have a lot of – we have a bunch of malls or stores in shopping centers that are outdoor shopping centers as well. They’re just part of the shopping center, but they’re full open-air shopping centers.

Brian Morrison

Okay and then Todd just in terms of the government assistance that you mentioned, how are you recognizing that in your Q1 financials, is that a contract [ph] expense or how does that?

Todd Ingledew

We’ve approved for it in our projections.

Brian Morrison

So that will be an offset to your SG&A.

Todd Ingledew

Yes, it will be an offset to our labor.

Brian Morrison

Okay, thank you. And then last question maybe for Jen, I’m wondering if there’s any sort of breakdown you guys in terms of – as a percentage of your sales, how you break it down by segments. How much might be athleisure versus denim versus evening wear? Do you have any color on that so that you can share with you?

Jennifer Wong

I’m going to have Brian answer that, he actually he runs products, so it’s been if I’ll have answer that.

Brian Morrison

Sure.

Brian Hill

I mean we don’t just have sort of two or three buckets we have like 15 or 20 buckets of product. Some would fall into various categories. There’s casual clothing probably isn’t necessarily athleisure then we have denim then we actually have athleisure product and we have going out in night, but maybe not sundress something like that which isn’t necessarily formal. We’re pretty balanced right across the board and you can imagine things are being skewing a little bit more from a stay at home comfort perspective and we’ve had obviously a lot of success with that product to the point where we found some inventory pressure running obviously some of that products and then some of the other products from going out at night and dressing to go to work and so that is, as we’ve less demand for that.

That said, I think what’s important to recognize is that, a lot of our product that we sell is testing the act and so we had a lot of product that over the – that is in our product that is testing and reacting and therefore we’re not committed to any high inventory levels of any particular product and we’ve been able to adjust. As I mentioned earlier, we have less product that we think we have to move at the end of the seasons. Right now, then we did exact same time last year. So, we think our inventory is really, really great shape and we’re adjusting and we’re making moves as quickly as we possibly can to reflect the demand that certain types of products that we’ve been getting.

Brian Morrison

Okay, thank you very much.

Operator

We’ve concluded the question-and-answer session. I would like to turn the conference back over to Helen Kelly for any closing remarks.

Helen Kelly

Thank you, Anastasia and thanks again everyone for joining us this afternoon. Team and I will be available after this call to answer any questions you may have. We look forward to speaking with you again. Thank you.

Operator

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

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