VANCOUVER, Jan. 10, 2018 /CNW/ - Aritzia Inc. ("Aritzia" or the "Company") (TSX: ATZ), an innovative design house of exclusive fashion brands, today announced financial results for the third quarter of fiscal 2018.

"In the third quarter, we delivered our thirteenth consecutive quarter of positive comparable sales growth.  Our strong revenue and adjusted EBITDA performance is a result of our diligent focus on executing against our long-term growth strategy. We believe our measured approach to eCommerce and store growth ensures thoughtful decision-making today to grow revenue, propel our brand, and invest in infrastructure to drive long-term value creation. We remain competitively positioned due to our vertically-integrated sourcing model and our focus on offering beautiful, high-quality products at an attainable price point with exceptional customer service," said Brian Hill, Aritzia Founder and Chief Executive Officer.

"As we look ahead, we will continue to execute on our successful strategy by enhancing our product supply chain, developing beautiful, high-quality products, capitalizing on premiere real estate locations, and growing our eCommerce business and omni-channel capabilities. We are excited about the opportunities ahead and believe we are well positioned to meet or exceed our long-term growth goals."

Unless otherwise indicated, all amounts are expressed in Canadian dollars. Certain metrics, including those expressed on an adjusted or comparable basis, are non-IFRS measures. See "Non-IFRS Measures including Retail Industry Metrics" and "Selected Consolidated Financial Information" further below.

Highlights for the Third Quarter

• Net revenue increased by 9.6% to $204.4 million from $186.5 million in Q3 last year. The weakening of the U.S. dollar year-over-year in the quarter negatively impacted net revenue by approximately 160 basis points, or $3.0 million
• Comparable sales growth was 6.3%, following 15.1% growth in Q3 last year
• Gross profit margin was 44.8%, compared to 44.1% in Q3 last year. This was primarily driven by continued improvement in product costs and the positive impact from the weakening of the U.S. dollar year-over-year in the quarter
• Adjusted EBITDA increased by 10.0% to $50.0 million from $45.4 million in Q3 last year
• Net income increased to $28.1 million, compared to a net loss of $8.1 million in Q3 last year
• Adjusted Net Income increased by 11.4% to $30.6 million, or $0.26 per diluted share (treasury stock method⁽¹⁾), from $27.5 million or $0.23 per diluted share (treasury stock method⁽²⁾), in Q3 last year
• The Company opened one new store (Babaton Pacific Centre in Vancouver) and expanded or relocated three stores (Eaton Centre and Scarborough Town Centre in Greater Toronto, and Bellevue Square in Seattle) during the quarter

Third Quarter Results

All comparative figures below are for the 13-week period ended November 26, 2017, compared to the 13-week period ended November 27, 2016.

Net revenue increased by 9.6% to $204.4 million from $186.5 million in the third quarter last year. The net revenue increase was primarily driven by the addition of seven new store openings and five expanded or repositioned stores since the third quarter of fiscal 2017, as well as comparable sales growth of 6.3%, resulting from continued momentum in the Company's eCommerce business. The weakening of the U.S.dollar year-over-year in the quarter negatively impacted net revenue by approximately 160 basis points, or $3.0 million.

Gross profit increased by 11.3% to $91.5 million, or 44.8% of net revenue, compared to $82.3 million, or 44.1% of net revenue, in the third quarter last year. This was primarily due to the benefit of ongoing product supply chain initiatives, as well as the positive impact from the weakening of the U.S. dollar year-over-year in the quarter, partially offset by straight-line rent expense from our new Vancouver distribution centre and a flagship store under construction of $1.0 million in the aggregate during the quarter.  We will continue to incur rent expense for our new distribution centre until its planned opening in the fall of 2018, which as expected, will temporarily inflate our reported cost of goods sold.

Selling, general and administrative ("SG&A") expenses decreased by 1.6% to $47.7 million compared to $48.5 million in the third quarter last year.  The third quarter of last year included $3.1 million of costs related to the Company's IPO. Excluding these IPO-related costs, SG&A was $45.3 million in the third quarter last year.  This increase in normalized SG&A dollars during the quarter was primarily due to variable selling expenses driven by higher sales volume, as well as investments in information technology and talent. SG&A expenses for the quarter were 23.3% of net revenue, compared to a normalized 24.3% in the third quarter last year after excluding IPO-related costs.

Other income, net was $2.0 million compared to $3.1 million in the third quarter last year. Other income, net this quarter primarily relates to unrealized operational foreign exchange gains of $0.8 million and unrealized foreign exchange gains on U.S. dollar forward contracts of $1.9 million, offset by realized operational foreign exchange losses of $0.1 million and realized foreign exchange losses on U.S. dollar forward contracts of $0.8 million.

Adjusted EBITDA increased by 10.0% to $50.0 million, or 24.4% of net revenue, compared to $45.4 million, or 24.4% of net revenue, in the third quarter last year. Adjusted EBITDA in the quarter excludes stock-based compensation expense of $3.9 million and unrealized foreign exchange gains on U.S. dollar forward contracts of $1.9 million. Adjusted EBITDA for the third quarter last year excludes stock-based compensation expense of $4.0 million, IPO-related costs of $3.1 million, and unrealized foreign exchange gains on U.S. dollar forward contracts of $1.1 million. The increase in Adjusted EBITDA during the quarter was primarily driven by the factors described above.

Included in Adjusted EBITDA is the aforementioned straight-line rent expense from the new distribution centre and a flagship store under construction of $1.0 million in the aggregate during the quarter.

Stock-based compensation expense was $3.9 million compared to $4.0 million in the third quarter last year. This quarter's stock-based compensation expense consists of $1.6 million in expenses related to the accounting for options under the legacy option plan and $2.3 million in expenses primarily related to the accounting of options under the new option plan.

Net income for the quarter was $28.1 million, compared to a net loss of $8.1 million in the third quarter last year which was primarily due to the non-cash income tax reversal of $28.3 million during the third quarter last year relating to the modification of the accounting treatment of the Company's legacy option plan from a liability to equity-settled plan as of September 30, 2016.

Adjusted Net Income increased by 11.4% to $30.6 million, or $0.26 per diluted share (treasury stock method⁽¹⁾), compared to Adjusted Net Income of $27.5 million, or $0.23 per diluted share (treasury stock method⁽²⁾), in the third quarter last year. Adjusted Net Income excludes the impact of stock-based compensation expense, unrealized foreign exchange losses/gains on U.S. dollar forward contracts and other non-recurring items, net of related tax effects.

Included in Adjusted Net Income is the aforementioned straight-line rent expense from the new distribution centre and a flagship store under construction of $1.0 million, net of related tax effects, in the aggregate during the quarter.

Cash on Hand was $105.2 million at the end of the quarter compared to $59.4 million at the end of the third quarter last year. The increase was primarily driven by the factors discussed above. The Company is considering the optimal use for its excess cash balance, including evaluating a normal course issuer bid (NCIB) in conjunction with refinancing its debt.

Year-to-Date Results

All comparative figures below are for the 39-week period ended November 26, 2017, compared to the 39-week period ended November 27, 2016.

Net revenue increased by 11.2% to $523.5 million from $470.8 million in the prior year. The net revenue increase was primarily driven by comparable sales growth of 6.7%, resulting from continued momentum in the Company's eCommerce business, and the revenue from new, expanded and repositioned stores.

Gross profit increased by 11.6% to $212.2 million, or 40.5% of net revenue, compared to $190.2 million, or 40.4% of net revenue, in the prior year. This was primarily due to the benefit of ongoing product supply chain initiatives, as well as the positive impact from the weakening of the U.S. dollar year-over-year in the quarter, partially offset by straight-line rent expense from our new Vancouver distribution centre and flagship stores under construction of $4.2 million in the aggregate during the period. We will continue to incur rent expense for our new distribution centre until its planned opening in the fall of 2018, which as expected, will temporarily inflate our reported cost of goods sold.

SG&A expenses increased by 3.0% to $133.1 million compared to $129.3 million in the prior year. The prior year included $7.7 million of costs related to the Company's IPO. Excluding these IPO-related costs, SG&A was $121.6 million in the prior year. SG&A expenses for the period were 25.4% of net revenue, compared to a normalized 25.8% in the prior year after excluding IPO-related costs.

Other expenses, net were $2.2 million compared to other income, net of $3.0 million in the prior year. Other expenses, net this year primarily relates to realized operational foreign exchange losses of $0.6 million, realized foreign exchange losses on U.S. dollar forward contracts of $1.5 million, unrealized operational foreign exchange losses of $0.1 million and unrealized foreign exchange losses on U.S. dollar forward contracts of $0.5 million, partially offset by interest income of $0.5 million.

Adjusted EBITDA increased by 10.8% to $94.6 million, or 18.1% of net revenue, as compared to $85.4 million, or 18.1% of net revenue, in the prior year. The increase in Adjusted EBITDA was primarily driven by the factors described above.

Included in Adjusted EBITDA is the aforementioned straight-line rent expense from the new distribution centre and flagship stores under construction of $4.2 million in the aggregate during the period.

Stock-based compensation expense was $11.6 million, consisting of $4.5 million in expenses related to the accounting for options under the legacy option plan and $7.1 million in expenses primarily related to the accounting of options under the new option plan. In the prior year, stock-based compensation was $98.6 million primarily due to the accounting of time-based and performance-based options under the legacy option plan in conjunction with the IPO.

Net income was $41.2 million, compared to a net loss of $67.6 million in the prior year which was primarily due to the aforementioned stock-based compensation expense in the prior year.

Adjusted Net Income increased by 15.3% to $53.4 million, or $0.46 per diluted share (treasury stock method⁽¹⁾), compared to Adjusted Net Income of $46.3 million, or $0.39 per diluted share (treasury stock method⁽²⁾), in the prior year.

Included in Adjusted Net Income is the aforementioned straight-line rent expense from the new distribution centre and flagship stores under construction of $4.2 million, net of related tax effects, in the aggregate during the period.

Subsequent Event

During the third quarter, Brian Hill, Founder, Chairman and CEO (through a holding investment company controlled by Mr. Hill) purchased an aggregate of 290,700 subordinate voting shares, increasing his equity ownership in the Company to 22.32%, consistent with his previously disclosed intention to maintain a long-term target equity ownership of between 20% to 25%.

On January 9, 2018, Mr. Hill voluntarily agreed to cancel an aggregate of 671,889 stock options granted to him in connection with the Company's IPO for no consideration in order to provide the Company with greater flexibility within the option pool from which the Company may further incentivize its current management. Mr. Hill remains fully committed to leading the Aritzia team for the foreseeable future and wants both the team and shareholders to benefit from the Company's long term value creation. The cancellation of these options results in accelerated vesting for accounting purposes, and therefore gives rise to expense recognition for the remaining unexpensed grant date fair value of $2.3 million. This amount will be recognized in stock-based compensation expense at the time of cancellation in the fourth quarter.

Outlook

The sales momentum in the third quarter has extended into the fourth quarter as a result of a strong start to the holiday and fall/winter sale season. 

The Company has already repositioned its San Francisco store to a flagship location and expanded its Aritzia location in Edmonton's Kingsway Mall in the fourth quarter.  In addition, the Company currently plans to open two new stores in the fourth quarter. This includes a new Aritzia store in Los Angeles at South Coast Plaza and a Babaton store in Toronto's Square One.

The Company expects that its sourcing initiatives underway will continue to benefit gross margin as the Company obtains better product costs. This margin improvement is expected to be offset in the near-term by the investments the Company is making in its distribution centre expansion. The Company continues to believe that for fiscal 2018, its gross profit margin will remain essentially flat with what was achieved in fiscal 2017. Likewise, the Company believes its SG&A expenses will increase alongside its net revenue.

The Company anticipates its total capital expenditure in fiscal 2018 to be between $60 and $65 million.

Overall, the Company continues to make progress on its strategic initiatives, and remains on track to meet or exceed its stated 2021 performance targets.

For additional information, please see the "Outlook" section of the Management's Discussion and Analysis for the third quarter ended November 26, 2017.

Conference Call

A conference call to discuss second quarter results is scheduled for Wednesday, January 10, 2018, at 1:30 p.m. PDT / 4:30 p.m. EDT. A replay will be available shortly after the conclusion of the call and will remain available until January 25, 2017. To access the replay, please dial 1-855-669-9658 and use replay access code 1973. A live and archived webcast will be available and will remain on Aritzia's investor relations website at investors.aritzia.com for 30 days.

About Aritzia

Aritzia is an innovative design house and fashion retailer of exclusive brands. The Company designs apparel and accessories for its collection of exclusive brands and sells them under the Aritzia banner. The Company's expansive and diverse range of women's fashion apparel and accessories addresses a broad range of style preferences and lifestyle requirements. Aritzia is well known and deeply loved by its customers in Canada with growing customer awareness and affinity in the United States and outside of North America. Aritzia aims to delight its customers through an aspirational shopping experience and exceptional customer service that extends across its more than 80 retail stores and eCommerce business, aritzia.com.

Non-IFRS Measures including Retail Industry Metrics

This press release makes reference to certain non-IFRS measures including certain retail industry metrics. These measures are not recognized measures under IFRS do not have a standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other companies. Rather, these measures are provided as additional information to complement those IFRS measures by providing further understanding of our results of operations from management's perspective. Accordingly, these measures should not be considered in isolation nor as a substitute for analysis of our financial information reported under IFRS. We use non-IFRS measures including "EBITDA", "Adjusted EBITDA", "Adjusted Net Income", "Adjusted Net Income per diluted share", and "gross profit margin". This press release also makes reference to "comparable sales growth", which is a commonly used operating metric in the retail industry but may be calculated differently compared to other retailers. Beginning Q1 2018, we changed our calculation methodology by applying the prior year's average quarterly exchange rate to both current year and prior year comparable sales to achieve a consistent basis for comparison. Prior to Q1 2018, comparable sales growth was calculated using a U.S. dollar to Canadian dollar exchange rate of 1:1.  These non-IFRS measures including retail industry metrics are used to provide investors with supplemental measures of our operating performance and thus highlight trends in our core business that may not otherwise be apparent when relying solely on IFRS measures. We believe that securities analysts, investors and other interested parties frequently use non-IFRS measures including retail industry metrics in the evaluation of issuers. Our management also uses non-IFRS measures including retail industry metrics in order to facilitate operating performance comparisons from period to period, to prepare annual operating budgets and forecasts and to determine components of management compensation. Definitions and reconciliations of non-IFRS measures to the relevant reported measures can be found in our MD&A. Such reconciliations can also be found in this press release under the heading "Selected Consolidated Financial Information".   

Forward-Looking Information

Certain statements made in this press release may constitute forward-looking information under applicable securities laws. These statements may relate to our future financial outlook and anticipated events or results and include, but are not limited to, expectations regarding industry trends, overall market growth rates, our growth rates and growth strategies, expectations regarding our capital expenditures, operations and use of cash on hand and future cash flow, our financial position, financial results, business plans and strategies, expectations regarding eCommerce growth and omni-channel capabilities, expectations regarding our sourcing initiatives, expectations regarding new store openings and the expansion and repositioning of existing stores, expectations regarding our sourcing model, our belief that our business model will enable us to deliver consistent sales and profitability growth and in turn, increase shareholder value over the long term, and expectations regarding the implementation of new accounting standards, expectations regarding our ability to meet or exceed our stated 2021 performance targets and other statements that are not historical facts. Particularly, information regarding our expectations of future results, targets, performance achievements, prospects or opportunities is forward-looking information. As the context requires, this may include certain targets as disclosed in the prospectus for our initial public offering, which are based on the factors and assumptions, and subject to the risks, as set out therein and herein. Often but not always, forward-looking statements can be identified by the use of forward-looking terminology such as "may" "will", "expect", "believe", "estimate", "plan", "could", "should", "would", "outlook", "forecast", "anticipate", "foresee", "continue" or the negative of these terms or variations of them or similar terminology. Forward-looking statements are made current as of the date they are made and are based on applicable estimates and assumptions made by us at the relevant time in light of our experience and perception of historical trends, current conditions and expected future developments, as well as other factors that we believe are appropriate and reasonable in the circumstances. However, we do not undertake to update any such forward-looking information whether as a result of new information, future events or otherwise, except as required under applicable securities laws in Canada. There can be no assurance that such estimates and assumptions will prove to be correct.  Many factors could cause our actual results, level of activity, performance or achievements or future events or developments to differ materially from those expressed or implied by the forward-looking statements, including, without limitation, the factors discussed in the "Risk Factors" section of the Company's annual information form dated May 10, 2017 for the fiscal year ended February 26, 2017 (the "AIF"). A copy of the AIF and the Company's other publicly filed documents can be accessed under the Company's profile on the System for Electronic Document Analysis and Retrieval ("SEDAR") at www.sedar.com. The Company cautions that the list of risk factors and uncertainties described in the AIF is not exhaustive and other factors could also adversely affect its results. Readers are urged to consider the risks, uncertainties and assumptions carefully in evaluating the forward-looking information and are cautioned not to place undue reliance on such information.

Selected Consolidated Financial Information

SOURCE Aritzia Inc.