Aritzia Inc. (ATZAF) Q4 2023 Earnings Call Transcript

Aritzia Inc. (OTCPK:ATZAF) Q4 2023 Earnings Conference Call May 2, 2023 4:30 PM ET

Company Participants

Beth Reed - Vice President, Investor Relations

Jennifer Wong - Chief Executive Officer

Todd Ingledew - Chief Financial Officer

Conference Call Participants

Mark Petrie - CIBC

Irene Nattel - RBC Capital Markets

Stephen MacLeod - BMO Capital Markets

Derek Dley - Canaccord Genuity

Martin Landry - Stifel GMP

Dylan Carden - William Blair

Brian Morrison - TD Securities

Alice Xiao - Bank of America

Operator

Thank you for standing by. This is the conference operator. Welcome to Aritzia's Fourth Quarter and Full Year Fiscal 2023 Earnings Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Beth Reed, Vice President, Investor Relations. Please go ahead.

Beth Reed

Good afternoon, and thanks for joining Aritzia's fourth quarter and full year fiscal 2023 earnings call. On the call today, I'm joined by Jennifer Wong, our Chief Executive Officer; and Todd Ingledew, our Chief Financial Officer.

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 and 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 quarterly and annual management discussion and analysis and our annual information form that are available on SEDAR, 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 financial statements and the MD&A are available on SEDAR as well as the Investor Relations section of our website.

I'll now turn the call over to Jennifer.

Jennifer Wong

Thanks, Beth, and good afternoon, everyone, and thank you for joining us today. Our strong results in Q4 wrapped up a tremendous year where the momentum in our business surpassed our highest expectations. After 37 years of consistent growth, Aritzia reached $1 billion in sales in fiscal 2022. And just 14 months after that, we achieved $2 billion ending fiscal 2023 at $2.2 billion in sales. This resulted in an unprecedented 2-year top line increase of 160% and a new $2.2 billion baseline from which we will continue to grow, maximizing sales and meeting the surge in demand for our product in an extremely dynamic operating environment was our top priority for the last 2 years. In fiscal 2023, we delivered 47% net revenue growth on top of 74% in fiscal 2022, primarily driven by client acquisition with consistency across customer metrics such as spend per client, shopping frequency and basket size. More people than ever before, discovered our much-loved everyday luxury experience with our active client base in the United States increasing by more than 50% during the year on top of an increase of over 100% in the prior year. In addition, we added 7 new boutiques in the United States with an increase of 18%. The U.S. now generates more than half of our total net revenue, and we still have a long runway of growth ahead of us. Turning to Q4. Record sales were higher than anticipated across all channels and all geographies. Net revenue of $638 million increased 44% from last year with comparable sales growth of 32%. And -- this growth was primarily fueled by our business in the U.S., where outstanding pace continued, growing by 56% from last year, while in Canada, we saw strong sales growth of 32%. In e-commerce, revenue grew an impressive 51% in Q4, driven by traffic growth in both Canada and the U.S. as well as improvement in conversion due to search and browse site enhancements and our improved inventory position compared to last year. We also made progress toward delivering e-commerce 2.0, personalized and product recommendation tests showed increased conversion rates and higher revenue per session. We will continue to further refine our personalization strategies as we execute on our e-commerce 2.0 roadmap to ensure that we are bringing a captivating personalized experience to our clients throughout their shopping journey on aritzia.com. We will seek to inspire the customer to discover our entire diverse product assortment while tailoring content to their individual style and preferences to keep them engaged. We continue to believe that e-commerce 2.0 is the key to more than doubling our e-commerce revenue by fiscal 2027. Our retail net revenue increased 38% in Q4, surpassing our expectations. Our momentum in the quarter was fueled by outstanding comparable sales growth in our boutiques. -- as well as the progress we made on our real estate expansion strategy. We opened 2 new boutiques during the quarter, LaCenterra in San Antonio, Texas, which is a new market for us and our fourth boutique in the state of Texas as well as fashion outlets in Chicago. Later this month, we will open our fifth boutique in Texas, South Lake Town Center in Dallas. New locations continue to open above our sales expectations and our growing collection of premier boutiques remains our #1 client acquisition tool by propelling our brand and driving and supporting our e-commerce business. In Q4, we also expanded our Upper Canada boutique in Ontario to a stunning 15,000 square foot space, including an AOK cafe. Our boutique expansions continue to perform exceptionally well with better-than-expected payback periods as the additional square footage allows us to provide our clients with an elevated shopping experience and a meaningfully wider product assortment. In product, sales of our professional assortments continue to increase, even as we maintained our momentum in casual and active wear styles. We also experienced another strong outerwear season as we continue to be the destination for the Supercut and Wilco. Our Super post influencer program strengthened throughout winter with the superposition celebrities like Tracy L.S. Ross, Lupita Nano and even Marta Stewart. We also continue to see strong results through our partnership with Emma Chamberlain, and recently featured her as the face of our Sunday Best spring campaign, Sunday using with EMA. Supported by our social and influencer strategies, our beautiful product and real estate expansion strategy are driving increased awareness of the Aritzia brand and a greater market share, propelling us along our path to gaining widespread recognition across the U.S. Shifting to supply chain. We took possession of our new cornerstone distribution center in Toronto, which will serve as a fulfillment hub for Eastern Canada and Eastern United States. As soon as the floor was poured in January. As a reminder, we are moving from a third-party operated 150,000 square foot facility to a brand-new Aritzia operated 550,000 square foot location that is designed to support several years of growth. The racking is in now, and it remains on track to open in late August. We ended the quarter with inventory up 125% over last year. Our inventory is heavily concentrated in client favorites and the year-over-year growth has further moderated throughout Q1 of fiscal 2024. We -- we continue to expect growth to more closely align with sales trends by the end of Q2 -- our growing recognition and industry-leading wages have allowed us to continue attracting world-class talent. The ongoing investments that we're making in retail labor help ensure that our clients continue to receive exceptional service, which is a key tenet of our everyday luxury experience. We are continuing to make smart strategic investments in our future. This includes investments in infrastructure that will allow us to catch up with our recent tremendous growth. And for example, we're currently in the process of upgrading our point-of-sale system for increased stability and performance while laying the foundation for future enhancements such as mobile point-of-sale and omnichannel services. In addition, we are investing in talent across all areas of the business as we scale our teams to align with our recent growth.

That said, while we continue to strategically invest with a long-term view, we are also focused on optimizing our processes to more efficiently manage our current business and ensure scalability for our ongoing growth. We have already identified and actioned opportunities that will deliver cost efficiencies beginning in the back half of the year, which Todd will discuss momentarily. Turning to ESG as Aritzia continues to grow and as our clients strive to live and purchase better, we're working to extend our sustainability programs and accelerate our progress across the value chain. -- fiscal 2023 was our first full year with an established environmental and social board committee, and we plan to publish our second annual ESG report in June.

I will now pass the call over to Todd.

Todd Ingledew

Thanks, Jennifer, and good afternoon, everyone. We are extremely pleased to have delivered another quarter of exceptional growth. We generated net revenue of $638 million in the fourth quarter, exceeding the high end of our guidance range and representing an increase of 44% from last year, supported by comparable sales growth of 32%. -- our business in the United States sustained its outstanding growth with net revenue of $337 million in the fourth quarter, an increase of 56% from last year. This momentum reflects our growing brand awareness and a significant increase in our U.S. client base.

We also experienced strong growth in Canada, where net revenue increased 32% to $300 million. In e-commerce, our business continued to grow sequentially with net revenue increasing 51% to $274 million, even as demand in our boutiques remained extremely robust. This speaks to the strength of our multichannel business.

E-commerce trends were strong across all geographies, primarily driven by traffic growth as well as increased conversion rates. Net revenue in our retail channel was $363 million, an increase of 38%. This was led by growth in the United States where our comparable new and expanded boutiques all performed exceptionally. Our Canadian boutiques also saw meaningful growth as we lapped a period of restrictions from the Omicron wave during our peak selling period in the fourth quarter last year.

We delivered gross profit of $242 million, up 35% compared to the fourth quarter last year. Gross profit margin was 38% as expected, declining 240 basis points from 40.4% last year. The decline was primarily driven by additional warehousing costs related to inventory management, ongoing inflationary pressures, normalized markdowns and the weakening of the Canadian dollar. These headwinds were partially offset by lower expedited freight costs and leverage on occupancy and depreciation costs.

SG&A expenses were $171 million or 26.9% of net revenue compared to 27.1% last year. Leverage from increased revenue was partially offset by investments in retail and support office talent, marketing initiatives and technology to support our accelerated momentum and fuel our future growth. Our adjusted EBITDA in the fourth quarter was $79 million, an increase of 20% from last year.

Adjusted EBITDA was 12.4% of net revenue compared to 14.9% last year. The margin pressure reflects ongoing inflationary pressure and investments in our infrastructure to sustain our rapid growth. At the end of the fourth quarter, inventory was in line with our expectations at $468 million, an increase of 125% compared to the end of the fourth quarter last year. As of last Sunday, April 30, our inventory was up 76%, and we continue to expect the year-over-year growth to normalize by the end of the second quarter.

Our total committed inventory at the end of the fourth quarter, which includes on hand, in transit and on order with the factory was up 14% over last year. Our liquidity position remained strong at the end of the fourth quarter with $87 million in cash and 0 drawn on our $175 million revolving credit facility. I will now shift to our outlook for the first quarter and fiscal year 2024. We -- the first quarter is off to a healthy start.

We are on track to deliver first quarter net revenue in the range of $450 million to $460 million, representing an increase of approximately 10% to 13% compared to the first quarter last year. We continue to see strength in the United States across both our e-commerce and retail channels as well as continued growth in Canada.

For the full year of fiscal 2024, we expect net revenue to be in the range of $2.42 billion to $2.5 billion, representing growth of 10% to 14% from fiscal 2023, including the 53rd week. This growth is on top of a 47% increase last year and 74% increase in fiscal 2022. We -- our fiscal 2024 net revenue outlook reflects current trends and the cadence of our boutique openings. In the fiscal year, we plan to open 8 new boutiques and to expand or reposition 4 boutiques, all located in the United States. We anticipate square footage growth of approximately 15% this year, with the majority occurring in the fourth quarter.

6 of the 8 new boutiques will open in the second half of the fiscal year, including 3 in the last month of the fiscal year. In fiscal 2025, we expect top line momentum to accelerate with the addition of the boutiques late in fiscal 2024, along with accelerated square footage growth of approximately 20% planned for fiscal 2025. Our expected revenue growth keeps us well on track to meet or exceed our long-term target of $3.5 billion to $3.8 billion in fiscal 2027.

We expect gross profit margin for the year to decline by approximately 200 basis points compared to last year. This reflects ongoing product and supply chain cost inflation, normalized markdowns, preopening lease amortization for our new Cornerstone distribution center and flagship boutiques in Manhattan and Chicago and additional warehousing costs related to inventory management. These headwinds will be partially offset by lower expedited freight costs.

These pressures are expected to drive gross profit margin decline of approximately 600 basis points in the first half of the year. In the second half of the year, we expect moderate gross profit margin expansion as transitory warehousing costs subside. We benefit from IMU improvements and we lap product and supply chain cost inflation from the second half of last year.

SG&A as a percent of net revenue is expected to increase by approximately 150 basis points compared to last year. Pressure will be concentrated in the first half, driven by the Eastern Distribution Center project costs and the annualization of investments in talent and increased retail wages made in the second half of last year. These pressures are expected to drive SG&A margin decline of approximately 400 basis points in the first half of the year. In the second half of the year, we expect modest SG&A leverage.

While we anticipate substantial margin headwinds in the first half of fiscal 2024, we expect to see adjusted EBITDA margin expansion beginning in the second half. The leverage in the second half will be partially driven by one of our strategic focuses for the year, which is to optimize our processes to more efficiently manage our current business and ensure scalability for our ongoing growth. We have already identified and begun to action opportunities that will deliver cost efficiencies, spanning negotiations with vendors, KPI improvements and automation opportunities.

Looking further ahead, in fiscal 2025, we expect our adjusted EBITDA margin to return to at a minimum 16% driven by IMU improvements, cost efficiencies and subsiding transitory cost pressures, all totaling an expected benefit of approximately 400 basis points. As set out in our long-term growth plan, we continue to expect to achieve an adjusted EBITDA margin of approximately 19% by fiscal 2027. We expect capital expenditures for fiscal 2024 of approximately $220 million, comprised primarily of new and repositioned boutiques, our new 550,000 square foot Cornerstone distribution center as well as support office expansion.

We continue to expect total capital expenditures of approximately $500 million through fiscal 2027. Our balance sheet is strong, and even with the capital investments for fiscal 2024, we expect to generate meaningful positive cash flow as our inventory levels normalize, resulting in an even stronger financial position at the end of the year. In closing, I'd like to highlight 3 things. First, we've experienced unprecedented growth over the last 2 years and are forecasted in fiscal 2024 to focus on building infrastructure to support our higher baseline and ensure scalability for our next phase of growth. Second, our boutique opening cadence will drive accelerated momentum in fiscal 2025.

And third, we expect actions taken this year to return our adjusted EBITDA margin to at a minimum 16% in fiscal 2025. Again, while we expect to see near-term margin pressure, we are confident that our growth strategies, targeted infrastructure investments and process optimizations will drive sustained double-digit revenue and earnings growth for the long term while delivering meaningful value for our shareholders. With that, I'll now turn the call back to Jennifer.

Jennifer Wong

Thanks, Todd. As Todd mentioned, the first quarter of fiscal 2024 is off to a healthy start and new seasonal styles are resonating well with our clients. We continue to see strength in the United States across both our e-commerce and retail channels as well as continued growth in Canada. While quarter-to-date sales trends have normalized from the unprecedented levels of growth we saw over the past 2 years, the strength of the Aritzia brand gives us confidence that we remain well positioned to capitalize on all of our opportunities in front of us.

As we digest the tremendous growth that we have experienced over the past few years, building our foundation for the next phase of growth ahead is our top priority. We are confident in the sustainability of our new higher baseline from which we will continue to advance our growth strategies. This is why in fiscal 2024, we are focused on investing in infrastructure to support the size of our business today and fuel our future growth, always with a long-term approach.

Our expected revenue growth keeps us well on track to meet or exceed our long-term target of $3.5 billion to $3.8 billion in fiscal 2027. We also remain committed to our 19% adjusted EBITDA margin target by fiscal 2027 as we expect to benefit from multiple tailwinds beginning later this year and as the mix of our business shifts further into the U.S. and e-commerce. In closing, I would like to reiterate that we are confident that our growth strategies targeted infrastructure investments and cost efficiencies will drive sustained double-digit revenue and earnings growth for the long term while delivering meaningful value for shareholders. I would also like to thank our dedicated team for their commitment to excellence as we transition into our next phase of growth as we're all energized and excited for all that is to come.

With that, Brenda, we're ready to please now begin Q&A.

Question-and-Answer Session

Operator

Certainly, we will now begin the question-and-answer session. [Operator Instructions] The first question comes from Mark Petrie from CIBC. Please go ahead.

Mark Petrie

Yes. Thanks, good afternoon. Could you go through a little bit of the gross margin drivers? Maybe just sort of break down the biggest drivers and give us a sense of sort of the relative first half, second half impact of each of them?

Todd Ingledew

Yes. Sure, Mark. So ongoing inflation is the largest impact to the margins in the first half. And obviously, that continues into the second half as well -- and we're expecting, as I said, approximately 600 basis points of pressure in the first half that will moderate to expansion in the second half. So we're expecting expansion in the second half. So it's really from a cost perspective, a tale of 2 halves.

And the other pressures in the first half are those that we experienced already in the fourth quarter, so normalized markdowns, the transitory warehousing costs related to our inventory management. And then we also, this year, have preopening lease amortization for our Toronto distribution center as well as our new flagship locations where we're repositioning all of the Manhattan flagships as well as opening a new flagship in Chicago. So those have pre-amortization of the lease costs associated that are hitting now.

And so that's the pressure in the first half. And then as we move into the second half of the year, we will have our new distribution center open at the end of August, which is the end of the second quarter. That will, along with the moderating of our inventory levels will improve our supply chain costs, not immediately at the beginning of the third quarter, but starting at the beginning and sort of working through the end of the year.

So we'll benefit from that as well as we will benefit from IMU improvement in the back half of the year and also leverage on rent. So those are the key drivers. And obviously, important to note, as I said, that we expect those improvements to begin to show in the back half but continue to improve into fiscal 2025.

Mark Petrie

Right. Okay. And can you quantify the impact of the warehousing costs in Q1 or in H1 or Q1 or Q2?

Todd Ingledew

It's in -- for the full year, it's just a little under 100 basis points. So it would be north of 200 basis points for the first half because that's where the majority of the pressure will be. -- some of it will linger into the back half. I just want to be clear on that.

Mark Petrie

Yes. Okay. So that was my other question. I guess, just related to that was you commented about inventory levels continue to expect to normalize closer to revenue growth by the end of Q2. So is that still the case? And how will that affect the gross margin in the second half?

Todd Ingledew

Yes. 100%. We're on track with our inventory levels. As I indicated, just this Sunday, we were at 76%, and we expect it to be fully moderated to our revenue growth by the end of the second quarter. And that will be part of the benefit we'll see in the back half of the year where we won't have the higher handling costs that are currently associated with that. It just won't be immediate as we -- because we have auxiliary warehouse facilities that we have to exit and close down, et cetera. So it won't be immediate as we open the new distribution center. But through the back half, those costs will dissipate.

Mark Petrie

Yes. Understood. Okay. And you referenced improving product margins. Is that a reflection of a decision about pricing within the portfolio? Or is that simply a reflection of new products continuing to come in at targeted margins. Where did you land on the whole pricing analysis?

Jennifer Wong

I'll just jump in on that one. As Todd mentioned, we do expect to improve our IMU margins, and we're really strategically approaching our IMU margins. You'll see it through a combination of cost efficiencies. And as we mentioned on our previous call, some selective pricing where we know that the value proposition makes sense for our customer. And so the key thing here is we're thinking about the IMU strategy carefully. And above all, I guess, just to remind you that as our U.S. sales mix increases, we do get a natural pricing increase and a natural IMU benefit.

Mark Petrie

Yes. Understood. Okay. And then I guess just one last question. Just with regards to the trajectory on sales growth. Obviously, appreciating that you're lapping some enormous growth over the last couple of years.

But I'm just curious when you're looking at sort of the trends of Q1 or thinking about fiscal '24 more broadly, is the deceleration consistent across geographies and channels? Or are you seeing shifts in behavior that suggests there's one channel or one geography is behaving a little bit differently?

Jennifer Wong

No. What we're seeing, like high level, what we're seeing is strengthen our brand, strengthen our product, product continues to resonate with our customer. As we've mentioned on the call, it's broad-based. We're not seeing any regional differences, it's strength across all geographies, all channels all channels, e-commerce, retail, Canada, U.S., east, west, what we're controlling or delivering on for our customer.

Todd's outlook takes into account current trends and the macro effects. And so really, what we're seeing is strength in the Aritzia brand and everyday luxury. And I guess, really, there's no question that when the weather pops, we usually see a positive impact on our sales. I mean, for God's sakes, at Stone, I think it snowed in the Midwest there, and what is it, 7 degrees in Toronto or 11 7 degrees in Toronto, where you are. So overall, we're still very confident in the strength of Aritzia and what we're seeing high level.

Mark Petrie

Understood. Appreciate the comments all the best.

Operator

The next question comes from Irene Nattel from RBC Capital Markets.

Irene Nattel

Just wondering what exact how confident are you in both the 16-plus percent EBITDA margin target for 25? And what would be the factors that you could see that would cause you to miss that margin target?

Todd Ingledew

We're extremely confident in hitting that target. It's based on the items that I mentioned. And one is the benefits that we're expecting from IMU increases, we'll see some in the fall of this year or the back half of this year. But that will translate into next year as well. And then the cost efficiencies that we're currently working on, we've been really department by department going through the process optimization opportunities, and we expect meaningful benefit from that exercise.

And we've already implemented some and are expecting -- have a long list of others that we are expecting to implement between now and the back half of the year as well as the subsiding of the transitory costs that we keep talking about, and one of those is obviously the extra handling from the inventory as we open the new distribution centers, that will no longer be an issue going into next year and also the project costs associated with that new distribution center, which are being expensed in the first half of this year.

And we also have, as I mentioned, the preopening costs, the lease amortization that as we open these new buildings and then the new -- the new flagship locations next year, those costs will become a tailwind as obviously, we begin to generate revenue. So all of those items put together, we feel very confident in the 400 basis points that would get us back to the 16%.

Irene Nattel

That's helpful, Todd. And then just kind of thinking through. So if the new DC is coming online late in Q2, what are you assuming in terms of sort of the ramp around efficiencies around throughput? Is this a case where it really does actually ramp really quickly? Or do you have to kind of do it start slowly. Anything you can tell us around that, please?

Todd Ingledew

It's an excellent question. On the operations side here. There's always a ramp. It's a new building for us. It's going to be a whole new crew. Likely, we're onboarding a lot of the supervisors and the management team here in Vancouver. So we think they'll hit the ground running. But certainly, it's immune facility. It's a much larger facility. We do expect that our metrics will improve over time. But certainly, we'll see a benefit as soon as we move in compared to what we're experiencing right now.

Irene Nattel

That's great. And then just finally, one question on the CapEx. So in your prepared remarks, you said that you still think it's going to be about $500 million to 27 million. So that implies given the $220 million in F '24, that implies a substantial step down. Again, what is your confidence in that $500 million? And is it really just around one Toronto is done, that's the big chunk of it.

Todd Ingledew

Yes. Look, as we've said, this year is a year of investment. So whether that's on the capital front or on the expense side and rightsizing our processes, et cetera. This year is about investment because of the phenomenal growth we've seen. And the capital is obviously concentrated this year. There's about $100 million of the $220 million is from infrastructure spend. DCO our distribution center in Toronto would be one of the components there, but also our 3PL in Columbus, Ohio. We're expanding that from 250,000 square feet approximately to approximately 500,000 square feet. So there's capital being outlaid there.

And then we have support office expansion that's hitting this year as well. And those projects, while we will likely have another DC on the West Coast before the end of the allo period, which we communicated previously. The large infrastructure builds are happening this year. And then on the store or the boutique expansion front, the other $120 million is related to that. And we're -- that's for the 8 new stores this year as well as the 4 expanded or repositioned stores, but it also includes dollars being spent in this fiscal year for next year's locations. And so we have, obviously, these large flagships we're replacing, again, all of our flagship locations in Manhattan. All of those are opening next year, and we're starting to spend on them this year. So that's why the dollars are elevated in this fiscal year.

Jennifer Wong

And I know I'm not suppose but I'm going to pile on. We're I know where , but I just want to add because we are excited about the investments. And our square footage is growing at 15% this year. As Todd mentioned, it's heavily concentrated in the second half of the year. That's going to be 20% square footage growth in fiscal 2025. So we expect to see momentum of the top line in 2025, as he's mentioned, and these are the store boutiques. And on those repositions and expansions in Manhattan, we do expect to see a 50% to 100% more productivity in those stores. And I think we have said on a previous call that they're more cost efficient than our current flagship. So we're super excited about these investments because we think that they're really going to pay off, particularly in the back half of the year, but even more so into fiscal '25 and set us up for our top line growth and goals by fiscal '2027.

Irene Nattel

Understood. Thank you.

Operator

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

Stephen MacLeod

I was just wondering, clearly like a bit of a pivot here with respect to building on infrastructure in the current fiscal year. And I'm just curious if you're able to -- was there any precipitating factors where you're seeing bottlenecks in your system, whether it's on the supply chain or distribution side or store operations side that sort of led you to take -- may take the decision to really focus on building up that infrastructure backbone.

Todd Ingledew

It's not any one thing, Stephen. As we mentioned, our top line growth grew 160% in the last 2 years. And in particular, the acceleration in the last fiscal year has been incredible. I sort of feel like if I can say it's like a head start on this year. And so if you just think about that growth overall and the business digesting it in all areas, we're just a much bigger business than we were 2 years ago, considerably bigger. And so with that, it takes scaling and getting economies of scale and some automation where automation makes sense. And so I just -- I think it's a factor of the tremendous growth that we've experienced in the last 2 years. Certainly, we have that distribution center, that cornerstone distribution center in Toronto can open soon enough. So we're really looking forward to that opening at the end of August. And these are just all things that we've lined up that will set us up for our next phase of growth.

Stephen MacLeod

Great. Okay. That message is loving clear. Great. And then maybe just on the inventory. Is it still safe to assume that or safe to say that the inventory composition is still largely comprised of proven sellers? And then secondly to that, once you get through inventory growth normalizing sales by the end of Q2, do you expect it to sort of continue to be at that rate where your inventory is growing with sales as you roll through the balance of the year?

Todd Ingledew

Yes. I think say that exactly, Stephen. That's what we're expecting today. I would say at most growing with our revenue in the back half of the year. And then as we move into spring, summer and the following season, as it has always done historically, it will move in lockstep with our revenue growth with some seasonal adjustment. But as we're now with supply chains returning to normal, able to get back to our normal operating procedures as far as inventory goes.

Stephen MacLeod

Okay. That's great. Well, thank you.

Operator

The next question comes from Derek Dley from Canaccord Genuity.

Derek Dley

Just on the price increases and the impact from inflation. So I think you guys quantified the impact on the margins from the new DC and the new stores. But what is the impact from inflation? I get it's the biggest bucket, but can you quantify it for us?

Todd Ingledew

Well, we haven't quantified it specifically, but it is not quite the majority of the 600 basis points -- it's fairly material. I mean there's obviously -- we have offsetting benefits from lower freight costs as well. But if you look at the $600 million on its own, it wouldn't quite be a majority, but it is the largest, by far, the inflationary pressure.

Derek Dley

Okay. And then on, I guess, a couple of things on that. On the freight costs, are you guys still having to use the expedited freight -- or just given what you saw in Q3 as supply chains eased enough where you're almost not using that or really close to not having to use that. And then number two, just on that inflation number, is it mostly -- is it product inflation? Is it inflation in other parts of the business? I'm just trying to get a better understanding of why that number is where it is.

Todd Ingledew

Yes. On the exudate [ph] freight, we always strategically use expedited freight as part of our supply chain process. particularly in season for reorders. So that won't change. It's just the amount that we're using it has moderated back to normal levels, which is meaningfully reduced from the elevated levels from the last couple of years. So there is still expedited freight costs, but it's a lot lower. And then as far as the inflationary pressures, product cost is a large one, but we're seeing it really across the board. I mean, the other larger components would be in our delivery costs, where we have inflation and really fuel surcharges, et cetera, within those delivery costs as well as labor, whether that's at the distribution center or within retail, obviously, our wages, as we've been describing, have gone up, which is directly related to inflation. But those are the large buckets that I would point out. But really, it's across the board when you're looking at expenses.

Derek Dley

Okay. And then just one last one. Just given now that the U.S. contribution in terms of revenue is now the majority of your revenue, and I expect this to increase over time. At what point does the appreciation of the U.S. dollar inflect to becoming a net benefit to Aritzia. I'd imagine you're pretty close to that level at this point?

Todd Ingledew

Yes. We're not quite there yet. It's still -- obviously, it's a benefit to the top line right now. But from a bottom line perspective, it would still -- the strengthening of the U.S. dollar today or weakening in the Canadian is a slight drag on the bottom line. But we are very close to the neutral point. And it would be somewhere in the high 50s mix. So once the U.S. is in the sort of mid- to high 50s, we're at that inflection point. And then anywhere beyond that, obviously, it reverses..

Operator

The next question comes from Martin Landry from Stifel GMP.

Martin Landry

I wanted to dig a little bit in your revenue guidance. You're guiding for 10% to 14% for this year. And I believe, Todd, you mentioned that you expect momentum to accelerate perhaps in fiscal '25. So -- and as I think you expect a square footage growth to maybe be a little higher in fiscal '25. So I was wondering your revenue guidance this year, is it a factor -- like it's a bit of a deceleration from what we've seen in recent years. And I understand this may not have been sustainable. But I'm trying to figure out, have your stores reached a sales capacity limit at this point, and then you need -- your growth may be more aligned with the square footage. Is that fair? Or...

Todd Ingledew

No, I wouldn't put it that way. I mean our current projection for this year, again, is based, as we said, off of the current trends for the year as well as the cadence of the boutique openings. But looking forward, our revenue growth will be from our new store expansions, obviously, 8 to 10 new stores per year and 3 to 4 expansions and repositions. And we are expecting, I would say, flat to modest growth in Canada from a comp perspective in retail. But in the U.S., as we've said, we do expect comparable sales growth in our retail stores to continue. And then e-commerce, obviously, continuing to grow meaningfully. So those are the key drivers of our revenue growth going forward. And that has not changed in any way. it's really in this fiscal year, obviously, we're moderating from an extremely high growth rate over the last 2 years, the 160% going from $857 million to $2.2 billion over the last 2 years. And as you said, that wasn't expected to continue. And this year, we have the majority of our square footage in the store expansion concentrated in the back half, which, as we said, will drive increased revenue growth primarily next year as well next year because of the flagship locations in Manhattan as well as the other boutiques we plan to open. We have 20% square footage, which is above -- at the Investor Day, we communicated low double-digit square footage growth annually. So the 20% is meaningfully above that, obviously, close to double what a normal year in the outlook was expected. So we expect meaningful growth acceleration in FY '25.

Martin Landry

Okay. I'm just trying to understand like the timing of the deceleration in your revenue growth. And I was wondering, are you seeing any changes right now in your customer patterns in terms of basket size, order frequency average unit price. Anything that's changed since last year?

Todd Ingledew

Yes. I think I addressed this just in a previous question, our top line sales still is driven by the strength of our brand and the strength of our product. It's still resonating broadly with the customer. Specifically, we're not seeing any changes in basket. They continue to hold up. Conversion rates remain solid. As I say, products are resonating with our clients. And certainly, we're controlling everything that we can deliver for our customers. So we're not seeing anything changing.

Martin Landry

Okay. And then maybe just lastly, are you surprised by that deceleration in revenue growth? Or were you expecting that?

Todd Ingledew

Yes. As I said, we were expecting that it would moderate, obviously, coming off the growth we were seeing in the last 2 years.

Operator

The next question comes from Dylan Carden from William Blair.

Dylan Carden

Just curious, I think -- I guess, tell me if I'm wrong, but part of the increase in the inventory was pull forward or sort of more complete ordering of certain seasons. So historically, you ordered 75% of the season. Now you're ordering 100% or close to it when do I have that right? And two, did that impact in any way your capacity to kind of chase trends, react to trends? I know that sort of promotions are normalizing, but more on the region react capabilities at these higher inventory levels. Does that hurt or hindered at all?

Todd Ingledew

No. With the 44% sales growth in Q4, I think we were more than comfortable with our ability to drive demand. So no, it has not hurt that ability. And that's one of the reasons why it's taking time for it to moderate is because we're not -- we're still ordering what we need to drive our spring/summer today. And -- and therefore, that's extending the tail of that inventory and why we're not coming completely normalized until the end of Q2. But no, we have ensured that we aren't impacting the business because as we said, again, it's heavily concentrated in proven sellers that we just are working our way through.

Dylan Carden

Got it. And then last one, just on HQ hiring, I know that you've done a lot recently continued to benefit from everyone else shrinking. Where are you as far as sort of capacity needs at sort of the headquarters level?

Todd Ingledew

Well, we did -- we invested in talent in our support office, particularly in the back half of the year last year. And so that is actually fueling a lot of these projects and a lot of the people that are on board here are to help with these investment projects that we've mentioned on the call. And certainly, I think we still have pockets of areas. It's not across the board, but areas within support office where we still want to make sure that we are investing in talent, namely product and creative digital technology and certainly in the real estate area because of all of these exciting builds that we have going on.

Dylan Carden

Would you say though that the pace slows relative to sort of the back half of '22 calendar '22?

Todd Ingledew

Yes. Certainly, compared to last year, I would say, yes. But as you know, we're still investing -- I think I mentioned we're still investing in talent. We always have the long-term view of our business. We might have front-end loaded the back half of last year. But we have -- we're excited about the long-range plan, and we're committed to making sure that we execute on that long-range plan, and we need top talent to do that.

Operator

The next question comes from Brian Morrison from TD Securities.

Brian Morrison

I just want to reference fiscal '25 for a second. So it looks like you're building off this 12.5% margin for this year. You have a 16% target in fiscal '25, and you're confident from 19% in the long term. So you have this recovery of 400 basis points you're talking about, why not 400 basis points plus scale from benefit from U.S. expansions and flagships and the investments that you're making, are you being prudent or modest in terms of the timing of the investments to flow through?

Todd Ingledew

Yes. I would say all of those investments will require a ramp period, and we're -- in the case of the Manhattan locations repositioning from existing into new and the old or the existing locations will have to come off before we see the full benefit of the new. And yes, I would say that there is some prudence baked into the '16, but that's why we're saying no no less than 16%.

Brian Morrison

So we should see some benefits from scale as we get into fiscal '25. -- no?

Todd Ingledew

Yes, I think that's fair, yes. 100%.

Brian Morrison

Okay. Okay. And then, Todd, I guess, with your updated guidance with respect to margins and CapEx, maybe you can just outline what your plan is for utilization of the NCIB this year?

Todd Ingledew

Yes. Well, given the heavy capital expenditures this fiscal year, we will at most be repurchasing to offset the exercising of options, but don't plan to be meaningfully active on the NCIB except to do that.

Brian Morrison

Thank you.

Operator

The next question comes from Alice Xiao from Bank of America.

Alice Xiao

My question is very similar to Brian's question on how we can reconcile the EBITDA margin guidance. I know the efficiencies will take some time to ramp, but what are you attributing to some of the ongoing structural benefits from growth in e-com and increasing U.S. mix. Those weren't really talked about in the components of the margin back and forth. So can you elaborate a little bit on that? And how much of that is a base case, how much of a base case is the 16% for us to build on?

Todd Ingledew

Yes. One thing I would just reiterate is that we've been operating in an environment of unprecedented growth and with a backdrop of COVID and supply chain issues and a very muddy operating environment over the last couple of years as we've experienced that growth. And so that has made, I guess, the underlying pressures somewhat difficult to manage. And so we have been working through that, and that's part of what you're seeing in the pressure on our EBITDA along with obviously inflation and what have you. And so we -- as I said, we're very confident that we're going to work through with IMU improvements, cost efficiencies and then the subsiding of those transitory cost pressures to get to 16% as a baseline for FY next year and that by FY '27, bringing to bear other improvements along with the growth in the U.S. as a percent of our mix and the growth of e-commerce also as a percent of our mix, those natural tailwinds to the margin will help elevate us to that 19% target by FY '27.

Alice Xiao

Got it. So it's really FY '25 to '27 expectation for those tailwinds -- got it. One quick one is, what is the 53rd-week contribution to sales and EPS that you guys are contemplating?

Todd Ingledew

Yes. It's roughly 150 basis points to the revenue growth.

Operator

This concludes the question-and-answer session. I will now turn the call back over to Beth Reed for closing remarks.

Beth Reed

Thanks again to everyone for joining us this afternoon. We're available after the call to answer your questions, and we look forward to providing another update at the end of the next quarter.

Operator

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