Catherine Tang – Senior Director, PMO Brian Hill – Founder Chief Executive Officer and Chairman Todd Ingledew – Chief Financial Officer

Meaghen Annett – TD Securities Irene Nattel – RBC Capital Markets Lorraine Hutchinson – Bank of America Patricia Baker – Scotiabank Camilo Lyon – Canaccord Genuity Matt Bank – CIBC Mark Altschwager – Robert W. Baird John Morris – BMO Capital Markets

Thank you, operator, and thank you all for joining us for Aritzia's second quarter 2018 earnings conference call. Joining me today for the results are Brian Hill, Founder, CEO and Chairman; and Todd Ingledew, CFO.

Jennifer Wong, President and COO, is unable to join today's call due to a bad flu. We will begin today's call with management's discussion followed by a question-and-answer period open to the analysts and investors.

Please note that remarks on this conference call may provide certain information regarding our expectations, future plans and intentions that may constitute forward-looking statements. We would refer you to our most recently filed management's discussion and analysis, which includes a summary of the significant assumptions underlying such forward-looking statements and certain risks and factors that could affect our future performance and our ability to deliver on these forward-looking statements.

The second quarter earnings release, the related financial statements, management's discussion and analysis are available on SEDAR as well as the Investor Relations section of Aritzia's website at aritzia.com. And finally, all figures discussed on this conference call are in Canadian dollars, unless otherwise noted.

Brian will begin with the highlights in the quarter, followed by an update on our operational and strategic growth initiatives. Todd will then provide a detailed review of our financial results.

I will now turn the call over to Founder, CEO and Chairman, Brian Hill.

Thank you, Catherine, and thank you, everyone, for joining us today. During the second quarter, we once again delivered strong financial performance, double-digit revenue growth as well as a meaningful adjusted EBITDA margin expansion, excluding the impact of foreign exchange and duplicate rent expenses associated with our distribution center expansion and flagship stores.

We believe that our results demonstrate the strength of our business model as an innovative design house and fashion retailer that provides beautiful, high-quality products and exceptional shopping experience, which resonate strongly with our customers. Highlighting our financial results, net revenue for the quarter increased 10.2% to $174 million, driven both by revenue from our new and expanded stores and by comparable sales growth of 5.4%.

We delivered our 12th consecutive quarter of positive comp growth in both our eCommerce and retail channels. This was despite pressure on our overall revenue from the lower level of markdown inventory in July given the phenomenal spring and summer seasons we previously reported.

As we have mentioned in the past, great full-price seasons are typically followed by softer sales seasons with lower markdowns. This, combined with our continued sourcing initiatives, had a significantly positive effect on our gross margins.

In fact, removing the impact of the distribution center's expansion and flagships not yet opening straight-line rent expense, our gross profit margin was 37.4%, a 150 basis point improvement from 35.9% in the same period last year. Making the same adjustments, along with unrealized operational foreign exchange losses, adjusted EBITDA grew 23% to $24.3 million during the quarter and adjusted net income grew 39.2% to $13 million.

In addition to delivering another quarter of strong financial results, we continued to make strides across our strategic initiatives. During the quarter, we remain focused on expanding our real estate portfolio with the addition of two premier locations: first, Aritzia Rush Street in Chicago; and second, Babaton Yorkdale in Toronto.

We also expanded our Square One store in Toronto. These new locations are all performing at or above our expectations.

We are particularly excited about the performance of our Rush Street flagship. We also saw the strong momentum in our eCommerce business continue and we are tracking ahead of the penetration expectations we laid out in our five-year plan.

The performance in eCommerce was largely driven by meaningful growth in traffic. We are developing our analytical capabilities while successfully building out our team's leadership, demonstrating that we can operate both best-in-class retail stores and a leading digital business.

As part of our continued efforts to manage our business for sustained long-term growth, we are committed to investing in both our talent and infrastructure. From a talent perspective, in addition to adding leadership in eCommerce, we've increased the capabilities across our senior management team including new senior-level talent in retail management, product, real estate, marketing and distribution.

From an infrastructure perspective, we successfully completed the rollout of our new point-of-sale system to all our U.S. stores.

This implementation, which was launched in mid-August in our Chicago area stores and rolled out to our 21 U.S. stores in September, has gone exceedingly well.

We are currently in the process of our Canadian store rollout, which began in Ontario earlier this week. We anticipate the system will be fully rolled out to all Canadian locations by the end of October.

The implementation has already begun to provide operational benefits and most importantly, the transition has been seamless for our customers. The new POS system is a critical building block for our omnichannel capabilities and will provide a holistic 360-degree view of our customer, enabling us to better personalize and enhance our customers' experience with Aritzia.

In addition, we continue to make progress on our new Vancouver distribution center. During the second quarter, we completed the selection and procurement of all major equipment and started the build-out.

In order to have our teams truly focused on the crucial holiday sales period, the facility's opening date has been shifted to the fall of 2018. Looking ahead, we see additional opportunities to grow the business as we execute on our strategies.

First, we remain committed to creating beautiful product with the key focus areas currently being our denim and leather initiatives. Secondly, we are continuing to grow our store base, signing leases in first-class locations with favorable economics.

The remaining new store openings this year include: our new Babaton banner in Square One Shopping Centre in Toronto, a new Aritzia store in South Coast Plaza in California. In addition, we'll be expanding and repositioning three to four existing locations.

This includes repositioning our existing 2,400 square-foot location in San Francisco to an 11,300 square-foot flagship store with a prominent Market Street location. As previously mentioned, our sales at our new Rush Street flagship store in Chicago are significantly exceeding our expectations.

This incredible, initial reception on Rush Street amongst luxury retailers suggests we may have more real estate opportunities than we originally anticipated in the U.S. While this will not manifest itself immediately in new stores, it certainly suggests the potential for more than we originally anticipated.

Third, eCommerce remains a meaningful part of our long-term growth strategy. We believe that the continued growth of our team will allow us to further develop opportunities to accelerate our eCommerce growth and further elevate the online experience for our customers.

Although our eCommerce business continues to grow faster than we originally planned, we still believe there's significant opportunity both in the short and long term to grow the core area of our business. Finally, as I mentioned earlier, we continue to make infrastructure investments in our business, including our new POS system, the expansion of the Vancouver distribution center and the bandwidth of our teams.

These investments will allow us to continue to seamlessly scale and support our growth going forward. At the start of the third quarter, our new fall product has been received extremely well.

Our comparable sales had been trending higher than our second quarter until the unseasonably warm weather across the continent arrived in the latter half of the month. The resulting pressure on our outerwear sales slowed down these comps to slightly below that of the second quarter.

However, based on the product trends to date, we expect our sales to regain the prior momentum once the weather turns. In conclusion, while the industry remains competitive and highly promotional, we are excited about our performance as we continue to build our best-in-class omni-channel global fashion business.

We have made great progress on our strategic plan and remain focused on moving the business forward as we continue to drive improvements in our supply chain in order to achieve higher-quality product and lower cost; to capitalize on great real estate opportunities at a pace we have not seen at a higher quality and lower cost; to realize meaningful growth in our eCommerce business; and to attract talent to complement our strong team; and finally, to invest in our infrastructure technology to drive both top line sales and create efficiencies in our operations. This will all manifest itself in continued double-digit revenue growth annually as we open locations in existing and un-penetrated markets across North America, expand our best-in-class eCommerce business and further innovate our brand and product assortment.

We also expect to continue to grow our bottom line through ongoing sourcing initiatives, our long-term occupancy cost savings and our operating leverage to continue to grow our top line. Overall, I remain extremely excited with Aritzia's long-term growth prospects.

And with that business overview, I'll turn the call over to our CFO, Todd Ingledew, to review our financial results in further detail.

Thank you, Brian. Good afternoon, everyone.

We are pleased with our second quarter financial performance. Net revenue increased by 10.2% to $174 million from $157.9 million in the same period last year, driven by the addition of eight new stores and the expansion or repositioning of four existing stores since the end of the second quarter last year as well as comparable sales growth of 5.4%.

The increase in comparable sales was the result of meaningful growth in our eCommerce business in addition to positive results in our retail stores. As Brian mentioned in his comments, we saw a strong sell-through with spring and summer product, resulting in lower levels of end-of-season merchandise.

While this impacted sales volume, it benefited our gross profit margin. Gross profit for the quarter increased by 11.4% to $63.1 million compared to $56.7 million in the second quarter last year.

Our gross profit margin was 36.3% during the quarter as compared to 35.9% in the second quarter last year. In addition to the lower level of markdowns, we also continue to benefit from lower product costs attributable to our sourcing initiatives.

However, this improvement was offset by additional straight-line rent expense related to both our new distribution center under construction in Vancouver and our new flagship stores prior to opening Specifically, three months of straight-line rent expense was recorded for our Rush Street store in Chicago prior to opening on August 24. And rent on our upcoming flagship store on Market Street in San Francisco is already being expensed, with that store slated to open by early December.

Excluding this additional rent expense related to the distribution center and flagship stores not yet open, gross profit margin for the second quarter of 2018 would have been 37.4%, 150-basis-point improvement from 35.9% in the same quarter last year. We will continue incurring duplicate rent expense for our new distribution center until its planned opening in the fall of 2018, which, as expected, will temporarily inflate our reported cost of goods sold by approximately $500,000 per quarter.

Selling, general and administrative expenses decreased 4% to $44.6 million compared to $46.4 million in the second quarter last year. The prior year included $4.6 million of costs related to the company's IPO.

SG&A was 25.6% of net revenue compared to a normalized 26.5% in the second quarter last year, after excluding these IPO-related costs. Adjusted EBITDA increased by 4.5% to $20.7 million or 11.9% of net revenue compared to $19.8 million or 12.5% of net revenue in the second quarter last year.

Adjusted EBITDA in this year's second quarter excludes $3 million of stock-based compensation expense and $3.2 million of unrealized foreign exchange gains on U.S. dollar forward contracts.

Excluding the duplicate rent expense of $1.9 million related to the new distribution center and flagship stores not yet open and $1.7 million of unrealized operational foreign exchange losses in the second quarter of this year and gains of $100,000 in the second quarter last year, our adjusted EBITDA margin expanded 150 basis points to 14% compared to 12.5% in the second quarter last year. Stock-based compensation expense of $3 million in the quarter was comprised of $0.6 million in costs related to our legacy option plan, net of $1.3 million reversal of previously recognized stock-based compensation expense relating to the forfeiture of options from departed employees and $2.4 million in cost due to the company's new option plan.

Finance expense decreased $1.4 million in the quarter from $2.3 million in the second quarter last year due to both lower average debt outstanding and lower average interest rates. Income tax expense for the quarter was $2.7 million compared to an income tax recovery of $15.8 million in the second quarter last year.

Our effective income tax rate was 35.3% as compared to 19% in the second quarter last year. Income tax expense reflected the non-deductibility of stock-based compensation expense in the second quarter of this year while stock-based compensation expense for legacy time-based options was treated as a deductible expense in last year's second quarter due to the cash settlement feature.

So as a reminder, our tax rate is between 27% and 28%. But due to the non-deductibility of stock-based compensation expense, the reported rate is higher.

Adjusted net income increased by 11.8% to $10.4 million or $0.09 per diluted share, compared to $9.3 million or $0.08 per diluted share in the second quarter last year. Our adjusted figures exclude stock-based compensation, unrealized foreign exchange loss on U.S.

dollar forward contracts and other nonrecurring items and the related tax effects. Excluding the impact of unrealized foreign exchange losses and duplicate rent expense associated with our DC expansion and flagship stores and related tax effects, adjusted net income increased by 39.2% to $13 million or $0.11 per diluted share compared to $9.4 million or $0.08 per diluted share in the second quarter last year.

We continue to have a strong balance sheet with a 1.1x total debt to LTM adjusted EBITDA ratio. Total debt at the end of the quarter was $133.8 million compared to $144 million last year.

And we had 0 drawn on our revolving credit facility as of August 27, 2017. Turning to our outlook.

Overall, we are pleased with the strong performance of our business, particularly our new and expanded stores and continued meaningful growth in our eCommerce business. As Brian mentioned, our new fall product is being well received in spite of the unseasonably warm weather across the continent.

While our third quarter-to-date comparable sales are currently trending slightly below that of the second quarter, we expect our sales to regain the prior momentum once the weather turns. We would like to note our non-comp revenue includes sales from new and expanded stores, existing stores that are impacted by the opening of a new or expanded store as well as locations that are significantly impacted by nearby construction.

As expected, existing stores impacted by new or expanded stores and those impacted by construction generally experience some level of sales pressure. Overall, we remain very pleased with the sales productivity and favorable contribution margins of both our comp and non-comp stores.

So far in the third quarter, we have opened one new store, a Babaton store in Vancouver's Pacific Centre Mall, and just today, opened the expansion of our Toronto Eaton Centre Aritzia. We plan to open two more new stores and expand or reposition an additional three to four existing locations through the remainder of fiscal 2018.

This includes the repositioning of an existing San Francisco location into a flagship store on Market Street. By the end of fiscal 2018, we will have opened a total of seven new stores and expanded or repositioned six to seven existing locations.

We expect that sourcing initiatives underway will result in continued improvement in product costs and benefit gross margin. This margin improvement is expected to be offset in the near term by the investments we're making in our distribution center expansion and additional rent from our San Francisco flagship.

We continue to believe that on an annual basis, our gross profit margin will remain essentially flat with what we've achieved last year. Likewise, we believe our SG&A cost will increase alongside our revenue.

We continue to anticipate total CapEx spend in fiscal 2018 to be between $55 million and $65 million comprised of $30 million to $35 million from store growth investments and $25 million to $30 million from infrastructure. The increased infrastructure spend this year is driven by project timing as we spent only $6 million on infrastructure in fiscal 2017.

We believe we will still average $15 million of infrastructure CapEx annually between fiscal 2017 and fiscal 2021. Overall, we are pleased with the progress we are making on our strategic initiatives, which puts us right on track to meet and/or exceed our stated 2021 performance targets.

And with that overview of our second quarter, we will now welcome questions from analysts. Given the amount of participation on today’s call, we’d kindly ask that you please limit yourself to two questions before re-queuing.

Operator?

Thank you, good morning. Just on margin performance.

So the gross margin improvement and reduction in SG&A as a percentage of sales was quite attractive in the quarter, but you've maintained your expectations for the year. So can you just give us a little bit more detail with respect to your thinking there?

And just as a follow-up, would you be able to quantify the gross margin improvement in the quarter that was related to the lower markdowns?

Hi, Meaghen, I'll start with that. Of the 150 basis point improvement, the normalized 150 basis points, about 50% of it was from the markdowns and the other 50% was from the continued improvements we're seeing from our sourcing initiatives.

For the back half of the year, we will continue to see improvements from our sourcing initiatives. But we continue to have the headwinds from the duplicate rent at the new DC as well as in Q3, we'll still have the duplicate rent or the additional rent from the San Francisco flagship store that's not yet open.

Therefore, we are confident in leaving our forecast for the year flat with the prior year from a gross margin perspective, but we don't anticipate exceeding it at this point.

And then my second question is just with respect to real estate opportunities. So given the optimism that you're expressing around opportunities, particularly in the U.S., do you have any update with respect to the 125 locations that were identified at the IPO?

And just given the momentum in the eCommerce business, is there even the potential for that to be reduced?

I'll take that. It's Brian.

We're looking at trying to balance the two. The eCommerce landscape shifting on a regular basis so we're going back, we're relooking the business on a regular basis.

There is certainly a time and capital allocation that one would suggest we should be putting more and more and more into eCommerce, and we're certainly looking at that. And that is a trend in the industry.

That said, we are grossly understored. And particularly with our Rush Street store opening, I mean, we're really excited about the business there.

We – and if you look at where we're located, we have a Dior across the street on one corner and we have a Marc Jacobs and a Saint Laurent on the other corner. We're so pleased with our business there that we actually, as I mentioned in my update, that we think there's actually even more opportunities for us in the United States.

So we're not going to go headlong into a bunch of luxury locations necessarily, but we're certainly going to continue to test out that model because this is certainly a luxury location and it's probably one of the most pleasant surprises we've had in an opening in five years. So we're super excited about the continued opportunities in real estate in the U.S., but it certainly is a balance between that and growing eCommerce.

I guess the good news is, is neither one of them have a limit or a ceiling on them in the foreseeable future. So we’re going to have lots of opportunity to grow both eCommerce and retail sales for many years to come before we even start considering having to pick and choose.

Thanks, and good afternoon, everyone. Just following up on your commentary, Brian, really interested to hear what you’re saying about Chicago.

So I know it’s really, really early days. But when you look at the sort of the type of customer, the basket, the type of product, are you seeing a different cadence or a different complexion to the sales in that store?

I think all our stores Irene. I think all our stores have a different complexion.

Certainly, Bloor Street and the customer and the purchasing that’s occurring in Bloor Street is different than that in some suburban Toronto locations and certainly those in London, Ontario and Ottawa. But Chicago, I was there for the opening.

I worked there in the store for the first three days. It was super exciting.

Just to let you know, we are in the process of adding a new cash, an additional cash counter and a couple of new fitting rooms in that store immediately. Call that bad planning and sign-off by the CEO or whatever, but it’s a high-class problem and we haven’t had to do this in years.

Any time I run into that problem, I’m pretty excited about it. I was there the first three days.

I mean, the customer was certainly older. The customer was certainly more affluential.

The customer did not look at prices and the customer was – the average purchase basket size was the largest we – I haven’t checked in the last couple of weeks. But for the first two, three weeks the store was open, it was our number one basket size in the company.

Now whether that was the euphoria of a new store opening or that was the customer who was used to looking at the prices at Saint Laurent and Marc Jacobs and Dior and thinking we’re giving our stuff away, I don’t know really at this point in time. But the customer was more mature, more affluential and had very low to no hesitation on any of our pricing, and the multiple purchases were extremely high.

That’s really interesting. Thank you.

And just continuing on that. So have there been locations in the past, Brian, that you’ve looked at and thought, I don’t know, maybe this is reaching a little bit too much for us and now you would go back and rethink?

I wouldn’t say that. Certainly, in Canada, no, because we’re in every shopping area there is.

But there are – it will make us rethink not just locations in the past, but certainly going forward if you have opportunities to be in with – closer to luxury versus closer to the Zaras and H&Ms in the world. Now it’s going to put us in a position where we’re going to have to think this thing through.

Now there is a challenge though. It’s not just us.

We’re going to have to talk to the landlords to make sure they’re comfortable with this, too. But we have a little bit of a proof of concept that – and the good news is, that we can rub shoulders with the fast fashion people and perform extremely well or we can rub shoulders with the luxury players and perform extremely well.

So this actually just allows us to better our case depending on the situation and the landscape of that particular shopping area to be able to lobby for the best location possible regardless of what the landlord has earmarked for the type of store they want in that area.

That’s really helpful. Thank you.

Thank you. Good afternoon.

I was just trying to get a little more comfortable with the quarter-to-date comp trajectory and your confidence that, that will come back. When you look at maybe comp ex-outerwear or are there regions you could call out that make you so confident that you can get back towards that 1Q – or 2Q rate, that would be helpful.

Yes, I guess, first of all, the season – the period started off at or above the rate there. So we’re – it softened considerably the last two weeks.

In the first, the first little bit, it was actually a little chillier in Toronto. I think Toronto, the warmest day of the year so far was about 10 days ago.

I don’t – don’t quote me on it. I can’t remember what it was.

But I remember looking down a couple of weeks ago thinking, we’re not going to sell many – much outerwear today. It’s 32 degrees in Toronto today.

So I know most of you on this call are back East. It’s been unseasonably warm.

What gives us the confidence is our outerwear sales specifically are off meaningfully right now. And we have the same selection, if not better, same innovation, if not better, same assortment, if not better, and colors and fabrics and everything else.

And we think we have the best outerwear selection we’ve ever had. And it did start off perfectly fine and in lockstep.

And then the last two weeks, we just gotten – the whole thing has kind of come down. But it’s been really the warm weather – those products and those kind of products that has been affected.

And I’m in the industry. We’ve had some board meetings recently.

And I know a lot of people and I’ve got a sense. And I think it would be consistent with a lot of people out there.

I think we’re going to be hearing a lot of people have had a struggle in the latter half of September with selling their winter products. It’s just people aren’t thinking that way.

So we’re pretty confident. This isn’t the first time we’ve seen it.

And we’re pretty confident that we’re going to get back to where we were in the – even in the first two weeks of September. The thing is, with our product, the nervous-making in this industry is when you release your new season.

And these last two weeks, our fall season runs from the beginning of August until mid-October. So we already had a six-week incredibly good – great reception on our fall product.

So we’re not concerned about our fall product not resonating with the customer. We are – this is a primarily outerwear and cold weather phenomena that we’re running into right now.

Great. And then just on SG&A.

Sounds like you’re still expecting SG&A to be in line with sales growth. So Todd, can you flex that down to make up for the shortfall in sales?

Yes. Well – maybe I’ll just go back to the drivers in the quarter first.

We – as we’ve talked about on previous calls, our store labor, we had been making investments there and it had been increasing as a percent of revenue. And this quarter, we are now in line with the prior year as we’re lapping those increases.

And so we expect that, that variable portion of the expense will maintain now flat with the prior year. And we did see some gains this quarter, some leverage from an SO labor perspective.

But as we’ve been saying, we continue to invest in our support office talent. And so we do expect that in the back half, we will see increases there.

But to specifically answer your question, yes, we’re comfortable that we will be able to maintain the same percentage despite the current revenue miss. I mean, we’re only a few, what, five weeks into the quarter now.

So we feel confident that, that will stay in line.

Thank you.

Yes. Good afternoon, everyone.

My questions had primarily been answered, but I’ll just dig a little further. First of all, I was really intrigued, Brian, by your discussion of the Chicago store.

I hadn’t gotten to see it myself. But I had heard from some friends that just happened to chance upon the store just how wonderful the experience was.

And I think the basket that they dropped was over $700. So it’s consistent with what you’re talking about.

But on the weather pattern and the fact that it is all outerwear and your indication that the fall merchandise has been – you’re getting a great response to the rest of the fall – of the new fall product line. So are you indicating there that you’re still seeing the traffic in the stores, but that people are just not picking up the outerwear?

Or has traffic really fallen off as well in the last two weeks?

We don’t count traffic per se within our organization. But our sense is – and all the reports also would suggest that traffic has fallen off the last few weeks, not just at our stores, but right across the board and the shopping.

Just people do not have the need right now to be out buying clothing when they’re wearing their summer and spring and summer outfits right now. So we understand there’s a bit of a traffic falloff within our stores as well here and not just within our stores, within all the shopping areas here.

Just so you know, we’ve seen an uptick again, this week again. So as I said, I’m not lying in bed worrying about our season right now and our comps right now.

We’re really excited about the business. And it is unseasonably warm, continues to be unseasonably warm in Vancouver or at least nothing but clear if nothing else.

And as we know, compared to two weeks ago or 10 days ago, it’s colder in the East but it’s still unseasonably warm. I mean, I recall about five years ago, we had an outerwear was going crazy for us and it was minus 10 in Toronto before Canadian Thanksgiving.

And it’s not 30 degrees, but I think its 15 degrees. So we have a 25-degree Celsius beta compared to where it was four, five – I can’t remember what year it was – four, five years ago, maybe it was six.

But so listen, I don’t like and I never have sat there and blamed sales on weather, and I’m not going to today do the same thing. We have positive comps so far in this period, and I'm really excited about them.

But I think when the weather, when it does turn, and it will, all the people in Toronto might not think it's going to, but then again, in Montreal, but it's going to get cold. And we expect to see our sales start driving in a very positive manner at that point in time.

No, I think even in that context, you did indicate that the comp so far in the third quarter are just slightly below where they were in the second quarter, and that's a pretty good trend.

Correct. Correct.

Thank you very much.

Thanks, good afternoon guys. I have a few questions.

One, Brian, would you be able to quantify how much sales you left on the table in the second quarter due to limited inventory? And then if we can think about ending inventory in Q2 and the quality of that inventory, maybe if you can just help us understand that and how you feel about that aged inventory and what of it is at risk and how that might play into the gross margin component for the back half of the year.

Should we continue to think about the level of increase being consistent in the second quarter through the second half of the year or are there some other puts and takes that we should factor in?

Hi, Camilo. I'm going to ask you to repeat question two.

But before I do that, I'll answer question one. We don't actually consider the inventory being limited in the second quarter.

We view it as we had fewer mistakes and fewer – less inventory to clear. I mean, I'll point out just so you're aware.

Our comps in P5 were negative. And that P5 is a pure 30-day all on sale.

They were actually negative in that period. So – not by a lot, but they were negative.

So that is – I will always hope and dream for negative comps in July and in January, and we did have them then. If you have big comps in July, you probably got a bit of a problem on your hands.

So – and we do not buy for our sales, just so you know. We do not purchase to sell things off-price.

We think it's negative for our brand. And so we use our off-price seasons to clear merchandise only.

Sure, we make money during those periods, but we'd rather make money at full-price than off-price. Sorry, can you repeat your second question again?

Sure. Sure.

It's just that the – with respect to the ending inventory, how do you feel about the quality of that inventory? And is there any sort of markdown risk that we should think about given your commentary around cold weather not happening thus far?

And how that flows into the gross margin assumption for the back half, maybe Todd can shed some light on – you already talked about the puts and takes being similar to what they have been, but – so should we think about the rate of improvement being similar as it was in Q2 as well?

Hi, Camilo. Yes, I can speak to that.

I mean, I think likely going back to one of our strengths is the best way to look at this. As you know, we're a demand-driven merchandise organization.

And so we are not 100% purchased at the end of Q2 for our fall/winter season. We take reads every week and add to our inventory as needed.

As we discussed and I think you've mentioned there is that our inventory was very clean at the end of the quarter given the fact that we had such strong sell-through in spring and summer. And we also actually just post the quarter had our warehouse sale in Vancouver, where we exceeded our expectations for further clearing a significant number of the discontinued product, a significant number of units there.

So we feel very good about our inventory levels today and don't anticipate that the small blip at the beginning of the quarter is going to impact our markdowns near the end of the season.

Great. And then if I could just sneak one more in on the new store productivity.

You mentioned that your noncomp revenue, you're very pleased with how the stores are performing. You gave some detail on the noncomp revenue contributors.

But if you could just articulate how your stores are performing, your new stores from a square foot – dollars per square foot basis, is there any change to that? Because it does look like the numbers are starting to contract a little bit.

And I know that there are some timing issues and some influencers that may look – may distort that number. So if you could just provide a little bit more color on the new store productivity metric, that’d be very helpful.

Thanks, Camilo. Our stores are continuing to perform at or above our projections, both internal projections and ones we outline for when we initially had the IPO.

So nothing’s changed in our front as far as our projections on a revenue per square foot basis – sales per square foot basis from – nothing’s changed in our perspective on where we’re going to net out here whatsoever. So we’re still confident that we’re going to be exactly where we’re going to be.

I mean, we do have some noncomp stores that get affected when things open. We had – unfortunately, our sidewalk failed in SoHo and we had barricades and hoarding and the sidewalk closed in front of our store in SoHo, for instance.

On the side, which affected the whole side of our store, plus the Broadway front, not just our store, but on the side, Balthazar as well, and on the front, not just our store, but Michael Kors as well. So essentially, the sidewalk was closed in front of our store all summer and spring.

I think we estimated that cost us $2 million in lost sales over that 6, 7-month period. It was unforeseen and that store comes out of comp at that point in time when people can’t walk up and down the sidewalk.

So there’s situations as such. That’s probably – and then, for instance, our Rush Street store is three blocks away from our Water Tower store.

And although this hasn’t shown up really, it will start to show up that our Water Tower store is being affected meaningfully from the Rush Street sales opening up. And Rush Street is dwarfing the sales of that store.

But that store is going to – is getting affected meaningfully with the kind of volumes we’re doing at Rush Street. So all these things affect the noncomp stores and they affect stores.

And those stores, the minute we open Rush Street, Water Tower goes – Rush Street is out of comp, but so is Water Tower out of comp, too. And we’d gladly put Water Tower and Rush Street back in the comp because the net effect of it is extremely positive, but it does have an effect.

And so that’s where some of the – I think we’ve had some shortfalls there is just sort of some of these things. But none of these effects are greater and/or more than we expected them to be.

And so on the other hand, except with exception that we didn’t know the sidewalk was going to fail, we had about a month’s notice and all of a sudden they’re putting up barricades and things. So some of these things happen, as we know, and unfortunate incidences in the United States and the Caribbean.

Obviously, you don’t know if something is going to hit and natural disasters hit and things like that, too. Fortunately for Aritzia, we don’t have any stores in those regions.

But I’m sure there’s lots of retailers being affected by things like that. So all those things add up.

But there’s nothing other than the, for instance, sidewalk closure we didn’t expect and anticipate was going to happen. So we expanded our store in Toronto at Eaton Centre.

We have four stores there. We’re expanding our Aritzia store there.

It’s going to affect the other stores we have. We have a Wilfred store right across the hallway, and it’s going to affect that store, albeit I would note that neither one of them are in comp right now.

But okay, hopefully, that’s helpful.

Yes. Thanks very much for that clarification.

Thanks. Just wanted to come back to the whole subject of eCommerce.

You noted that the pace of eCommerce is exceeding the trajectory that you had kind of anticipated at the time of IPO. Again, can you just talk about where you’re seeing it coming from?

Whether you’re seeing any difference at all in product type that’s being bought online, basket size and how you see it evolving. And whether you’ve seen a pickup in some of the – in eCommerce sales in some of the newer markets you’ve gone into with bricks-and-mortar.

Thanks, Irene. Well, first of all, we’re seeing it everywhere.

We’re seeing it in store – in areas we’ve opened stores. We’re seeing it in mature markets.

We’re seeing it in urban markets where we have lots of stores. We’re seeing increases in rural markets where we have fewer stores or no stores.

We’re seeing our volume and our traffic increase on our website. We’ve seen our conversion rate inch up just a little bit, not a ton, but we’ve seen it inch up a little bit.

And – but we’re seeing basket size, Todd, what’s the basket size?

It’s fairly consistent.

There, the basket size is fairly consistent. But – but it’s growing at a rate faster than – meaningfully faster than we thought it would.

And we’ve mentioned, we’re extremely confident we’re going to hit those numbers or exceed those numbers. But it’s been very – it continues to outperform our expectations and we’re going to continue to invest more resources into it to feed this growth that we – growth opportunity that we see in front of us here.

I just want to go back to the gross margin for a second. So one thing we haven’t talked about is the stronger Canadian dollar.

So just wondering when that will impact the cost of sales, how material it could be and just what’s the typical lag time from the currency move to seeing it in the numbers?

So certainly, the Canadian dollar and the strength of the Canadian dollar affects us greatly. Historically, we didn’t do a lot of hedging.

However, when I was out on the roadshow, I think it was the only question I got asked every single meeting was, do we hedge? So we put in a nice little hedging strategy in place and when we were going public and everything else.

And as it turns out, we probably would have been better off without the hedging strategy because we’ve hedged the dollar the whole way along the increase here. So we’re going to see some positive effect of the Canadian dollar here most certainly, but less than we probably would have liked to and would have seen in the past.

And – but as these hedges mature, we’re going to see the effect of that. But unfortunately, we’ve hedged out for six months here.

And so I think Todd mentioned that, the loss we’ve had to book there. So once these hedges hit maturity, we’re going to see more beneficial effects, but it certainly is a positive, all positive news for us every time that dollar inches up a little bit.

Okay. And then longer term, I mean, flagships are core to the strategy.

So how do you expect this early rent expense from flagships to play out over time? Will it be a drag next year?

We don’t have any significant plan today for flagships next year. And I think the issue this year was that we had three large flagships very compressed during a short time frame that we’re opening.

And therefore, made the comparison to last year, where we didn’t have any such flagships, difficult. And that’s why we’ve been adding it back.

But going forward, again, we don’t have any plan for next year at this point. We may add them.

But we don’t anticipate we’ll have three opening within several months of each other.

And if I could add, it depends what we call flagships. I mentioned we’re opening in South Coast Plaza.

It’s not flagship in nature because it’s not the same size and scale. But we think from a how prolific that shopping center is and the global exposure that consumer that is in that shopping center, it’s going to act as a brand-propelling store for us again.

And we’re also undertaking an expansion of our SoHo location as well here, which the rent does not increase in the store. We’re already paying that rent in the store and – but we’re undergoing an expansion of that store as well.

So we’re excited because we’re still increasing our exposure globally with the stores, but they will not be acting in the same nature and have the same drag on our rent and cost of goods sold like they did this year in so much as San Francisco and Rush Street.

Great. Thank you very much.

Good afternoon, thanks for taking the question. I wanted to follow up on the inventory topic for a moment.

So you’ve had a couple of quarters where the leaner inventory has held back the comps later in the quarter, but boosted margin. I mean, so I’m curious, are you planning your buys more conservatively versus last year when your inventory position was supporting the double-digit comp?

And beyond the weather dynamic in outerwear, I mean, as you look at the fall season, do you feel your inventory is positioned in a way where a mid or high single digit comp is achievable? Or I mean, are you thinking about the business more in the low to mid-single-digit comp sort of way?

The inventory we carry, we have no problem to support 20%, 30% comps if the customer decided they wanted to shop that much with us at Aritzia. So we don’t – we do not feel that our inventory levels at all affect our full-price selling periods.

They only affect our off-price selling seasons, which are two sort of six to eight week periods in – within twice a year. So we do not feel – we are not buying our inventory more conservatively at all.

We’re planning it the same way we always have planned it. As comps – we have inventory for months out and those comps are not too far out.

And so as comps increase or sales increase, we scramble and get some more inventory and then usually are very successful in doing so. So we – the soft comps we had in P5 were – that’s a purely sale period and that is – it is purposefully self-inflicted as we’re not buying inventory for the end of the season and we had such a strong spring and summer regular price season that those comps were off.

But the spring and summer regular price season were not affected whatsoever by any kind of conservatism in inventory, nor would our full-price season this season be affected by any conservatism as well. We’re consistent in how we approach our business.

We’ve been consistent how our inventory levels have been for the last sort of 10 to 20 years. And that formula seems to work for us.

And that’s why our margins and gross margins are so healthy is because we have a great formula and we stick to it and nothing’s changed at this point.

That’s really helpful. And then, Todd, on the sourcing side.

As you make progress on the sourcing initiatives, do you see further opportunity versus what was expected maybe a year ago? I mean, could the product costs remain a tailwind into next year?

Well, I think there’s something brought up earlier, just earlier as the Canadian dollar strengthens, it certainly has – is advantageous to us. But yes, we still see opportunities.

I mean, we probably picked off a majority of the low-hanging fruit, but there’s still a lot of mid- and high-hanging fruit that we can chase here that is positive. The other thing we’re seeing – and we’re not turning all this into margin expansion.

We are making decisions here to produce and/or improve our quality here as well. So the – I talked about this on the roadshow.

But when we did our whole down resourcing initiative, we saved some money, but we also took that into going with 100% goose down versus duck down and as well as using ethically sourced down. So we’re taking some of these savings and improving the quality and innovation on our products, both fabrics and construction of our products and giving those back to the consumer and at existing prices that they were seeing before.

So improved quality, improved product at existing prices, plus complemented – duplicated with margin expansion. So we still see – the answer to your question is, do we still see opportunities?

Most certainly and but – and those will manifest itself both in brand-propelling, improved product and innovation as well as cost savings as well.

That’s great. Thank you.

That’s all I have.

Thank you.

Hi, add my congrats on the healthy results especially in that gross margin. Hi, Brian, I wanted to ask – you mentioned the denim and the leather in your prepared remarks.

And to the extent that you can share it with us, are you willing to – any kind of update there, it sounds pretty interesting and exciting in terms of the kind of work that you’re doing along those lines and those classifications.

Thanks, John. Two things, first of all, we don’t see the leather market has necessarily expanded any greater.

We think it’s always been there, but we think we’ve been under-assorted in leather and we haven’t done any internal leather ourselves. We have a great partner that we presently do business with and we’ll be continuing to do business with, but we’re going to augment that with the supply chain ourselves.

We’re really excited and confident about the sampling and everything that we received in. The product will be in the stores in early spring.

And we’re looking forward to growing that portions of our business to right size it with other people in our sector and the sector above us as well, because we think we can deliver the quality of leather that some of the more luxury and junior luxury players are delivering it at more risky stress size prices. The denim market is an interesting market as Milos and I have been discussing for about six months is, there has been a resurgence in denim, it doesn’t look like the old resurgence in denim, which was a high-end, high-priced luxury denim.

The denim, the window of manufacturing denim, the players in the world has caught up. The rest of the world has caught up, so there’s more supply chain opportunities for high-quality denim, both in the denim itself and the washing and finishing of that denim.

And we just – and then that’s coupled with an actual resurgence of denim in the marketplace, albeit at mid and lower prices. But we think there’s an opportunity for us there.

And we recently hired a denim expert that’s come from a long lineage of denim expertise out of a place in – a company out of San Francisco. And she’s started this week.

And we’re looking forward to working with her closely and working on some great things with this denim product. I’m actually very excited because when I was a teenager, that was my specialty, was working in the denim section of our family store.

So I’m very passionate about denim. I think I’ve been dealing with denim since I was 15 years old.

And if you knew how old I was now, that’s a long time. And so I’m going to be working closely with this expert that we’re bringing in, who has expertise not just in design, but also in wash and finishing and fabrication.

And we’re looking to do some great things on this denim front, too. And this will not probably manifest.

It may or may not manifest itself in another line. We feel that our existing lines and existing collections are – do have some denim in them, but they should have more, number one.

And number two, the quality should be – we think we can improve and innovate as well from a quality perspective and fit and construction. So we just think there’s a great opportunity here.

And so we’re going to be focusing on that, too. That’ll probably be pushed out a little bit more.

It will probably be pushed out a little bit more until the fall of 2018 before we see a full assortment. We’ll probably be testing some product prior to that, but it will be fall 2018 before we have that full assortment in our stores.

But we think there’s a great opportunity with better margins than third parties and that equally is good quality, if not better, and better pricing for the consumer, like everything else we do at Aritzia.

That sounds great. Thanks.

Good luck for the rest of fall.

Great, thank you.

Yes, thank you, everybody, for your time and particularly your participation and with the question period. I’d just like to reiterate that we’re continuing to be excited about the business, and if nothing else, getting more and more excited about the business.

We’re building a great team here. We’re building on our infrastructure, as we mentioned, our POS.

And every month that goes by and every period or quarter that goes by, we have better infrastructure, better people and it seems also more opportunities. So we’re looking to continue to deliver strong financial results and drive shareholder value for many years to come.

So I look forward to speaking with you on our next earnings call and maybe I’ll see some of you out on the road. So I look forward to it or maybe even better, in some of our stores someday.

So thank you for coming and look forward to coming out to our call and look forward to speaking to you. Thank you.