Annual Report 2018
Aritzia is a vertically
integrated,
innovative design
house of exclusive
fashion brands.
We believe in high-quality, beautifully designed product.
We believe in aspirational environments and experiences.
And we believe that all of this should come at a price
that is truly attainable.
From our Founder,
Chief Executive Officer & Chairman
into anything, which means our mistakes are few and
relatively inexpensive. Over three decades of success
is proof that this approach works. We appreciate
the investors who have put their faith in us and our
approach to the business.
Our powerful business model
We have built a powerful business model anchored
by a simple mantra: we are in the fashion business. To
be successful in this industry we believe you must be
good at fashion and good at business. Unlike most in
the industry we are good at both. That coupled with
our model has stood the test of time. We attribute
Aritzia’s consistent financial performance to our first-
rate execution of our model’s three fundamental
business functions.
1. Differentiated global sourcing strategy
We have a differentiated global sourcing strategy
that allows us to continually refine our supply
chain elevating our product, increasing the value
to our customer and growing our gross margin.
Our product teams plan, develop and design our
seasonal collections, then partner directly with our
mills, our suppliers and our manufacturers to deliver
exceptional value at attainable price points.
2. Innovative creative development
Our
innovative creative development covers our
product, our stores/website, and our marketing/
communications. Our innovative design house offering
a strategic mix of exclusive brands, combined with a
refined and proven merchandise strategy, ensure we
provide a balance assortment of high quality, beautifully
designed and constructed products that our customer
desires. Our stores and website deliver on both form
and function creating an unrivaled customer experience.
Our communications and marketing strategies are
both brand propelling and sales driving through both
traditional and digital channels.
3. Aspirational omni-channel shopping experience
We offer our products to our customers through a
seamless omni-channel approach and delight our
customers with an aspirational shopping experience
both in our premier real estate locations and on
Aritzia.com. We focus on every detail of delivering
exceptional customer service no matter where they
choose to shop our brand.
Fellow Shareholders:
After another successful year for Aritzia I want to express
my appreciation for your continued support and
ongoing confidence in our business and our team.
Coming up to two years operating as a public
company, I have on occasion been asked how
things have been going since we have been public.
There is no doubt that the retail landscape has been
challenging for a number of companies, however, in
difficult times, well positioned companies can take
advantage of opportunities, and we are enjoying this
enviable position in the present environment. Our
performance has been exceptional and we are on track
to meet or exceed all of the targets that we laid out at
our IPO. The driver of this exceptional performance
is our powerful business model combined with the
incredible team that executes on that model.
Being a public company has not altered the way we
operate the business. We are focused on creating
sustainable long term value. Our decisions are
considered, and we invest in infrastructure to support
our growth. We pride ourselves on flawless, best-in-
class execution. We will never be accused of rushing
1 is
the
three-dimensional competency
Aritzia’s
exception in our industry; it is very rare to have the
deep expertise we enjoy across all three of these
areas. Underpinning all our efforts is a commitment
to the infrastructure, discipline and agility we need
to capitalize on the opportunities ahead and drive
long-term value. We challenge the notion that
fashion businesses can either be good at retail, or
eCommerce, but not both. We are delivering best-
in-class experience and operating profitably in both
online and in-store channels equally.
The keys to our success have always been to focus
on our powerful business model, understand how
external factors affect us, and develop strategies
to take advantage of these changes. Thanks to this
deliberately methodical approach, Aritzia has had
another tremendous year. Here are a few of the
highlights we achieved:
Financial growth
• Our final quarter of the year marked the highest
fourth quarter net revenue in the company’s history, a
remarkable milestone. This was our 14th consecutive
quarter of comparable sales growth.
• Newly implemented eCommerce tools deepened
our understanding of what our clients want and set the
stage for a seamless, omni-channel experience. We
refined Aritzia.com and are now using AI to provide
personalized product recommendations, increasing
our clicks on recommendations by over 20%. We won
the 2017 Salesforce award for the strongest online
sales growth.
• A full slate of Aritzia, Wilfred and Babaton store
openings included impressive new Aritzia flagships
in Los Angeles, Chicago and San Francisco that
continue to drive strong sales performance.
Brand
• After 20 plus years we unveiled our new logo and
elevated packaging that capture the considered
design for which Aritzia is known. Clean and modern,
our updated logo has a timeless quality that can
endure for the foreseeable future. With our retail and
eCommerce packaging, we created an engaging
experience for our customer and celebrated our
tradition of using original art and photography as our
creative vehicle.
with our leather program, had the most successful
product launch in Aritzia history.
• We secured over 3,000 media placements, many
featured in top-tier outlets, including more than 20
placements on Vogue.com. We dressed over 50 VIPs,
including Bella Hadid, Kylie Jenner, Karlie Kloss, Malia
Obama, Diane Kruger, Jessica Alba, Meghan Markle
– the newly minted Duchess of Sussex, and our own
first lady Sophie Trudeau who were photographed
wearing Aritzia multiple times in the last year.
Culture and People
• We have the benefit of an unusually large proportion
of people with long tenures in our organization. We
realize that this is not the norm in today’s environment
and are proud to have created such an enduring
culture. Propelled by the efforts of this highly
experienced group, Aritzia’s methodical approach to
business has been honed over years and has helped
deliver on our enduring success.
• This past year 800 of our people benefitted from
our development program, Aritzia University, AU for
You, completing personal development training to
elevate their careers, comprehensive training to help
them define and develop their leadership potential
and prepare for the next step in their careers.
• We expanded the Aritzia talent pool across all levels
and workplaces. We welcomed new executives in
eCommerce, marketing and people, as well as senior
leadership in supply chain and retail. We were also
very proud to have been voted a Best Place to Work
by Indeed.com.
Operations and Infrastructure
• After 20 years, we seamlessly replaced our legacy
point of sale system—a critical building block for our
success. The new system is now live in every single
one of our stores, serving as a foundation for the
omni-channel experience by providing visibility into
inventory and a single view of the customer.
•Our supply chain network expanded to accommodate
our growing sales. We are almost tripling the size of
our Vancouver distribution centre and are on track to
relocate to the new facility this fall. Distribution and
fulfillment has now become a core competency and
competitive advantage for us at Aritzia.
• Our beautiful product showcased an overarching
focus on quality. We elevated and expanded our
portfolio of exclusive brands, as well as our outerwear
program. We expanded into new categories and,
• Numerous eCommerce platform enhancements
and an ongoing refinement of procedures and
systems ensure that we have a solid and scalable
foundation for our continued growth.
2
Returning for a moment to our status as a public
company, naturally, we have also received some
questions regarding our valuation. I am disappointed
that the stock price has not reflected our performance
since we have been public. My commitment to you
is that we will remain focused on creating value for
our customers, employees, partners and investors in
equal measure. We will continue to work hard and
make all the right decisions for the long term and
continue to deliver exceptional results. Over time,
I trust that our stock price will ultimately reflect our
outstanding performance.
To close, I would like to express my appreciation to
our people for everything that you do. Aritzia simply
would not be where we are without you. I could not
be more excited about what we will achieve in the
year ahead, and for many years to come.
Thanks to all of you for taking this journey with us.
Brian Hill
Our growth strategies
Over the past 30 years, the verticalization of retail
and the globalization of trade have transformed the
retail environment. Aritzia’s business model takes
full advantage of both of these disruptions. More
recently, our industry has again been disrupted by
the rise of digital technology, and we are embracing
this latest change as well. The shift to digital does
not fundamentally change our core business model,
rather it impacts the strategies we use to execute on
our model. Our digital strategy involves more than
just our technology and eCommerce business; it runs
through everything we do. From the design of our
product to the service we deliver in our stores, we
are deploying powerful digital tools to heighten our
customer’s experience with our brand. Our digital
evolution will ultimately enable us to predict her
needs and exceed her expectations.
We will continue to focus our near-term growth
strategy on the North American market, where we see
tremendous opportunity. We see significant potential
to drive our eCommerce channel and capitalize on our
updated point of sale system to provide a seamless
omni-channel experience. We will be adding to our
premier real estate portfolio reaching new markets
and expanding stores in Canada and the United
States. We will continue to build on our portfolio of
exclusive brands, design beautiful and innovative
products, pursue category expansions such as our
much anticipated denim program and drive sourcing
efficiencies.
As I look back on this year and forward to our future,
I can confidently say that we are as well positioned
as anyone in the industry to take advantage of the
opportunities in front of us. We are not over-stored,
infrastructure, a loyal,
and we have world-class
passionate customer base, beautiful high quality
product and a beloved brand. We believe the value
proposition we offer is better than what we are seeing
anywhere in the industry. We have the best team
we have ever had—the highest skilled and the most
dedicated stretching across the organization from
our distribution centers, to our support offices, to our
stores.
3 A Portfolio of
Exclusive Brands:
We conceive, create, develop our own brands, and sell
them under the Aritzia banner. Approaching each brand as
an independent label with its own aesthetic, we address a
broad range of style preferences and lifestyle requirements.
Our exclusive brands currently represent over 90% of our
net revenue.
4 An Aspirational Shopping
Experience
A Record of
Consistent Growth:
Net Revenue Growth (C$ millions)
Aritzia has a proven track record of consistent net revenue
growth, with strong net revenue growth every year for the
last 21 years.
20%
CAGR
$667
$743
$322
$353
$377
$542
$427
$69
$89
$113
$153
$189
$207
$244
FY 2005
FY 2006
FY 2007
FY 2008
FY 2009
FY 2010
FY 2011
FY 2012
FY 2013
FY 2014
FY 2015
FY 2016
FY 2017
FY 2018
Measured Store Growth
We have never closed an Aritzia store in our 33-year
history — a testament to our disciplined and measured
store growth strategy.
13%
CAGR
42
7
35
47
8
39
51
10
41
54
12
42
62
14
48
64
15
49
79
19
60
85
22
63
87
22
65
74
17
57
21
28
26
36
31
15
18
FY 2005
FY 2006
FY 2007
FY 2008
FY 2009
FY 2010
FY 2011
FY 2012
FY 2013
FY 2014
FY 2015
FY 2016
FY 2017
FY 2018 Current
Canada
US
5 Differentiated global
sourcing strategy:
We have a differentiated global sourcing strategy that allows
us to continually refine our supply chain elevating our product,
increasing the value to our customer and growing our gross
margin. Our product teams plan, develop and design our seasonal
collections, then partner directly with our mills, our suppliers and
our manufacturers to deliver exceptional value at attainable price
points.
6 Innovative creative
development:
innovative creative development covers our product,
Our
our stores/website, and our marketing/communications. Our
innovative design house offering a strategic mix of exclusive
brands, combined with a refined and proven merchandise
strategy, ensure we provide a balance assortment of high quality,
beautifully designed and constructed products that our customer
desires. Our stores and website deliver on both form and function
creating an unrivaled customer experience. Our communications
and marketing strategies are both brand propelling and sales
driving through both traditional and digital channels.
7 Aspirational omni-channel
shopping experience:
We offer our products to our customers through a seamless omni-
channel approach and delight our customers with an aspirational
shopping experience both in our premier real estate locations and
on Aritzia.com. We focus on every detail of delivering exceptional
customer service no matter where they choose to shop our brand.
8 Selected Financial Metrics1:
6.6% comparable sales growth in Fiscal
2018, following 14.1% in Fiscal 2017
Net Revenue (C$ millions)
14 consecutive quarters of positive
comparable sales growth
Gross profit margin remained at 39.8%
in Fiscal 2018, similar to Fiscal 2017
Significant free cash flow generation –
Adjusted EBITDA grew 12.8% to $132.7
million in Fiscal 2018
1 In addition to using financial measures prescribed under International Financial
Reporting Standards (“IFRS”), this Annual Report makes reference to certain non-IFRS
measures, including certain retail industry metrics. These measures are not recognized
measures under IFRS and do not have a standardized meaning prescribed by IFRS
and are therefore unlikely to be comparable to similar measures presented by
other companies. Please refer to the section entitled “Non-IFRS Measures” in the
Management’s Discussion & Analysis within this Annual Report for a discussion of the
definitions, components, reconciliations, and use of these measures.
² Figures adjusted to exclude stock-based compensation and unrealized FX (gains)
losses on forward contracts.
17%
CAGR
$667
$743
$542
FY 2016
FY 2017
FY 2018
Adjusted EBITDA2 (C$ millions)
25%
CAGR
$118
$133
$85
FY 2016
FY 2017
FY 2018
Adjusted Net Income2 (C$ millions)
38%
CAGR
$65
$76
$40
FY 2016
FY 2017
FY 2018
9 Management’s Discussion
& Analysis
Consolidated Financial Statements
10 Aritzia Inc. MANAGEMENT’S DISCUSSION AND ANALYSIS Fiscal Year Ended February 25, 2018 May 10, 2018 The following Management’s Discussion and Analysis (“MD&A”) dated May 10, 2018 is intended to assist readers in understanding the business environment, strategies and performance and risk factors of Aritzia Inc. (together with its consolidated subsidiaries, referred to herein as “Aritzia”, the “Company”, “we”, “us” or “our”). This MD&A provides the reader with a view and analysis, from the perspective of management, of the Company’s financial results for the fourth quarter and the fiscal year ended February 25, 2018. This MD&A should be read in conjunction with the Company’s audited annual consolidated financial statements and accompanying notes for Fiscal 2018 (as hereinafter defined). Basis of Presentation Our audited annual consolidated financial statements and accompanying notes have been prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”), using the accounting policies described therein. All amounts are presented in thousands of Canadian dollars unless otherwise indicated. We manage our business on the basis of one operating and reportable segment. All references in this MD&A to “Q4 2018” are to our 13-week period ended February 25, 2018, and to “Q4 2017” are to our 13-week period ended February 26, 2017. All references in this MD&A to “Fiscal 2018” are to our 52-week period ended February 25, 2018, to “Fiscal 2017” are to our 52-week period ended February 26, 2017 and to “Fiscal 2016” are to our 52-week period ended February 28, 2016. In addition, references to “Q1 2018” are to our 13-week period ended May 28, 2017, to “Q2 2018” are to our 13-week period ended August 27, 2017, and to “Q3 2018” are to our 13-week period ended November 26, 2017. The audited annual consolidated financial statements and accompanying notes for Fiscal 2018 and this MD&A were authorized by the Company’s Board of Directors. Non-IFRS Measures Including Retail Industry Metrics This MD&A makes reference to certain non-IFRS measures including certain retail industry metrics. These measures are not recognized measures under IFRS, do not have a standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other companies. Rather, these measures are provided as additional information to complement those IFRS measures by providing further understanding of our results of operations from management’s perspective. Accordingly, these measures should not be considered in isolation or as a substitute for analysis of our financial information reported under IFRS. We use non-IFRS measures including “EBITDA”, “Adjusted EBITDA”, “Adjusted Net Income”, “Adjusted Net Income per diluted share” and “gross profit margin”. This MD&A also makes reference to “comparable sales growth”, which is a commonly used operating metric in the retail industry but may be calculated differently compared to other retailers. Our comparable sales growth calculation excludes the impact of foreign currency fluctuations. Beginning Q1 2018, we changed our calculation methodology by applying the prior year’s average quarterly exchange rate to both current year and prior year comparable sales to achieve a consistent basis for comparison. Prior to Q1 2018, comparable sales growth was calculated using a U.S. dollar to Canadian dollar exchange rate of 1:1. These non-IFRS measures, including retail industry metrics, are used to provide investors with supplemental measures of our operating performance and thus 11 highlight trends in our core business that may not otherwise be apparent when relying solely on IFRS measures. We
believe that securities analysts, investors and other interested parties frequently use non-IFRS measures, including
retail industry metrics, in the evaluation of issuers. Our management also uses non-IFRS measures, including retail
industry metrics, in order to facilitate operating performance comparisons from period to period, to prepare annual
operating budgets and forecasts and to determine components of management compensation. For definitions and
reconciliations of these non-IFRS measures to the relevant reported measures, please see the “How We Assess the
Performance of Our Business” and “Selected Consolidated Financial Information” sections of this MD&A.
Forward-Looking Information
Certain statements made in this MD&A may constitute forward-looking information under applicable securities
laws. These statements may relate to our future financial outlook and anticipated events or results and include, but
are not limited to, expectations regarding positive comparable sales growth for the first quarter of 2019, expectations
regarding the quality of our products and our channel-agnostic customer experience, expectations regarding our
technology and infrastructure, statements related to the Company's normal course issuer bid, outlook for revenue
growth and Adjusted EBITDA margin in fiscal 2019 as further described below, the expansion and repositioning of
our store locations, the launch of our own denim brand in Fall/Winter 2018, expectations regarding the Company
meeting or exceeding its stated fiscal 2021 performance targets, and other statements that are not historical facts.
Particularly, information regarding our expectations of future results, targets, performance achievements, prospects
or opportunities is forward-looking information. As the context requires, this may include certain targets as disclosed
in the prospectus for our initial public offering, which are based on the factors and assumptions, and subject to the
risks, as set out therein and herein. See also the “Outlook” section of this MD&A.
Often but not always, forward-looking statements can be identified by the use of forward-looking terminology
such as “may” “will”, “expect”, “believe”, “estimate”, “plan”, “could”, “should”, “would”, “outlook”, “forecast”,
“anticipate”, “foresee”, “continue” or the negative of these terms or variations of them or similar terminology.
Forward-looking statements are current as of the date of this MD&A and are based on applicable estimates and
assumptions made by us in light of our experience and perception of historical trends, current conditions and
expected future developments, as well as other factors that we believe are appropriate and reasonable in the
circumstances. However, we do not undertake to update any such forward-looking information whether as a result of
new information, future events or otherwise, except as required under applicable securities laws in Canada. There can
be no assurance that such estimates and assumptions will prove to be correct.
Implicit in forward-looking statements in respect of the Company’s expectations for fiscal 2019 to deliver low to
mid-teens revenue growth and consistent Adjusted EBITDA margin, as compared to fiscal 2018, are certain current
assumptions, including, among others, the opening of five to six new stores including the Babaton store in Square
One Shopping Centre in Toronto, and the Aritzia store in Cross Iron Mills in Calgary, the expansion or repositioning of
four to five stores, the continued ability to drive growth in our eCommerce business, gross profit margin benefit from
sourcing initiatives will be offset by the higher raw material costs for the Fall/Winter season, SG&A will grow
proportionately with revenue growth in fiscal 2019, the continued investments in people, technology and
infrastructure, primarily related to eCommerce, net capital expenditures in the range of $55 million to $60 million
with approximately 50% for store network expansion, taxation rates consistent with historical levels, assumptions
regarding the overall retail environment and currency exchange rates for fiscal 2019. Specifically, we have assumed
the following exchange rates for fiscal 2019: USD:CAD = 1:1.30.
This forward-looking information and other forward-looking information are based on our opinions, estimates
and assumptions in light of our experience and perception of historical trends, current conditions and expected future
developments, as well as other factors that we currently believe are appropriate and reasonable in the circumstances.
Despite a careful process to prepare and review the forward-looking information, there can be no assurance that the
underlying opinions, estimates and assumptions will prove to be correct. Certain assumptions in respect of the
expansion and enhancement of our store network; the growth of our eCommerce business; our ability to drive
comparable sales growth; our ability to maintain, enhance, and grow our appeal within our addressable market; our
ability to drive ongoing development and innovation of our exclusive brands and product categories; our ability to
continue directly sourcing from third party mills, trim suppliers and manufacturers for our exclusive brands; our ability
to build our international presence; our ability to retain key personnel; our ability to maintain and expand distribution
capabilities; our ability to continue investing in infrastructure to support our growth; our ability to obtain and maintain
existing financing on acceptable terms; currency exchange and interest rates; the impact of competition; the changes
12
and trends in our industry or the global economy; and the changes in laws, rules, regulations, and global standards
are material factors made in preparing forward-looking information and management’s expectations.
Many factors could cause our actual results, level of activity, performance or achievements or future events or
developments to differ materially from those expressed or implied by the forward-looking statements, including,
without limitation, the factors discussed in the “Risk Factors” section of this MD&A and in the Company’s annual
information form dated May 10, 2018 for the fiscal year ended February 25, 2018 (the “AIF”). A copy of the AIF and
the Company’s other publicly filed documents can be accessed under the Company’s profile on the System for
Electronic Document Analysis and Retrieval (“SEDAR”) at www.sedar.com. These factors are not intended to
represent a complete list of the factors that could adversely affect the Company’s results. Readers are urged to
consider the risks, uncertainties and assumptions carefully in evaluating the forward-looking information and are
cautioned not to place undue reliance on such information. These factors should be considered carefully.
The purpose of the forward-looking statements is to provide the reader with a description of management’s
current expectations regarding the Company’s financial performance and they may not be appropriate for other
purposes; readers should not place undue reliance on forward-looking statements made herein. To the extent any
forward-looking information in this MD&A constitutes future-oriented financial information or financial outlook, within
the meaning of applicable securities laws, such information is being provided to demonstrate the potential of the
Company and readers are cautioned that this information may not be appropriate for any other purpose. Future-
oriented financial information and financial outlook, as with forward-looking information generally, are based on
current assumptions and subject to risks, uncertainties and other factors. Furthermore, unless otherwise stated, the
forward-looking statements contained in this MD&A are made as of the date of this MD&A, and we have no intention
and undertake no obligation to update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise, except as required by applicable securities laws. The forward-looking
statements contained in this MD&A are expressly qualified by this cautionary statement.
Overview
Aritzia is a vertically integrated, innovative design house of exclusive fashion brands. We design apparel and
accessories for our collection of exclusive brands and sell them under the Aritzia banner. We conceive, create,
develop and sell a strategic mix of women’s fashion products directly to our customers with a depth of design and
quality that provides compelling value. Our unique multi-brand portfolio and product mix affords us enhanced
flexibility to address evolving fashion trends and enables us to appeal to our customers across multiple life stages,
resulting in strong and enduring customer loyalty.
We connect our customers to the energy of our culture through the products we sell, the environments we
create and the ways in which we communicate. We currently operate 65 stores in Canada and 22 stores in the United
States, averaging approximately 6,000 square feet, all of which are in prime locations within high performing retail
malls and high streets. We sell our products exclusively through our stores and aritzia.com, giving us complete
control of the presentation of our brand and the relationships with our customers. This strategy allows us to present
our brand in a consistent manner, including pricing, marketing and product presentation. We strive to offer our
customers an aspirational shopping experience and exceptional level of service at every interaction. Our culture is
highly focused on the customer, and our sales associates and eCommerce support teams are trained to provide
shopping experiences that are personalized to exceed our customers’ wants and needs.
Initial Public Offering
On October 3, 2016, we successfully closed our initial public offering (the “IPO”) of our subordinate voting
shares (the “Shares”) at a price of $16.00 per Share through a secondary sale of shares by our principal shareholders.
Our principal shareholders sold 25,000,000 Shares under the IPO for total gross proceeds of $400.0 million. The
Shares are listed for trading on the Toronto Stock Exchange under the symbol “ATZ”.
The underwriters were granted an over-allotment option (the “Over-Allotment Option”) to purchase up to an
additional 3,750,000 Shares from our principal shareholders at a price of $16.00 per Share. The Over-Allotment
Option was fully exercised after the IPO and raised additional gross proceeds of $60.0 million for the selling
shareholders. Underwriting fees were paid by the selling shareholders and other expenses related to the IPO of
approximately $7.7 million were incurred and are being paid by us.
13
In connection with and immediately prior to the IPO, each Class A and Class C common share was exchanged
for either one multiple voting share or one Share. Our Class B and Class D common shares and preferred shares were
removed from our authorized share capital. Our authorized share capital consists of (i) an unlimited number of Shares,
(ii) an unlimited number of multiple voting shares and (iii) an unlimited number of preferred shares, issuable in series.
Following the foregoing share exchanges, all of our issued and outstanding multiple voting shares and Shares
were consolidated on an approximately one-to-0.5932 basis. In connection with the IPO, options to acquire Class A
and Class D common shares were also consolidated on an approximately one-to-0.5932 basis for options exercisable
to acquire Shares at a post-consolidated exercise price such that the in-the-money value of such options remained
unchanged.
Concurrent with the IPO, amendments to our credit facilities with our syndicate of lenders became effective. See
the section entitled “Liquidity and Capital Resources – Credit Facilities”.
Secondary Offering
On January 26, 2017, we successfully closed a secondary offering (the “Secondary Offering”) of our Shares by
certain of our shareholders at a price of $17.45 per Share, as well as a concurrent block trade by a group of our
employees (the “Concurrent Block Trade”). Our shareholders sold 20,100,000 Shares under the Secondary Offering
and our employees sold 1,788,366 Shares under the Concurrent Block Trade for total gross proceeds of $382.0
million. Underwriting fees were paid by the selling shareholders and other expenses related to the Secondary
Offering of approximately $0.8 million were incurred and paid by us.
Financial Highlights
We refer the reader to the section entitled “How We Assess the Performance of Our Business” of this MD&A for
the definition of the items discussed below and, when applicable, to the section entitled “Selected Consolidated
Financial Information” for reconciliations of non-IFRS measures with the most directly comparable IFRS measure.
Q4 2018 Compared to Q4 2017
Select financial highlights include the following:
Net revenue increased by 11.9% to $219.8 million from $196.4 million in Q4 2017. The weakening of
the U.S. dollar year-over-year in the quarter negatively impacted net revenue growth by approximately
130 basis points, or $2.8 million.
Comparable sales growth(1) was 6.0%, following 12.3% comparable sales growth in Q4 2017.
Gross profit margin was 37.9% in Q4 2018, compared to 38.4% in Q4 2017. This decrease was due
primarily to higher occupancy costs.
SG&A expenses increased by 2.6% to $50.7 million from $49.5 million in Q4 2017. Excluding the impact
of Secondary Offering costs of approximately $0.9 million incurred in Q4 2017, SG&A expenses
increased by 4.4%, but decreased as a percentage of net revenue to 23.1% compared to a normalized
24.7% in Q4 2017.
Notes:
(1) Our comparable sales growth calculation excludes the impact of foreign currency fluctuations. Beginning Q1 2018, we changed our
calculation methodology by applying the prior year’s average quarterly exchange rate to both current year and prior year comparable sales to
achieve a consistent basis for comparison. Prior to Q1 2018, comparable sales growth was calculated using a U.S. dollar to Canadian dollar
exchange rate of 1:1. The prior fiscal quarters have been recalculated using the new constant currency calculation (see “Summary of
Consolidated Quarterly Results and Certain Performance Measures”).
14
Other income, net was $0.3 million in Q4 2018, compared to other expense, net of $1.6 million in Q4
2017.
Adjusted EBITDA increased by 18.0% to $38.1 million from $32.3 million in Q4 2017. Adjusted EBITDA
was 17.3% of net revenue, compared to 16.4% of net revenue in Q4 2017.
Stock-based compensation of $5.6 million was expensed in Q4 2018, compared to $4.4 million
expensed in Q4 2017.
Income tax expense of $10.0 million was expensed in Q4 2018, compared to $7.0 million expensed in
Q4 2017. Included in the Q4 2018 income tax expense is a $1.5 million charge relating to the U.S. Tax
Cuts and Jobs Act (“U.S. tax reform”).
Net income increased by 37.9% to $15.9 million from $11.5 million in Q4 2017.
Adjusted Net Income increased by 23.0% to $22.5 million, or $0.19 per diluted share (treasury stock
method(2)), from $18.3 million or $0.16 per diluted share (treasury stock method(3)) in Q4 2017.
We opened one new store (South Coast Plaza in Southern California) and expanded or relocated two
stores (Westfield Center in San Francisco and Kingsway Mall in Edmonton) during Q4 2018.
Fiscal 2018 Compared to Fiscal 2017
Select financial highlights include the following:
Net revenue increased by 11.4% to $743.3 million from $667.2 million in Fiscal 2017.
Comparable sales growth(1) was 6.6%, following 14.1% comparable sales growth in Fiscal 2017.
Gross profit margin remained flat at 39.8% compared to Fiscal 2017.
SG&A expenses increased by 2.8% to $183.9 million from $178.8 million in Fiscal 2017. Excluding the
impact of IPO and Secondary Offering costs of approximately $8.6 million incurred in Fiscal 2017, SG&A
expenses increased by 8.0%, but decreased as a percentage of net revenue to 24.7% compared to a
normalized 25.5% in Fiscal 2017.
Other expense, net was $1.9 million in Fiscal 2018, compared to other income, net of $1.4 million in
Fiscal 2017.
Adjusted EBITDA increased by 12.8% to $132.7 million from $117.7 million in Fiscal 2017. Adjusted
EBITDA was 17.9% of net revenue, compared to 17.6% of net revenue in Fiscal 2017.
(2) Adjusted Net Income per diluted share for Q4 2018 and Fiscal 2018 is a non-IFRS measure and is calculated by dividing Adjusted Net Income
by the total number of outstanding shares plus the total number of dilutive share options that would be included under the treasury stock
method as at February 25, 2018 (or 117,252,533 diluted shares). For reconciliation of diluted shares to a reported measure, please see
“Selected Consolidated Financial Information”.
(3) Adjusted Net Income per diluted share for Q4 2017 and Fiscal 2017 is a non-IFRS measure and is calculated by dividing Adjusted Net Income
by the total number of outstanding shares plus the total number of dilutive share options that would be included under the treasury stock
method as at February 26, 2017 (or 117,408,845 diluted shares). For reconciliation of diluted shares to a reported measure, please see
“Selected Consolidated Financial Information”.
15
Stock-based compensation expense was $17.2 million in Fiscal 2018, compared to $103.0 million
expensed in Fiscal 2017. In Fiscal 2017, stock-based compensation expense included the fair value
accounting of our legacy time-based options and the triggering of our legacy performance-based
options in connection with the IPO.
Net income was $57.1 million in Fiscal 2018, compared to a net loss of $56.1 million in Fiscal 2017
primarily due to the aforementioned stock-based compensation expense in Fiscal 2017.
Adjusted Net Income increased by 17.5% to $75.9 million, or $0.65 per diluted share (treasury stock
method(2)), from $64.6 million, or $0.55 per diluted share (treasury stock method(3)) in Fiscal 2017.
We opened six new stores and expanded or relocated seven stores during Fiscal 2018. At the end of
Fiscal 2018, we had 63 stores in Canada and 22 stores in the United States.
Subsequent Event
On May 10, 2018, we announced a normal course issuer bid, under which we are authorized to purchase up to
5,429,658 of our Shares, representing approximately 10% of the public float, during the twelve month period
commencing May 15, 2018 and ending May 14, 2019. Any Shares purchased under the normal course issuer bid will
be cancelled.
Summary of Factors Affecting Performance
We believe that our performance and future success depend on a number of factors that present significant
opportunities for us. These factors are also subject to a number of inherent risks and challenges, some of which are
discussed below. See also the “Risk Factors” section of this MD&A and in our AIF.
Our Brand
Aritzia is a growing, vertically integrated, innovative design house and fashion brand that creates and develops
fashion apparel. We have become a well known and deeply loved brand by our customers in Canada with growing
customer awareness and affinity in the United States and outside of North America. Maintaining, enhancing and
growing our brand appeal within our addressable market is critical to our continued success. Any loss of brand
appeal may adversely affect our business and financial results.
Product Innovation and Merchandise Planning Strategy
We believe that our differentiated multi-brand strategy is a key driver of our continued year-over-year net
revenue growth and comparable sales growth. Each of our exclusive brands is treated as an independent label with
its own vision and aesthetic point of view, and is supported by our own dedicated in-house design team focused on
creating beautiful products. A highlight of our Spring 2018 collection included our recently launched leather
program. We are excited to launch our own denim brand in Fall/Winter 2018 to capitalize on the strong fashion
trends in this category. Our demand-driven merchandise planning, buying and inventory strategies have been
developed and refined over many years, and are designed to ensure that we have the right product, at the right time,
at the right price, in the right quantity and in the right place.
Store Network Expansion and Enhancement
We have a meaningful opportunity to continue to grow our store network across North America, particularly in
the United States. In addition to opening new Aritzia and exclusive brand stores (e.g. Wilfred, Babaton and TNA), we
have generated attractive returns on capital by enhancing elements of our existing stores (including footprint, layout
and assortment) through carefully considered store expansions and repositions. As a result of our disciplined real
estate selection process and compelling store economics, we have never closed an Aritzia store in our 33-year history.
16
The following table summarizes the change in our store count for the periods indicated.
Number of stores, beginning of period
New stores
Number of stores, end of period
Stores expanded or repositioned
Q4 2018
Q4 2017 Fiscal 2018
Fiscal 2017
84
1
85
2
77
2
79
-
79
6
85
7
74
5
79
5
Subsequent to year end, we opened our Babaton Square One store located in Toronto and our CrossIron Mills
store located in Calgary. We also are in the process of expanding our Soho store located in New York and
repositioning our Southgate store located in Edmonton.
eCommerce Growth
Our eCommerce business was launched in fiscal 2013 and quickly surpassed our growth expectations with
continued growth in online traffic during Fiscal 2018.
We believe the following factors will support the net revenue growth of aritzia.com:
Drive our omni-channel growth and capabilities – Our customers shop both online and in-stores, and we
believe there are synergies between our store network and aritzia.com, with the success of each channel
benefiting the other through increased brand awareness and affinity. The successful implementation of
our new point-of-sale system is the foundation for a multi-year strategy that is intended to align our
people, processes and systems so our customers can shop and receive our products through any of our
channels they choose.
Capitalizing on digital marketing channels to acquire new customers - We are directing resources with a
renewed focus on digital marketing, including programs centred on search engine optimization, social
and email programs.
Increasing the use of data analytics to improve online conversion and customer loyalty through
increased personalization – We are in the early phases of leveraging advanced business intelligence and
behaviour analytics to further enhance our understanding of our customers. This includes optimizing our
online operations to enhance personalization which we believe will drive higher conversion and
customer loyalty.
Enhancing our international eCommerce business – Our work to enhance our international website,
together with our ability to ship to international markets via aritzia.com is setting the foundation for
future expansion by gaining brand awareness, gathering intelligence, and identifying international
markets to expand our store network.
Sourcing and Production
We contract and maintain direct relationships with a diversified base of independent suppliers and
manufacturers for our exclusive brands, which provide us with the flexibility to source high quality materials and
products at competitive costs. We source the majority of our raw materials directly from suppliers and manufacturers,
which we believe to be best-in-class, located primarily in Asia and Europe that uphold our standards for quality, lead
time and cost. By partnering closely with long-standing manufacturers as well as adding new innovative and scalable
manufacturers, we have been able to drive lower product costs. We also maintain a formalized quality assurance
program whereby we inspect our manufacturers’ factories to ensure quality control. We engage independent expert
service providers to conduct factory audits for compliance with local laws and regulations and global standards
17
Infrastructure Investments
We continue to strategically invest ahead of our growth plans. At the end of Fiscal 2017, we implemented a set
of enhancements to our new human resource information system, which included the implementation of employee
self-service, and time and absence management. Since then we launched additional capabilities of this system to
better enable strategic human capital decisions.
In October 2017, we successfully completed the implementation of our new point-of-sale (POS) system in all of
our Canadian stores and our customer care centre following the POS system implementation in our US stores in
September 2017. The new POS system provides us with a robust platform on which to build and evolve the services
and experience we offer to our customers. It has provided us with world class infrastructure, labour efficiencies,
greater access to more reliable data and specifically, a foundation to evolve our omni-channel and clienteling
capabilities. The new POS system provides near real-time visibility to inventory and sales data. This has already
allowed us to respond more nimbly in managing our inventory to maximize sales, as well as begin providing true
omni-channel capabilities to give customers even more flexibility in how they shop and receive Aritzia products.
In April 2017, we expanded our Columbus area distribution centre capacity from 45,000 square feet to 138,000
square feet. We also began the process of relocating and expanding our Greater Vancouver distribution centre, from
our existing 83,000 square foot facility into a new 223,000 square foot flagship facility. We believe the new flagship
distribution centre is on track to be operational by the Fall of 2018 which will provide increased efficiencies and help
us to advance omni-channel efforts.
We are also working to drive our digital strategy, which is creating additional opportunities throughout the
organization as we use digital tools to heighten our customers’ overall experience with the brand. Our focus on
building our digital infrastructure impacts everything we do. In our view, digital is about more than just our
technology and eCommerce business, it runs through the business all the way from design to the service we deliver in
stores.
We also continue to expand our talent pool across the organization. We're continuing to find exceptional talent
at all levels to facilitate our expected future growth. In the third quarter, we added key executives in People,
Marketing, and eCommerce, as well as senior level talent in product and distribution.
These investments in systems and infrastructure are expected to drive increased efficiencies and enable our
growth for the long term.
Consumer Trends
The women’s apparel industry is subject to shifts in consumer trends, preferences and consumer spending and
our revenue and operating results depend, in part, on our ability to respond to such changes in a timely manner. Our
differentiated multi-brand strategy gives us control over our products and provides us with the flexibility to optimize
our brand mix as needed to address changes in consumer demand and fashion preferences, which has been a critical
driver of the consistency of our growth. Our diversified mix of exclusive brands satisfies a broad range of fashion
needs, which allows us to attract a wide customer base and increases our addressable market. Our revenue is also
impacted by discretionary spending by consumers, which is affected by many factors that are beyond our control,
including, but not limited to, general economic conditions, consumer disposable income levels, consumer confidence
levels, consumer debt, the cost of basic necessities and other goods and the effects of weather or natural disasters.
We believe that our track record demonstrates the success of our exclusive brand strategy at responding to changes
in fashion demands through all stages of economic cycles.
Seasonality
Our business is seasonal, with a higher proportion of net revenue and operating cash flows generated during
the second half of the fiscal year, which includes the back-to-school and holiday seasons. We also have higher
working capital requirements in the periods preceding the launch of new seasons as we receive and pay for new
inventory. We manage our working capital needs through cash flow from operations and our Revolving Credit Facility
(defined herein).
18
Average quarterly share of annual net revenue over the last three completed fiscal years is as follows:
First fiscal quarter
Second fiscal quarter
Third fiscal quarter
Fourth fiscal quarter
Yearly total
19%
23%
28%
30%
100%
Weather
Extreme weather conditions in the areas in which our stores are located could adversely affect our business and
financial results. For example, frequent or unusually heavy snowfall, ice storms, rainstorms or other extreme weather
conditions over a prolonged period could make it difficult for our customers to travel to our stores and thereby
reduce our revenue and profitability. This is potentially mitigated by our customers’ ability to buy our products
through aritzia.com. Our business is also susceptible to unseasonable weather conditions. For example, extended
periods of unseasonably warm temperatures during the winter season or cool weather during the summer season
could render a portion of our inventory incompatible with those unseasonable conditions, which could adversely
affect sales of these seasonal items.
Competition
We operate in the women’s apparel industry, primarily within the North American market. We are strategically
positioned in a customer market segment of the global fashion landscape between fast fashion and affordable luxury.
We compete on the basis of several factors that include our strategic mix of exclusive brands, offering high quality
products at an attainable price point, our proven and sophisticated merchandise planning strategy, our focus on
providing exceptional customer service, our premier real estate portfolio and our market positioning. We believe the
industry is evolving to benefit players like us that have the scale needed to leverage their infrastructure and
capabilities in areas such as brand equity creation, real estate selection, store design, supply chain and eCommerce.
Foreign Exchange
The majority of our net revenue is derived in Canadian dollars while the vast majority of our cost of goods sold is
denominated in U.S. dollars. Fluctuations in the exchange rate of the Canadian dollar versus the U.S. dollar could
materially affect our gross profit margins and operating results. We use foreign currency forward contracts to mitigate
risks associated with forecasted U.S. dollar merchandise purchases sold in Canada, but there can be no assurances
that such strategies will prove to be successful. See “Financial Instruments” and “Risk Factors” sections of this MD&A.
19
How We Assess the Performance of Our Business
In assessing the performance of our business, we consider a variety of financial and operating measures that
affect our operating results.
Net Revenue
Net revenue primarily reflects our sale of merchandise, less returns and discounts. Retail revenue is recognized
when the customer receives and pays for the merchandise at the point of sale, net of an estimated allowance for
returns. For merchandise that is ordered and paid in a store and subsequently picked up by the customer, revenue is
deferred until the customer receives the merchandise. eCommerce revenue is recognized at the estimated date of
receipt of the merchandise by the customer, net of an estimated allowance for returns. Revenues are reported net of
sales taxes collected from various governmental agencies.
Comparable Sales Growth
Comparable sales growth is a retail industry metric used to compare the percentage change in sales derived
from the established stores of a certain period as compared to the sales from the same stores in the same period in
the prior year. Comparable sales growth helps to explain our revenue growth in established stores and eCommerce,
which may not otherwise be apparent when relying solely on net revenues. Comparable sales is calculated based on
revenue (net of sales tax, returns and discounts) from stores that have been opened for at least 56 weeks including
eCommerce revenue (net of sales tax, returns and discounts), and excludes stores that were expanded or
repositioned, stores in centres where we opened a new additional store and stores significantly impacted by nearby
construction and other similar disruptions during this period. Our comparable sales growth calculation excludes the
impact of foreign currency fluctuations. Beginning Q1 2018, we changed our calculation methodology by applying
the prior year’s average quarterly exchange rate to both current year and prior year comparable sales to achieve a
consistent basis for comparison. Prior to Q1 2018, comparable sales growth was calculated using a U.S. dollar to
Canadian dollar exchange rate of 1:1. The prior fiscal quarters have been recalculated using the new constant
currency calculation (see “Summary of Consolidated Quarterly Results and Certain Performance Measures”). Our
comparable sales growth may be calculated differently compared to other retailers.
Gross Profit
Gross profit reflects our net revenue less cost of goods sold. Cost of goods sold includes inventory and product-
related costs and occupancy costs, as well as depreciation expense for our stores and distribution centres. Our cost of
goods sold may include different costs compared to other retailers. Gross profit as a percentage of net revenue (gross
profit margin) is impacted by the components of cost of goods sold, product mix and markdowns. We define gross
profit margin as our gross profit divided by our net revenues.
Selling, General and Administrative (“SG&A”) Expenses
Our SG&A expenses consist of selling expenses that are generally variable with net revenue and general and
administrative operating expenses that are primarily fixed. Our SG&A expenses also include depreciation and
amortization expenses for all support office assets and intangible assets. We expect our SG&A expenses to increase
as we continue to open new stores, grow our eCommerce business, increase brand awareness and invest in our
infrastructure and people.
SG&A expenses as a percentage of net revenue is usually higher in the lower-volume first and second quarters,
and lower in the higher-volume third and fourth quarters because a portion of these costs are relatively fixed. Our
SG&A expenses may include different expenses compared to other retailers.
EBITDA
We define EBITDA as consolidated net income (loss) before depreciation and amortization, finance expense and
income tax expense.
20
Adjusted EBITDA
We believe Adjusted EBITDA is a useful measure of operating performance, as it provides a more relevant
picture of operating results in that it excludes the effects of financing and investing activities by removing the effects
of interest, depreciation and amortization, expenses that are not reflective of underlying business performance and
other one-time or non-recurring expenses. We use Adjusted EBITDA to facilitate a comparison of our operating
performance on a consistent basis from period-to-period and to provide for a more complete understanding of
factors and trends affecting our business. We define Adjusted EBITDA as consolidated net income (loss) before
depreciation and amortization, finance expense and income tax expense, adjusted for the impact of certain items,
including non-cash items such as stock-based compensation expense, unrealized foreign exchange gains or losses on
forward contracts and other items we consider non-recurring and not representative of our ongoing operating
performance. Because Adjusted EBITDA excludes certain non-cash items, we believe that it is less susceptible to
variances in actual performance resulting from depreciation and amortization and other non-cash charges.
Adjusted Net Income (per diluted share)
We believe Adjusted Net Income (per diluted share) is a useful measure of performance, as it provides a more
relevant picture of results by excluding the effects of expenses that are not reflective of underlying business
performance and other one-time or non-recurring expenses. We use Adjusted Net Income to facilitate a comparison
of our performance on a consistent basis from period-to-period and to provide for a more complete understanding of
factors and trends affecting our business. We define Adjusted Net Income as consolidated net income (loss), adjusted
for the impact of certain items, including non-cash items such as stock-based compensation expense, unrealized
foreign exchange gains or losses on forward contracts and other items we consider non-recurring and not
representative of our ongoing operating performance, net of related tax effects. We define Adjusted Net Income per
diluted share by dividing Adjusted Net Income by the total number of outstanding shares plus the total number of
dilutive share options that would be included under the treasury stock method as at the end of the relevant period.
21
Selected Consolidated Financial Information
The following table summarizes our recent results of operations for the periods and fiscal years indicated. The
selected consolidated financial information set out below for Fiscal 2018, Fiscal 2017 and Fiscal 2016 has been
derived from our audited annual consolidated financial statements and related notes. The selected consolidated
financial information set out below for Q4 2018 and Q4 2017 is unaudited.
Q4 2018
13 weeks
Q4 2017
13 weeks
Fiscal 2018
52 weeks
Fiscal 2017
52 weeks
Fiscal 2016
52 weeks
(in thousands of Canadian dollars, unless otherwise noted)
Consolidated Statements of Operations:
Net revenue
Cost of goods sold
$ 219,804 100.0% $ 196,396 100.0% $ 743,267 100.0% $ 667,181 100.0% $ 542,463
344,095
136,519
447,776
401,658
121,028
60.2%
61.6%
60.2%
62.1%
Gross profit
83,285
37.9%
75,368
38.4%
295,491
39.8%
265,523
39.8%
198,368
Operating expenses
Selling, general and administrative
Stock-based compensation expense
50,738
5,599
23.1%
2.5%
49,471
4,413
25.2%
2.2%
183,857
17,240
24.7%
2.3%
178,773
103,044
26.8%
15.4%
135,111
10,651
Income (loss) from operations
Finance expense
Other (income) expense, net
26,948
1,318
(291)
12.3%
0.6%
(0.1%)
21,484
1,339
1,589
10.9%
0.7%
0.8%
94,394
5,221
1,890
12.7%
0.7%
0.3%
(16,294)
10,455
(1,362)
(2.4%)
1.6%
(0.2%)
52,606
10,995
(3,512)
Income (loss) before income taxes
Income tax expense
25,921
10,020
11.8%
4.6%
18,556
7,028
9.4%
3.6%
87,283
30,190
11.7%
4.1%
(25,387)
30,722
(3.8%)
4.6%
45,123
12,751
Net income (loss)
$
15,901
7.2% $
11,528
5.9% $
57,093
7.7% $
(56,109)
(8.4%) $
32,372
Other Performance Measures:
Year-over-year net revenue growth
Comparable sales growth
Capital expenditures (excluding
proceeds from leasehold
inducements)
Number of stores, end of period
New stores added
Stores expanded or repositioned
$
11.9%
6.0%
18,784
85
1
2
$
17.4%
12.3%
11,610
79
2
-
$
11.4%
6.6%
66,330
85
6
7
$
23.0%
14.1%
31,136
79
5
5
26.9%
16.8%
$
28,183
74
10
2
100.0%
63.4%
36.6%
24.9%
2.0%
9.7%
2.0%
(0.6%)
8.3%
2.4%
6.0%
22
The following table provides a reconciliation of net income (loss) to EBITDA, Adjusted EBITDA and Adjusted Net
Income, Adjusted Net Income per Diluted share and Comparable Sales to Net Revenue for the periods indicated.
Q4 2018
13 weeks
Q4 2017
13 weeks
Fiscal 2018
52 weeks
Fiscal 2017
52 weeks
Fiscal 2016
52 weeks
(in thousands of Canadian dollars unless otherwise noted)
Reconciliation of Net Income (Loss) to
Adjusted EBITDA:
Net income (loss)
Depreciation and amortization
Finance expense
Income tax expense
$
EBITDA
Adjustments to EBITDA:
Stock-based compensation expense
Unrealized foreign exchange (gain) loss
on forward contracts
IPO and Secondary Offering costs
Other non-recurring items(1)
15,901
5,961
1,318
10,020
33,200
5,599
(698)
-
-
$
11,528
5,362
1,339
7,028
25,257
4,413
1,730
881
-
$
57,093
22,844
5,221
30,190
115,348
17,240
(233)
(115)
476
$
(56,109)
21,129
10,455
30,722
6,197
103,044
(181)
8,604
-
$
32,372
18,200
10,995
12,751
74,318
10,651
-
-
-
Adjusted EBITDA
$
38,101
$
32,281
$ 132,716
$
117,664
$
84,969
Adjusted EBITDA as a Percentage of Net
Revenue
Reconciliation of Net Income (Loss) to
Adjusted Net Income:
Net income (loss)
Adjustments to net income (loss):
Stock-based compensation expense
Unrealized foreign exchange (gain) loss
on forward contracts
IPO and Secondary Offering costs
Refinancing costs related to debt
modification at the IPO
Other non-recurring items(1)
U.S. tax reform impact(2)
Related tax effects
17.3%
16.4%
17.9%
17.6%
15.7%
$
15,901
$
11,528
$
57,093
$
(56,109)
$
32,372
17,240
103,044
10,651
5,599
(698)
-
-
-
1,503
184
4,413
1,730
881
-
-
-
(268)
(233)
(115)
-
476
1,503
(30)
(181)
8,604
2,867
-
-
6,402
Adjusted Net Income
$
22,489
$
18,284
$
75,934
$
64,627
Adjusted Net Income as a Percentage of Net
Revenue
Adjusted Net Income per Diluted Share (3)(4) $
10.2%
0.19
9.3%
0.16
$
10.2%
0.65
$
$
9.7%
0.55
-
-
-
-
-
(2,741)
40,282
7.4%
0.34
$
$
___________________________
Notes:
(1) Other non-recurring items include separation costs related to a senior Company executive departure.
(2) On December 22, 2017, the US Tax Cuts and Jobs Act (“U.S. tax reform”) was enacted, reducing the United States federal corporate
income tax rate from 35% to 21%. As a result, our US deferred income tax asset was remeasured at the reduced rate, resulting in a
nonrecurring charge of $1.5 million to deferred income tax expense.
(3) Adjusted Net Income per diluted share for Q4 2018 and Fiscal 2018 is a non-IFRS measure and is calculated by dividing Adjusted Net
Income by the total number of outstanding shares plus the total number of dilutive share options that would be included under the
treasury stock method as at February 25, 2018 (or 117,252,533 diluted shares). For reconciliation of diluted shares to a reported measure,
please see “Selected Consolidated Financial Information”.
(4) Adjusted Net Income per diluted share for Q4 2017 and Fiscal 2017 is a non-IFRS measure and is calculated by dividing Adjusted Net
Income by the total number of outstanding shares plus the total number of dilutive share options that would be included under the
treasury stock method as at February 26, 2017 (or 117,408,845 diluted shares). For reconciliation of diluted shares to a reported measure,
please see “Selected Consolidated Financial Information”.
23
Q4 2018
13 weeks
Q4 2017
13 weeks
Fiscal 2018
52 weeks
Fiscal 2017
52 weeks
Fiscal 2016
52 weeks
(in thousands of Canadian dollars)
Reconciliation of Comparable Sales to
Net Revenue:
Comparable sales(5)
Non-comparable sales
$ 160,897
58,907
$ 141,881
$ 540,915
$ 478,517
54,515
202,352
188,664
Net revenue
$ 219,804
$ 196,396
$ 743,267
$ 667,181
$ 418,626
123,837
$ 542,463
___________________________
Note:
(5)
The comparable sales for a given period represents revenue (net of sales tax, returns and discounts) from stores that have been opened
for at least 56 weeks including eCommerce revenue (net of sales tax, returns and discounts) within that given period. This information is
provided to give context for comparable sales in such given period as compared to net revenue reported in our financial statements. Our
comparable sales growth calculation excludes the impact of foreign currency fluctuations. Beginning Q1 2018, we changed our calculation
methodology by applying the prior year’s average quarterly exchange rate to both current year and prior year comparable sales to
achieve a consistent basis for comparison. Prior to Q1 2018, comparable sales growth was calculated using a U.S. dollar to Canadian dollar
exchange rate of 1:1. See relevant definition in “How We Assess the Performance of Our Business” of this MD&A.
Q4 2018
13 weeks
Q4 2017
13 weeks
Fiscal 2018
52 weeks
Fiscal 2017
52 weeks
Reconciliation of Diluted Shares (for purposes of Adjusted
Net Income per diluted share) to Shares
Outstanding:
Weighted average number of basic shares outstanding
Adjustment to account for difference in weighted average
number of shares outstanding and actual number of
shares outstanding
111,562,636
107,612,377
110,180,126
104,787,171
468,707
1,160,084
1,851,217
3,985,290
Total number of shares outstanding
Dilutive share options under the treasury stock method
112,031,343
5,221,190
108,772,461
8,636,384
112,031,343
5,221,190
108,772,461
8,636,384
Total number of diluted shares for purposes of Adjusted
Net Income per diluted share(6)(7)
___________________________
117,252,533
117,408,845
117,252,533
117,408,845
Notes:
(6)
(7)
Total number of diluted shares for purposes of calculating Adjusted Net Income per diluted share for Q4 2018 and Fiscal 2018 is a non-
IFRS measure and is calculated by dividing taking the total number of outstanding shares plus the total number of dilutive share options
that would be included under the treasury stock method as at February 25, 2018 (or 117,252,533 diluted shares).
Total number of diluted shares for purposes of calculating Adjusted Net Income per diluted share for Q4 2017 and Fiscal 2017 is a non-
IFRS measure and is calculated by dividing taking the total number of outstanding shares plus the total number of dilutive share options
that would be included under the treasury stock method as at February 26, 2017 (or 117,408,845 diluted shares).
24
The following table provides selected financial position data for the periods indicated.
Selected Consolidated Financial Position Data:
Total assets
Total non-current liabilities
Results of Operations
Analysis of Results for Q4 2018 to Q4 2017
As at
February 25,
2018
As at
February 26,
2017
$
567,678 $
176,948
486,845
183,728
The following section provides an overview of our financial performance during Q4 2018 compared to Q4 2017.
Net Revenue
Net revenue increased by 11.9% to $219.8 million in Q4 2018, compared to $196.4 million in Q4 2017. The net
revenue increase was primarily driven by the addition of six new store openings and seven expanded or repositioned
stores since the fourth quarter of Fiscal 2017, as well as comparable sales growth of 6.0%, delivering our 14th
consecutive quarter of positive comparable sales growth, resulting from continued momentum in our eCommerce
business. The weakening of the U.S. dollar year-over-year in the quarter negatively impacted net revenue growth by
approximately 130 basis points, or $2.8 million.
Gross Profit
Gross profit increased by 10.5% to $83.3 million, or 37.9% of net revenue in Q4 2018, compared to $75.4
million, or 38.4% of net revenue in Q4 2017. Our gross profit margin was affected by increased occupancy costs in
Q4 2018, including $0.5 million related to our new Vancouver distribution centre under construction. Gross profit
margin benefited from the weakening of the U.S. dollar year-over-year and along with continued product cost
improvements related to sourcing initiatives, offset by a slightly higher mix of end-of-season sale merchandise
compared to last year.
We will continue to incur rent expense for our new distribution centre until its planned opening in the Fall of
2018, which as expected, will temporarily inflate our reported cost of goods sold.
SG&A Expenses
SG&A expenses increased by 2.6% to $50.7 million in Q4 2018, compared to $49.5 million in Q4 2017.
Excluding the impact of Secondary Offering costs of approximately $0.9 million incurred during Q4 2017, SG&A
expenses were $48.6 million in Q4 2017. This increase in SG&A expenses was primarily due to variable selling
expenses driven by higher sales volume.
SG&A expenses were 23.1% of net revenue in Q4 2018, compared to a normalized 24.7% of net revenue in Q4
2017, after excluding the impact of the aforementioned offering costs. This decrease in SG&A expenses as a
percentage of net revenue during the quarter was primarily due to leveraging of selling labor costs and the timing of
investments in people and technology.
25
Other (Income) Expense, net
Other income, net was $0.3 million in Q4 2018, compared to other expense, net of $1.6 million in Q4 2017.
Other income, net of $0.3 million in Q4 2018 primarily relates to:
unrealized foreign exchange gains on forward contracts of $0.7 million; and
interest income of $0.3 million, partially offset by
realized foreign exchange losses on the settlement of forward contracts of $0.7 million.
Other expenses, net of $1.6 million in Q4 2017 primarily relates to:
unrealized foreign exchange losses on forward contracts of $1.7 million; and
unrealized and realized operational foreign exchange losses of $0.7 million, partially offset by
realized foreign exchange gains on the settlement of forward contracts of $0.7 million; and
interest income of $0.1 million.
Adjusted EBITDA
Adjusted EBITDA increased by 18.0% to $38.1 million, or 17.3% of net revenue in Q4 2018, compared to $32.3
million, or 16.4% of net revenue in Q4 2017, primarily due to the factors discussed above.
Included in Adjusted EBITDA is the aforementioned straight-line rent expense from our new distribution centre
under construction of $0.5 million during Q4 2018.
Stock-Based Compensation Expense
Stock-based compensation of $5.6 million was expensed in Q4 2018, compared to $4.4 million in Q4 2017.
Included in Q4 2018 is $1.2 million in expenses related to the accounting for options under our legacy option
plan and $4.4 million in expenses primarily related to the accounting for options under our new option plan. Included
in the expense for options under our new option plan was $2.3 million recognized from the cancellation of 671,889
time-based options granted to a director and officer. The cancellation of these options results in accelerated vesting
in accordance with IFRS 2.
Included in Q4 2017 is $2.3 million in expenses related to the accounting for options under our legacy option
plan and $2.1 million in expenses primarily related to the accounting for options under our new option plan.
Finance Expense
Finance expense remained flat at $1.3 million in Q4 2018 and Q4 2017.
Income Tax Expense
Income tax expense is recognized based on management’s best estimate of the weighted average annual
income tax rate expected for the full fiscal year. The statutory income tax rates for Q4 2018 and Q4 2017 were 26.4%
and 26.3%, respectively.
Income tax expense was $10.0 million in Q4 2018, compared to $7.0 million in Q4 2017 and the effective tax
rates for Q4 2018 and Q4 2017 were 38.7% and 37.9%, respectively. The increase in the income tax expense is due
to an increase in net income before taxes, and a remeasurement of deferred tax assets due to the U.S. tax reform
resulting in a non-recurring charge of $1.5 million to deferred income tax expense. Similarly, the increase in the
effective tax rate when compared to Q4 2017 is also primarily driven by this remeasurement adjustment.
Net Income
Net income was $15.9 million in Q4 2018, compared to net income of $11.5 million in Q4 2017. This increase is
primarily the result of an 11.9% increase in net revenue and an increase in other income, net, partially offset by a
26
decrease in gross profit margin, along with an increase in SG&A expenses, stock-based compensation expense and
income tax expense.
Adjusted Net Income
Adjusted Net Income increased by 23.0% to $22.5 million, or $0.19 per diluted share (treasury stock method(4))
in Q4 2018, compared to $18.3 million, or $0.16 per diluted share (treasury stock method(5)) in Q4 2017, primarily
due to the factors discussed above. Adjusted net income in Q4 2018 also excludes the impact of a non-recurring
charge of $1.5 million to deferred income tax expense from the enactment of the U.S. tax reform.
Included in Adjusted Net Income is the aforementioned straight-line rent expense from our new distribution
centre under construction of $0.5 million, net of related tax effects, during Q4 2018.
Analysis of Results for Fiscal 2018 to Fiscal 2017
The following section provides an overview of our financial performance during Fiscal 2018 compared to Fiscal
2017.
Net Revenue
Net revenue increased by 11.4% to $743.3 million in Fiscal 2018 from $667.2 million in Fiscal 2017. The
increase was primarily driven by the revenue from new, expanded and repositioned stores and comparable sales
growth of 6.6%, resulting from continued momentum in our eCommerce business.
Gross Profit
Gross profit increased by 11.3% to $295.5 million, or 39.8% of net revenue in Fiscal 2018, compared to $265.5
million, or 39.8% of net revenue in Fiscal 2017. The benefit to gross profit margin of product supply chain initiatives
and the weakening of the U.S. dollar were offset by increased occupancy costs. The higher occupancy costs were the
result of rent expense from the new Vancouver distribution centre and flagship stores under construction of $4.7
million in the aggregate during Fiscal 2018. Fiscal 2017 included rent expense from a flagship store under
construction of $0.3 million.
We will continue to incur rent expense for our new distribution centre until its planned opening in the Fall of
2018, which as expected, will temporarily inflate our reported cost of goods.
SG&A Expenses
SG&A expenses increased by 2.8% to $183.9 million in Fiscal 2018, compared to $178.8 million in Fiscal 2017.
Excluding the impact of IPO costs and Secondary Offering costs of approximately $8.6 million incurred during
Fiscal 2017, SG&A expenses were $170.2 million in Fiscal 2017. The increase in SG&A expenses was primarily due to
variable selling expenses driven by higher sales volume.
SG&A expenses decreased to 24.7% of net revenue in Fiscal 2018, compared to a normalized 25.5% of net
revenue in Fiscal 2017 excluding the impact of the aforementioned offering costs.
(4)
(5)
Adjusted Net Income per diluted share for Q4 2018 and Fiscal 2018 is a non-IFRS measure and is calculated by dividing Adjusted Net
Income by the total number of outstanding shares plus the total number of dilutive share options that would be included under the treasury
stock method as at February 25, 2018 (or 117,252,533 diluted shares). For reconciliation of diluted shares to a reported measure, please
see “Selected Consolidated Financial Information”.
Adjusted Net Income per diluted share for Q4 2017 and Fiscal 2017 is a non-IFRS measure and is calculated by dividing Adjusted Net
Income by the total number of outstanding shares plus the total number of dilutive share options that would be included under the treasury
stock method as at February 26, 2017 (or 117,408,845 diluted shares). For reconciliation of diluted shares to a reported measure, please
see “Selected Consolidated Financial Information”.
27
Other Expense (Income), net
Other expense, net was $1.9 million in Fiscal 2018, compared to other income, net of $1.4 million in Fiscal 2017.
Other expense, net of $1.9 million in Fiscal 2018 primarily relates to:
realized foreign exchange losses on the settlement of forward contracts of $2.2 million; and
realized and unrealized operational foreign exchange losses of $0.8 million, partially offset by
interest income of $0.9 million; and
unrealized foreign exchange gains on forward contracts of $0.2 million.
Other income, net of $1.4 million in Fiscal 2017 primarily relates to:
realized foreign exchange gains on the settlement of our forward contracts of $1.4 million; and
unrealized foreign exchange gains on forward contracts of $0.2 million; and
interest income of $0.2 million, partially offset by
realized and unrealized operational foreign exchange losses of $0.4 million.
Adjusted EBITDA
Adjusted EBITDA increased by 12.8% to $132.7 million, or 17.9% of net revenue in Fiscal 2018, compared to
$117.7 million, or 17.6% of net revenue in Fiscal 2017, primarily due to the factors discussed above.
Included in Adjusted EBITDA is the aforementioned straight-line rent expense from our new distribution centre
and flagship stores under construction of $4.7 million in the aggregate during Fiscal 2018. Fiscal 2017 included rent
expense from a flagship store under construction of $0.3 million.
Stock-Based Compensation Expense
Stock-based compensation of $17.2 million was expensed in Fiscal 2018, compared to $103.0 million in Fiscal
2017.
Included in Fiscal 2018 is $5.7 million in expenses related to the accounting for options under our legacy option
plan and $11.5 million in expenses primarily related to the accounting of options under our new option plan.
Stock-based compensation of $103.0 million was expensed in Fiscal 2017 due to the accounting of time-based
and performance-based options under the legacy option plan in conjunction with the IPO. In Fiscal 2017, stock-based
compensation of approximately $76.1 million was expensed relating to the accounting for fair value adjustments on
our time-based option plan, driven by the increase in valuation of our Shares in connection with the IPO. At the end
of Q2 2017, we also concluded that it was probable that the performance conditions relating to our performance-
based options would be achieved in connection with the IPO. As a result, we also recognized stock-based
compensation expense for our performance-based options in the amount of $23.6 million in Fiscal 2017.
Finance Expense
Finance expense was $5.2 million in Fiscal 2018, compared to $10.5 million in Fiscal 2017. The decrease was
primarily driven by the write-off of deferred financing costs of $2.9 million associated with the amendment of our
credit facilities concurrent with the closing of the IPO in Q3 2017, as well as lower average debt outstanding and
lower average interest rates in Fiscal 2018.
Income Tax Expense
Income tax expense is recognized based on management’s best estimate of the weighted average annual
income tax rate expected for the full fiscal year. The statutory income tax rates for Fiscal 2018 and Fiscal 2017 were
26.4% and 26.3%, respectively.
Income tax expense was $30.2 million in Fiscal 2018, compared to $30.7 million in Fiscal 2017 and the effective
tax rates for Fiscal 2018 and Fiscal 2017 were 34.6% and (121.0%), respectively. The increase in the effective tax rate
28
when compared to the statutory rate is due to stock-based compensation expense not being deductible for tax
purposes and a remeasurement of deferred tax assets at the reduced U.S. federal income tax rate due to the U.S. tax
reform. In Fiscal 2017, stock-based compensation was also not a deductible expense, resulting in an increased
income tax expense over a loss before income taxes and an effective tax rate of (121.0%).
Net Income (Loss)
Net income for Fiscal 2018 was $57.1 million, compared to net loss of $56.1 million in Fiscal 2017. This increase
is primarily the result of an 11.4% increase in net revenue and a decrease in stock-based compensation expense,
finance expense and income tax expense, partially offset by higher SG&A expenses and other expense (income), net.
Adjusted Net Income
Adjusted Net Income increased by 17.5% to $75.9 million, or $0.65 per diluted share (treasury stock method(4))
in Fiscal 2018, compared to $64.6 million, or $0.55 per diluted share (treasury stock method(5)) in Fiscal 2017,
primarily due to the factors discussed above. Adjusted net income in Fiscal 2018 also excludes the impact of a non-
recurring charge of $1.5 million to deferred income tax expense from the enactment of the U.S. tax reform.
Included in Adjusted Net Income is the aforementioned straight-line rent expense from our new distribution
centre and flagship stores under construction of $4.7 million, net of related tax effects, in the aggregate during Fiscal
2018. Fiscal 2017 included rent expense from a flagship store under construction of $0.3 million, net of related tax
effects.
29
Summary of Consolidated Quarterly Results and Certain Performance Measures
The following table summarizes the results of our operations for the last eight most recently completed quarters.
This unaudited quarterly information, other than Adjusted EBITDA, Adjusted Net Income and comparable sales
growth, has been prepared in accordance with IFRS. Due to seasonality, the results of operations for any quarter are
not necessarily indicative of the results of operations for the fiscal year.
Q4
Fiscal 2018
Q3
Q2
Q1
Q4
Fiscal 2017
Q3
Q2
Q1
(in thousands of Canadian dollars)
Consolidated Statements of
Operations:
Net revenue
Gross profit
Income (loss) from operations
$
219,804 $ 204,449 $ 173,968 $ 145,046 $ 196,396 $ 186,460 $ 157,918 $ 126,407
51,211
13,064
56,671
(80,686)
63,130
15,514
57,538
12,028
75,368
21,484
82,273
29,844
83,285
26,948
91,538
39,904
Net income (loss)
$
15,901 $
28,073 $
4,990 $
8,129 $
11,528 $
(8,097) $
(67,288) $
7,748
Percentage of Net Revenue:
Net revenue
Gross profit
Income (loss) from operations
Net income (loss)
Adjusted EBITDA (1)
Adjusted Net Income (1)
Other Performance Measures:
Comparable Sales Growth –
constant currency(1)(2)
Comparable Sales Growth – prior
methodology(1)(2)
Stores
Number of stores, beginning of
period
New stores
Number of stores, end of period
Stores expanded or repositioned
___________________________
100.0%
37.9%
12.3%
7.2%
38,101
22,489
100.0%
44.8%
19.5%
13.7%
49,962
30,595
100.0%
36.3%
8.9%
100.0%
39.7%
8.3%
100.0%
38.4%
10.9%
100.0%
44.1%
16.0%
100.0%
35.9%
(51.1%)
100.0%
40.5%
10.3%
2.9%
20,700
10,380
5.6%
5.9%
(4.3%)
(42.6%)
6.1%
23,953
12,470
32,281
18,284
45,427
27,457
19,809
9,281
20,147
9,605
6.0%
6.1%
6.3%
6.3%
5.4%
5.3%
9.3%
9.3%
12.3%
15.1%
16.4%
12.8%
11.5%
15.2%
16.9%
12.9%
84
1
85
2
83
1
84
3
81
2
83
1
79
2
81
1
77
2
79
-
75
2
77
2
74
1
75
74
-
74
1
2
Note:
(1)
See “How We Assess the Performance of Our Business” for definitions of Adjusted EBITDA, Adjusted Net Income and Comparable Sales
Growth, which are non-IFRS measures including Retail Industry Metrics. See also “Non-IFRS Measures”.
(2) Our comparable sales growth calculation excludes the impact of foreign currency fluctuations. Beginning Q1 2018, we changed our
calculation methodology by applying the prior year’s average quarterly exchange rate to both current year and prior year comparable
sales to achieve a consistent basis for comparison. Prior to Q1 2018, comparable sales growth was calculated using a U.S. dollar to
Canadian dollar exchange rate of 1:1. The prior fiscal quarters have been recalculated using the new constant currency calculation.
Liquidity and Capital Resources
Overview
Our principal uses of funds are for operating expenses, capital expenditures and debt service requirements. We
believe that cash generated from operations, together with amounts available under our credit facilities (defined
herein), are expected to be sufficient to meet our future operating expenses, capital expenditures and future debt
service requirements. Our ability to fund operating expenses, capital expenditures and future debt service
requirements will depend on, among other things, our future operating performance, which will be affected by
general economic, financial and other factors, including factors beyond our control. See “Summary of Factors
Affecting Performance” and “Risk Factors” of this MD&A for additional information. We review investment
opportunities in the normal course of our business and may make select investments to implement our business
strategy when suitable opportunities arise. Historically, the funding for any such investments has come from cash
flows from operating activities and/or our credit facilities.
30
Credit Facilities
As at February 25, 2018, the aggregate amount outstanding under our term credit facility was $118.7 million,
maturing on May 13, 2019 (“Term Credit Facility”). A $70.0 million revolving credit facility is also available as part of
this facility (“Revolving Credit Facility” and together with the Term Credit Facility, the “Credit Facilities”). No amounts
were drawn on the Revolving Credit Facility as at February 25, 2018. Scheduled mandatory repayments of the Term
Credit Facility will be $19.2 million in February 2019, with the balance due on the maturity date of May 13, 2019. In
addition, the Term Credit Facility requires mandatory loan prepayments by us of principal and interest if certain
events occur. See “Contractual Obligations – Off-Balance Sheet Arrangements and Commitments” for letters of credit
issued.
Concurrent with the IPO, amendments to our Credit Facilities with our syndicate of lenders became effective.
Each of the Credit Facilities has various interest rate charge options that are based on Canadian prime rates, base
rates and LIBOR rates plus the applicable margin from time to time in effect. The amendment included allowing us to
enter into bi-lateral letters of credit agreements of up to $75.0 million with different lenders, lowering the applicable
margin on interest rates and amending other terms and conditions.
On March 29, 2017 and July 25, 2017, we entered into trade finance agreements for letters of credit, $50.0
million with HSBC and $25.0 million with CIBC, respectively, all secured pari passu with the Credit Facilities. The
interest rate is between 1.17% and 2.00%.
The credit agreement contains restrictive covenants customary for credit facilities of this nature, including
restrictions on us and each credit facility guarantor, subject to certain exceptions, to incur indebtedness, grant liens,
merge, amalgamate or consolidate with other companies, transfer, lease or otherwise dispose of all or substantially all
of its assets, liquidate or dissolve, engage in any material business other than the fashion retail business, make
investments, acquisitions, loans, advances or guarantees, make any restricted payments, enter into transactions with
affiliates, repay indebtedness, enter into restrictive agreements, enter into sale-leaseback transactions, ensure
pension plan compliance, sell or discount receivables, enter into agreements with unconditional purchase
obligations, issue shares, create or acquire a subsidiary or make any hostile acquisitions.
Cash Flows
The following table presents cash flows for the periods and fiscal years indicated.
Q4 2018 Q4 2017 Fiscal 2018 Fiscal 2017
52 weeks
52 weeks
13 weeks
13 weeks
Net cash generated from operating activities
Net cash (used in) generated from financing activities
Net cash used in investing activities
Effect of exchange rate changes on cash and cash
equivalents
$
38,809 $
(12,694)
(18,784)
30,176 $ 105,358 $ 112,102
(5,060)
(5,974)
(31,136)
(66,330)
1,785
(11,610)
(35)
(223)
(106)
35
Increase in cash and cash equivalents
$
7,296 $
20,128 $
32,948 $
75,941
(in thousands of Canadian dollars)
Analysis of Cash Flows for the Fourth Quarter and Fiscal 2018
Cash Flows Generated from Operating Activities
For Q4 2018, cash flows generated from operating activities totalled $38.8 million, compared to $30.2 million in
Q4 2017. This increase was primarily attributable to higher Adjusted EBITDA and a lower use of working capital due
to the timing of certain payments.
For Fiscal 2018, cash flows generated from operating activities totalled $105.4 million, compared to $112.1
million for Fiscal 2017. This decrease was primarily due to higher income taxes paid during Fiscal 2018 and a higher
use of working capital due to the timing of certain payments, partially offset by higher Adjusted EBITDA and lower
offering costs in Fiscal 2018.
31
Cash Flows (Used in) Generated from Financing Activities
For Q4 2018, cash flows used in financing activities totalled $12.7 million, compared to cash flows of $1.8
million generated in Q4 2017. This increase was primarily due to a repayment on our Credit Facilities made in Q4
2018, partially offset by higher net proceeds received from options exercised in Q4 2018.
For Fiscal 2018, cash flows used in financing activities totalled $6.0 million, compared to $5.1 million in Fiscal
2017. This increase was primarily due to higher repayments on our Credit Facilities made in Fiscal 2018, partially
offset by higher net proceeds received from options exercised in Fiscal 2018.
Cash Flows Used in Investing Activities
For Q4 2018, cash flows used in investing activities totalled $18.8 million, compared to $11.6 million in Q4
2017. This increase was primarily due to timing of capital expenditures related to new stores and store expansions
and repositions, as well as the construction commencement of our expanded distribution centre during Q4 2018.
For Fiscal 2018, cash flows used in investing activities totalled $66.3 million, compared to $31.1 million in Fiscal
2017. This increase was primarily due to timing of capital expenditures related to new stores and store expansions
and repositions, as well as the implementation of our new POS system and construction commencement of our
distribution centre during Fiscal 2018.
Contractual Obligations
The following table summarizes our significant undiscounted maturities of our contractual obligations and
commitments as at February 25, 2018.
Less than
1 year
1 to
5 years
More than
5 years
(in thousands of Canadian dollars)
Total
$
66,195 $
399
4,236
19,127
- $
-
761
99,611
- $
-
-
-
66,195
399
4,997
118,738
$
89,957 $ 100,372 $
- $ 190,329
Accounts payable and accrued liabilities
Finance lease obligations
Assumed interest on long-term debt(1)
Debt(2)
Total contractual obligations
___________________________
Notes:
(1)
(2)
Based on interest rate in effect as at February 25, 2018.
The Term Credit Facility requires mandatory loan prepayments by Aritzia of principal and interest if certain events occur.
Off-Balance Sheet Arrangements and Commitments
The following table summarizes our off-balance sheet arrangements and commitments as at February 25, 2018.
Less than
1 year
1 to
5 years
More than
5 years
(in thousands of Canadian dollars)
Total
Operating leases
Purchase obligations
$
80,470 $
24,177
314,467 $
262,713 $
-
-
657,650
24,177
$
104,647 $
314,467 $
262,713 $
681,827
Operating leases for certain of our premises include renewal options, rent escalation clauses and free-rent
periods. The operating lease commitment reflects minimum annual commitments for our operating leases for our
premises (excluding other occupancy charges and additional rent based on a percentage of revenue).
Our third party manufacturers purchase raw materials on our behalf to be used for future production. As at
February 25, 2018, we had $24.2 million of raw materials not already included for use in purchase orders.
32
We enter into trade letters of credit to facilitate the international purchase of inventory. We also enter into
standby letters of credit to secure certain of our obligations, including leases and duties related to import purchases.
As at February 25, 2018, letters of credit totalling $20.9 million have been issued.
Other than those items disclosed here and elsewhere in this MD&A and our consolidated financial statements,
we do not have any material off-balance sheet arrangements or commitments as at February 25, 2018.
Subsequent to year end, we entered into additional operating leases, increasing the total minimum lease
commitments by $46.8 million (excluding other occupancy charges and additional rent based on percentage of
sales).
Financial Instruments
We primarily use foreign currency forward contracts to manage our exposure to fluctuations with respect to the
U.S. dollar for U.S. dollar merchandise purchases sold in Canada. We currently do not apply hedge accounting. The
fair value of the forward contracts is included in prepaid expenses and other current assets or in accounts payable
and accrued liabilities, depending on whether they represent assets or liabilities to us. Changes in the fair value of
foreign currency forward contracts are recorded in net income (loss). As at February 25, 2018, we had approximately
$30.3 million of U.S. dollar denominated forward contracts outstanding at an average forward rate of 1.2494. The
forward contracts had a positive fair value of $0.4 million as at February 25, 2018.
Related Party Transactions (in thousands of Canadian dollars unless otherwise indicated)
Berkshire Partners LLC (“Berkshire”) is the investment manager to private equity funds that indirectly hold an
ultimate controlling interest in us. Berkshire provided consulting and management advisory services to us pursuant to
a Management Agreement dated December 19, 2005. Concurrent with the closing of the IPO, we terminated the
Management Agreement with Berkshire.
During the year ended February 26, 2017, we incurred management fees of $190 for services rendered. Total
net reimbursements to Berkshire for travel, lodging and other costs for the year ended February 25, 2018 were $66
(February 26, 2017 - $247).
In connection with the IPO and Secondary Offering, we reimbursed in aggregate $1.4 million in professional
fees and other costs to the principal selling shareholders in accordance with our obligations under the registration
rights agreement. At February 25, 2018, $652 was included in accounts payable and accrued liabilities (February 26,
2017 - $948).
During the year ended February 25, 2018, we purchased $8.3 million (February 26, 2017 - $10.8 million) of
merchandise from a company partially owned by private equity funds managed by Berkshire. In August 2017,
Berkshire exited its investment from the merchandise company; as such, purchases from the merchandise company
subsequent to August 2017 are not considered related party transactions. At February 26, 2017, $47 was included in
accounts payable and accrued liabilities.
During the year ended February 25, 2018, we paid $3.6 million (February 26, 2017 – $2.2 million) for rent of
premises and $385 (February 26, 2017 - $nil) for the use of a leased asset wholly or partially owned by companies
that are owned by a director and officer of the Company. At February 25, 2018, $100 (February 26, 2017 - $nil) was
included in accounts payable and accrued liabilities.
During the year ended February 26, 2017, we provided unsecured loans bearing interest at a rate between 1%
to 5% to certain employees, with certain repayment terms. As at February 25, 2018, the outstanding balance on the
employee loans was $nil (February 26, 2017 - $125) and was included in accounts receivable and/or other assets.
33
Transactions with Key Management
Key management includes our directors and executive team. Compensation awarded to key management
includes:
Q4 2018
13 weeks
Q4 2017
13 weeks
(in thousands of Canadian dollars)
Fiscal 2018
52 weeks
Fiscal 2017
52 weeks
Salaries, directors’ fees and short-term benefits $
Stock-based compensation expense
852 $
3,326
855 $
1,773
3,117 $
7,358
3,084
14,781
$
4,178 $
2,628 $
10,475 $
17,865
Critical Accounting Estimates and Judgments
The preparation of consolidated financial statements in accordance with IFRS requires management to make
judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of
assets, liabilities, income and expenses. Estimates and assumptions are continuously evaluated and are based on
management’s best judgments and experience and other factors, including expectations of future events that are
believed to be reasonable under the circumstances. Revisions to accounting estimates are recognized in the period in
which the estimates are revised and in any future periods affected. Actual results may differ from these estimates.
The following discusses the most significant accounting judgments and estimates made by management in
preparation of the consolidated financial statements:
Valuation of Finished Goods Inventory
Inventory, consisting of finished goods, is stated at the lower of cost and net realizable value. Cost is determined
using weighted average costs. Cost of inventories includes the cost of merchandise and all costs incurred to deliver
the inventory to our distribution centres including freight and duty.
We periodically review our inventories and make provisions as necessary to appropriately value obsolete or
damaged goods. In addition, as part of inventory valuations, we accrue for inventory shrinkage for lost or stolen items
based on historical trends from actual physical inventory counts.
Impairment of Assets
Goodwill and intangible assets that have an indefinite useful life are not subject to amortization and are tested
annually for impairment or more frequently if events or changes in circumstances indicate that they might be
impaired.
Other assets are tested for impairment whenever events or changes in circumstances indicate that the carrying
amount may not be recoverable.
An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable
amount. The recoverable amount is the higher of an asset’s fair value less costs of disposal and value in use. The
recoverable value is determined using discounted future cash flow models, which incorporate assumptions regarding
future events, specifically future cash flows, growth rates and discount rates.
For the purposes of assessing impairment, assets are grouped at the lowest levels where there are separately
identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets
(cash-generating unit). Non-financial assets, other than goodwill, that suffered an impairment are reviewed for
possible reversal of the impairment at the end of each reporting period.
Stock-Based Compensation Expense
Stock-based compensation expense requires the use of estimates in the Black-Scholes option pricing model.
The classification of stock options as an equity-settled or cash-settled plan is influenced by judgment in determining
the expected settlement of the option. Judgment is also required in determining the timing of expense recognition
for performance-based options.
34
Income Tax Expense
Income tax expense requires judgment to determine when tax losses, credits and provisions are recognized
based on tax rules in various jurisdictions.
Significant New Accounting Standards Adopted
In December 2014, the IASB
issued amendments to International Accounting Standard (“IAS”) 1,
“Presentation of Financial Statements”, as part of its major initiative to improve presentation and disclosure in
financial reports (the “Disclosure Initiative”). These amendments will not require any significant change to current
practice, but should facilitate improved financial statement disclosures. The amendments are effective for annual
periods beginning on or after January 1, 2016. We adopted IAS 1 for our consolidated financial statements during
the year ended February 26, 2017, and no material changes have been made as a result of this amendment to IAS 1.
In January 2016, the IASB issued amendments to IAS 7, “Statement of Cash Flows”, which are effective for
annual periods beginning on or after January 1, 2017. The amendments clarify that entities shall provide disclosures
that enable users of financial statements to evaluate changes in liabilities arising from financing activities. We
adopted amendments to IAS 7 for our consolidated financial statements during the year ended February 25, 2018.
Implementation of the standard has not had a material effect on the consolidated financial statements.
Significant New Accounting Standards Issued But Not Yet Adopted
In May 2014, the IASB issued IFRS 15, “Revenue from Contracts with Customers”. The new standard contains
a single model that applies to contracts with customers and two approaches to recognizing revenue: at a point in time
or over time. The model features a contract-based five-step analysis of transactions to determine whether, how much
and when revenue is recognized. New estimates and judgmental thresholds have been introduced, which may affect
the amount and/or timing of revenue recognized. IFRS 15 is effective for annual periods beginning on or after
January 1, 2018, with early application permitted. The implementation of the standard is not expected to have a
material quantitative impact on the consolidated financial statements. We are currently evaluating the effects of the
disclosure requirements of IFRS 15 on our consolidated financial statements and expect to apply the standard in
accordance with its future mandatory effective date.
In July 2014, the IASB issued the final version of IFRS 9, “Financial Instruments”, which reflects all phases of
the financial instruments project and replaces IAS 39, “Financial Instruments: Recognition and Measurement”, and all
previous versions of IFRS 9. The new standard introduces new requirements for classification and measurement,
impairment and hedge accounting. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with
early application permitted. We have determined that the adoption of IFRS 9 will have no material impact on our
consolidated financial statements with respect to our historical debt modifications. We are currently evaluating the
effects of the disclosure requirements of IFRS 9 on our consolidated financial statements and expect to apply the
standard in accordance with its future mandatory effective date.
35
In January 2016, the IASB issued IFRS 16, “Leases”, which sets out a new model for lease accounting replacing
IAS 17. The standard introduces a single lessee accounting model and requires a lessee to recognize assets and
liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is
required to recognize a right-of-use asset representing its right to use the underlying asset and a lease liability
representing its obligation to make lease payments. Lessors continue to classify leases as finance and operating
leases. Other areas of the lease accounting model have been impacted, including the definition of a lease.
Transitional provisions have been provided. IFRS 16 is effective for annual periods beginning on or after January 1,
2019, and is to be applied retrospectively. Early adoption is permitted if IFRS 15 has been adopted. While we are
currently evaluating the impact this new guidance will have on our consolidated financial statements, the recognition
of certain leases is expected to increase the assets and liabilities on our consolidated statements of financial position
upon adoption. As a result, we expect IFRS 16 to have a fundamental change on the consolidated statements of
financial position. We expect to apply the standard in accordance with its future mandatory effective date.
In June 2016, the IASB issued amendments to IFRS 2, “Share-based Payment”, clarifying how to account for
certain types of share-based payment transactions. The amendments provide requirements on the accounting for: the
effects of vesting and non-vesting conditions on the measurement of cash-settled share-based payments; share-
based payment transactions with a net settlement feature for withholding tax obligations; and a modification to the
terms and conditions of a share-based payment that changes the classification from cash-settled to equity-settled. The
amendments to IFRS 2 are effective prospectively for annual periods beginning on or after January 1, 2018 with early
application permitted. We have determined that the adoption of IFRS 2 will have no material impact on our
consolidated financial statements.
Outlook
The first quarter of fiscal 2019 is off to a strong start with the Spring and Summer collections being well-
received by our customers, putting us on track for sequentially higher comparable sales growth for the quarter.
For fiscal 2019, we expect to deliver low to mid-teens revenue growth and consistent Adjusted EBITDA margin, as
compared to Fiscal 2018. This assumes:
Five to six new stores including the Babaton store in Square One Shopping Centre in Toronto, and the Aritzia
store in CrossIron Mills in Calgary both already opened in the first quarter.
Four to five store expansions or repositions.
Gross profit margin benefit from sourcing initiatives will be offset by higher raw material costs for the
Fall/Winter season.
SG&A expenses will grow proportionately with revenue growth in fiscal 2019. We will continue to make
strategic investments in people, technology and infrastructure, primarily related to eCommerce, to support its
long term growth. The majority of investments related to our eCommerce platform improvements are
expensed within SG&A.
Net capital expenditures in the range of $55 million to $60 million with approximately 50% for store network
expansion.
Fiscal 2019 is a 53 week year.
Overall, we remain on track to meet or exceed our stated fiscal 2021 performance targets.
Risk Factors
For a detailed description of risk factors associated with the Company, refer to the “Risk Factors” section of the
Company’s AIF, which is available on SEDAR at www.sedar.com.
36
In addition, we are exposed to a variety of financial risks in the normal course of operations including foreign
exchange, interest rate, credit and liquidity risk, as summarized below. Our overall risk management program and
business practices seek to minimize any potential adverse effects on our consolidated financial performance.
Risk management is carried out under practices approved by our Audit Committee. This includes reviewing and
making recommendations to the Board on the adequacy of our risk management policies and procedures with
regard to identifying the Company’s principal risks and implementing appropriate systems and controls to manage
these risks. Risk management covers many areas of risk including, but not limited to, foreign exchange risk, interest
rate risk, credit risk and liquidity risk.
Foreign Exchange Risk
We source the majority of our raw materials and merchandise from various suppliers in Asia and Europe with the
vast majority of purchases denominated in U.S. dollars. Our foreign exchange risk is primarily with respect to the U.S.
dollar but we have limited exposure to other currencies as well. We use foreign exchange forward contracts to
mitigate risks associated with forecasted U.S. dollar merchandise purchases sold in Canada.
Interest Rate Risk
We are exposed to changes in interest rates on our cash and cash equivalents, bank indebtedness and long-
term debt. Debt issued at variable rates exposes us to cash flow interest rate risk. Debt issued at fixed rates exposes
us to fair value interest rate risk. During the period, we had only variable interest rate debt.
Credit Risk
Credit risk refers to the possibility that we can suffer financial losses due to the failure of our counterparties to
meet their payment obligations. We are exposed to minimal credit risk. We do not extend credit to customers, but do
have some receivable exposure in relation to tenant improvement allowances. To reduce this risk, we enter into
leases with landlords with established credit history, and for certain leases, we may offset rent payments until
accounts receivable are fully satisfied. We deposit our cash and cash equivalents with major financial institutions that
have been assigned high credit ratings by internationally recognized credit rating agencies. We only enter into
derivative contracts with major financial institutions, as described above, for the purchase of foreign currency forward
contracts.
Liquidity risk
Liquidity risk is the risk that we cannot meet a demand for cash or fund our obligations as they come due. We
manage liquidity risk by continuously monitoring actual and projected cash flows, taking into account the seasonality
of our revenue, income and working capital needs. The Revolving Credit Facility is used to maintain liquidity.
Controls and Procedures
Disclosure controls and procedures
Management is responsible for establishing and maintaining a system of controls and procedures over the
public disclosure of financial and non-financial information regarding the Company. Such controls and procedures
are designed to provide reasonable assurance that all relevant information is gathered and reported to senior
management on a timely basis, including the CEO and the CFO, so that they can make appropriate decisions
regarding public disclosure, including information contained in annual and interim filings, including the consolidated
financial statements, MD&A, Annual Information Form, and other documents and external communications.
As required by CSA National Instrument 52-109 (“NI 52-109”), Certification of Disclosure in Issuers’ Annual and
Interim Filings, an evaluation of the adequacy of the design (quarterly) and effective operation (annually) of the
Company’s disclosure controls and procedures was conducted under the supervision of management, including the
CEO and CFO, as of February 25, 2018. The evaluation included documentation review, enquiries and other
procedures considered by management to be appropriate in the circumstances. Based on that evaluation, the CEO
37
and the CFO have concluded that the design and operation of the system of disclosure controls and procedures were
effective as at February 25, 2018.
Internal control over financial reporting
Management is also responsible for establishing and maintaining appropriate internal control over financial
reporting. The Company’s internal control over financial reporting include, but are not limited to, detailed policies
and procedures relating to financial accounting and reporting, and controls over systems that process and summarize
transactions. The Company’s procedures for financial reporting also include the active involvement of qualified
financial professionals, senior management and its Audit Committee.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those
systems determined to be effective can provide only reasonable assurance with respect to financial statement
preparation and presentation.
As also required by NI 52-109, management, including the CEO and CFO, evaluated the adequacy of the design
(quarterly) and the effective operation (annually) of the Company’s internal control over financial reporting as defined
in NI 52-109, as at February 25, 2018. In making this assessment, management, including the CEO and CFO, used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control –
Integrated Framework (2013). This evaluation included review of the documentation of controls, evaluation of the
design and testing the operating effectiveness of controls, and a conclusion about this evaluation. Based on that
evaluation, the CEO and the CFO have concluded that the design and operation of the internal controls over financial
reporting were effective as at February 25, 2018 in providing reasonable assurance regarding the reliability of
financial reporting and the preparation of consolidated financial statements for external purposes in accordance with
IFRS.
Changes in Internal Control Over Financial Reporting
During the quarter and year ended February 25, 2018, there have been no changes in the Company’s internal
control over financial reporting that have materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
Share Information Prior to the Completion of the IPO
Prior to the completion of the IPO, we had an unlimited authorized number of Class A, B, C and D common
shares, with no par value. The Class A, B, C and D common shares were identical, except for an additional 0.001%
voting right attached to each Class B common share and no voting right attached to each Class D common share. The
Class A, B, C and D common shares ranked pari passu in all respects, including the right to receive dividends and
upon any distribution of our assets.
Prior to the completion of the IPO, we had 110,987,688 Class A common shares and 62,781,263 Class C
common shares issued and outstanding. In addition, there were 28,692,457 options (after giving effect to the
cancellation of 898,625 options upon closing), each exercisable for one common share, issued and outstanding.
Assuming exercise of all outstanding options, there would have been 202,461,408 common shares issued and
outstanding on a fully diluted basis.
Current Share Information
As of May 9, 2018, an aggregate of 56,434,240 Shares, 55,756,002 multiple voting shares and no preferred
shares are issued and outstanding. All of the issued and outstanding multiple voting shares are, directly or indirectly,
held or controlled by the principal shareholders. As of May 9, 2018, an aggregate of 12,475,874 options to acquire
Shares are outstanding.
Additional Information
Additional information relating to the Company, including the Company’s AIF, is available on SEDAR at
www.sedar.com. The Company’s Shares are listed for trading on the Toronto Stock Exchange (“TSX”) under the
symbol “ATZ”.
38
Aritzia Inc. Consolidated Financial Statements February 25, 2018 and February 26, 2017 (in thousands of Canadian dollars)39 May 10, 2018
Independent Auditor’s Report
To the Shareholders of Aritzia Inc.
We have audited the accompanying consolidated financial statements of Aritzia Inc. and its
subsidiaries, which comprise the consolidated statements of financial position as at February 25,
2018 and February 26, 2017 and the consolidated statements of operations, comprehensive income
(loss), changes in shareholders’ equity, and cash flows for the years then ended, and the related
notes, which comprise a summary of significant accounting policies and other explanatory
information.
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated
financial statements in accordance with International Financial Reporting Standards, and for such
internal control as management determines is necessary to enable the preparation of consolidated
financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our
audits. We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we comply with ethical requirements and plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial
statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the consolidated financial statements. The procedures selected depend on the
auditor’s judgment, including the assessment of the risks of material misstatement of the
consolidated financial statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the entity’s preparation and fair
presentation of the consolidated financial statements in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness
of accounting policies used and the reasonableness of accounting estimates made by management,
as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to
provide a basis for our audit opinion.
PricewaterhouseCoopers LLP
PricewaterhouseCoopers Place, 250 Howe Street, Suite 1400, Vancouver, British Columbia, Canada V6C 3S7
T: +1 604 806 7000, F: +1 604 806 7806
“PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership.
40
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the
financial position of Aritzia Inc. and its subsidiaries as at February 25, 2018 and February 26, 2017
and their financial performance and their cash flows for the years then ended in accordance with
International Financial Reporting Standards.
Signed “PricewaterhouseCoopers LLP”
Chartered Professional Accountants
41
Aritzia Inc.
Consolidated Statements of Financial Position
As at February 25, 2018 and February 26, 2017
(in thousands of Canadian dollars)
Assets
Current assets
Cash and cash equivalents
Accounts receivable
Inventory
Income taxes recoverable
Prepaid expenses and other current assets
Total current assets
--
Property and equipment
Intangible assets
Goodwill
Other assets
Deferred tax assets
Total assets
Liabilities
Current liabilities
Accounts payable and accrued liabilities
Income taxes payable
Current portion of lease obligations
Current portion of long-term debt
Deferred revenue
Total current liabilities
Other non-current liabilities
Deferred tax liabilities
Lease obligations
Long-term debt
Total liabilities
Shareholders’ Equity
Share capital
Contributed surplus
Retained earnings (deficit)
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
Commitments and contingencies (note 18)
Subsequent events (notes 18 and 23)
Note
February 25,
2018
February 26,
2017
$
5
6
7
7
16
$
8 $
6
10
9
16
6
10
12
$
$112,475 $
2,413
78,833
1,728
15,307
210,756
135,672
61,387
151,682
1,664
6,517
567,678 $
66,195 $
—
399
19,127
19,308
105,029
59,566
17,922
—
99,460
281,977
171,130
76,522
38,613
(564)
285,701
567,678 $
79,527
2,624
74,184
-
12,743
169,078
95,695
58,484
151,682
2,052
9,854
486,845
50,484
19,222
766
15,288
15,749
101,509
47,711
16,555
983
118,479
285,237
131,853
88,612
(18,480)
(377)
201,608
486,845
Approved by the Board of Directors
__________________Brian Hill Director
__________Marni Payne Director
The accompanying notes are an integral part of these consolidated financial statements.
42
Aritzia Inc.
Consolidated Statements of Operations
For the years ended February 25, 2018 and February 26, 2017
(in thousands of Canadian dollars, except number of shares and per share amounts)
Net revenue
Cost of goods sold
Gross profit
Operating expenses
Selling, general and administrative
Stock-based compensation expense
Income (loss) from operations
Finance expense
Other expense (income), net
Income (loss) before income taxes
Income tax expense
Net income (loss)
Net income (loss) per share
Basic
Diluted
Weighted average number of shares outstanding
(thousands)
Basic
Diluted
Note
February 25,
2018
February 26,
2017
$
743,267 $
667,181
15
447,776
401,658
295,491
265,523
13, 15
183,857
17,240
178,773
103,044
94,394
(16,294)
15
5,221
1,890
10,455
(1,362)
87,283
(25,387)
16
30,190
30,722
$
57,093 $
(56,109)
14 $
14
0.52 $
0.49
(0.54)
(0.54)
14
14
110,180
116,280
104,787
104,787
The accompanying notes are an integral part of these consolidated financial statements.
43
Aritzia Inc.
Consolidated Statements of Comprehensive Income (Loss)
For the years ended February 25, 2018 and February 26, 2017
(in thousands of Canadian dollars)
Net income (loss)
Other comprehensive loss
Items that are or may be reclassified subsequently to
net income:
Foreign currency translation adjustment
Comprehensive income (loss)
February 25,
2018
February 26,
2017
$
57,093 $
(56,109)
(187)
(59)
$
56,906 $
(56,168)
The accompanying notes are an integral part of these consolidated financial statements.
44
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45
Aritzia Inc.
Consolidated Statements of Cash Flows
For the years ended February 25, 2018 and February 26, 2017
(in thousands of Canadian dollars)
Operating activities
Net income (loss) for the year
Adjustments for:
Note
February 25,
2018
February 26,
2017
$
57,093 $
(56,109)
Depreciation and amortization
Finance expense
Stock-based compensation expense
Amortization of deferred rent
Amortization of deferred lease inducements
Unrealized foreign exchange gain on forward contracts
Other
Income tax expense
13, 15
11
16
Proceeds from deferred lease inducements
Cash generated before non-cash working capital balances and
interest and income taxes
22,844
5,221
17,240
8,370
(3,224)
(233)
(199)
30,190
7,077
144,379
Net change in non-cash working capital balances
20
13,013
Cash generated before interest and income taxes
Interest paid
Income taxes paid
Net cash generated from operating activities
Financing activities
Repayment of long-term debt
Repayment of lease obligations
Payment of financing fees
Proceeds from options exercised
Net cash used in financing activities
Investing activities
Purchase of property and equipment
Purchase of intangible assets
Net cash used in investing activities
Effect of exchange rate changes on cash and
cash equivalents
Increase in cash and cash equivalents
Cash and cash equivalents - Beginning of year
Cash and cash equivalents - End of year
Supplemental cash flow information (note 20)
10
6
10
13
6
7
157,392
(5,314)
(46,720)
105,358
(15,321)
(928)
-
10,275
(5,974)
(61,061)
(5,269)
(66,330)
(106)
32,948
79,527
$
112,475 $
The accompanying notes are an integral part of these consolidated financial statements.
21,129
10,455
103,044
2,866
(2,517)
(181)
-
30,722
8,064
117,473
20,814
138,287
(6,958)
(19,227)
112,102
(11,491)
(755)
(827)
8,013
(5,060)
(29,807)
(1,329)
(31,136)
35
75,941
3,586
79,527
46
Aritzia Inc.
Notes to Consolidated Financial Statements
February 25, 2018 and February 26, 2017
(in thousands of Canadian dollars, unless otherwise noted)
1 Nature of operations and basis of presentation
Nature of operations
Aritzia Inc. and its subsidiaries (collectively referred to as the “Company”) is a vertically integrated design
house of exclusive fashion brands. The Company designs apparel and accessories for its collection of
exclusive brands and sells them under the Aritzia banner. The Company’s range of women’s fashion
apparel and accessories addresses a range of style preferences and lifestyle requirements. As at February
25, 2018, there were 85 retail stores (February 26, 2017 – 79 retail stores).
Aritzia Inc. is a corporation governed by the Business Corporations Act (British Columbia). The address of
its registered office is 666 Burrard Street, Suite 1700, Vancouver, B.C., Canada, V6C 2X8. On August 10,
2016, the Company changed its name from Aritzia Capital Corporation to Aritzia Inc.
On October 3, 2016, the Company completed an initial public offering (the “IPO”) of its subordinate voting
shares through a secondary sale of shares by its principal shareholders.
The IPO of 25,000,000 subordinate voting shares at $16.00 per subordinate voting share raised gross
proceeds of $400.0 million for the selling shareholders. In addition, such shareholders of the Company
granted the underwriters an over-allotment option to purchase from the selling shareholders an additional
3,750,000 subordinate voting shares at an exercise price of $16.00 per subordinate voting share. The over-
allotment option was fully exercised after the IPO and raised additional gross proceeds of $60.0 million for
the selling shareholders. Underwriting fees were paid by the selling shareholders, and other expenses
related to the IPO of approximately $7.7 million were incurred and are being paid by the Company.
On January 26, 2017, the Company completed a secondary offering (the “Secondary Offering”) on a
bought deal basis of its subordinate voting shares through a secondary sale of shares by certain
shareholders, as well as a concurrent block trade by a group of employees of the Company (the
“Concurrent Block Trade”).
The Secondary Offering of 20,100,000 subordinate voting shares and the sale of 1,788,366 subordinate
voting shares through the Concurrent Block Trade raised gross proceeds of $382.0 million for the selling
shareholders, at a price of $17.45 per subordinate voting share. Underwriting fees were paid by the selling
shareholders, and other expenses related to the Secondary Offering of approximately $0.8 million were
incurred and paid by the Company.
The Company’s subordinate voting shares are listed on the Toronto Stock Exchange under the stock
symbol “ATZ”.
47
Aritzia Inc.
Notes to Consolidated Financial Statements
February 25, 2018 and February 26, 2017
(in thousands of Canadian dollars, unless otherwise noted)
Basis of preparation
The Company’s fiscal year-end is the Sunday closest to the last day of February, typically resulting in a 52-
week year, but occasionally giving rise to an additional week, resulting in a 53-week year, which last
occurred in fiscal 2013. All references to 2018 and 2017 represent the fiscal years ended February 25,
2018 and February 26, 2017, respectively.
Seasonality of operations
The Company’s business is affected by the pattern of seasonality common to most retail apparel
businesses. Historically, the Company has recognized a significant portion of its operating profit in the third
and fourth fiscal quarters of each year as a result of increased net revenue during the back-to-school and
holiday season.
Statement of compliance
The consolidated financial statements of the Company have been prepared in accordance with
International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards
Board (“IASB”). The consolidated financial statements have been prepared on a historical cost basis, except
for derivative instruments, the cash-settled legacy option plan and Deferred Share Units (“DSUs”) as
disclosed in the accounting policies set out in note 2.
These consolidated financial statements were authorized for issue by the Board of Directors on May 10,
2018.
2 Summary of significant accounting policies
Principles of consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned
subsidiaries, including Aritzia LP and United States of Aritzia Inc. All intercompany transactions and
balances are eliminated on consolidation, and consistent accounting policies are applied across the
Company.
Functional and presentation currency
The functional currency for each entity included in these consolidated financial statements is the currency of
the primary economic environment in which the entity operates. These consolidated financial statements
are presented in Canadian dollars, which is the Company’s functional currency.
U.S. operations
Assets and liabilities of the Company’s U.S. operations have a functional currency of U.S. dollars and are
translated into Canadian dollars at the exchange rate in effect at the reporting date. Revenues and
48
Aritzia Inc.
Notes to Consolidated Financial Statements
February 25, 2018 and February 26, 2017
(in thousands of Canadian dollars, unless otherwise noted)
expenses are translated into Canadian dollars at average exchange rates during the reporting period. The
resulting unrealized translation gains or losses are included in other comprehensive income (loss).
Translation of other foreign currency transactions and balances
Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated into
the functional currencies at the exchange rate at that date. Other consolidated statement of financial
position items denominated in foreign currencies are translated into the functional currencies at the
exchange rate prevailing at the respective transaction dates. Revenues and expenses denominated in
foreign currencies are translated into the functional currencies at average exchange rates during the
period. The resulting gains or losses on translation are included in the determination of net income (loss).
Cash and cash equivalents
Cash and cash equivalents comprise cash on hand and term deposits with an original maturity of less than
three months. At February 25, 2018, the Company had $108.3 million in cash held in term deposits
classified as cash equivalents (February 26, 2017 - $68.8 million).
Accounts receivable
Accounts receivable primarily comprise landlord lease inducement receivables and duty drawback
receivables from the relevant governmental authorities. The Company records a landlord lease inducement
receivable when the Company has fulfilled certain requirements under the lease agreement to be eligible
to receive cash. An allowance for doubtful accounts represents management’s best estimate of probable
credit losses in accounts receivable. Receivables are written off against the allowance when management
believes that the amount receivable will not be recovered. At February 25, 2018 and February 26, 2017,
the Company recorded no allowance for doubtful accounts.
Prepaid expenses and other current assets
Prepaid expenses and other current assets comprise prepaid expenses, deposits and packaging supplies.
Inventory
Inventory, consisting of finished goods, is stated at lower of cost and net realizable value. Cost is
determined using weighted average costs. Cost of inventories includes the cost of merchandise and all
costs incurred to deliver inventory to the Company’s distribution centres including freight and duty.
The Company periodically reviews its inventories and makes provisions as necessary to appropriately value
obsolete or damaged goods. In addition, as part of inventory valuations, the Company accrues for
inventory shrinkage for lost or stolen items based on historical trends.
49
Aritzia Inc.
Notes to Consolidated Financial Statements
February 25, 2018 and February 26, 2017
(in thousands of Canadian dollars, unless otherwise noted)
Property and equipment
Property and equipment are measured at cost less accumulated depreciation and accumulated impairment
losses. Cost includes expenditures that are directly attributable to the acquisition of the asset, including any
costs directly attributable to bringing the asset to a working condition for its intended use. Purchased
software that is integral to the functionality of the related equipment is capitalized as part of that
equipment.
The Company capitalizes borrowing costs incurred as part of the financing of the acquisition and
construction of property and equipment. Maintenance and repairs are expensed as incurred. Cost and
related accumulated depreciation for property and equipment are removed from the accounts upon their
sale or disposition and the resulting gain or loss is reflected in the results of operations.
Depreciation is recognized in net income (loss) on a straight-line basis over the estimated useful lives of
each component of an item of property and equipment, commencing when the assets are ready for use,
as follows:
Computer hardware and software
Furniture and equipment
Leasehold improvements
3 - 10 years
3 - 10 years
shorter of lease term and
estimated useful life
Estimates of useful lives, residual values and methods of depreciation are reviewed annually. Any changes
are accounted for prospectively as a change in accounting estimate. Depreciation expense is recorded in
the consolidated statements of operations in cost of goods sold and selling, general and administrative
expenses.
Intangible assets
Intangible assets are recorded at cost and include trade names, trademarks, non-competition agreements,
retail leases and internally developed computer software.
Significant costs to purchase any trademarks from third parties are capitalized and amortized over the
useful lives of the assets. Cost includes all expenditures that are directly attributable to the acquisition or
development of the asset.
The Company capitalizes, in intangible assets, direct costs incurred during the application and
infrastructure development stages of developing computer software for internal use. All costs incurred
during the preliminary project stage, including project scoping, identification and testing of alternatives,
are expensed as incurred.
50
Aritzia Inc.
Notes to Consolidated Financial Statements
February 25, 2018 and February 26, 2017
(in thousands of Canadian dollars, unless otherwise noted)
The Aritzia trade name has been determined to have an indefinite life and is not amortized. The remaining
intangible assets are amortized on a straight-line basis over their estimated useful lives as follows:
Other trade names and trademarks
Retail leases included in other intangible
assets
Computer software
term of registration or up to a
maximum of 20 years
term of lease
3 - 7 years
Estimates of useful lives, residual values and methods of amortization are reviewed annually. Any changes
are accounted for prospectively as a change in accounting estimate. Amortization expense is recorded in
the consolidated statements of operations in cost of goods sold and selling, general and administrative
expenses.
Goodwill
Goodwill represents non-identifiable intangible assets acquired on business combinations.
Impairment of assets
Goodwill and intangible assets that have an indefinite useful life are not subject to amortization and are
tested annually for impairment, or more frequently if events or changes in circumstances indicate that they
might be impaired. Other assets are tested for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount
by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the
higher of an asset’s fair value less costs of disposal and value in use. For the purposes of assessing
impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows
which are largely independent of the cash inflows from other assets or groups of assets (cash-generating
unit or “CGU”). Non-financial assets, other than goodwill, that suffered an impairment are reviewed for
possible reversal of the impairment at the end of each reporting period.
Leases
Leases are classified as either operating or finance, based on the substance of the transaction at inception
of the lease. Classification is reassessed if the terms of the lease are changed.
51
Aritzia Inc.
Notes to Consolidated Financial Statements
February 25, 2018 and February 26, 2017
(in thousands of Canadian dollars, unless otherwise noted)
Operating leases
Leases in which a significant portion of the risks and rewards of ownership are not assumed by the
Company are classified as operating leases. The Company carries on its operations in premises under
leases of varying terms, which are accounted for as operating leases. Operating leases are recorded on a
straight-line basis over the term of the lease beginning on the possession date. Accordingly, reasonably
assured rent escalations are amortized over the lease term, and free-rent periods are allocated to a portion
of rent expense. The difference between the recognized rental expense and the total rental payments is
reflected in the consolidated statements of financial position as a deferred lease liability. Contingent rental
payments based on sales volumes are recorded in the period in which the sales occur.
Tenant allowances are recorded as deferred lease credits on the consolidated statements of financial
position and amortized as a reduction of rent expense over the term of the respective leases.
Finance leases
Finance leases are capitalized at the commencement of the lease at the inception-date fair value of the
leased property or, if lower, at the present value of the minimum lease payments. Lease payments are
apportioned between finance charges and reduction of the lease liability so as to achieve a constant rate of
interest on the remaining balance of the liability. Finance charges are recognized in finance expense in the
consolidated statements of operations. An asset under a finance lease is depreciated over the shorter of the
useful life of the asset and the lease term.
Provisions
Provisions are recognized when the Company has a present legal or constructive obligation as a result of a
past event, it is probable that an outflow of economic benefits will be required to settle the obligation, and
a reliable estimate can be made of the amount of the obligation. If the effect of the time value of money is
material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risks
specific to the liability. Where discounting is used, the increase in the provision due to the passage of time
is recognized as a finance cost.
An asset retirement obligation is a legal obligation associated with the retirement of tangible long-lived
assets that the Company may be required to settle. The Company’s asset retirement obligations are
primarily associated with leasehold improvements that the Company is contractually obligated to remove
at the end of a lease. At inception of a lease with such conditions, the Company recognizes the best
estimate of the fair value of the liability, with a corresponding increase in the carrying value of the related
asset. The liability, recorded in other non-current liabilities, is estimated based on a number of assumptions
requiring management’s judgment, including store closing costs, cost inflation rates and discount rates,
and is accreted to its projected future value over time. The capitalized asset is depreciated over its useful
life. Upon satisfaction of the asset retirement obligation conditions, differences between the recorded asset
retirement obligation liability and the actual retirement costs incurred are recognized as a gain or loss in
the consolidated statements of operations.
52
Aritzia Inc.
Notes to Consolidated Financial Statements
February 25, 2018 and February 26, 2017
(in thousands of Canadian dollars, unless otherwise noted)
Financial instruments
Financial assets and financial liabilities are recognized when the Company becomes a party to the
contractual provision of the financial instrument. Financial assets are derecognized when the contractual
rights to receive cash flows from the financial asset expire and financial liabilities are derecognized when
obligations under the contract expire, are discharged or cancelled. All financial instruments upon initial
recognition are measured at fair value and are classified as financial assets or financial liabilities at fair value
through profit or loss (“FVTPL”), loans and receivables, other financial liabilities or derivative instruments.
Loans and receivables and other financial liabilities are measured at amortized cost and derivative
instruments are measured at FVTPL. The following classifications have been applied:
cash and cash equivalents and accounts receivable are classified as loans and receivables;
bank indebtedness, accounts payable and accrued liabilities, lease obligations and long-term debt are
classified as other financial liabilities; and
foreign currency forward contracts are classified as financial assets or financial liabilities at FVTPL.
Bank indebtedness and long-term debt are initially recognized at fair value, net of recognized transaction
costs, and subsequently measured at amortized cost using the effective interest rate method.
Financial assets and financial liabilities are measured at fair value using a valuation hierarchy for disclosure
of fair value measurements. The determination of the applicable level within the hierarchy of a particular
asset or liability depends on the inputs used in the valuation as of the measurement date, notably the
extent to which the inputs are market-based (observable) or internally derived (unobservable). Observable
inputs are inputs that market participants would use in pricing the asset or liability based on market data
obtained from independent sources. Unobservable inputs are inputs based on a company’s own
assumptions about market participant assumptions using the best information available. The hierarchy is
broken down into three levels based on the reliability of inputs as follows:
Level 1 - Valuations based on quoted prices in active markets for identical assets or liabilities that a
company has the ability to access at the measurement date.
Level 2 - Valuations based on quoted inputs other than quoted prices included within Level 1, that are
observable for the asset or liability, either directly or indirectly through corroboration with observable
market data.
Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value
measurement.
53
Aritzia Inc.
Notes to Consolidated Financial Statements
February 25, 2018 and February 26, 2017
(in thousands of Canadian dollars, unless otherwise noted)
Offsetting financial instruments
Financial assets and financial liabilities are offset and the net amount is reported in the consolidated
statements of financial position when there is a legally enforceable right to offset the recognized amounts
and there is an intention to settle on a net basis or to realize the asset and settle the liability simultaneously.
Share capital
Multiple voting shares and subordinate voting shares are classified as shareholders’ equity. Incremental
costs directly attributable to the issuance of shares are shown in equity as a deduction, net of tax, from the
proceeds of the issuance. When share capital recognized as equity is re-purchased for cancellation, the
amount of consideration paid, which includes directly attributable costs, net of tax, is recognized as a
deduction from equity. The excess of the purchase price over the carrying amount of the shares is charged
to retained earnings.
Revenue recognition
Net revenue reflects the Company’s sales of merchandise, less returns and discounts. Retail revenue is
recognized when the customer receives and pays for the merchandise at the point of sale, net of an
estimated allowance for returns. For merchandise that is ordered and paid in a store and subsequently
picked up by the customer, revenue is deferred until the customer receives the merchandise. eCommerce
revenue is recognized at the estimated date of receipt of the merchandise by the customer, net of an
estimated allowance for returns. Revenues are reported net of sales taxes collected from various
governmental agencies.
Receipts from the sale of gift cards are treated as deferred revenue. When gift cards are redeemed for
merchandise, the Company recognizes the related revenue. The Company estimates gift card breakage, to
the extent management determines there is no requirement for remitting card balances to government
agencies under unclaimed property laws, and recognizes revenue in proportion to actual gift card
redemptions as a component of net revenue.
The Company recognizes promotional gift cards as a reduction of revenue upon redemption.
Cost of goods sold
Cost of goods sold includes inventory and product-related costs and occupancy costs, as well as
depreciation expense for the Company’s stores and distribution centres.
Selling, general and administrative
Selling, general and administrative expenses consist of selling expenses that are generally variable with
revenues and general and administrative operating expenses that are primarily fixed. Selling, general and
administrative expenses also include depreciation and amortization expense for all support office assets
and intangible assets.
54
Aritzia Inc.
Notes to Consolidated Financial Statements
February 25, 2018 and February 26, 2017
(in thousands of Canadian dollars, unless otherwise noted)
Store opening costs
Store opening costs are expensed as incurred.
Employee benefits
Short-term employee benefit obligations, which include wages, salaries, compensated absences and
bonuses, are expensed as the related service is provided.
Termination benefits are recognized as an expense when the Company has demonstrated commitment,
without realistic possibility of withdrawal, to a formal detailed plan to terminate employment before the
normal retirement date.
Income tax expense
Current and deferred income taxes are recognized in the Company’s net income (loss), except to the extent
that they relate to a business combination or items recognized directly in equity or other comprehensive
income (loss).
Current taxes are recognized for the estimated taxes payable or receivable on taxable income or loss for
the current year and any adjustment to income taxes payable in respect of previous years. Current income
taxes are determined using tax rates and tax laws that have been enacted or substantively enacted by the
year-end date.
Deferred tax assets and liabilities are recognized where the carrying amount of an asset or liability differs
from its tax base, except for taxable temporary differences arising on the initial recognition of goodwill and
temporary differences arising on the initial recognition of an asset or liability in a transaction that is not a
business combination, and at the time of the transaction affects neither accounting nor taxable income or
loss. In addition, deferred tax liabilities are not recognized for taxable temporary differences arising on
investments in subsidiaries, associates and joint ventures where the reversal of the temporary difference
can be controlled and it is probable that the difference will not reverse in the foreseeable future. The
amount of deferred tax provided is based on the expected manner of realization or settlement of the
carrying amount of the asset and liability, using tax rates enacted or substantively enacted at the year-end
date.
A deferred tax asset is recognized for unused tax losses, tax credits and deductible temporary differences,
to the extent that it is probable that future taxable profits will be available against which they can be
utilized. The carrying amount of deferred tax assets is reviewed at each statement of financial position date
and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to
allow all or part of the asset to be recovered.
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset
current tax assets against current tax liabilities and when the deferred income tax assets and liabilities
relate to income tax levied by the same taxation authority on either the taxable entity or different taxable
entities where there is an intention to settle the balances on a net basis.
55
Aritzia Inc.
Notes to Consolidated Financial Statements
February 25, 2018 and February 26, 2017
(in thousands of Canadian dollars, unless otherwise noted)
Stock-based compensation expense
Stock Option Plans
The Company has a legacy Equity Incentive Plan (the “Legacy Plan”) pursuant to which it has granted time-
based and performance-based stock options to directors, employees, consultants and advisors. Concurrent
with the IPO, the Company amended and restated the Legacy Plan to comply with public company
provisions as required by the Toronto Stock Exchange. The Company also implemented a new stock option
plan (the “2016 Option Plan”), pursuant to which it can grant time-based stock options to acquire
subordinate voting shares to directors, executive officers, employees and consultants.
The Legacy Plan in effect prior to the IPO provided that the Board of Directors, at its sole discretion, could
elect to settle vested time-based options in cash upon the request of an option holder under certain
circumstances. As a result of the Company having historically cash-settled vested time-based options for
certain option holders prior to the IPO, the Company was considered to have a cash-settled plan.
Prior to the IPO, as a cash-settled plan, the Company was required to record a liability for the potential
future settlement of the vested time-based options at each reporting date by reference to the fair value of
the liability. The liability was adjusted each reporting period for changes in the fair value of the options,
with the corresponding amount reflected in the consolidated statements of operations. The fair value of the
liability was determined using the Black-Scholes option pricing model.
The Company had both time-based and performance-based options prior to the IPO. After the IPO, the
Company has only time-based options. For awards with service conditions that are subject to graded
vesting, compensation cost is recognized on a straight-line basis over the requisite service period for each
separately vesting portion of the award as if the award was, in substance, multiple awards. In addition, the
total amount of compensation expense to be recognized is based on the number of awards expected to
vest and is adjusted to reflect those awards that do ultimately vest. For awards with performance
conditions, the Company recognizes the compensation expense if and when the Company concludes that it
is probable that the performance conditions will be achieved. The Company reassesses the probability of
achieving the performance conditions at each reporting date.
Deferred Share Units
In conjunction with the IPO, the Company adopted the Director Deferred Share Unit Program for
non-employee board members. DSUs are grants of notional subordinate voting shares that are redeemable
for cash based on the market value of the Company’s shares and are non-dilutive to shareholders. The cost
of the service received as consideration is initially measured based on the market value of the Company’s
shares at the date of grant. The grant-date fair value is recognized as stock-based compensation expense
with a corresponding increase recorded in other liabilities. DSUs are remeasured at each reporting date
based on the market value of the Company’s shares with changes in fair value recognized as stock-based
compensation expense for the proportion of the service that has been rendered at that date.
56
Aritzia Inc.
Notes to Consolidated Financial Statements
February 25, 2018 and February 26, 2017
(in thousands of Canadian dollars, unless otherwise noted)
Net income (loss) per share
Basic net income (loss) per share is calculated by dividing the net income (loss) for the fiscal year
attributable to shareholders of the Company by the weighted average number of multiple voting shares
and subordinate voting shares outstanding during the year.
In calculating diluted net income (loss) per share for options that can be settled in either shares or cash, the
more dilutive of the cash-settled and equity-settled method is used. Diluted net income (loss) per share,
assuming cash settlement, is calculated consistent with basic net income (loss) per share, as the accounting
for the liability is based on the fair value alternative and cash settlement would not result in the issuance of
additional equity instruments. Diluted net income (loss) per share, assuming equity settlement, is calculated
for dilutive share options by adjusting the numerator to reflect what income would have been if the grant
date fair value was reflected in net income and by adjusting the denominator by the weighted average
number of shares that would be included under the treasury stock method.
3 Significant new accounting standards
Standards recently adopted
In December 2014, the IASB issued amendments to International Accounting Standard (“IAS”) 1,
“Presentation of Financial Statements”, as part of its major initiative to improve presentation and disclosure
in financial reports (the “Disclosure Initiative”). These amendments will not require any significant change to
current practice, but should facilitate improved financial statement disclosures. The amendments are
effective for annual periods beginning on or after January 1, 2016. The Company adopted IAS 1 for its
consolidated financial statements during the year ended February 26, 2017, and no material changes have
been made as a result of this amendment to IAS 1.
In January 2016, the IASB issued amendments to IAS 7, “Statement of Cash Flows”, which are effective for
annual periods beginning on or after January 1, 2017. The amendments clarify that entities shall provide
disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing
activities. The Company adopted amendments to IAS 7 for its consolidated financial statements during the
year ended February 25, 2018. Implementation of the standard has not had a material effect on the
consolidated financial statements.
Standards issued but not yet adopted
In May 2014, the IASB issued IFRS 15, “Revenue from Contracts with Customers”. The new standard
contains a single model that applies to contracts with customers and two approaches to recognizing
revenue: at a point in time or over time. The model features a contract-based five-step analysis of
transactions to determine whether, how much and when revenue is recognized. New estimates and
judgmental thresholds have been introduced, which may affect the amount and/or timing of revenue
recognized. IFRS 15 is effective for annual periods beginning on or after January 1, 2018, with early
application permitted. The implementation of the standard is not expected to have a material quantitative
impact on the consolidated financial statements. The Company is currently evaluating the effects of
57
Aritzia Inc.
Notes to Consolidated Financial Statements
February 25, 2018 and February 26, 2017
(in thousands of Canadian dollars, unless otherwise noted)
disclosure requirements of IFRS 15 on its consolidated financial statements and expects to apply the
standard in accordance with its future mandatory effective date.
In July 2014, the IASB issued the final version of IFRS 9, “Financial Instruments”, which reflects all phases of
the financial instruments project and replaces IAS 39, “Financial Instruments: Recognition and
Measurement”, and all previous versions of IFRS 9. The new standard introduces new requirements for
classification and measurement, impairment and hedge accounting. IFRS 9 is effective for annual periods
beginning on or after January 1, 2018, with early application permitted. The Company has determined that
the adoption of IFRS 9 will have no material impact on its consolidated financial statements with respect to
its historical debt modifications. The Company is currently evaluating the effects of the disclosure
requirements of IFRS 9 on its consolidated financial statements and expects to apply the standard in
accordance with its future mandatory effective date.
In January 2016, the IASB issued IFRS 16, “Leases”, which sets out a new model for lease accounting
replacing IAS 17. The standard introduces a single lessee accounting model and requires a lessee to
recognize assets and liabilities for all leases with a term of more than 12 months, unless the underlying
asset is of low value. A lessee is required to recognize a right-of-use asset representing its right to use the
underlying asset and a lease liability representing its obligation to make lease payments. Lessors continue
to classify leases as finance and operating leases. Other areas of the lease accounting model have been
impacted, including the definition of a lease. Transitional provisions have been provided. IFRS 16 is
effective for annual periods beginning on or after January 1, 2019, and is to be applied retrospectively.
Early adoption is permitted if IFRS 15 has been adopted. While the Company is currently evaluating the
impact this new guidance will have on its consolidated financial statements, the recognition of certain
leases is expected to increase the assets and liabilities on the consolidated statement of financial position
upon adoption. As a result, the Company expects IFRS 16 to have a fundamental change on the
consolidated statements of financial position. The Company expects to apply the standard in accordance
with its future mandatory effective date.
In June 2016, the IASB issued amendments to IFRS 2, “Share-based Payment”, clarifying how to account for
certain types of share-based payment transactions. The amendments provide requirements on the
accounting for: the effects of vesting and non-vesting conditions on the measurement of cash-settled share-
based payments; share-based payment transactions with a net settlement feature for withholding tax
obligations; and a modification to the terms and conditions of a share-based payment that changes the
classification from cash-settled to equity-settled. The amendments to IFRS 2 are effective prospectively for
annual periods beginning on or after January 1, 2018, with early application permitted. The Company has
determined that the adoption of IFRS 2 will have no material impact on its consolidated financial
statements.
58
Aritzia Inc.
Notes to Consolidated Financial Statements
February 25, 2018 and February 26, 2017
(in thousands of Canadian dollars, unless otherwise noted)
4 Critical accounting estimates and judgments
The preparation of consolidated financial statements in accordance with IFRS requires management to
make judgments, estimates and assumptions that affect the application of accounting policies and the
reported amounts of assets, liabilities, income and expenses. Estimates and assumptions are continuously
evaluated and are based on management’s best judgments and experience and other factors, including
expectations of future events that are believed to be reasonable under the circumstances. Revisions to
accounting estimates are recognized in the period in which the estimates are revised and in any future
periods affected. Actual results may differ from these estimates.
Significant judgments and estimates made by management in the process of applying accounting policies
and that have the most significant effect on the amounts recognized in the consolidated financial
statements include the following:
The provision recorded to remeasure inventories based on the lower of cost and net realizable value
(note 5), which is a critical estimate.
Property and equipment impairment testing, which is influenced by judgment in defining a CGU and
determining the indicators of impairment, and estimates used to measure impairment losses, if any
(note 6). These estimates include future cash flow projections, growth rates and discount rates.
Goodwill and indefinite life intangible asset impairment testing, which requires management to make
critical estimates in the impairment testing model. On an annual basis, the Company tests whether
goodwill and indefinite life intangible assets are impaired. The recoverable value is determined using
discounted future cash flow models, which incorporate assumptions regarding future events,
specifically future cash flows, growth rates and discount rates (note 7).
Stock-based compensation expense, which requires the use of estimates in the Black-Scholes option
pricing model (note 13). The classification of stock options as an equity-settled or cash-settled plan is
influenced by judgment in determining the expected settlement of the option. Judgement is also
required in determining the timing of expense recognition for performance-based options.
Income taxes, which requires judgment to determine when tax losses, credits and provisions are
recognized based on tax rules in various jurisdictions (note 16).
59
Aritzia Inc.
Notes to Consolidated Financial Statements
February 25, 2018 and February 26, 2017
(in thousands of Canadian dollars, unless otherwise noted)
5
Inventory
Finished goods
Finished goods in transit
February 25,
2018
February 26,
2017
$
$
60,385 $
18,448
68,620
5,564
78,833 $
74,184
The Company records a reserve to value inventory to its estimated net realizable value. This resulted in an
expense in cost of goods sold of $2.0 million for the year ended February 25, 2018 (February 26, 2017 -
$2.6 million). No inventory write-downs recorded in previous periods were reversed.
All of the Company’s inventory is pledged as security for the Credit Facilities (note 10).
6 Property and equipment
Leasehold
improvements
Furniture
and
equipment
Computer
hardware
Computer
software
Construction-
in-
progress
Total
Cost
Balance, February 28, 2016 $
Additions
Transfers from construction-
in-progress
Dispositions
Foreign exchange
Balance, February 26, 2017
Additions
Transfers from construction-
in-progress
Dispositions
Foreign exchange
116,979 $
15,339
25,999 $
4,920
18,366 $
1,479
6,510 $
919
4,077 $
11,323
171,931
33,980
595
(50)
(1,558)
173
(16)
(239)
4
(9,135)
(592)
131,305
29,906
30,837
7,317
10,122
4,000
9,844
-
(1,450)
718
(337)
(321)
355
(1,784)
(68)
35
(24)
688
8,128
981
8
(2,847)
(149)
(807)
-
(111)
-
(9,225)
(1,812)
14,482
20,194
194,874
62,398
(10,925)
-
(402)
-
(4,968)
(2,390)
Balance, February 25, 2018 $
169,605 $
38,214 $
12,625 $
6,121 $
23,349 $
249,914
Accumulated depreciation
Balance, February 28, 2016 $
Depreciation
Dispositions
Foreign exchange
Balance, February 26, 2017
Depreciation
Dispositions
Foreign exchange
55,425 $
12,856
(50)
(859)
67,372
13,846
-
(849)
15,676 $
3,211
(16)
(155)
18,716
3,465
(185)
(180)
14,768 $
1,652
(9,135)
(75)
7,210
2,300
(1,679)
(66)
4,572 $
1,219
(24)
114
5,881
1,321
(2,770)
(140)
- $
-
-
-
-
-
-
-
90,441
18,938
(9,225)
(975)
99,179
20,932
(4,634)
(1,235)
Balance, February 25, 2018 $
80,369 $
21,816 $
7,765 $
4,292 $
- $
114,242
Net carrying value
Balance, February 25, 2018 $
Balance, February 26, 2017
89,236 $
63,933
16,398 $
12,121
4,860 $
2,912
1,829 $
2,247
23,349 $
14,482
135,672
95,695
Construction-in-progress includes store build costs for stores not yet opened and support office projects
not put into use.
60
Aritzia Inc.
Notes to Consolidated Financial Statements
February 25, 2018 and February 26, 2017
(in thousands of Canadian dollars, unless otherwise noted)
During the year ended February 25, 2018, interest of $239 was capitalized to assets under construction
(February 26, 2017 - $208). These interest costs relating to qualifying assets were capitalized at a weighted
average rate of 3.21% (February 26, 2017 - 3.97%).
As at February 25, 2018, an amount of $1.3 million (February 26, 2017 - $2.8 million) of the furniture and
equipment, computer hardware and computer software was held under finance leases. Accumulated
depreciation relating to this property and equipment amounted to $1.0 million (February 26, 2017 - $1.5
million).
Minimum annual payments for the Company’s finance lease obligations are as follows:
2019
Thereafter
Total minimum lease payments
Less: amount representing interest
7 Goodwill and intangible assets
$
$
408
-
408
(9)
399
Indefinite life
trade name
Definite life
trade name
Trademarks
Computer
software
Other
intangible
assets
Total
intangible
assets
Goodwill
$
46,092 $
-
17,175 $
-
1,709 $
-
19,834 $
2,076
3,519 $
-
88,329 $
2,076
151,682
-
46,092
-
17,175
-
1,709
-
21,910
4,815
3,519
-
90,405
4,815
151,682
-
Cost
Balance, February
28, 2016
Additions
Balance, February
26, 2017
Additions
Balance, February
25, 2018
$
46,092 $
17,175 $
1,709 $
26,725 $
3,519 $
95,220 $
151,682
Accumulated
amortization
Balance, February
28, 2016
Amortization
Balance, February
26, 2017
Amortization
Balance, February
25, 2018
Net carrying value
Balance, February
25, 2018
Balance, February
26, 2017
$
$
$
- $
-
-
-
8,864 $
719
1,709 $
-
15,715 $
1,395
3,519 $
-
29,807 $
2,114
9,583
657
1,709
-
17,110
1,255
3,519
-
31,921
1,912
- $
10,240 $
1,709 $
18,365 $
3,519 $
33,833 $
-
-
-
-
-
46,092 $
6,935 $
- $
8,360 $
- $
61,387 $
151,682
46,092
7,592
-
4,800
-
58,484
151,682
61
Aritzia Inc.
Notes to Consolidated Financial Statements
February 25, 2018 and February 26, 2017
(in thousands of Canadian dollars, unless otherwise noted)
Until December 19, 2005, the operations of the Company were owned by a private, closely held Canadian
company. On December 19, 2005, a company owned by funds managed by Berkshire Partners LLC
(“Berkshire”) purchased the majority of the operations through a newly created company, Aritzia Capital
Corporation. The acquisition transaction was treated as a business combination and the identified assets
and liabilities that were acquired were measured at their acquisition date fair values, including goodwill
and the indefinite life trade name.
Goodwill and the indefinite life trade name are monitored and allocated to the group of CGUs at a country
level, based on the expected future benefits to be derived.
In assessing goodwill and the indefinite life trade name for impairment, the Company compared the
aggregate recoverable amount of the assets included in each of the CGUs to their respective carrying
amounts. The recoverable amounts have been determined based on the higher of the value in use and fair
value less costs of disposal. The Company performed its annual impairment test of goodwill and the
indefinite life trade name on the first day of the fourth quarter in fiscal 2018 and fiscal 2017.
The recoverable amount of goodwill and the indefinite life trade name was based on value in use,
calculated using discounted cash flows over five years with a terminal value generated from continuing use
of the CGUs. Cash flows were projected based on actual operating results and growth assumptions of
2.00% to account for what management believes approximates inflationary increases. A pre-tax discount
rate of 15.91% was used in the model.
As at February 25, 2018 and February 26, 2017, management has determined that there was no
impairment of goodwill or the indefinite life trade name.
8 Accounts payable and accrued liabilities
Trade accounts payable
Other non-trade payables
Employee benefits payable
February 25,
2018
February 26,
2017
$
$
43,443 $
6,709
16,043
30,028
6,182
14,274
66,195 $
50,484
62
Aritzia Inc.
Notes to Consolidated Financial Statements
February 25, 2018 and February 26, 2017
(in thousands of Canadian dollars, unless otherwise noted)
9 Other non-current liabilities
Deferred lease liability
Deferred lease inducements
Asset retirement obligations
Director Deferred Share Unit Program liability (note 13)
10 Bank indebtedness and long-term debt
February 25,
2018
February 26,
2017
$
37,529 $
20,617
916
504
29,970
16,675
889
177
$
59,566 $
47,711
Concurrent with the closing of the IPO in the year ended February 26, 2017, the Company amended its
term loan and revolving credit facility (collectively the “Credit Facilities”) with its syndicate of lenders. The
amendments included allowing the Company to enter into bilateral letters of credit agreements of up to
$75.0 million within different lenders, lowering the applicable margin on interest rates and amending other
terms and conditions. As a result of the amendments, the Company wrote off financing fees of $2.9 million
related to the previous credit facilities in finance expense for the year ended February 26, 2017 (note 15).
a) Long-term debt
Term loan
Less: Deferred financing fees
Term loan, net of deferred financing fees
Less: Current portion
Long-term debt
February 25,
2018
February 26,
2017
$
118,738 $
(151)
118,587
(19,127)
134,059
(292)
133,767
(15,288)
$
99,460 $
118,479
The Company has a term loan of $118.7 million (February 26, 2017 - $134.1 million) that matures on
May 13, 2019. The Company has the option to borrow using Banker’s Acceptance borrowings (“BA”),
LIBO rate borrowings (“LIBO”), or Canadian prime rate borrowings (“Prime”) plus a marginal interest
rate between 0.75% and 3.00% (February 26, 2017 – 0.75% and 3.00%).
During the year ended February 25, 2018, the Company incurred $4.1 million of interest (February 26,
2017 - $5.6 million), at a weighted average rate of 3.21% (February 26, 2017 – 3.97%). At February 25,
2018, the interest rate on the loan was 3.58% (February 26, 2017 - 2.95%), based on a one-month BA
rate.
63
Aritzia Inc.
Notes to Consolidated Financial Statements
February 25, 2018 and February 26, 2017
(in thousands of Canadian dollars, unless otherwise noted)
The term loan requires mandatory loan prepayments by the Company of principal and interest if
certain events occur. At February 25, 2018 and February 26, 2017, the Company was not required to
make a mandatory loan prepayment.
The Company defers third party costs and creditor fees directly associated with acquiring long-term
debt. These deferred costs are classified against long-term debt and bank indebtedness and are
amortized as finance expense over the expected life of the related indebtedness using the effective
interest rate method.
b) Bank indebtedness
As at February 25, 2018, the Company has a revolving credit facility for operations of $70 million
(February 26, 2017 - $70.0 million). The revolving credit facility bears interest at BA, LIBO or Prime plus
a marginal rate between 0.75% and 3.00% (February 26, 2017 – 0.75% and 3.00%). The amount
available under this facility is reduced by certain open letters of credit (note 18(c)) to $54.1 million
(February 26, 2017 - $50.7 million). Up to $5.0 million of the facility can be drawn upon by way of a
swingline loan. The swingline loan bears interest at Prime plus a marginal rate between 0.75% and
2.00%. At February 25, 2018 and February 26, 2017, no advances were made under this facility.
During the year ended February 25, 2018, the Company incurred interest of $nil (February 26, 2017 -
$0.1 million at an average rate of 5.20%) related to the revolving credit facility.
During the year ended February 25, 2018, the Company entered into $75.0 million of trade finance
agreements for letters of credit, secured pari passu with the Credit Facilities. The interest rate for the
letters of credit is between 1.17% and 2.00%. The amount available under these facilities is reduced by
certain open letters of credit (note 18(c)) to $70.0 million (February 26, 2017 - $nil).
The Credit Facilities are collateralized by a first priority lien on all assets, leased real property interests and
inventory. In addition, the Company is to maintain certain financial covenants. At February 25, 2018 and
February 26, 2017, the Company was in compliance with all financial covenants.
64
Aritzia Inc.
Notes to Consolidated Financial Statements
February 25, 2018 and February 26, 2017
(in thousands of Canadian dollars, unless otherwise noted)
11 Derivative financial instruments
The Company uses foreign currency forward contracts to manage its exposure to fluctuations with respect
to the U.S. dollar for U.S. dollar merchandise purchases sold in Canada. The fair value of the forward
contracts is included in prepaid expenses and other current assets or in accounts payable and accrued
liabilities in the consolidated statements of financial position, depending on whether they represent assets
or liabilities to the Company.
The amount recorded in the consolidated statements of operations in other expense (income), net relates
to the change in fair value of foreign currency forward contracts during the year ended February 25, 2018,
which was a gain of $0.2 million (February 26, 2017 – gain of $0.2 million).
The forward contracts generally have a term of no more than 12 months. The notional amount of these
contracts outstanding at February 25, 2018 was $30.3 million U.S. dollars at an average forward rate of
1.2494 (February 26, 2017 - $27.5 million U.S. dollars at an average forward rate of 1.3026).
12 Share capital
Prior to the IPO, the Company’s authorized share capital consisted of an unlimited number of Class A,
Class B, Class C, Class D common shares and preferred shares. There were 110,987,688 Class A common
shares and 62,781,263 Class C common shares issued and outstanding. Neither the Class A common
shares nor the Class C common shares issued had a par value.
Immediately prior to the closing of the IPO, all of the outstanding Class A and Class C common shares were
exchanged for either one multiple voting share or one subordinate voting share. The Company’s Class B
and Class D common shares and preferred shares were removed from the Company’s authorized share
capital. The Company’s authorized share capital consists of (i) an unlimited number of subordinate voting
shares, (ii) an unlimited number of multiple voting shares and (iii) an unlimited number of preferred shares,
issuable in series. Each subordinate voting share is entitled to one vote and each multiple voting share is
entitled to 10 votes on all matters upon which holders are entitled to vote.
Following the foregoing share exchanges, all of the Company’s issued and outstanding multiple voting
shares and subordinate voting shares were consolidated on a one-to-0.5931691091 basis.
Concurrent with the IPO and Secondary Offering, the selling shareholders exchanged a certain number of
their multiple voting shares for subordinate voting shares.
As at February 25, 2018, there were 55,756,002 (February 26, 2017 – 55,756,002) multiple voting shares
and 56,275,341(February 26, 2017 – 53,016,459) subordinate voting shares issued and outstanding.
Neither the multiple voting shares nor the subordinate voting shares issued have a par value.
65
Aritzia Inc.
Notes to Consolidated Financial Statements
February 25, 2018 and February 26, 2017
(in thousands of Canadian dollars, unless otherwise noted)
13 Stock options
The Company has granted stock options under the Legacy Plan and the 2016 Option Plan.
Legacy Plan
Prior to the IPO, the Company had both time-based and performance-based options to acquire Class A or
Class D common shares. Time-based and performance-based options annually vest pro-rata on the
anniversary of the grant date for a period of up to five years. Vested performance-based options become
earned and exercisable upon a liquidation event based upon the majority shareholder’s achievement of a
certain internal rate of return. As a result of the IPO, a liquidation event was triggered and, as such, certain
performance-based options under the Legacy Plan became earned and exercisable.
In connection with the IPO, options to acquire Class A and Class D common shares were also consolidated
on a one-to-0.5931691091 basis for options exercisable to acquire subordinate voting shares at a post-
consolidated exercise price such that the in-the-money value of such options remained unchanged.
Following completion of the IPO, no additional options will be granted under the Legacy Plan, and the
outstanding options under the Legacy Plan are exercisable for subordinate voting shares of the Company.
Outstanding stock options have a term of 10 years to 15 years. Transactions for stock options granted
under the Legacy Plan for the years ended February 25, 2018 and February 26, 2017 were as follows:
February 25, 2018
February 26, 2017(1)
Number
of
stock
options
Weighted
average
exercise
price
Number
of
stock
options
Weighted
average
exercise
price
Outstanding, at beginning of year
11,288,672
$
3.82
16,766,534
$
2.83
Granted
Exercised
Forfeited
Expired
Cancelled (2)
Outstanding, at end of year
-
(3,258,882)
(260,026)
(21,394)
-
7,748,370
Exercisable, at end of year
5,546,773
-
3.15
4.28
2.36
-
874,924
(5,698,087)
(121,662)
-
(533,037)
4.09
11,288,672
3.44
7,602,406
$
$
7.09
1.42
4.01
-
3.56
3.82
3.03
$
$
(1)
This table reflects the options and exercise price after the one-to-0.5931691091 share
consolidation which took effect immediately prior to the closing of the IPO.
(2) Upon closing of the IPO, the Company cancelled 533,037 performance-based options under the
Legacy Plan.
66
Aritzia Inc.
Notes to Consolidated Financial Statements
February 25, 2018 and February 26, 2017
(in thousands of Canadian dollars, unless otherwise noted)
Information relating to stock options outstanding and exercisable as at February 25, 2018 is as follows:
Exercise prices
per share
$0.01 to $3.19
$3.20 to $5.07
$5.08 to $7.09
Stock options outstanding
Stock options exercisable
Weighted
average
remaining
contractual
life
(in years)
2.49
4.66
7.84
4.92
Number of
stock
options
2,570,587
2,798,502
2,379,281
7,748,370
Weighted
average
exercise
price
$1.77
$4.29
$6.36
Number of
stock
options
2,434,392
2,371,593
740,788
$4.09
5,546,773
Weighted
average
remaining
contractual
life
(in years)
2.28
4.36
7.75
3.90
Weighted
average
exercise
price
$1.69
$4.37
$6.20
$3.44
a) Time-based options
The Legacy Plan in effect prior to the IPO provided that the Board of Directors, at its sole discretion,
could elect to settle vested time-based options in cash upon the request of an option holder under
certain circumstances. As a result of the Company having historically cash-settled vested time-based
options for certain option holders prior to the IPO, the Company was considered to have a cash-settled
plan. As a cash-settled plan, the Company was required to record a liability for the potential future
settlement of the vested time-based options at each reporting date by reference to the fair value of the
liability. Concurrent with the IPO, the Company amended the Legacy Plan to remove the cash
settlement feature as of September 30, 2016. As a result of this modification, the Company accounts
for the time-based options as an equity-settled plan from the date of modification.
The fair value of the recorded liability in relation to the time-based options at the date of modification,
September 30, 2016, was $107.2 million. This amount has been reclassified to contributed surplus on
the consolidated statements of financial position.
The weighted average fair value of the time-based stock options at the date of modification was
estimated based on the Black-Scholes option pricing model using the following assumptions:
Dividend yield
Expected volatility
Risk-free interest rate
Expected life
Exercise price (post share consolidation)
Weighted average fair value of stock options
estimated at the date of modification
0.0%
44.0%
1.0%
1.2 to 5.7 years
$0.01 to $7.09
$11.51
The computation of expected volatility was based on the historical volatility of comparable companies
from a representative peer group of publicly traded retail apparel companies. The expected life
estimate was determined by management based on a number of factors including vesting terms,
exercise behaviour and the contractual term of the options.
67
Aritzia Inc.
Notes to Consolidated Financial Statements
February 25, 2018 and February 26, 2017
(in thousands of Canadian dollars, unless otherwise noted)
For the year ended February 25, 2018, stock-based compensation expense in relation to the time-
based options was $4.5 million (February 26, 2017 - $76.1 million). Included in the expense for the
year ended February 26, 2017 was an adjustment for the fair value of the options based on an updated
estimated share price of the Company up to the date of the plan modification, from being cash-settled
to equity-settled, on September 30, 2016.
b) Performance-based options
The performance-based options are equity-settled. As such, the expense associated with performance-
based options is recorded as stock-based compensation expense with a corresponding entry made to
contributed surplus on the consolidated statements of financial position.
During August 2016, the Company concluded that it is probable that the performance conditions will
be achieved and recognized stock-based compensation expense in relation to the performance-based
options of $22.5 million during the 13-week period ended August 28, 2016. For the year ended
February 25, 2018, the Company recognized stock-based compensation expense of $1.2 million
(February 26, 2017 - $23.6 million).
The weighted average fair value of the performance-based stock options at the date of grant was
estimated based on the Black-Scholes option pricing model using the following assumptions:
Dividend yield
Expected volatility
Risk-free interest rate
Expected life
Exercise price (post share consolidation)
Weighted average fair value of stock options
estimated at the date of grant
0.0%
43.1% to 54.8%
1.0% to 3.5%
0.8 to 10.0 years
$0.01 to $7.09
$3.51
2016 Option Plan
Concurrent with the IPO, the Company adopted the 2016 Option Plan pursuant to which it can grant share
options to acquire subordinate voting shares to directors, executive officers, employees and consultants.
The options vest annually pro-rata on the anniversary of the grant date over a period of five years.
68
Aritzia Inc.
Notes to Consolidated Financial Statements
February 25, 2018 and February 26, 2017
(in thousands of Canadian dollars, unless otherwise noted)
Transactions for stock options granted under the 2016 Option Plan for the years ended February 25, 2018
and February 26, 2017 are as follows:
February 25, 2018
February 26, 2017
Number
of
stock
options
Weighted
average
exercise
price
Number
of
stock
options
Weighted
average
exercise
price
Outstanding, at beginning of year
3,263,759
$
16.12
-
$
-
Granted
Forfeited
Cancelled
Outstanding, at end of year
Exercisable, at end of year
2,786,295
(430,807)
(671,899)
4,947,348
456,929
$
$
13.75
16.07
16.00
3,263,759
-
-
14.80
3,263,759
16.14
-
$
$
16.12
-
-
16.12
-
Information relating to stock options outstanding and exercisable as at February 25, 2018 is as follows:
Exercise prices
per share
$13.27 to $14.12
$14.13 to $16.60
Stock options outstanding
Stock options exercisable
Weighted
average
remaining
contractual
life
(in years)
6.76
5.74
6.22
Number of
stock
options
2,332,069
2,615,279
4,947,348
Weighted
average
exercise
price
$13.66
$15.82
Number of
stock
options
-
456,929
$14.80
456,929
Weighted
average
remaining
contractual
life
(in years)
-
5.67
5.67
Weighted
average
exercise
price
-
$16.14
$16.14
The weighted average fair value of the time-based stock options granted during the year ended February
25, 2018 was estimated at the date of the grant based on the Black-Scholes option pricing model using the
following assumptions:
Dividend yield
Expected volatility
Risk-free interest rate
Expected life
Exercise price
Weighted average fair value of share options
estimated at the date of grant
0.0%
42.0% to 43.0%
1.1% to 2.1%
6.0 to 7.0 years
$13.27 to $14.20
$5.96
Stock-based compensation expense in relation to the time-based options under the 2016 Option Plan for
the year ended February 25, 2018 was $11.2 million (February 26, 2017 - $3.1 million). Included in the
expense for the year ended February 25, 2018 was $2.3 million recognized from the cancellation of
671,889 time-based options granted to a director and officer of the Company. The cancellation of these
options resulted in accelerated vesting in accordance with IFRS 2.
69
Aritzia Inc.
Notes to Consolidated Financial Statements
February 25, 2018 and February 26, 2017
(in thousands of Canadian dollars, unless otherwise noted)
Director Deferred Share Unit Program
The Director Deferred Share Unit Program was adopted in conjunction with the IPO for non-employee
board members. Each eligible director receives a portion of his or her annual director retainer in DSUs.
The grant of DSUs does not entitle any eligible director to dividends or other distributions on the
Company’s subordinate voting shares, or to exercise voting rights or any other rights attaching to the
ownership of the subordinate voting shares, provided that the Board may determine if and when DSUs are
to be credited with dividend equivalents based on the dividend policy of the Company at the relevant time.
DSUs vest when granted, but are not redeemable for cash settlement until the eligible director ceases to be
a member of the Board. DSUs are granted quarterly and the Company is required to record a liability for
the potential future settlement of the DSUs at each reporting date by reference to the fair value of the
liability. The fair value of the recorded liability in relation to the DSUs was $0.5 million at February 25, 2018
(February 26, 2017 - $0.2 million), with the expense recorded as stock-based compensation during the year
of $0.3 million (February 26, 2017 - $0.2 million).
14 Net income (loss) per share
a) Basic
Basic net income (loss) per share is calculated by dividing the income (loss) attributable to
shareholders of the Company by the weighted average number of multiple voting shares and
subordinate voting shares outstanding during the periods ended on the dates provided below. As all
the classes of shares are subject to the same distribution rights, the Company performs the net income
(loss) per share calculations as if all shares are a single class.
Net income (loss) attributable to shareholders of the Company
Weighted average number of shares outstanding during the year
$
(thousands)
February 25,
2018
February 26,
2017 (1)
57,093 $
(56,109)
110,180
104,787
Basic net income (loss) per share
$
0.52 $
(0.54)
(1)
The weighted average number of shares outstanding was adjusted after giving effect, on a
retrospective basis, to a one-to-0.5931691091 share consolidation that occurred in connection
with the IPO.
b) Diluted
In calculating diluted net income (loss) per share for options that can be settled in either shares or
cash, the more dilutive of the cash-settled and equity-settled method is used. Accordingly, stock
options that are accounted for as cash-settled will require adjustments to the numerator and
70
Aritzia Inc.
Notes to Consolidated Financial Statements
February 25, 2018 and February 26, 2017
(in thousands of Canadian dollars, unless otherwise noted)
denominator if the equity-settled method is determined to have a more dilutive effect. The cash-
settled method was more dilutive up to the date of modification for the year ended February 26, 2017.
Net income (loss) attributable to shareholders of the Company
Weighted average number of shares for diluted net income (loss)
$
per share (thousands)
February 25,
2018
February 26,
2017(1)
57,093 $
(56,109)
116,280
104,787
Diluted net income (loss) per share
$
0.49 $
(0.54)
(1)
The weighted average number of shares outstanding was adjusted after giving effect, on a
retrospective basis, to a one-to-0.5931691091 share consolidation that occurred in connection
with the IPO.
15 Expenses by nature
Inventory and product-related costs and occupancy costs
Depreciation expense
Salaries, wages and employee benefits
Stock-based compensation expense
Interest expense and banking fees
Write-off of deferred financing fees (1)
Amortization of deferred financing fees
Cost of goods sold
February 25,
2018
February 26,
2017
$
$
$
$
$
$
429,969 $
17,807
384,543
17,115
447,776 $
401,658
Personnel expenses
February 25,
2018
February 26,
2017
147,708 $
17,240
139,662
103,044
164,948 $
242,706
Finance expense
February 25,
2018
February 26,
2017
5,029 $
-
192
6,988
2,867
600
5,221 $
10,455
(1) During the year ended February 26, 2017, the Company wrote off financing fees of $2.9 million as a
result of the amendment of its Credit Facilities concurrent with the closing of the IPO (note 10).
71
Aritzia Inc.
Notes to Consolidated Financial Statements
February 25, 2018 and February 26, 2017
(in thousands of Canadian dollars, unless otherwise noted)
16 Income taxes
a)
Income tax expense
Current tax expense
Current period
Adjustment for prior period
Deferred tax expense
Origination and reversal of temporary differences
Adjustment for prior period
Changes in substantively enacted tax rates
February 25,
2018
February 26,
2017
$
26,310 $
(492)
25,818
2,273
270
1,829
4,372
27,305
125
27,430
3,167
54
71
3,292
Income tax expense
$
30,190 $
30,722
On December 22, 2017, the U.S. Tax Cuts and Jobs Act (“U.S. tax reform”) was enacted, reducing the
United States federal corporate income tax rate from 35% to 21%. As a result, the Company’s U.S.
deferred income tax asset was remeasured at the reduced rate, resulting in a deferred income tax
expense increase of $1.5 million.
b) Reconciliation of effective tax rate
The Company’s income tax expense differs from that calculated by applying the combined
substantively enacted Canadian federal and provincial statutory income tax rates for the years ended
February 25, 2018 and February 26, 2017 of 26.4% and 26.3%, respectively, as follows:
Income (loss) before income taxes
Expected income tax expense (recovery)
Increase (decrease) in income taxes resulting from
Non-deductible stock-based compensation
Other non-deductible amounts
Foreign tax rate differences
Changes in substantively enacted tax rates
Adjustment for prior years
Other
February 25,
2018
February 26,
2017
$
$
87,283 $
(25,387)
23,060 $
(6,687)
4,468
274
766
1,829
(222)
15
36,089
703
321
71
179
46
Income tax expense
$
30,190 $
30,722
72
Aritzia Inc.
Notes to Consolidated Financial Statements
February 25, 2018 and February 26, 2017
(in thousands of Canadian dollars, unless otherwise noted)
c) Deferred income tax
The tax effects of the significant temporary differences that comprise deferred tax assets and liabilities
as at February 25, 2018 and February 26, 2017 are as follows:
Deferred tax assets
Deferred lease liability
Stock-based compensation
Financing and share issuance costs
Accounts payable and accrued liabilities
Other
$
Total deferred tax assets
Deferred tax liabilities
Goodwill and intangible assets
Property and equipment
Other
Total deferred tax liabilities
Net deferred tax liability
February 25,
2018
February 26,
2017
17,067 $
135
1,558
596
2,631
21,987
(20,869)
(12,485)
(38)
(33,392)
16,431
47
1,815
805
2,688
21,786
(18,841)
(9,577)
(69)
(28,487)
$
(11,405) $
(6,701)
The net change in deferred income tax liabilities is recorded as follows:
Deferred tax expense recorded in net income
Deferred tax expense recorded in other comprehensive
income (loss)
February 25,
2018
February 26,
2017
$
$
4,372 $
332
4,704 $
3,292
279
3,571
Of the deferred income tax balances, the Company expects $1.7 million of the deferred tax assets to
be recovered within 12 months and $0.2 million of the deferred tax liabilities to be settled within
12 months.
The Company intends to indefinitely reinvest the undistributed earnings of its foreign subsidiaries;
accordingly, the Company has not recorded a deferred tax liability on these earnings.
73
Aritzia Inc.
Notes to Consolidated Financial Statements
February 25, 2018 and February 26, 2017
(in thousands of Canadian dollars, unless otherwise noted)
17 Segment information
The Company defines an operating segment on the same basis that it uses to evaluate performance
internally and to allocate resources by the Chief Operating Decision Maker (the “CODM”). The Company
has determined that the Chief Executive Officer is its CODM and there is one operating segment.
Therefore, the Company reports as a single segment. This includes all sales channels accessed by the
Company’s customers, including sales through the Company’s eCommerce website and sales at the
Company’s stores.
The following table summarizes net revenue by geographic location of customers:
Canada
United States
February 25,
2018
February 26,
2017
$
$
548,728 $
194,539
496,292
170,889
743,267 $
667,181
The Company’s non-current, non-financial assets (property and equipment, intangible assets and goodwill)
are geographically located as follows:
Canada
United States
18 Commitments and contingencies
a) Operating leases
February 25,
2018
February 26,
2017
$
$
291,270 $
57,471
274,502
31,359
348,741 $
305,861
The Company conducts operations from leased stores, distribution centres and administrative offices.
For the year ended February 25, 2018, the rent expense under these operating leases was $103.3
million, including $2.0 million of contingent rent (February 26, 2017 - $86.7 million, including
$1.6 million of contingent rent).
Leases for certain of the Company’s premises include renewal options, rent escalation clauses, and
free-rent periods. Minimum annual commitments for the Company’s operating leases for its premises,
excluding other occupancy charges and additional rent based on a percentage of sales, are as follows:
Less than 1 year
Between 1 and 5 years
More than 5 years
Total
$
$
80,470
314,467
262,713
657,650
74
Aritzia Inc.
Notes to Consolidated Financial Statements
February 25, 2018 and February 26, 2017
(in thousands of Canadian dollars, unless otherwise noted)
Subsequent to year end, the Company entered into additional operating leases, increasing the total
minimum lease commitments by $46.8 million (excluding other occupancy charges and additional rent
based on percentage of sales).
b) Purchase obligations
At February 25, 2018, the Company had purchase obligations of $24.2 million (February 26, 2017 -
$24.8 million), which represent commitments for fabric expected to be used during upcoming
seasons, made in the normal course of business.
c)
Letters of credit
At February 25, 2018, the Company had open letters of credit of $20.9 million (February 26, 2017 -
$19.3 million).
19 Related party transactions
The Company is ultimately controlled by Canada Retail Holdings, L.P., also being the Company’s ultimate
parent.
The Company entered into the following transactions with related parties:
a) Berkshire is the investment manager to private equity funds that indirectly holds an ultimate
controlling interest in the Company. Berkshire provided consulting and management advisory services
to the Company pursuant to a Management Agreement dated December 19, 2005. Concurrent with
the closing of the IPO, the Company terminated the Management Agreement with Berkshire.
During the year ended February 26, 2017, the Company incurred management fees of $190 for
services rendered. Total net reimbursements to Berkshire for travel, lodging and other costs for the
year ended February 25, 2018 were $66 (February 26, 2017 - $247).
In connection with the IPO and Secondary Offering, the Company reimbursed in aggregate $1.4
million in professional fees and other costs to the principal selling shareholders in accordance with the
Company’s obligations under the registration rights agreement. At February 25, 2018, $652 was
included in accounts payable and accrued liabilities (February 26, 2017 - $948).
b) During the year ended February 25, 2018, the Company purchased $8.3 million (February 26, 2017 -
$10.8 million) of merchandise from a company partially owned by private equity funds managed by
Berkshire. In August 2017, Berkshire exited its investment from the merchandise company; as such,
purchases from the merchandise company subsequent to August 2017 are not considered related
party transactions. At February 26, 2017, $47 was included in accounts payable and accrued liabilities.
c) During the year ended February 25, 2018, the Company paid $3.6 million (February 26, 2017 – $2.2
million) for rent of premises and $385 (February 26, 2017 - $nil) for the use of a leased asset wholly or
75
Aritzia Inc.
Notes to Consolidated Financial Statements
February 25, 2018 and February 26, 2017
(in thousands of Canadian dollars, unless otherwise noted)
partially owned by companies that are owned by a director and officer of the Company. At February
25, 2018, $100 (February 26, 2017 - $nil) was included in accounts payable and accrued liabilities.
d) During the year ended February 26, 2017, the Company provided unsecured loans bearing interest at
a rate between 1% to 5% to certain employees, with certain repayment terms. As at February 25, 2018,
the outstanding balance on the employee loans was $nil (February 26, 2017 - $125) and was included
in accounts receivable and/or other assets.
e) Key management includes the Company’s directors and executive team. Compensation awarded to
key management includes:
Salaries, directors’ fees and short-term benefits
Stock-based compensation expense (1)
February 25,
2018
February 26,
2017
$
$
3,117 $
7,358
3,084
14,781
10,475 $
17,865
(1)
Included in the expense for the year ended February 25, 2018 was $2.3 million of expense
recognized from the cancellation of 671,889 time-based options granted to a director and officer
of the Company. The cancellation of these options resulted in accelerated vesting in accordance
with IFRS 2.
20 Supplemental cash flow information
Net change in non-cash working capital balances
Accounts receivable
Inventory
Prepaid expenses and other current assets
Other assets
Accounts payable and accrued liabilities
Deferred revenue
Supplemental cash flow information
Accrued purchases of property and equipment
Accrued purchases of intangible assets
February 25,
2018
February 26,
2017
$
941 $
(5,155)
(2,430)
300
15,638
3,719
959
2,695
(2,569)
1,683
12,367
5,679
$
$
13,013 $
20,814
6,799 $
271
5,859
729
76
Aritzia Inc.
Notes to Consolidated Financial Statements
February 25, 2018 and February 26, 2017
(in thousands of Canadian dollars, unless otherwise noted)
21 Financial instruments and risk management
The Company is exposed to a variety of financial risks in the normal course of operations including
currency, interest rate, credit and liquidity risk, as summarized below. The Company’s overall risk
management program and business practices seek to minimize any potential adverse effects on the
Company’s consolidated financial performance.
Risk management is carried out under practices approved by the Company’s Audit Committee. This
includes reviewing and making recommendations to the Board on the adequacy of the Company’s risk
management policies and procedures with regard to identifying the Company’s principal risks and
implementing appropriate systems and controls to manage these risks. Risk management covers many
areas of risk including, but not limited to, foreign exchange risk, interest rate risk, credit risk and liquidity
risk.
Financial instruments by category
The classification of financial instruments and their carrying amounts are as follows:
Financial assets
Cash and cash equivalents
Accounts receivable
Foreign currency forward contracts
Financial liabilities
Accounts payable and accrued liabilities
Lease obligations
Long-term debt (net of deferred financing fees)
February 25,
2018
February 26,
2017
$
$
112,475 $
2,413
414
79,527
2,624
181
66,195 $
399
118,587
50,484
1,749
133,767
The carrying value of cash and cash equivalents, accounts receivable and accounts payable and accrued
liabilities approximates their fair value due to the immediate or short-term maturity of these financial
instruments. The fair value of the lease obligations is approximately equal to their carrying value. For the
other financial liabilities, the fair value is as follows:
Long-term debt (Level 2)
Foreign currency forward contracts (Level 2)
$
118,738 $
414
134,059
181
February 25,
2018
February 26,
2017
77
Aritzia Inc.
Notes to Consolidated Financial Statements
February 25, 2018 and February 26, 2017
(in thousands of Canadian dollars, unless otherwise noted)
a) Market risk
Currency risk
The Company is exposed to foreign exchange risk on foreign currency denominated transactions,
monetary assets and liabilities denominated in a foreign currency, and net investments in foreign
operations. The Company sources the majority of its raw materials and merchandise from various
suppliers in Asia and Europe with the vast majority of purchases denominated in U.S. dollars. In
addition, the Company operates retail stores in the U.S.A. The Company’s foreign exchange risk is
primarily with respect to the U.S. dollar but the Company has limited exposure to other currencies as
well. Foreign currency forward contracts are used to mitigate risks associated with forecasted U.S.
dollar merchandise purchases sold in Canada.
As at February 25, 2018, a $0.01 variation in the Canadian dollar against the U.S. dollar on net
monetary accounts in U.S. dollars would, all other variables being constant, have an approximate
favourable (or unfavourable) impact of $0.1 million on net income (loss).
Interest rate risk
The Company is exposed to changes in interest rates on its cash and cash equivalents, bank
indebtedness and long-term debt. Debt issued at variable rates exposes the Company to cash flow
interest rate risk. Debt issued at fixed rates exposes the Company to fair value interest rate risk. During
the year, the Company had only variable rate debt. An increase (or decrease) in interest rate by 1%
would result in an increase (or decrease) of $1.3 million in interest expense on the Credit Facilities.
b) Credit risk
Credit risk is the risk of an unexpected loss if a counterparty to a financial instrument fails to meet its
contractual obligations. Financial instruments that potentially subject the Company to credit risk
consist of cash and cash equivalents, accounts receivable, and derivative contracts used to hedge
market risks. The Company offsets credit risks associated with cash and cash equivalents by depositing
its cash and cash equivalents with major financial institutions that have been assigned high credit
ratings by internationally recognized credit rating agencies. The Company is exposed to credit risk on
accounts receivable from its landlords for tenant allowances. To reduce this risk, the Company enters
into leases with landlords with established credit history and, for certain leases, the Company may
offset rent payments until accounts receivable are fully satisfied. The Company only enters into
derivative contracts with major financial institutions, as described above, for the purchase of its foreign
currency forward contracts.
78
Aritzia Inc.
Notes to Consolidated Financial Statements
February 25, 2018 and February 26, 2017
(in thousands of Canadian dollars, unless otherwise noted)
c)
Liquidity risk
Liquidity risk is the risk that the Company cannot meet a demand for cash or fund its obligations as
they come due. Liquidity risk also includes the risk of not being able to liquidate assets in a timely
manner at a reasonable price. The Company manages liquidity risk through various means, including
monitoring actual and projected cash flows, taking into account the seasonality of its revenue, income
and working capital needs. The Company’s revolving credit facility is used to maintain liquidity. As at
February 25, 2018, the Company had available credit of $70.0 million (February 26, 2017 - $70.0
million) under its revolving credit facility, of which $nil (February 26, 2017 - $nil) was drawn, and had
outstanding letters of credit totalling $15.9 million (February 26, 2017 - $19.3 million), which reduced
the availability under this credit facility. The amount drawn under this credit facility is presented as
bank indebtedness in current liabilities based on the Company’s estimate of what it expects to settle in
the next 12 months (note 10). As at February 25, 2018, the Company also had available credit of $75.0
million under trade finance agreements (February 26, 2017 – $nil), of which $5.0 million of letters of
credit was outstanding (February 26, 2017 – $nil).
The following table identifies the undiscounted contractual maturities of the Company’s financial
liabilities as at February 25, 2018:
Within one year
After one but
not more than
5 years
After 5 years
Total
Accounts payable and accrued
liabilities
Lease obligations
Assumed interest on long-term
debt (1)
Long-term debt
Total
$
$
66,195 $
399
4,236
19,127
- $
-
761
99,611
- $
-
-
-
66,195
399
4,997
118,738
89,957 $
100,372 $
- $
190,329
(1)
based on interest rates in effect as at February 25, 2018
22 Capital management
The Company’s objectives when managing capital are to:
ensure sufficient liquidity to enable the internal financing of capital projects thereby facilitating its
growth;
provide a strong capital base so as to maintain investor, creditor and market confidence and to sustain
future development of the business; and
maintain a flexible capital structure that optimizes the cost of capital at acceptable risk and preserves
the ability to meet financial obligations.
The Company defines capital as its Credit Facilities and shareholders’ equity. The Company’s primary uses
of capital are to finance increases in non-cash working capital along with capital expenditures for new store
additions, existing store expansion and renovation projects, and other infrastructure investments. The
79
Aritzia Inc.
Notes to Consolidated Financial Statements
February 25, 2018 and February 26, 2017
(in thousands of Canadian dollars, unless otherwise noted)
Company currently funds these requirements out of its internally generated cash flows and revolving credit
facility.
The Company is subject to financial covenants and collateral pursuant to the Credit Facilities presented in
note 10.
23 Subsequent event
On May 10, 2018, the Company announced a normal course issuer bid, under which the Company is
authorized to purchase up to 5,429,658 of its subordinate voting shares, representing approximately 10%
of the public float, during the twelve month period commencing May 15, 2018 and ending May 14, 2019.
Any subordinate voting shares purchased under the normal course issuer bid will be cancelled.
80
Consolidated Financial Statements