Annual Report 2019
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
FELLOW SHAREHOLDERS:
I’m delighted to share our results for Fiscal 2019.
Our performance reflects the dedication of our
people, and the support from you, our shareholders.
I want to express my deep appreciation for your
ongoing confidence in our business and team.
Today’s fashion industry is evolving at a rapid pace,
and I have, on occasion, been asked for my perspective
on the shifting landscape. One change that is top of
mind of late is in the motivation behind consumers’
choices, which used to be made primarily based on style
preferences, including personal taste and current trends.
However, clients now demand more. Today, companies
must have conviction and purpose—a reason to exist
that goes beyond financial motives.
I’m extremely proud that Aritzia has always operated
with a strong sense of purpose: our commitment to
championing and empowering women has been core
to our company values for 34 years. Women make up
85% of our team, including 54% of the Aritzia Leadership
Team and 40% of our Named Executive Officers. We are
passionate about supporting women’s growth and equal
opportunity in the communities where we live and work.
We have contributed more than $16 million in product
donations, financial support and volunteer hours to
organizations helping women and girls succeed at work
and in life.
We recognize that there are still—and will always
be—many improvements to make. We will continue
working to effect positive change, as we know that
our long-term success depends on our commitment
to act responsibly and sustainably. With every decision,
we seek to reinforce our commitment to our people, to
our corporate responsibility, and to leaving a lasting
impact greater than ourselves. My pride in Aritzia stems
from these deeply held values, as well as from our
past achievements and plans for the future, which I am
pleased to share with you.
FISCAL 2019 HIGHLIGHTS
Our methodical approach and ability to execute against
our proven business model has resulted in another
strong year for Aritzia. Here are a few of the highlights
we achieved:
Financial
· Growing affinity for the brand, coupled with our
beautiful, high-quality product and aspirational shopping
experience, fueled net revenue growth of 17.6%. We are
particularly pleased with the performance of our U.S.
business, which saw growth of nearly 36% for the year.
· We continued to see consistent comparable sales
strength. Comparable sales increased 9.8% for the year,
and our fourth quarter marked our 18th consecutive
quarter of comparable sales growth.
· In eCommerce, our digital marketing efforts drove
client acquisition and retention, resulting in a 38%
increase in traffic for the year. In particular, celebrity
and influencer partnerships, search engine optimization,
and core site enhancements drove incremental sales in
both Canada and the U.S.
· A full slate of Aritzia boutique openings included
expanded flagships in New York City (SoHo) and Toronto
(Bloor St.), and locations in two new U.S. markets:
Washington, DC and San Diego. We opened our first A-OK
Cafés (premium coffee bars within our boutiques) to
further enhance our clients’ shopping experience.
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Brand
· Our collections’ consistently beautiful design and high-
quality craftsmanship resulted in strong performance
across all product categories. We elevated and expanded
our portfolio of brands and successfully entered a new
category with the launch of a denim brand, Denim Forum.
· We increased our brand awareness by cultivating relat-
ionships with our A-list celebrity following, which
includes Meghan Markle, Duchess of Sussex as well
as Kendall Jenner, Ariana Grande, and Hailey Bieber,
among others.
· We partnered with celebrated fine-art and fashion
photographer Juergen Teller, a prestigious coup for our
annual Artistic License series. His work was featured on
our packaging and in our boutiques.
Culture
· We expanded our talent pool across all workplaces with
candidates sourced from our robust internal pipeline
and complemented by seasoned professionals from
outside our organization.
Operations
· We completed the relocation of our Vancouver distri-
bution centre—tripling its size—and upgraded our
Warehouse Management System. With these upgrades,
distribution and fulfillment are now not only a core
competency, but also a competitive advantage for Aritzia.
OUR GROWTH STRATEGIES
Looking towards the future, we continue to leverage
new ways to meet our clients’ needs and surpass their
expectations across all channels.
Grow eCommerce
We have made great progress and remain focused on
our multi-year eCommerce initiatives: driving client
acquisition and retention through digital marketing,
enhancing the aritzia.com experience, growing our
clienteling program, building seamless omni-channel
capabilities, and enhancing our site for top interna-
tional countries. Over the last few years, we have put
significant resources behind our eCommerce business
and we look forward to seeing the benefits of these
strategic investments and initiatives.
our brand for both existing and new clients. In the U.S.,
our growing brand awareness has resulted in numerous
opportunities to negotiate premier locations with
landlords. We plan to open six boutiques in the U.S. in fiscal
2020, four of which will be in new markets.
Drive Exclusive Brand and Product Innovation
We will build on our portfolio of exclusive brands, with
a continued focus on delivering beautiful and high-
quality products that delight our clients. We will pursue
further expansion into new categories, some of which
may be exclusive to aritzia.com.
Enhance Long-Term Profitability
In addition to continually seeking to elevate the quality
of our product, long-term profitability is at the core of
our decision making, with a focus on driving sourcing
efficiencies to contribute to the growth of our bottom
line.
Drive Brand Awareness
Driving brand awareness remains the primary focus
of our marketing initiatives. We will expand our successful
organic and paid influencer programs and further
enhance our social media capabilities to attract new
clients.
As I look back on this year and forward to our future,
I am proud of what we’ve accomplished and confident
that we will achieve our Fiscal 2021 targets. We remain
well positioned to drive long-term revenue and earnings
growth and I am tremendously excited about the
opportunities ahead.
In March, we marked a significant milestone, completing
a secondary offering and concurrent repurchase of
Berkshire Partners’ remaining shares in Aritzia. I would
like to thank Berkshire for a very successful 14-year
relationship, as well as for their collaboration over the
years.
I would also like to express my deep appreciation to our
people. Our strong performance is due, above all else,
to the talent, passion and dedication of our team. When
Aritzia launched 34 years ago, I simply would not have
imagined where we are today—nearly a billion-dollar
company with our 100th boutique just around the corner.
My heartfelt thanks for all that you do each and every day.
Sincerely,
Expand Our Boutique Network
We will continue to grow our boutique network across
North America, creating memorable interactions with
Brian Hill
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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.
Fall 1994
Winter 2015
Fall 2016
Spring 2006
Spring 2009
Fall 2009
Tna
Fall 1997
Spring 2017
Fall 2006
Fall 2018
Spring 2017
Fall 2017
3
A Record of
Consistent Growth
NET REVENUE GROWTH (C$ MILLIONS)
We attribute our proven track record of consistent net
revenue growth to our distinct market position,
operational excellence and relentless focus on long-
term objectives.
17.2%
CAGR
$667
$743
$874
$322
$353
$377
$542
$427
$189
$207
$244
$153
FY 2008
FY 2009
FY 2010
FY 2011
FY 2012
FY 2013
FY 2014
FY 2015
FY 2016
FY 2017
FY 2018
FY 2019
MEASURED STORE GROWTH
We have never closed an Aritzia store in our 34-year
history — a testament to our disciplined and measured
store-growth strategy.
11.3%
CAGR
42
7
35
47
8
39
51
10
41
54
12
42
62
14
48
64
15
49
36
31
28
26
79
19
60
85
22
63
74
17
57
91
24
67
FY 2008
FY 2009
FY 2010
FY 2011
FY 2012
FY 2013
FY 2014
FY 2015
FY 2016
FY 2017
FY 2018
FY 2019
Canada
US
4
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, dev-
elop and design our seasonal collections, then partner
directly with our mills, our suppliers and our manufacturers
to deliver exceptional value at attainable price points.
5
Innovative Creative
Development
Our innovative creative development covers our
product, our stores and website, and our marketing and
communications. Our innovative design house offering
a strategic mix of exclusive brands, combined with a
refined and proven merchandise strategy, ensures that we
provide the balanced 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.
6
Aspirational Omni-Channel
Shopping Experience
We offer our products to our customers through a
seamless omni-channel approach and delight our
them with an aspirational shopping experience, both in
our premier real estate locations and on aritzia.com. We
focus on every detail of delivering exceptional service no
matter where our customers choose to shop our brand.
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Selected Financial Metrics1:
9.8% comparable sales growth in Fiscal 2019, following
6.6% in Fiscal 2018
Net Revenue (C$ millions)
18 consecutive quarters of positive comparable sales
growth with continued strong momentum from our
eCommerce business
Significant free cash flow generation – Adjusted EBITDA
grew 21.3% to $161.0 million in Fiscal 2019
17.2%
CAGR
$743
$874
$667
$542
FY 2016
FY 2017
FY 2018
FY 2019
Adjusted EBITDA2 (C$ millions)
23.6%
CAGR
$133
$161
$118
$85
FY 2016
FY 2017
FY 2018
FY 2019
Adjusted Net Income2 (C$ millions)
32.9%
CAGR
$95
$76
$65
$40
FY 2016
FY 2017
FY 2018
FY 2019
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 mea-
sures presented by other companies. Please refer to the section entitled
“Non-IFRS Measures Including Retail Industry Metrics” in the Management’s
Discussion & Analysis within this Annual Report for a discussion of the defini-
tions, components, reconciliations, and use of these measures
2. Figures adjusted to exclude stock-based compensation, unrealized FX (gains)
losses on forward contracts, IPO and Secondary Costs, and a lease exit cost in
Fiscal 2019.
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Management’s Discussion
& Analysis
9
Aritzia Inc.
MANAGEMENT’S DISCUSSION AND ANALYSIS
Fiscal Year Ended March 3, 2019
May 9, 2019
The following Management’s Discussion and Analysis (“MD&A”) dated May 9, 2019 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 March 3, 2019. This MD&A should be read in conjunction with the
Company’s audited annual consolidated financial statements and accompanying notes for Fiscal 2019 (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 2019” are to our 14-week period ended March 3, 2019, and to “Q4 2018”
are to our 13-week period ended February 25, 2018. All references in this MD&A to “Fiscal 2019” are to our 53-week
period ended March 3, 2019, 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 2020” are to our 52-week period ended March 1,
2020. In addition, references to “Q1 2019” are to our 13-week period ended May 27, 2018, to “Q2 2019” are to our
13-week period ended August 26, 2018, to “Q3 2019” are to our 13-week period ended November 25, 2018, and to
“Q1 2020” are to our 13-week period ended June 2, 2019.
The audited annual consolidated financial statements and accompanying notes for Fiscal 2019 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. These non-IFRS measures, including retail
industry metrics, are used to provide investors with supplemental measures of our operating performance and thus
highlight trends in our core business that may not otherwise be apparent when relying solely on IFRS measures. We
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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 the quality of our products and our channel-agnostic client experience,
expectations regarding our technology and infrastructure, outlook for revenue growth and gross profit margin in
Fiscal 2020 as further described below, the expansion and repositioning of our boutique locations, 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 2020 to deliver low
double digit revenue growth and flat gross profit margin, as compared to fiscal 2019, are certain current assumptions,
including, among others, the opening of six new boutiques in the U.S. including the Hudson Yards boutique in New
York already opened in Q1 2020, three boutique expansions or repositions in Canada including the Mapleview
boutique in Greater Toronto already opened in Q1 2020, gross profit margin is expected to be slightly higher in the
first half of the year due to occupancy cost leverage being partially offset by the weakening of the Canadian dollar,
and slightly lower in the second half of the year due to higher raw material costs for the fall/winter season, the
continued ability to drive growth in our eCommerce business, SG&A to grow faster than revenue, as we will continue
to make strategic investments in technology and infrastructure to support our long term growth, a portion of the
investments related to our eCommerce platform improvements, omni-channel capabilities and other infrastructure
including the product life-cycle management and data analytics platforms will be expensed within SG&A, incremental
SG&A expenses related to these initiatives in Fiscal 2020 are expected to be approximately $7 million to $8 million,
and occur primarily in the second and third quarters, net capital expenditures in the range of $45 million to $50
million, assumptions regarding the overall retail environment and currency exchange rates for Fiscal 2020.
Specifically, we have assumed the following exchange rates for Fiscal 2020: USD:CAD = 1:1.33.
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 boutique 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
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existing financing on acceptable terms; currency exchange and interest rates; the impact of competition; the changes
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 9, 2019 for the fiscal year ended March 3, 2019 (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. We conceive, create, develop and sell a strategic mix of women’s
fashion products directly to our clients 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 clients across multiple life stages, resulting in strong and enduring client loyalty.
We connect our clients 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 67 boutiques in Canada and 25 boutiques 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 boutiques and aritzia.com, giving us
complete control of the presentation of our brand and the relationships with our clients. This strategy allows us to
present our brand in a consistent manner, including pricing, marketing and product presentation. We strive to offer
our clients an aspirational shopping experience and exceptional level of service at every interaction. Our culture is
highly focused on the client, and our sales associates and eCommerce support teams are trained to provide shopping
experiences that are personalized to exceed our clients’ wants and needs.
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Secondary Offerings
On August 7, 2018, we completed a secondary offering (the “August 2018 Secondary Offering”) on a bought
deal basis of our subordinate voting shares through a secondary sale of shares by certain shareholders. The August
2018 Secondary Offering of 6,050,000 subordinate voting shares raised gross proceeds of $100.1 million for the
selling shareholders, at a price of $16.55 per subordinate voting share. We did not receive any proceeds from the
August 2018 Secondary Offering. As part of the August 2018 Secondary Offering, certain selling shareholders
exchanged 5,880,000 of their multiple voting shares for subordinate voting shares. Underwriting fees were paid by
the selling shareholders, and other expenses related to the August 2018 Secondary Offering of $0.6 million are being
paid by us.
Subsequent to the year ended March 3, 2019, on March 8, 2019, we completed a secondary offering (the
“March 2019 Secondary Offering”) on a bought deal basis of our subordinate voting shares through a secondary sale
of shares by certain shareholders. The March 2019 Secondary Offering of 19,505,000 subordinate voting shares
raised gross proceeds of $329.6 million for the selling shareholders, at a price of $16.90 per subordinate voting share
(the “March 2019 Offering Price”). We did not receive any proceeds from the March 2019 Secondary Offering.
Underwriting fees were paid by the selling shareholders.
Concurrent with the completion of the March 2019 Secondary Offering, on March 8, 2019, we also completed a
repurchase of 6,333,653 subordinate voting shares and multiple voting shares (the “Shares”) for cancellation from
certain shareholders, including an investment vehicle (the “Berkshire Shareholder”) managed by Berkshire Partners
LLC (“Berkshire”) (the “Share Repurchase”). The purchase price per Share paid by us under the Share Repurchase was
the same as the March 2019 Offering Price and resulted in an aggregate purchase price of $107.0 million paid to the
selling shareholders. Total expenses related to the March 2019 Secondary Offering and Share Repurchase of $2.5
million are being paid by us and are being reimbursed by the selling shareholders participating in the Share
Repurchase, including the Berkshire Shareholder.
Upon completion of the March 2019 Secondary Offering and Share Repurchase on March 8, 2019, the Berkshire
Shareholder has no remaining equity interest in 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 2019 Compared to Q4 2018
Select financial highlights include the following:
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13
Comparable sales growth(1) was 5.5%, the 18th consecutive quarter of positive growth.
Net revenue increased by 17.9% to $259.1 million from $219.8 million in Q4 2018, with positive
performance across all geographies and all channels.
Gross profit margin was 36.2%, compared to 37.9% in Q4 2018. The decline was primarily due to the
weakening of the Canadian dollar.
Adjusted EBITDA(1) increased by 11.7% to $42.6 million from $38.1 million in Q4 2018.
Net income increased by 17.7% to $18.7 million from $15.9 million in Q4 2018.
Adjusted Net Income(1) increased by 11.5% to $25.1 million, or $0.21 per diluted share(1), from $22.5
million, or $0.19 per diluted share(1) in Q4 2018.
Fiscal 2019 Compared to Fiscal 2018
Select financial highlights include the following:
Comparable sales growth(1) was 9.8%, following 6.6% comparable sales growth in Fiscal 2018.
Net revenue increased by 17.6% to $874.3 million from $743.3 million in Fiscal 2018.
Gross profit margin was 39.2% compared to 39.8% in Fiscal 2018.
Adjusted EBITDA(1) increased by 21.3% to $161.0 million from $132.7 million in Fiscal 2018.
Net income increased by 37.9% to $78.7 million from $57.1 million in Fiscal 2018.
Adjusted Net Income(1) increased by 24.5% to $94.5 million, or $0.81 per diluted share(1), from $75.9
million, or $0.65 per diluted share(1) in Fiscal 2018.
Strategic accomplishments for Fiscal 2019
Grew boutique network with seven new boutiques: five in Canada, including one in a new market
(Quebec City), and two in the United States, both in new markets (San Diego and Washington, D.C.). All
boutiques opened in Fiscal 2019 are performing at or above expectations.
Expanded or repositioned four boutiques, including two expanded flagship locations (Bloor Street in
Toronto and Soho in New York).
Achieved significant eCommerce growth, driven by a continued focus on search engine optimization
and core site enhancements.
Drove product innovation with the successful launch of a leather program and denim brand, as well as
an enhanced outerwear program.
Increased social media and influencer marketing efforts, which fueled brand awareness in the U.S. and
contributed to 36% U.S. revenue growth.
Advanced omni-channel capabilities by opening a new 225,000-square-foot Greater Vancouver
distribution centre and upgrading the warehouse management system.
Notes :
(1)
See the sections below entitled “How We Assess the Performance of our Business” and “Selected Consolidated Financial Information” for
further details concerning comparable sales growth, Adjusted EBITDA, Adjusted Net Income and Adjusted Net Income per diluted share and for a
reconciliation to the most comparable IFRS measure.
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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 of exclusive fashion brands that creates and
develops fashion apparel. We have become a well known and deeply loved brand by our clients in Canada with
growing client 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.
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. We believe our expansion into categories such as leather and denim will help drive
increased wallet share among our existing clients as well as attract new clients. 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.
Boutique Network Expansion and Enhancement
We have a meaningful opportunity to continue to grow our boutique network across North America, particularly
in the United States. Our growing brand awareness among both consumers and landlords continues to fuel new
opportunities to secure premier locations in the best markets. In addition to opening new Aritzia and exclusive brand
boutiques (e.g. Wilfred, Babaton and TNA), we have generated attractive returns on capital by enhancing elements of
our existing boutiques (including footprint, layout and assortment) through carefully considered boutique expansions
and repositions. As a result of our disciplined real estate selection process and compelling boutique economics, we
have never closed an Aritzia boutique in our 34-year history.
The following table summarizes the change in our boutique count for the periods indicated.
Q4 2019
Q4 2018 Fiscal 2019 Fiscal 2018
Number of boutiques, beginning of period
New boutiques added
Boutique repositioned into a flagship boutique(2)
Number of boutiques, end of period
Boutiques expanded or repositioned
92
-
(1)
91
1
84
1
-
85
2
85
7
(1)
91
4
79
6
-
85
7
(2) Q4 2019 and Fiscal 2019 includes the reposition of one of our banner locations into the flagship boutique located on the same street.
Subsequent to year end, we opened our Hudson Yards boutique located in New York, and one pop-up boutique
(North Park in Dallas), along with the reposition of our Mapleview boutique in Burlington.
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15
eCommerce Growth
Our eCommerce business was launched in fiscal 2013 and quickly surpassed our growth expectations with
continued growth in online traffic.
We believe the following factors will support the net revenue growth of aritzia.com:
Capitalizing on digital marketing channels to drive client acquisition and retention - We are focusing on
digital marketing to engage our existing clients, acquire new clients and drive further brand awareness.
Digital marketing programs include search engine optimization enhancements, refinement of our email
marketing and further leveraging our social media.
Improving the digital experience to enhance the shopping experience online – aritzia.com is an evolving
digital representation of our brand, which is designed to inspire our clients’ digital shopping experience
at every touch point of their journey.
Growing our clienteling program using personalization – We are in the early phases of leveraging
advanced business intelligence and behaviour analytics to further enhance our understanding of our
clients which will enable us to predict their needs and exceed their expectations. This includes
optimizing our online operations to enhance personalization, which we believe will allow us to tailor an
experience specific to a client and drive higher conversion and client loyalty.
Driving our omni-channel growth and capabilities – Our clients shop both online and in our boutiques,
and we believe there are synergies between our boutique 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 clients can shop and receive our products
through any of our channels they choose.
Enhancing our efforts in 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 boutique 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.
Infrastructure Investments
We continue to strategically invest in infrastructure to safeguard and maximize our existing business, as well as
enable growth. In Fiscal 2018, we successfully completed the implementation of our new point-of-sale (“POS”) system
in all of our boutiques and our client care centre. This new POS system provides us with a robust platform on which to
build and evolve the services and experience we offer to our clients. 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 our clients even more flexibility in how they shop and receive Aritzia products.
In Fiscal 2019, we implemented verified eCommerce returns and integrated payments, which allows us to further
enhance our clients’ experience.
7
16
In August 2018, we successfully completed the opening of our Greater Vancouver distribution centre, moving
from an 83,000 square foot facility into a new 225,000 square foot flagship facility with an upgraded warehouse-
management system. The new distribution centre primarily services the west coast and serves as a hub for the rest of
our network.
The next business transforming foundational technology we are implementing is a Product Lifecycle
Management (“PLM”) system. The PLM system will manage all of the data and support all of the processes to bring a
product to market. This will enable us to focus on innovation, drive quality, reduce speed to market where
appropriate, and ultimately, optimize costs in our manufacturing processes.
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 clients’ 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 boutiques.
We also continue to expand our talent pool across the organization. We are continuing to find exceptional talent
at all levels to facilitate our expected future growth.
These investments in systems, infrastructure and people 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 client 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
(as hereinafter defined).
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%
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17
Weather
Extreme weather conditions in the areas in which our boutiques 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 clients to travel to our boutiques and
thereby reduce our revenue and profitability. This is potentially mitigated by our clients’ 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 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 client 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, boutique 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. From time to time, 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.
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 reflects our sale of merchandise, less returns and discounts. Retail revenue at point-of-sale is
measured at the fair value of the consideration received at the time the sale is made to the customer, net of discounts
and an estimated allowance for returns. For merchandise that is ordered and paid in a boutique and subsequently
picked up by or delivered to the customer, revenue is deferred until control of the merchandise has been transferred
to the customer. eCommerce revenue is recognized at the date control has been transferred to the customer, and
measured at the fair value of consideration received, net of discounts and an estimated allowance for returns.
Revenues are reported net of sales taxes collected for various governmental agencies. See “Significant New
Accounting Standards Recently Adopted – IFRS 15 – Revenue from Contracts with Customers.”
Comparable Sales Growth
Comparable sales growth is a retail industry metric used to compare the percentage change in sales derived
from the established boutiques of a certain period as compared to the sales from the same boutiques in the same
period in the prior year. Comparable sales growth helps to explain our revenue growth in established boutiques and
eCommerce. Comparable sales is calculated based on revenue (net of sales tax, returns and discounts) from
boutiques that have been opened for at least 56 weeks including eCommerce revenue (net of sales tax, returns and
discounts), and excludes boutiques that were expanded or repositioned, boutiques in centres where we opened a
new additional boutique, boutiques significantly impacted by nearby construction and other similar disruptions
during this period and week 53 net revenue, if applicable. Our comparable sales growth calculation excludes the
9
18
impact of foreign currency fluctuations. We apply the prior year’s average quarterly exchange rate to both current
year and prior year comparable sales to achieve a consistent basis for comparison (i.e. on a constant currency basis).
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 and amortization expense for our boutiques and
distribution centres. Our cost of goods sold may include different costs compared to other retailers. Gross profit
margin is impacted by the components of cost of goods sold, product mix and markdowns. Currently our product
costs have been pressured by rising materials costs, particularly wool, silk, down, cotton and polyester. 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 boutiques, grow our eCommerce business, increase brand awareness and invest in our
infrastructure and people.
SG&A expenses as a percentage of net revenue are 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 before depreciation and amortization, finance expense and
income tax expense.
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 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, 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 weighted average number of diluted shares outstanding. For purposes of
reporting our Adjusted Net Income per diluted share, we have adopted the IFRS method for calculating weighted
average number of diluted shares outstanding since Q1 2019. Please see “Summary of Consolidated Quarterly
10
19
Results and Certain Performance Measures” for a comparison of the impact of the current diluted share calculation
versus our prior methodology.
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 2019, Fiscal 2018 and Fiscal 2017 has been
derived from our audited annual consolidated financial statements and related notes. The selected consolidated
financial information set out below for Q4 2019 and Q4 2018 is unaudited.
Q4 2019
14 weeks
Q4 2018
13 weeks
Fiscal 2019
53 weeks
Fiscal 2018
52 weeks
Fiscal 2017
52 weeks
(in thousands of Canadian dollars, unless otherwise noted)
Consolidated Statements of Operations:
Net revenue
Cost of goods sold
$
259,050 $
165,203
219,804
136,519
$
874,296
531,383
$
743,267
447,776
$
667,181
401,658
Gross profit
93,847
83,285
342,913
295,491
265,523
Operating expenses
Selling, general and administrative
Stock-based compensation expense
Income (loss) from operations
Finance expense
Other expenses (income)
Income (loss) before income taxes
Income tax expense
59,349
2,596
31,902
1,219
4,416
26,267
7,544
50,738
5,599
26,948
1,318
(291)
25,921
10,020
215,297
11,540
116,076
4,821
(395)
111,650
32,922
183,857
17,240
94,394
5,221
1,890
87,283
30,190
178,773
103,044
(16,294)
10,455
(1,362)
(25,387)
30,722
Net income (loss)
$
18,723 $
15,901
$
78,728
$
57,093
$
(56,109)
100.0%
63.8%
100.0%
62.1%
100.0%
60.8%
100.0%
60.2%
36.2%
37.9%
39.2%
39.8%
Percentage of Net Revenue:
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 expenses (income)
Income (loss) before income taxes
Income tax expense
Net income (loss)
Other Performance Measures:
Year-over-year net revenue growth
Comparable sales growth
Capital cash expenditures (excluding proceeds
from leasehold inducements)
$
Number of boutiques, end of period
New boutiques added
Boutiques expanded or repositioned(3)
22.9%
1.0%
12.3%
0.5%
1.7%
10.1%
2.9%
7.2%
17.9%
5.5%
14,677 $
91
-
-
100.0%
60.2%
39.8%
26.8%
15.4%
(2.4%)
1.6%
(0.2%)
(3.8%)
4.6%
23.1%
2.5%
12.3%
0.6%
(0.1%)
11.8%
4.6%
24.6%
1.3%
13.3%
0.6%
(0.0%)
12.8%
3.8%
24.7%
2.3%
12.7%
0.7%
0.3%
11.7%
4.1%
7.2%
9.0%
7.7%
(8.4%)
11.9%
6.0%
18,784
85
1
2
$
17.6%
9.8%
62,010
91
7
3
$
11.4%
6.6%
66,330
85
6
7
$
23.0%
14.1%
31,136
79
5
5
Note:
(3)
Q4 2019 and Fiscal 2019 includes the reposition of one of our banner locations into the flagship boutique located on the same street.
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20
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.
Reconciliation of Net Income (Loss) to
Adjusted EBITDA:
Net income (loss)
Depreciation and amortization
Finance expense
Income tax expense
Q4 2019
14 weeks
Q4 2018
13 weeks
Fiscal 2019
53 weeks
Fiscal 2018
52 weeks
Fiscal 2017
52 weeks
(in thousands of Canadian dollars, unless otherwise noted)
$
18,723 $
7,355
1,219
7,544
$
15,901
5,961
1,318
10,020
$
78,728
27,065
4,821
32,922
$
57,093
22,844
5,221
30,190
(56,109)
21,129
10,455
30,722
EBITDA
34,841
33,200
143,536
115,348
6,197
Adjustments to EBITDA:
Stock-based compensation expense
Lease exit cost
IPO and Secondary Offering costs
Unrealized foreign exchange (gain) loss on
forward contracts
Other non-recurring items(4)
Adjusted EBITDA
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
Lease exit cost
IPO and Secondary Offering costs
Unrealized foreign exchange (gain) loss on
forward contracts
Refinancing costs related to debt
modification at the IPO
Other non-recurring items(4)
U.S. tax reform impact(5)
Related tax effects
Adjusted Net Income
Adjusted Net Income as a Percentage of Net
Revenue
Weighted Average Number of Diluted Shares
Outstanding (thousands)
Adjusted Net Income per Diluted Share
2,596
5,725
(594)
-
-
5,599
-
-
(698)
-
11,540
5,725
(171)
415
-
17,240
-
(115)
(233)
476
103,044
-
8,604
(181)
-
$
42,568 $
38,101
$
161,045
$
132,716
$
117,664
16.4%
17.3%
18.4%
17.9%
17.6%
$
18,723 $
15,901
$
78,728
$
57,093
$
(56,109)
2,596
5,725
(594)
-
-
-
-
(1,378)
5,599
-
-
(698)
-
-
1,503
184
11,540
5,725
(171)
415
-
-
-
(1,694)
17,240
-
(115)
(233)
-
476
1,503
(30)
103,044
-
8,604
(181)
2,867
-
-
6,402
$
25,072 $
22,489
$
94,543
$
75,934
$
64,627
9.7%
10.2%
10.8%
10.2%
9.7%
117,488
$
0.21 $
116,622
0.19
117,358
0.81
$
116,280
0.65
$
104,787
0.62
$
___________________________
Notes:
(4)
(5)
Other non-recurring items in Fiscal 2018 relate to separation costs for a senior Company executive departure.
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 in Q4 2018 and Fiscal 2018.
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21
Q4 2019
14 weeks
Q4 2018
13 weeks
Fiscal 2019
53 weeks
Fiscal 2018
52 weeks
Fiscal 2017
52 weeks
(in thousands of Canadian dollars, unless otherwise noted)
Reconciliation of Comparable Sales to Net Revenue:
Comparable sales(6)
Non-comparable sales
$
205,064 $
53,986
160,897 $
58,907
644,957 $
229,339
540,915 $
202,352
478,517
188,664
Net revenue
$
259,050 $
219,804 $
874,296 $
743,267 $
667,181
___________________________
Notes:
(6)
The comparable sales for a given period represents revenue (net of sales tax, returns and discounts) from boutiques 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 and the 14th week and 53rd week of Q4 2019 and
Fiscal 2019, respectively. For more details, please see the “Comparable Sales Growth” subsection of the “How We Assess the Performance
of Our Business” section of this MD&A.
The following table provides selected financial position data for the periods indicated.
As at
March 3, 2019
As at
February 25, 2018
(restated)(7)
$
629,374 $
164,454
568,376
176,948
Selected Consolidated Financial Position Data:
Total assets
Total non-current liabilities
___________________________
Notes:
(7)
See the section below entitled “Significant New Accounting Standards Recently Adopted” for further details concerning the restatement
relating to the adoption of new accounting standards.
Results of Operations
Analysis of Results for Q4 2019 to Q4 2018
The following section provides an overview of our financial performance during Q4 2019 compared to Q4 2018.
Net Revenue
Net revenue increased by 17.9% to $259.1 million in Q4 2019 from $219.8 million in Q4 2018. The 53rd week of
Fiscal 2019 provided $12.2 million of net revenue. Comparable sales growth of 5.5% was driven by momentum in our
eCommerce business as well as positive performance across our boutique network in both the U.S. and Canada. Net
revenue growth also reflects the addition of seven new boutiques and four expanded or repositioned boutiques since
Q4 2018.
Gross Profit
Gross profit increased by 12.7% to $93.8 million compared to $83.3 million in Q4 2018. As a percent of
revenue, gross profit margin declined 170 basis points to 36.2% due primarily to a 140 basis point impact related to
the weakening of the Canadian dollar compared to Q4 2018, as well as, continued pressure from higher raw material
costs. These factors were partially offset by the benefit from sourcing initiatives, lower markdowns and leverage from
rent.
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SG&A Expenses
SG&A expenses increased by 17.0% to $59.3 million, compared to $50.7 million in Q4 2018. SG&A expenses
were 22.9% of net revenue, a decrease of 20 basis points from Q4 2018. Leverage on fixed costs was partially offset
by continued investments in people, technology and infrastructure.
Other Expenses (Income)
Other expenses were $4.4 million in Q4 2019, compared to other income of $0.3 million in Q4 2018.
Other expenses of $4.4 million in Q4 2019 primarily relates to:
a lease exit cost of $5.7 million, partially offset by
offering transaction cost recoveries of $0.6 million,
interest income of $0.6 million, and
unrealized and realized operational foreign exchange gains of $0.1 million.
Other expenses during Q4 2019 primarily consisted of a one-time expense of $5.7 million related to the exit of a
lease commitment for the planned repositioning of one of our flagship boutiques. The commitment was made due to
the uncertainty of remaining in the existing location as a result of redevelopment plans which were subsequently
abandoned. For brand and financial reasons, we exited the alternative lease commitment, resulting in the one-time
expense.
Other income 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.
Adjusted EBITDA
Adjusted EBITDA increased by 11.7% to $42.6 million, or 16.4% of net revenue in Q4 2019, compared to $38.1
million, or 17.3% of net revenue in Q4 2018, primarily due to the factors discussed above.
Stock-Based Compensation Expense
Stock-based compensation decreased by $3.0 million to $2.6 million in Q4 2019, compared to $5.6 million in
Q4 2018.
Included in Q4 2019 is $2.1 million in expenses primarily related to the accounting for options under our new
option plan and $0.5 million in expenses related to the accounting for options under our legacy option plan.
Included in Q4 2018 is $4.3 million in expenses primarily related to the accounting for options under our new
option plan, $1.2 million in expenses related to the accounting for options under our legacy option plan, and $0.1
million in expenses related to the accounting for our deferred share units. Included in the expense for options under
our new option plan was $2.3 million recognized from the cancellation of 671,899 time-based options granted to a
director and officer. The cancellation of these options results in accelerated vesting in accordance with IFRS 2.
Finance Expense
Finance expense decreased by $0.1 million to $1.2 million in Q4 2019, compared to $1.3 million in Q4 2018.
The decrease was primarily driven by lower average debt outstanding associated with the amendment of our credit
facilities in June 2018, partially offset by higher interest rates.
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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. To the extent that forecasts differ from actual results, adjustments are
recognized in subsequent periods. The statutory income tax rates for Q4 2019 and Q4 2018 were 26.9% and 26.4%,
respectively.
Income tax expense decreased by $2.5 million to $7.5 million in Q4 2019, compared to $10.0 million in Q4
2018 and the effective tax rates for Q4 2019 and Q4 2018 were 28.7% and 38.7%, respectively. The decrease in
income tax expense is mostly due to a re-measurement of deferred tax assets at a reduced tax rate passed by the U.S.
tax reform, resulting in a one-time charge of $1.5 million to deferred income tax expense in Q4 2018. The decrease in
the effective tax rate is primarily driven by this re-measurement adjustment and a decrease in stock-based
compensation expense which is not deductible for tax.
Net Income
Net income increased by 17.7% to $18.7 million in Q4 2019, compared to net income of $15.9 million in Q4
2018. This increase is primarily the result of an 17.9% increase in net revenue as well as a decrease in stock-based
compensation expense and income tax expense, partially offset by a decrease in gross profit margin, along with an
increase in SG&A expenses and other expenses.
Adjusted Net Income
Adjusted Net Income increased by 11.5% to $25.1 million, or $0.21 per diluted share in Q4 2019, compared to
$22.5 million, or $0.19 per diluted share in Q4 2018 primarily due to the factors described above.
Analysis of Results for Fiscal 2019 to Fiscal 2018
The following section provides an overview of our financial performance during Fiscal 2019 compared to Fiscal
2018.
Net Revenue
Net revenue increased by 17.6% to $874.3 million in Fiscal 2019, including $12.2 million from the extra week,
compared to $743.3 million in Fiscal 2018. The increase was primarily driven by the revenue from new, expanded
and repositioned boutiques, as well as comparable sales growth of 9.8%, resulting from continued strength in our
eCommerce business as well as strong performance in boutiques.
Gross Profit
Gross profit increased by 16.0% to $342.9 million in Fiscal 2019, compared to $295.5 million in Fiscal 2018. As a
percent of revenue, gross profit margin declined 60 basis points to 39.2% due primarily to increased warehousing
and distribution costs and the weakening of the Canadian dollar compared to last year.
SG&A Expenses
SG&A expenses increased by 17.1% to $215.3 million, or 24.6% of net revenue in Fiscal 2019, compared to
$183.9 million, or 24.7% of net revenue in Fiscal 2018. The increase in SG&A expenses was primarily due to variable
selling expenses driven by higher sales volume, as well as the impact from continued investments in our strategic
growth initiatives and infrastructure.
Other (Income) Expenses
Other income was $0.4 million in Fiscal 2019, compared to other expenses of $1.9 million in Fiscal 2018.
Other income of $0.4 million in Fiscal 2019 primarily relates to:
15
24
realized foreign exchange gains on the settlement of forward contracts of $2.3 million,
realized and unrealized operational foreign exchange gains of $2.3 million,
interest income of $1.7 million, and
offering transaction cost recoveries of $0.2 million; partially offset by
a lease exit cost of $5.7 million, and
unrealized foreign exchange losses on forward contracts of $0.4 million.
The lease exit cost of $5.7 million related to the exit of a lease commitment for the planned repositioning of one
of our flagship boutiques. The commitment was made due to the uncertainty of remaining in the existing location as a
result of redevelopment plans which were subsequently abandoned. For brand and financial reasons, we exited the
alternative lease commitment, resulting in the one-time expense.
Other expenses 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.
Adjusted EBITDA
Adjusted EBITDA increased by 21.3% to $161.0 million, or 18.4% of net revenue in Fiscal 2019, compared to
$132.7 million, or 17.9% of net revenue in Fiscal 2018 primarily due to the factors described above.
Stock-Based Compensation Expense
Stock-based compensation decreased by $5.7 million to $11.5 million in Fiscal 2019, compared to $17.2 million
in Fiscal 2018.
Included in Fiscal 2019 is $8.6 million in expenses related to the accounting for options under our new option
plan, $2.4 million in expenses related to the accounting for options under our legacy option plan and $0.5 million in
expenses related to the accounting for our deferred share units. Included in Fiscal 2018 is $11.2 million in expenses
related to the accounting for options under our new option plan, $5.7 million in expenses related to the accounting
for options under our legacy option plan and $0.3 million in expenses related to the accounting for our deferred
share units and restricted share units.
Finance Expense
Finance expense decreased by $0.4 million to $4.8 million in Fiscal 2019, compared to $5.2 million in Fiscal
2018. The decrease is primarily driven by lower average debt outstanding associated with the amendment of our
credit facilities in June 2018, partially offset by higher interest rates.
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. To the extent that forecasts differ from actual results, adjustments are
recognized in subsequent periods. The statutory income tax rates for Fiscal 2019 and Fiscal 2018 were 26.9% and
26.4%, respectively.
Income tax expense increased by $2.7 million to $32.9 million in Fiscal 2019, compared to $30.2 million in Fiscal
2018 and the effective tax rates for Fiscal 2019 and Fiscal 2018 were 29.5% and 34.6%, respectively. The increase in
income tax expense is due to an increase in income from operations. The decrease in the effective tax rate compared
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25
to Fiscal 2018 is due to a decrease in the amount of stock-based compensation expense and a one time re-
measurement of deferred tax assets at a reduced rate passed by the U.S. tax reform in the prior year.
Net Income
Net income increased by 37.9% to $78.7 million in Fiscal 2019, compared to net income of $57.1 million in
Fiscal 2018. This increase is primarily the result of a 17.6% increase in net revenue and an increase in other income, as
well as a decrease in stock-based compensation expense and finance expense, partially offset by lower gross profit
margin and higher SG&A expenses and income tax expense.
Adjusted Net Income
Adjusted Net Income increased by 24.5% to $94.5 million, or $0.81 per diluted share in Fiscal 2019, compared
to $75.9 million, or $0.65 per diluted share in Fiscal 2018, primarily due to the factors described above.
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26
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 2019
Q3
Q2
Q1
Q4
14 weeks 13 weeks
13 weeks 13 weeks
13 weeks
Fiscal 2018
Q3
13 weeks
Q2
Q1
13 weeks 13 weeks
(in thousands of Canadian dollars, unless otherwise noted)
Consolidated Statements of
Operations:
Net revenue
Gross profit
Income from operations
Net income
Percentage of Net Revenue:
Net revenue
Gross profit
Income from operations
Net income
Adjusted EBITDA (8)
Adjusted Net Income (8)
Weighted average number of diluted
shares – IFRS (in thousands)
Total number of diluted shares – prior
$
259,050 $
93,847
31,902
18,723
242,876 $ 205,359 $ 167,011 $ 219,804 $ 204,449 $ 173,968 $ 145,046
57,538
83,285
104,789
12,028
26,948
45,339
8,129
15,901
32,600
91,538
39,904
28,073
76,734
21,681
15,115
63,130
15,514
4,990
67,543
16,731
12,290
100.0%
36.2%
12.3%
7.2%
100.0%
43.1%
18.7%
13.4%
100.0%
37.4%
10.6%
7.4%
100.0%
40.4%
10.0%
7.4%
100.0%
37.9%
12.3%
7.2%
100.0%
44.8%
19.5%
13.7%
100.0%
36.3%
8.9%
2.9%
100.0%
39.7%
8.3%
5.6%
$
42,568 $
25,072
57,093 $
35,933
33,032 $
18,295
28,352 $
15,243
38,101 $
22,489
49,962 $
30,595
20,700 $
10,380
23,953
12,470
117,488
117,681
117,410
116,780
116,622
116,168
116,244
116,375
methodology (in thousands)
118,049
118,785
117,995
117,519
117,253
116,851
116,745
117,206
Other Performance Measures:
Comparable Sales Growth(8)
Boutiques
Number of boutiques, beginning of
period
New boutiques added
Boutique repositioned into a flagship
boutique(9)
Number of boutiques, end of period
Boutiques expanded or repositioned
___________________________
Note:
5.5%
12.9%
11.5%
10.9%
6.0%
6.3%
5.4%
9.3%
92
-
(1)
91
1
90
2
-
92
-
87
3
-
90
1
85
2
-
87
2
84
1
-
85
2
83
1
-
84
3
81
2
-
83
1
79
2
-
81
1
(8) 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”.
(9) Q4 2019 includes the reposition of one of the Company’s banner locations into the flagship boutique located on the same street.
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, 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.
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Historically, the funding for any such investments has come from cash flows from operating activities and/or our credit
facilities.
Credit Facilities
On June 28, 2018, we amended our term loan and revolving credit facility (collectively the “Credit Facilities”)
with our syndicate of lenders. The amendment agreement included a reduction of the term loan from $118.7 million
to $75.0 million and an increase of the revolving credit facility from $70.0 million to $100.0 million. The amended
Credit Facilities mature on May 22, 2022 and have no scheduled principal payments prior to maturity. Interest is paid
on a monthly basis. Under the amended Credit Facilities, we have the option to borrow using Banker’s Acceptance
borrowings, LIBO rate borrowings, or Canadian prime rate borrowings plus a marginal interest rate between 0.50%
and 2.50%. As part of the amendment, we made a $43.7 million term loan repayment on June 27, 2018.
In addition, we also have letters of credit facilities of $75.0 million, secured pari passu with the Credit Facilities.
The interest rate for the letters of credit is between 1.00% and 2.50%.
As at March 3, 2019, the aggregate amount outstanding under our term loan credit facility was $75.0 million. No
amounts were drawn on the revolving credit facility as at March 3, 2019. The term loan 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.
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 2019 Q4 2018 Fiscal 2019 Fiscal 2018
52 weeks
13 weeks
53 weeks
14 weeks
Net cash (used in) generated from operating activities
Net cash used in financing activities
Net cash used in investing activities
Effect of exchange rate changes on cash and cash
equivalents
$
(7,386) $
(56)
(14,677)
38,809 $
(12,694)
(18,784)
96,175 $ 105,358
(5,974)
(46,193)
(66,330)
(62,010)
(24)
(35)
450
(106)
(Decrease) increase in cash and cash equivalents
$
(22,143) $
7,296 $
(11,578) $
32,948
(in thousands of Canadian dollars)
Analysis of Cash Flows for the Fourth Quarter and Fiscal 2019
Cash Flows (Used in) Generated from Operating Activities
For Q4 2019, cash flows used in operating activities totalled $7.4 million, compared to cash flows of $38.8
million generated in Q4 2018. This decrease was primarily attributable to a higher use of working capital due to
increased volume and the timing of inventory purchases and a decrease in proceeds received from deferred lease
inducements, partially offset by higher Adjusted EBITDA.
For Fiscal 2019, cash flows generated from operating activities totalled $96.2 million, compared to $105.4
million for Fiscal 2018. This decrease was primarily attributable to a higher use of working capital due to increased
volume and the timing of inventory purchases, partially offset by higher Adjusted EBITDA, and lower income tax
payments made in Fiscal 2019.
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Cash Flows Used in Financing Activities
For Q4 2019, cash flows used in financing activities totalled $0.1 million, compared to $12.7 million used in Q4
2018. This change 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, and repurchase of subordinate voting shares for
cancellation in Q4 2019 under our normal course issuer bid.
For Fiscal 2019, cash flows used in financing activities totalled $46.2 million, compared to $6.0 million used in
Fiscal 2018. This change was primarily due to a $43.7 million term loan repayment made in Q2 2019 as a result of our
debt refinancing and the repurchase of subordinate voting shares for cancellation in Fiscal 2019 under our normal
course issuer bid. See “Current Share Information” below.
Cash Flows Used in Investing Activities
For Q4 2019, cash flows used in investing activities totalled $14.7 million, compared to $18.8 million in Q4
2018. Investing activities in Q4 2019 relate to new boutiques and boutique expansions and repositions.
For Fiscal 2019, cash flows used in investing activities totalled $62.0 million, compared to $66.3 million in Fiscal
2018. Investing activities in Fiscal 2019 relate to new boutiques and boutique expansions and repositions, as well as
investment in our new Greater Vancouver distribution centre.
Contractual Obligations
The following table summarizes our significant undiscounted maturities of our contractual obligations and
commitments as at March 3, 2019.
Accounts payable and accrued liabilities
Assumed interest on long-term debt(10)
Debt(11)
$
62,736 $
- $
2,668
-
5,952
75,000
- $
-
-
62,736
8,620
75,000
Less than
1 year
1 to
5 years
More than
5 years
(in thousands of Canadian dollars)
Total
Total contractual obligations
___________________________
Notes:
(10) Based on interest rate in effect as at March 3, 2019.
(11) The Credit Facilities require mandatory loan prepayments by Aritzia of principal and interest if certain events occur. The Credit Facilities
146,356
65,404 $
80,952 $
- $
$
mature on May 22, 2022 and have no scheduled principal payments prior to maturity.
Off-Balance Sheet Arrangements and Commitments
The following table summarizes our off-balance sheet arrangements and commitments as at March 3, 2019.
Less than
1 year
1 to
5 years
5 years
(in thousands of Canadian dollars)
More than
Total
Operating leases
Product purchase obligations
$
83,551 $
45,636
356,517 $
235,354 $
-
-
675,422
45,636
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 rent based on a percentage of revenue).
$
129,187 $
356,517 $
235,354 $
721,058
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29
Our third party manufacturers purchase raw materials on our behalf to be used for future production. As at
March 3, 2019, we had purchase obligations of $45.6 million, which represent commitments for fabric to be used
during upcoming seasons, made in the normal course of business.
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 March 3, 2019, letters of credit totalling $43.1 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 March 3, 2019.
Subsequent to year end, we entered into additional operating leases, increasing the total minimum lease
commitments by $20.4 million (excluding other occupancy charges and rent based on percentage of revenue).
See also “Significant New Accounting Standards Issued But Not Yet Adopted – IFRS 16 – Leases” below.
Financial Instruments
From time to time, we 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. 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. As at March 3, 2019, we did not have any outstanding foreign currency forward contracts.
Related Party Transactions (in thousands of Canadian dollars unless otherwise indicated)
Prior to the August 2018 Secondary Offering, we were ultimately controlled by Canada Retail Holdings, L.P., our
ultimate parent and the Berkshire Shareholder. Effective August 7, 2018, upon completion of the August 2018
Secondary Offering, neither Canada Retail Holdings, L.P. nor any other entity maintained ultimate control of us.
Subsequent to the year ended March 3, 2019, upon completion of the March 2019 Secondary Offering and Share
Repurchase, the Berkshire Shareholder sold its entire investment in us. As a result, effective March 8, 2019, the
Company is ultimately controlled by AHI Holdings Inc., an entity controlled by a director and officer of the Company
(“Principal Shareholder”).
We entered into the following transactions with related parties:
Total reimbursements to Berkshire for travel, lodging and other costs for the year ended March 3, 2019 was $59
(February 25, 2018 - $66). As at March 3, 2019, $nil was included in accounts payable and accrued liabilities
(February 25, 2018 - $nil).
In connection with the March 2019 Secondary Offering and Share Repurchase, we incurred an aggregate of
$2.5 million in professional fees and other costs, $185 of which are costs incurred on behalf of the selling
shareholders. At March 3, 2019, $2.5 million was included in accounts receivable, which represents the full amount
being reimbursed by the selling shareholders participating in the Share Repurchase, including the Berkshire
Shareholder. Also in connection with the March 2019 Secondary Offering and Share Repurchase, $0.7 million in costs
relating to our IPO, previously included in accounts payable and accrued liabilities, was extinguished.
During the year ended March 3, 2019, we paid $4.1 million (February 25, 2018 - $3.6 million), for rent of
premises and $0.9 million (February 25, 2018 - $0.4 million) for the use of a leased asset wholly or partially owned by
companies that are owned by a director and officer of the Company. As at March 3, 2019, $71 was included in
accounts payable and accrued liabilities (February 25, 2018 - $100) and $52 was included in prepaid expenses and
other current assets (February 25, 2018 - $nil).
During the year ended February 25, 2018, we purchased $8.3 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.
Transactions with Key Management
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30
Key management includes our directors and executive team. Compensation awarded to key management
includes:
Q4 2019
14 weeks
Q4 2018
13 weeks
(in thousands of Canadian dollars)
Fiscal 2019
53 weeks
Fiscal 2018
52 weeks
Salaries, directors’ fees and short-term benefits $
Stock-based compensation expense(12)
980 $
645
852 $
3,326
3,478 $
3,695
3,117
7,358
Notes:
(12)
Included in the expense for Q4 2018 and Fiscal 2018 was $2.3 million of expense recognized from the cancellation of 671,899 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.
$
1,625 $
4,178 $
7,173 $
10,475
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.
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31
Stock-Based Compensation Expense
Stock-based compensation expense requires the use of estimates in the Black-Scholes option pricing model,
including stock price volatility and the expected life of options.
Gift Card Breakage
Recognition of gift card breakage requires the use of judgment in defining our average gift card breakage rate,
based on historical redemption rates. The resulting revenue from breakage is recognized in proportion to actual gift
card redemptions.
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
IFRS 15 – Revenue from Contracts with Customers
Effective February 26, 2018, we adopted IFRS 15 issued in May 2014, and amended in September 2015 and
April 2016. IFRS 15 outlines a single comprehensive five-step framework for the recognition, measurement and
disclosure of revenue from contracts with customers, excluding contracts within the scope of the accounting
standards on leases, insurance contracts and financial instruments. IFRS 15 is effective for annual periods beginning
on or after January 1, 2018. We adopted the standard using the full retrospective approach. The adoption of IFRS 15
did not have a material impact on our consolidated financial statements other than on the recognition of our sales
return allowance. Under IAS 18, “Revenue”, the sales return allowance on the consolidated Statement of Financial
Position was recognized on a net basis, with no adjustment to other current assets. Upon adoption of IFRS 15, the
sales return allowance is recognized on a gross basis, resulting in an adjustment of the Statement of Financial Position
line items noted below. As the impact is limited to these two financial statement line items, a February 25, 2018
opening Statement of Financial Position has not been presented.
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32
The financial impact of the adoption of IFRS 15 is as follows:
As at February 25, 2018
As at February 26, 2017
Prepaid expenses and other
current assets
Accounts payable and accrued
liabilities(13)
As
previously
reported
15,307
66,594
(13) Includes current portion of lease obligation
IFRS 15
adjustments
As
restated
As
previously
reported
IFRS 15
adjustments
As
restated
698
698
16,005
12,743
67,292
51,250
696
696
13,439
51,946
IFRS 9 – Financial Instruments: Classification and Measurement and Impairment
Effective February 26, 2018, we adopted (i) IFRS 9, issued in July 2014, which replaces IAS 39, “Financial
Instruments: Recognition and Measurement”, and (ii) related amendments to IFRS 7, “Financial Instruments:
Disclosures”. The new standard introduces new requirements for classification and measurement of financial assets
and liabilities, impairment of financial assets and hedge accounting. IFRS 9 is effective for annual periods beginning
on or after January 1, 2018. We applied the requirements of the new standard retrospectively.
IFRS 9 contains a new classification and measurement approach for financial assets that reflects the business
model in which the assets are managed and their cash flow characteristics. Financial assets are classified and
measured based on three categories: amortized cost; fair value through other comprehensive income; or fair value
through profit or loss. Financial liabilities are classified and measured based on two categories: amortized cost or fair
value through profit or loss.
IFRS 9 replaces the incurred loss model in IAS 39 with a forward-looking expected credit loss model (“ECL”). This
new model applies to financial assets measured at amortized cost. Under IFRS 9, credit losses are recognized earlier
than under IAS 39.
The adoption of IFRS 9 did not result in a material change in classification, measurement or the carrying amount
of our financial assets and liabilities.
Amendments to IFRS 2 – Share-based Payment
Effective February 26, 2018, we adopted amendments to IFRS 2, issued in June 2016, which clarify how to
account for certain types of share-based payment transactions. The amendments provide requirements on the
accounting for: (i) the effects of vesting and non-vesting conditions on the measurement of cash-settled share-based
payments; (ii) share-based payment transactions with a net settlement feature for withholding tax obligations; and (iii)
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. The adoption of the amendments to IFRS 2 did not have a material impact on our consolidated
financial statements.
Significant New Accounting Standards Issued But Not Yet Adopted
IFRS 16 - Leases
In January 2016, the IASB issued IFRS 16, which sets out a new model for lease accounting replacing IAS 17,
“Leases”. 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.
24
33
Transitional provisions have been provided. IFRS 16 is effective for annual periods beginning on or after January 1,
2019. Early adoption is permitted if IFRS 15 has been adopted.
We will apply the new standard for Fiscal 2020 using the modified retrospective method. The modified
retrospective method applies the requirements of IFRS 16 retrospectively with no restatement of the comparative
period.
The new standard is expected to materially increase the assets and liabilities on the consolidated statement of
financial position as the majority of our operating leases disclosed in the “Contractual Obligations” section of this
MD&A are in scope for IFRS 16. Based on the information as at March 3, 2019, as a result of the initial application of
the standard, we estimate to recognize approximately $460 million to $510 million of lease liabilities and $340
million to $390 milion of right-of-use assets on our consolidated statements of financial position. The difference, net
of the deferred tax impact, will be recorded in opening retained earnings. The right-of-use assets will be depreciated
on a straight-line basis over the remaining lease term. The lease liability will be carried at amortized cost with a
finance charge recorded from the amortization of the lease liability discount. The depreciation expense of the right-
of-use assets and the finance charge of the lease liability will partially replace the lease-related expenses recorded in
costs of goods sold and selling, general and administrative expenses, previously recognized on a straight-line basis
over the lease term under IAS 17. Variable lease payments will continue to be expensed as incurred.
The new standard will not change the amount of cash transferred between the lessor and lessee, but will
change the presentation of the operating and financing cash flows presented in our consolidated statement of cash
flows.
We have elected to apply the following practical expedients, as described under IFRS 16:
i)
ii)
iii)
recognition exemption of short term leases;
recognition exemption of low-value leases; and
grandfather prior conclusions on contracts containing leases.
Annual Improvements
In December 2017, the IASB issued amendments to IAS 12, “Income Taxes” and IAS 23, “Borrowing Costs” to
clarify existing requirements. These clarification amendments will be effective for annual periods beginning on or
after January 1, 2019. The implementation of these clarification amendments is not expected to have a material
impact on our consolidated financial statements.
Outlook
The first quarter of Fiscal 2020 is off to a strong start with the spring and summer collections being well-received by
clients, with quarter to date comparable sales growth trending sequentially higher than Q4 2019.
For Fiscal 2020, we currently expect the following:
Net revenue growth in the low double-digits.
Six new boutiques in the U.S., including the Hudson Yards boutique in New York already opened in the first
quarter.
Three boutique expansions or repositions in Canada, including the expansion of the Mapleview boutique in
greater Toronto already opened in the first quarter.
Gross profit margin flat as compared to Fiscal 2019. Gross profit margin is expected to be slightly higher in
the first half of the year due to occupancy cost leverage being partially offset by the weakening of the
Canadian dollar, and slightly lower in the second half of the year due to higher raw material costs for the
fall/winter season.
SG&A to grow faster than revenue, as we will continue to make strategic investments in technology and
infrastructure to support our long term growth. A portion of the investments related to our eCommerce
25
34
platform improvements, omni-channel capabilities and other infrastructure including the product life-cycle
management and data analytics platforms will be expensed within SG&A. Incremental SG&A expenses
related to these initiatives in Fiscal 2020 are expected to be approximately $7 million to $8 million, and occur
primarily in the second and third quarters.
Net capital expenditures in the range of $45 million to $50 million.
Overall, we remain on track to meet or exceed our stated fiscal 2021 performance targets.
See “Forward-Looking Information”.
Risk Factors
For a detailed description of risk factors associated with the Company, refer to the “Risk Factors” section of our
AIF, which is available on SEDAR at www.sedar.com.
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 may 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 Fiscal 2019, 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 our clients, 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 Credit Facility is used to maintain liquidity.
26
35
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 and timely
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 - Certification of Disclosure in Issuers’ Annual and Interim
Filings (“NI 52-109”), 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 at March 3, 2019. Based on that evaluation, the CEO and the CFO have concluded that the design
and operation of the system of disclosure controls and procedures were effective as at March 3, 2019.
Although the Company’s disclosure controls and procedures were operating effectively as of March 3, 2019,
there can be no assurance that the Company’s disclosure controls and procedures will detect or uncover all failures of
persons within the Company to disclose material information otherwise required to be set forth in the Company’s
regulatory filings.
Internal Control over Financial Reporting
Management is also responsible for establishing and maintaining adequate internal controls over financial
reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial reports for external purposes in accordance with IFRS. The Company’s internal controls 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.
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 March 3, 2019. In making this assessment, management, including the CEO and CFO, used the
framework set forth in the Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on that evaluation, the CEO and the CFO have concluded that the
design and operation of the Company’s internal controls over financial reporting, as defined by NI 52-109, were
effective as at March 3, 2019.
In designing such controls, it should be recognized that due to inherent limitations, any control, no matter how
well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and
may not prevent or detect misstatements. Additionally, management is required to use judgment in evaluating
controls and procedures. Therefore, even when determined to be designed effectively, disclosure controls and
internal control over financial reporting can provide only reasonable assurance with respect to disclosure, reporting
and financial statement preparation.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal controls over financial reporting during the quarter and year ended
March 3, 2019 that have materially affected, or are reasonably likely to materially affect, our internal controls over
financial reporting.
Current Share Information
On May 10, 2018, we announced the commencement of a normal course issuer bid (“NCIB”) to purchase and
cancel up to 5,429,658 subordinate voting shares commencing May 15, 2018 and ending May 14, 2019. During
Fiscal 2019, we repurchased 549,880 subordinate voting shares for cancellation at an average price of $17.07 per
27
36
subordinate voting share, for total cash consideration of $9.4 million. Due to the Share Repurchase, we have
suspended further purchases under our NCIB. We will evaluate renewing our NCIB in due course.
On May 31, 2018, we entered into an automated share purchase plan (“ASPP”) with a designated broker for the
purpose of permitting us to purchase our subordinate voting shares under the NCIB during self-imposed blackout
periods. The volume of purchases is determined by the broker in its sole discretion based on purchase price and
maximum volume parameters established by us under the ASPP. We record a liability for purchases that are
estimated to occur during blackout periods based on the parameters of the NCIB and ASPP. On March 3, 2019, we
cancelled our ASPP.
Shareholders may receive a copy of the TSX notice in respect of the NCIB, without charge, by contacting the
Company.
As of May 8, 2019, an aggregate of 83,238,108 subordinate voting shares, 24,537,349 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 Shareholder. As of May 8, 2019, an aggregate of 9,617,605
options to acquire subordinate voting shares are outstanding.
See “Secondary Offerings” section of this MD&A for further details on current share information.
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”.
28
37
Aritzia Inc.
Consolidated Financial Statements
March 3, 2019 and February 25, 2018
(in thousands of Canadian dollars)
38
Independent auditor’s report
To the Shareholders of Aritzia Inc.
Our opinion
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects,
the financial position of Aritzia Inc. and its subsidiaries (together, the Company) as at March 3, 2019 and
February 25, 2018, and its financial performance and its cash flows for the years then ended in accordance
with International Financial Reporting Standards (IFRS).
What we have audited
The Company’s consolidated financial statements comprise:
the consolidated statements of financial position as at March 3, 2019 and February 25, 2018;
the consolidated statements of operations for the years then ended;
the consolidated statements of comprehensive income for the years then ended;
the consolidated statements of changes in shareholders’ equity for the years then ended;
the consolidated statements of cash flows for the years then ended; and
the notes to the consolidated financial statements, which include a summary of significant
accounting policies.
Basis for opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our
responsibilities under those standards are further described in the Auditor’s responsibilities for the audit
of the consolidated financial statements section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
opinion.
Independence
We are independent of the Company in accordance with the ethical requirements that are relevant to our
audit of the consolidated financial statements in Canada. We have fulfilled our other ethical
responsibilities in accordance with these requirements.
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.
39
Other information
Management is responsible for the other information. The other information comprises the Management’s
Discussion and Analysis, which we obtained prior to the date of this auditor’s report and the information,
other than the consolidated financial statements and our auditor's report thereon, included in the Annual
Report, which is expected to be made available to us after that date.
Our opinion on the consolidated financial statements does not cover the other information and we do not
and will not express an opinion or any form of assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the
other information identified above and, in doing so, consider whether the other information is materially
inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or
otherwise appears to be materially misstated.
If, based on the work we have performed on the other information that we obtained prior to the date of
this auditor’s report, we conclude that there is a material misstatement of this other information, we are
required to report that fact. We have nothing to report in this regard. When we read the information, other
than the consolidated financial statements and our auditor's report thereon, included in the Annual
Report, if we conclude that there is a material misstatement therein, we are required to communicate the
matter to those charged with governance.
Responsibilities of management and those charged with governance for the
consolidated financial statements
Management is responsible for the preparation and fair presentation of the consolidated financial
statements in accordance with IFRS, 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.
In preparing the consolidated financial statements, management is responsible for assessing the
Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going
concern and using the going concern basis of accounting unless management either intends to liquidate
the Company or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Company’s financial reporting process.
40
Auditor’s responsibilities for the audit of the consolidated financial statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as
a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s
report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee
that an audit conducted in accordance with Canadian generally accepted auditing standards will always
detect a material misstatement when it exists. Misstatements can arise from fraud or error and are
considered material if, individually or in the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these consolidated financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise
professional judgment and maintain professional skepticism throughout the audit. We also:
Identify and assess the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error, design and perform audit procedures responsive to those risks, and
obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk
of not detecting a material misstatement resulting from fraud is higher than for one resulting from
error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the
override of internal control.
Obtain an understanding of internal control relevant to the audit 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 Company’s internal control.
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting
estimates and related disclosures made by management.
Conclude on the appropriateness of management’s use of the going concern basis of accounting and,
based on the audit evidence obtained, whether a material uncertainty exists related to events or
conditions that may cast significant doubt on the Company’s ability to continue as a going concern.
If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s
report to the related disclosures in the consolidated financial statements or, if such disclosures are
inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to
the date of our auditor’s report. However, future events or conditions may cause the Company to
cease to continue as a going concern.
Evaluate the overall presentation, structure and content of the consolidated financial statements,
including the disclosures, and whether the consolidated financial statements represent the
underlying transactions and events in a manner that achieves fair presentation.
Obtain sufficient appropriate audit evidence regarding the financial information of the entities or
business activities within the Company to express an opinion on the consolidated financial
statements. We are responsible for the direction, supervision and performance of the group audit.
We remain solely responsible for our audit opinion.
41
We communicate with those charged with governance regarding, among other matters, the planned scope
and timing of the audit and significant audit findings, including any significant deficiencies in internal
control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant
ethical requirements regarding independence, and to communicate with them all relationships and other
matters that may reasonably be thought to bear on our independence, and where applicable, related
safeguards.
The engagement partner on the audit resulting in this independent auditor’s report is John DeLucchi.
(signed) PricewaterhouseCoopers LLP
Chartered Professional Accountants
Vancouver, British Columbia
May 9, 2019
42
Aritzia Inc.
Consolidated Statements of Financial Position
As at March 3, 2019 and February 25, 2018
(in thousands of Canadian dollars)
Assets
Current assets
Cash and cash equivalents
Accounts receivable
Income taxes recoverable
Inventory
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 long-term debt
Deferred revenue
Total current liabilities
Other non-current liabilities
Deferred tax liabilities
Long-term debt
Total liabilities
Shareholders’ equity
Share capital
Contributed surplus
Retained earnings
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
Subsequent events (notes 1, 18 and 19)
Commitments and contingencies (note 18)
Note
March 3,
2019
February 25,
2018
(Restated -
note 2)
$
16
5
6
7
7
16
$
8 $
16
10
9
16
10
12
$
$
$
100,897
4,355
-
112,183
18,422
235,857
167,593
64,427
151,682
2,209
7,606
629,374
62,736
3,644
-
24,231
90,611
69,828
20,002
74,624
255,065
199,517
65,806
109,339
(353)
374,309
$
629,374
$
112,475
2,413
1,728
78,833
16,005
211,454
135,672
61,387
151,682
1,664
6,517
568,376
67,292
-
19,127
19,308
105,727
59,566
17,922
99,460
282,675
171,130
76,522
38,613
(564)
285,701
568,376
Approved by the Board of Directors
___________Brian Hill Director _______Marnie Payne Director
The accompanying notes are an integral part of these consolidated financial statements.
43
Aritzia Inc.
Consolidated Statements of Operations
For the years ended March 3, 2019 and February 25, 2018
(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 from operations
Finance expense
Other (income) expenses
Income before income taxes
Income tax expense
Net income
Net income per share
Basic
Diluted
Weighted average number
of shares outstanding (thousands)
Basic
Diluted
Note
March 3,
2019
February 25,
2018
17 $
874,296 $
743,267
15
15
13, 15
15
11, 15
16
531,383
342,913
215,297
11,540
116,076
4,821
(395)
111,650
32,922
447,776
295,491
183,857
17,240
94,394
5,221
1,890
87,283
30,190
$
78,728 $
57,093
14 $
14
0.70
0.67
$
0.52
0.49
14
14
113,015
117,358
110,180
116,280
The accompanying notes are an integral part of these consolidated financial statements.
44
Aritzia Inc.
Consolidated Statements of Comprehensive Income
For the years ended March 3, 2019 and February 25, 2018
(in thousands of Canadian dollars)
Net income
Other comprehensive income (loss)
Items that are or may be reclassified subsequently to net
income:
Foreign currency translation adjustment
Comprehensive income
March 3,
2019
February 25,
2018
$
78,728 $
57,093
211
(187)
$
78,939 $
56,906
The accompanying notes are an integral part of these consolidated financial statements.
45
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T
Aritzia Inc.
Consolidated Statements of Cash Flows
For the years ended March 3, 2019 and February 25, 2018
(in thousands of Canadian dollars)
Note
March 3,
2019
February 25,
2018
Operating activities
Net income for the year
Adjustments for:
$
78,728 $
Depreciation and amortization
Finance expense
Stock-based compensation expense
Amortization of deferred rent and deferred lease
inducements
6, 7
15
13
11
16
20
10
10
13
12
6
7
Unrealized foreign exchange loss (gain) on
forward contracts
Income tax expense
Proceeds from deferred lease inducements
Cash generated before non-cash working capital balances
and interest and income taxes
Net change in non-cash working capital balances
Cash generated before interest and income taxes
Interest paid
Income taxes paid
Net cash generated from operating activities
Financing activities
Repayment of lease obligations
Repayment of long-term debt
Payment of financing fees
Proceeds from options exercised
Subordinate voting shares repurchased for cancellation
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
(Decrease) 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)
27,065
4,821
11,540
(905)
415
32,922
12,148
166,734
(39,616)
127,118
(4,709)
(26,234)
96,175
(454)
(43,738)
(667)
8,057
(9,391)
(46,193)
(56,425)
(5,585)
(62,010)
450
(11,578)
112,475
57,093
22,844
5,221
17,240
4,947
(233)
30,190
7,077
144,379
13,013
157,392
(5,314)
(46,720)
105,358
(928)
(15,321)
-
10,275
-
(5,974)
(61,061)
(5,269)
(66,330)
(106)
32,948
79,527
$
100,897 $
112,475
The accompanying notes are an integral part of these consolidated financial statements.
47
Aritzia Inc.
Notes to Consolidated Financial Statements
March 3, 2019 and February 25, 2018
(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. The Company’s assortment of women’s fashion apparel and accessories addresses a
range of style preferences and lifestyle requirements. As at March 3, 2019, the Company had 91 boutiques
(February 25, 2018 – 85 boutiques).
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 7, 2018, the Company completed a secondary offering (the “August 2018 Secondary Offering”)
on a bought deal basis of its subordinate voting shares through a secondary sale of shares by certain
shareholders. The August 2018 Secondary Offering of 6,050,000 subordinate voting shares raised gross
proceeds of $100.1 million for the selling shareholders, at a price of $16.55 per subordinate voting share.
The Company did not receive any proceeds from the August 2018 Secondary Offering. As part of the
August 2018 Secondary Offering, certain selling shareholders exchanged 5,880,000 of their multiple
voting shares for subordinate voting shares. Underwriting fees were paid by the selling shareholders, and
other expenses related to the August 2018 Secondary Offering of $0.6 million are being paid by the
Company.
Subsequent to the year ended March 3, 2019, on March 8, 2019, the Company completed a secondary
offering (the “March 2019 Secondary Offering”) on a bought deal basis of its subordinate voting shares
through a secondary sale of shares by certain shareholders. The March 2019 Secondary Offering of
19,505,000 subordinate voting shares raised gross proceeds of $329.6 million for the selling shareholders,
at a price of $16.90 per subordinate voting share (the “March 2019 Offering Price”). The Company did not
receive any proceeds from the March 2019 Secondary Offering. Underwriting fees were paid by the selling
shareholders.
Concurrent with the completion of the March 2019 Secondary Offering, on March 8, 2019, the Company
also completed its purchase of 6,333,653 subordinate voting shares and multiple voting shares (the
“Shares”) for cancellation from certain shareholders, including an investment vehicle (the “Berkshire
Shareholder”) managed by Berkshire Partners LLC (“Berkshire”) (the “Share Repurchase”). The purchase
price per Share paid by the Company under the Share Repurchase was the same as the March 2019
Offering Price and resulted in an aggregate purchase price of $107.0 million paid to the selling
shareholders. Total expenses related to the March 2019 Secondary Offering and Share Repurchase of $2.5
million are being paid by the Company and are being reimbursed by the selling shareholders participating
in the Share Repurchase, including the Berkshire Shareholder.
Upon completion of the March 2019 Secondary Offering and Share Repurchase on March 8, 2019, the
Berkshire Shareholder has no remaining equity interest in the Company.
48
(1)
Aritzia Inc.
Notes to Consolidated Financial Statements
March 3, 2019 and February 25, 2018
(in thousands of Canadian dollars, unless otherwise noted)
The Company’s subordinate voting shares are listed on the Toronto Stock Exchange under the stock
symbol “ATZ”.
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. Fiscal 2019 was a
53-week year. Fiscal 2018 was a 52-week year. All references to 2019 and 2018 represent the fiscal years
ended March 3, 2019 and February 25, 2018, 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 quarters of each fiscal year as a result of increased net revenue during the back-to-school and
holiday seasons.
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, deferred share units and restricted share units, as disclosed in the accounting
policies set out in note 3.
These consolidated financial statements were authorized for issue by the Board of Directors on May 9,
2019.
2 Significant new accounting standards
Standards recently adopted
IFRS 15 – Revenue from Contracts with Customers
Effective February 26, 2018, the Company adopted IFRS 15 issued in May 2014, and amended in
September 2015 and April 2016. IFRS 15 outlines a single comprehensive five-step framework for the
recognition, measurement and disclosure of revenue from contracts with customers, excluding contracts
within the scope of the accounting standards on leases, insurance contracts and financial instruments. IFRS
15 is effective for annual periods beginning on or after January 1, 2018. The Company adopted the
standard using the full retrospective approach. The adoption of IFRS 15 did not have a material impact on
the Company’s consolidated financial statements other than on the Company’s recognition of its sales
return allowance. Under IAS 18, “Revenue”, the sales return allowance on the consolidated Statement of
Financial Position was recognized on a net basis, with no adjustment to other current assets. Upon adoption
of IFRS 15, the sales return allowance is recognized on a gross basis, resulting in an adjustment of the
(2)
49
Aritzia Inc.
Notes to Consolidated Financial Statements
March 3, 2019 and February 25, 2018
(in thousands of Canadian dollars, unless otherwise noted)
Statement of Financial Position line items noted below. As the impact is limited to these two financial
statement line items, a February 25, 2018 opening Statement of Financial Position has not been presented.
The financial impact of the adoption of IFRS 15 is as follows:
As at February 25, 2018
As at February 26, 2017
As
previously
reported
IFRS-15
adjustments As restated
As
previously
reported
IFRS-15
adjustments As restated
Prepaid expenses and other
current assets
Accounts payable and
accrued liabilities(1)
15,307
66,594
698
698
16,005
12,743
67,292
51,250
696
696
13,439
51,946
(1) Includes current portion of lease obligation
IFRS 9 – Financial Instruments: Classification and Measurement and Impairment
Effective February 26, 2018, the Company adopted (i) IFRS 9, issued in July 2014, which replaces IAS 39,
“Financial Instruments: Recognition and Measurement”, and (ii) related amendments to IFRS 7, “Financial
Instruments: Disclosures”. The new standard introduces new requirements for classification and
measurement of financial assets and liabilities, impairment of financial assets and hedge accounting. IFRS 9
is effective for annual periods beginning on or after January 1, 2018. The Company applied the
requirements of the new standard retrospectively.
IFRS 9 contains a new classification and measurement approach for financial assets that reflects the
business model in which the assets are managed and their cash flow characteristics. Financial assets are
classified and measured based on three categories: amortized cost; fair value through other
comprehensive income; or fair value through profit or loss. Financial liabilities are classified and measured
based on two categories: amortized cost or fair value through profit or loss.
IFRS 9 replaces the incurred loss model in IAS 39 with a forward-looking expected credit loss model
(“ECL”). This new model applies to financial assets measured at amortized cost. Under IFRS 9, credit losses
are recognized earlier than under IAS 39.
The adoption of IFRS 9 did not result in a material change in classification, measurement or the carrying
amount of financial assets and liabilities of the Company.
Amendments to IFRS 2 – Share-based Payment
Effective February 26, 2018, the Company adopted amendments to IFRS 2, issued in June 2016, which
clarify how to account for certain types of share-based payment transactions. The amendments provide
requirements on the accounting for: (i) the effects of vesting and non-vesting conditions on the
measurement of cash-settled share-based payments; (ii) share-based payment transactions with a net
settlement feature for withholding tax obligations; and (iii) 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. The
(3)
50
Aritzia Inc.
Notes to Consolidated Financial Statements
March 3, 2019 and February 25, 2018
(in thousands of Canadian dollars, unless otherwise noted)
adoption of the amendments to IFRS 2 did not have a material impact on the Company’s consolidated
financial statements.
Standards issued but not yet adopted
IFRS 16 – Leases
In January 2016, the IASB issued IFRS 16, which sets out a new model for lease accounting replacing IAS
17, “Leases”. 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. Early adoption is permitted if IFRS 15 has been
adopted.
The Company will apply the new standard for fiscal 2020 using the modified retrospective method. The
modified retrospective method applies the requirements of IFRS 16 retrospectively with no restatement of
the comparative period.
The new standard is expected to materially increase the assets and liabilities on the consolidated statement
of financial position as the majority of the Company’s operating leases disclosed in note 18(a) to these
consolidated financial statements are in scope for IFRS 16. Based on the information as at March 3, 2019, as
a result of the initial application of the standard, the Company estimates to recognize approximately $460
million to $510 million of lease liabilities and $340 million to $390 million of right-of-use assets on its
consolidated statements of financial position. The difference, net of the deferred tax impact, will be
recorded in opening retained earnings. The right-of-use assets will be depreciated on a straight-line basis
over the remaining lease term. The lease liability will be carried at amortized cost with a finance charge
recorded from the amortization of the lease liability discount. The depreciation expense of the right-of-use
assets and the finance charge of the lease liability will partially replace the lease-related expenses recorded
in costs of goods sold and selling, general and administrative expenses, previously recognized on a
straight-line basis over the lease term under IAS 17. Variable lease payments will continue to be expensed
as incurred.
The new standard will not change the amount of cash transferred between the lessor and lessee, but will
change the presentation of the operating and financing cash flows presented in the Company’s
consolidated statement of cash flows.
The Company has elected to apply the following practical expedients, as described under IFRS 16:
i)
recognition exemption of short term leases;
ii) recognition exemption of low-value leases; and
iii) grandfather prior conclusions on contracts containing leases.
(4)
51
Aritzia Inc.
Notes to Consolidated Financial Statements
March 3, 2019 and February 25, 2018
(in thousands of Canadian dollars, unless otherwise noted)
Annual Improvements
In December 2017, the IASB issued amendments to IAS 12, “Income Taxes” and IAS 23, “Borrowing Costs”
to clarify existing requirements. These clarification amendments will be effective for annual periods
beginning on or after January 1, 2019. The implementation of these clarification amendments is not
expected to have a material impact on the Company’s consolidated financial statements.
3 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
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.
Cash and cash equivalents
Cash and cash equivalents comprise cash on hand and term deposits with an original maturity of less than
three months. As at March 3, 2019, the Company had $44.9 million in cash held in term deposits classified
as cash equivalents (February 25, 2018 - $108.3 million).
52
(5)
Aritzia Inc.
Notes to Consolidated Financial Statements
March 3, 2019 and February 25, 2018
(in thousands of Canadian dollars, unless otherwise noted)
Prepaid expenses and other current assets
Prepaid expenses and other current assets comprise of prepaid expenses, deposits and packaging
supplies.
Inventory
Inventory, consisting of finished goods, is carried 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 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.
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 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.
(6)
53
Aritzia Inc.
Notes to Consolidated Financial Statements
March 3, 2019 and February 25, 2018
(in thousands of Canadian dollars, unless otherwise noted)
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.
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.
54
(7)
Aritzia Inc.
Notes to Consolidated Financial Statements
March 3, 2019 and February 25, 2018
(in thousands of Canadian dollars, unless otherwise noted)
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 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.
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.
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. The Company’s financial assets, which
includes cash and cash equivalents and accounts receivable, are classified as amortized cost. The
Company’s financial liabilities, which includes accounts payable and accrued liabilities and long term debt,
are classified as amortized cost. The Company’s foreign currency forward contracts, if any, are classified as
fair value through profit or loss (“FVTPL”).
(8)
55
Aritzia Inc.
Notes to Consolidated Financial Statements
March 3, 2019 and February 25, 2018
(in thousands of Canadian dollars, unless otherwise noted)
Financial assets are initially measured at fair value and subsequently measured at amortized cost using the
effective interest method if both of the following conditions are met and they are not designated as FVTPL:
(i)
the financial asset is held within a business model whose objective is to hold financial assets to
collect contractual cash flows; and
(ii)
the contractual terms of the financial asset give rise, on specified dates, to cash flows that are
solely payments of principal and interest on the principal amount outstanding. All financial assets
not classified as amortized cost as described above are measured at FVTPL.
Financial liabilities are initially measured at fair value, less any directly attributable transaction costs, and
subsequently measured at amortized cost using the effective interest 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.
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
(9)
56
Aritzia Inc.
Notes to Consolidated Financial Statements
March 3, 2019 and February 25, 2018
(in thousands of Canadian dollars, unless otherwise noted)
deduction from equity. The excess of the purchase price over the carrying amount of the shares is charged
to retained earnings.
Revenue recognition
The Company recognizes revenue when control of the goods or services has been transferred to the
customer. Revenue is measured at the fair value of the amount of consideration to which the Company
expects to be entitled to, including variable consideration, if any, to the extent that it is highly probable that
a significant reversal will not occur.
Net revenue reflects the Company’s sale of merchandise, less returns and discounts. Retail revenue at
point-of-sale is measured at the fair value of the consideration received at the time the sale is made to the
customer, net of discounts and estimated allowance for returns. For merchandise that is ordered and paid
for in a boutique and subsequently picked up by or delivered to the customer, revenue is deferred until
control of the merchandise has been transferred to the customer. eCommerce revenue is recognized at the
date control has been transferred to the customer, and measured at the fair value of the consideration
received, net of discounts and an estimated allowance for returns.
Revenues are reported net of sales taxes collected for 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 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.
Store opening costs
Store opening costs are expensed as incurred.
(10)
57
Aritzia Inc.
Notes to Consolidated Financial Statements
March 3, 2019 and February 25, 2018
(in thousands of Canadian dollars, unless otherwise noted)
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, except to the extent that
they relate to a business combination or items recognized directly in equity or other comprehensive
income.
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.
58
(11)
Aritzia Inc.
Notes to Consolidated Financial Statements
March 3, 2019 and February 25, 2018
(in thousands of Canadian dollars, unless otherwise noted)
Stock-based compensation expense
Stock Option Plans
Prior to the Company’s initial public offering (the “IPO”) the Company had 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 implemented a new stock option plan (the “Option Plan”), pursuant
to which it can grant time-based stock options to acquire subordinate voting shares to directors, executive
officers, employees and consultants.
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.
Deferred Share Units and Restricted Share Units
The Company has a Director Deferred Share Unit (“DSU”) Program for non employee board members.
Effective October 3, 2018, the Company adopted a Restricted Share Unit (“RSU”) Program for employees
and consultants. DSUs and RSUs 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 and RSUs 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.
Net income per share
Basic net income per share is calculated by dividing the net income 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.
Diluted net income per share is calculated by dividing the net income 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, plus the weighted average number of subordinate voting shares
that would be issued on exercise of dilutive options granted, as calculated under the treasury stock
method.
(12)
59
Aritzia Inc.
Notes to Consolidated Financial Statements
March 3, 2019 and February 25, 2018
(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 judgment in determining the most
appropriate inputs, including estimates and assumptions with respect to expected life, risk-free
interest rate, volatility and forfeiture rate (note 13).
Gift card breakage, which requires the use of judgment in defining the Company’s average gift card
breakage rate, based on historical redemption rates (note 3). The resulting revenue from breakage is
recognized in proportion to actual gift card redemptions.
Income taxes, which requires judgment to determine when tax losses, credits and provisions are
recognized based on tax rules in various jurisdictions (note 16).
60
(13)
Aritzia Inc.
Notes to Consolidated Financial Statements
March 3, 2019 and February 25, 2018
(in thousands of Canadian dollars, unless otherwise noted)
5
Inventory
Finished goods
Finished goods in transit
March 3,
2019
February 25,
2018
$
$
98,324
13,859
$
112,183
$
60,385
18,448
78,833
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 $3.2 million for the year ended March 3, 2019 (February 25, 2018 - $2.0
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 26, 2017 $
Additions
Transfers from construction-
in-progress
Dispositions
Foreign exchange
Balance, February 25, 2018
Additions
Transfers from construction-
in-progress
Dispositions
Foreign exchange
131,305 $
29,906
30,837 $
7,317
10,122 $
4,000
8,128 $
981
14,482 $
20,194
194,874
62,398
9,844
-
(1,450)
169,605
26,596
24,099
(15,011)
2,022
718
(337)
(321)
38,214
9,085
6,216
(4,057)
407
355
(1,784)
(68)
12,625
3,348
290
(1,011)
195
8
(2,847)
(149)
6,121
356
864
(240)
(87)
(10,925)
-
(402)
23,349
14,566
(31,469)
-
1,835
-
(4,968)
(2,390)
249,914
53,951
-
(20,319)
4,372
Balance, March 3, 2019
$
207,311 $
49,865 $
15,447 $
7,014 $
8,281 $
287,918
Accumulated depreciation
Balance, February 26, 2017 $
Depreciation
Dispositions
Foreign exchange
Balance, February 25, 2018
Depreciation
Dispositions
Foreign exchange
Balance, March 3, 2019
Net carrying value
Balance, March 3, 2019
Balance, February 25, 2018
$
$
67,372 $
13,846
-
(849)
80,369
16,389
(15,011)
1,169
18,716 $
3,465
(185)
(180)
21,816
4,677
(4,057)
442
7,210 $
2,300
(1,679)
(66)
7,765
2,859
(1,011)
57
5,881 $
1,321
(2,770)
(140)
4,292
783
(240)
26
- $
-
-
-
-
-
-
-
99,179
20,932
(4,634)
(1,235)
114,242
24,708
(20,319)
1,694
82,916 $
22,878 $
9,670 $
4,861 $
- $
120,325
124,395 $
89,236
26,987 $
16,398
5,777 $
4,860
2,153 $
1,829
8,281 $
23,349
167,593
135,672
Construction-in-progress includes store build costs for stores not yet opened and support office projects
not put into use.
(14)
61
Aritzia Inc.
Notes to Consolidated Financial Statements
March 3, 2019 and February 25, 2018
(in thousands of Canadian dollars, unless otherwise noted)
During the year ended March 3, 2019, interest of $182 was capitalized to assets under construction
(February 25, 2018 - $239). These interest costs relating to qualifying assets were capitalized at a weighted
average rate of 3.97% (February 25, 2018 – 3.21%).
7 Goodwill and intangible assets
Indefinite life
trade name
Definite life
trade name
Trademarks
Computer
software
Other
intangible
assets
Construction-
in-
progress
Total
intangible
assets
$
46,092 $
-
17,175 $
-
1,709 $
-
21,910 $
4,815
3,519 $
-
- $
-
90,405
4,815
46,092
-
17,175
-
1,709
210
26,725
3,989
3,519
-
-
1,198
95,220
5,397
Cost
Balance, February
26, 2017
Additions
Balance, February
25, 2018
Additions
Balance, March
3, 2019
$
46,092 $
17,175 $
1,919 $
30,714 $
3,519 $
1,198 $
100,617
Accumulated
amortization
Balance, February
26, 2017
Amortization
Balance, February
25, 2018
Amortization
Balance, March
3, 2019
Net carrying value
Balance, March
3, 2019
Balance, February
25, 2018
$
$
$
- $
-
-
-
9,583 $
657
1,709 $
-
17,110 $
1,255
3,519 $
-
- $
-
31,921
1,912
10,240
657
1,709
-
18,365
1,700
3,519
-
-
-
33,833
2,357
- $
10,897 $
1,709 $
20,065 $
3,519 $
- $
36,190
46,092 $
6,278 $
210 $
10,649 $
46,092
6,935
-
8,360
- $
-
1,198 $
64,427
-
61,387
Construction-in-progress includes internally generated computer software not put into use.
Until December 19, 2005, the operations of the Company were owned by a private, closely held Canadian
company. On December 19, 2005, 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. During the years ended March 3,
2019 and February 25, 2018, there were no additions to goodwill.
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 2019 and fiscal 2018.
(15)
62
Aritzia Inc.
Notes to Consolidated Financial Statements
March 3, 2019 and February 25, 2018
(in thousands of Canadian dollars, unless otherwise noted)
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 10.64% was used in the model. Reasonably possible changes in key assumptions would not cause
the carrying amount to exceed the estimated recoverable amount.
As at March 3, 2019 and February 25, 2018, 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
9 Other non-current liabilities
March 3,
2019
February 25,
2018
(Restated -
note 2)
$
$
$
35,411
11,687
15,638
62,736
$
44,141
7,108
16,043
67,292
Deferred lease liability
Deferred lease inducements
Director Deferred Share Unit Program and Restricted Share Unit
$
Program liability (note 13)
Asset retirement obligations
March 3,
2019
February 25,
2018
40,256
28,131
$
1,097
344
37,529
20,617
504
916
$
69,828
$
59,566
(16)
63
Aritzia Inc.
Notes to Consolidated Financial Statements
March 3, 2019 and February 25, 2018
(in thousands of Canadian dollars, unless otherwise noted)
10 Bank indebtedness and long-term debt
The Company has a term loan and revolving credit facility with its syndicate of lenders.
a)
Long-term debt
March 3,
2019
February 25,
2018
Term loan
Less: Deferred financing fees
$
75,000
(376)
$
Term loan, net of deferred financing fees
Less: Current portion
74,624
-
118,738
(151)
118,587
(19,127)
Long-term debt
$
74,624
$
99,460
On June 28, 2018, the Company amended its term loan and revolving credit facility (collectively the
“Credit Facilities”) with its syndicate of lenders. The amendment agreement included a reduction of
the term loan from $118.7 million to $75.0 million and an increase of the revolving credit facility from
$70.0 million to $100.0 million. The amended Credit Facilities mature on May 22, 2022 and have no
scheduled principal payments prior to maturity. Interest is paid on a monthly basis. Under the
amended Credit Facilities, 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 0.50% and 2.50% (February 25, 2018 – 0.75% and 3.00%). As part of
the amendment, the Company made a $43.7 million term loan repayment on June 27, 2018. As part of
the amendment, the Company incurred $0.7 million of financing fees which have been deferred and
are being amortized over the term of the Credit Facilities.
During the year ended March 3, 2019 the Company incurred $3.4 million of interest (February 25,
2018 - $4.1 million), at a weighted average rate of 3.97% (February 25, 2018 – 3.21%). As at March 3,
2019, the interest rate on the loan was 3.57% (February 25, 2018 – 3.58%), based on a one-month BA
rate.
The term loan requires mandatory loan prepayments by the Company of principal and interest if
certain events occur. As at March 3, 2019 and February 25, 2018, 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.
64
(17)
Aritzia Inc.
Notes to Consolidated Financial Statements
March 3, 2019 and February 25, 2018
(in thousands of Canadian dollars, unless otherwise noted)
b) Bank indebtedness
The Company has a revolving credit facility of $100.0 million (February 25, 2018 - $70.0 million). The
revolving credit facility bears interest at BA, LIBO or Prime plus a marginal rate between 0.50% and
2.50% (February 25, 2018 – 0.75% and 3.00%). As at March 3, 2019, there were no open letters of
credit against the revolving credit facility. As at February 25, 2018, the amount available under the
revolving credit facility was reduced to $54.1 million by certain open letters of credit (note 18(c)). Up to
$10.0 million of the facility can be drawn upon by way of a swingline loan.
As at March 3, 2019 and February 25, 2018, no advances were made under this revolving credit
facility.
The Company also has letters of credit facilities of $75.0 million, secured pari passu with the Credit
Facilities. The interest rate for the letters of credit is between 1.00% and 2.50%. The amount available
under these facilities is reduced to $31.9 million (February 25, 2018 - $70.0 million) by certain open
letters of credit (note 18(c)).
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. As at March 3, 2019 and
February 25, 2018, the Company was in compliance with all financial covenants.
11 Derivative financial instruments
From time to time, 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 amounts recorded in the consolidated statements of operations in other (income) expense include the
unrealized change in fair value of foreign currency forward contracts during the year ended March 3, 2019,
which was a loss of $0.4 million (February 25, 2018 – gain of $0.2 million). During the year ended March 3,
2019, the Company also realized a gain of $2.3 million (February 25, 2018 – a loss of $2.2 million), in other
(income) expense, arising from the settlement of foreign currency forward contracts.
The foreign currency forward contracts generally have a term of no more than 12 months. The notional
amount of these contracts outstanding as at March 3, 2019 was $nil (February 25, 2018 - $30.3 million U.S.
dollars at an average forward rate of 1.2494). As at February 25, 2018, the forward contracts had a positive
fair value of $0.4 million.
(18)
65
Aritzia Inc.
Notes to Consolidated Financial Statements
March 3, 2019 and February 25, 2018
(in thousands of Canadian dollars, unless otherwise noted)
12 Share capital
On May 10, 2018, the Company announced the commencement of a normal course issuer bid (“NCIB”) to
purchase and cancel up to 5,429,658 subordinate voting shares over the 12-month period commencing
May 15, 2018 and ending May 14, 2019. All repurchases are made through the facilities of the Toronto
Stock Exchange and are done at market prices. As purchases are made, the Company reduces share capital
for the average book value of the subordinate voting shares repurchased, and charges retained earnings
for the difference between the price paid and the average book value. During the year ended March 3,
2019, the Company repurchased 549,880 subordinate voting shares for cancellation at an average price of
$17.07 per subordinate voting share, for total cash consideration of $9.4 million.
On May 31, 2018, the Company entered into an automated share purchase plan (“ASPP”) with a
designated broker for the purpose of permitting the Company to purchase its subordinate voting shares
under the NCIB during self-imposed blackout periods. The volume of purchases is determined by the
broker in its sole discretion based on purchase price and maximum volume parameters established by the
Company under the ASPP. The Company records a liability for purchases that are estimated to occur during
blackout periods based on the parameters of the NCIB and ASPP. On March 3, 2019, in connection with the
Share Repurchase, the Company cancelled its ASPP.
On February 19, 2019, in connection with the March 2019 Secondary Offering and Share Repurchase,
certain selling shareholders exchanged 5,344,234 of their multiple voting shares for subordinate voting
shares.
As at March 3, 2019, there were 44,531,768 multiple voting shares and 69,409,683 subordinate voting
shares issued and outstanding. There were no preferred shares issued and outstanding as at March 3,
2019. Neither the multiple voting shares nor the subordinate voting shares issued have a par value.
13 Stock options
The Company has granted stock options under the Legacy Plan and the Option Plan.
Legacy Plan
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.
The options vest annually pro rata on the anniversary of the grant date over a period of five years. All issued
options expire after 10 to 15 years from the date granted.
Transactions for stock options granted under the Legacy Plan for the years ended March 3, 2019 and
February 25, 2018 were as follows:
66
(19)
Aritzia Inc.
Notes to Consolidated Financial Statements
March 3, 2019 and February 25, 2018
(in thousands of Canadian dollars, unless otherwise noted)
March 3, 2019
February 25, 2018
Number
of
stock
options
Weighted
average
exercise
price
Number
of
stock
options
Weighted
average
exercise
price
Outstanding, at beginning of year
7,748,370
$
4.09
11,288,672
$
Exercised
Forfeited
Expired
(2,345,238)
(321,415)
-
2.68
5.76
-
(3,258,882)
(260,026)
(21,394)
Outstanding, at end of year
5,081,717
$
4.64
7,748,370
$
3.82
3.15
4.28
2.36
4.09
Exercisable, at end of year
3,993,040
4.25
5,546,773
$
3.44
Information relating to stock options outstanding under the Legacy Plan and exercisable as at March 3,
2019 is as follows:
Exercise prices
per share
$0.01 to $3.88
$3.89 to $5.24
$5.25 to $7.09
Stock options outstanding
Stock options exercisable
Weighted
average
remaining
contractual
life
(in years)
2.51
3.71
6.91
4.41
Number of
stock
options
1,585,944
1,790,653
1,705,120
5,081,717
Weighted
average
exercise
price
$2.47
$4.76
$6.52
Number of
stock
options
1,500,534
1,665,514
826,992
$4.64
3,993,040
Weighted
average
remaining
contractual
life
(in years)
2.35
3.55
6.89
3.79
Weighted
average
exercise
price
$2.42
$4.80
$6.45
$4.25
Stock-based compensation expense in relation to the options under the Legacy Plan for the year ended
March 3, 2019 was $2.4 million (February 25, 2018 – $5.7 million).
Option Plan
Options to acquire subordinate voting shares under the Option Plan may be granted to directors, executive
officers, employees and consultants of the Company. The options vest annually pro rata on the anniversary
of the grant date over a period of five years. All issued options expire after seven years from the date
granted.
Transactions for stock options granted under the Option Plan for the years ended March 3, 2019 and
February 25, 2018 were as follows:
(20)
67
Aritzia Inc.
Notes to Consolidated Financial Statements
March 3, 2019 and February 25, 2018
(in thousands of Canadian dollars, unless otherwise noted)
March 3, 2019
February 25, 2018
Number
of
stock
options
Weighted
average
exercise
price
Number
of
stock
options
Weighted
average
exercise
price
Outstanding, at beginning of year
4,947,348
$
14.80
3,263,759
$
16.12
Granted
Exercised
Forfeited
Cancelled
Outstanding, at end of year
Exercisable, at end of year
305,721
(114,750)
(370,592)
-
4,767,727
1,214,409
$
$
16.00
15.50
15.51
-
2,786,295
-
(430,807)
(671,899)
14.81
4,947,348
15.13
456,929
$
$
13.75
-
16.07
16.00
14.80
16.14
Information relating to stock options outstanding under the Option Plan and exercisable as at March 3,
2019 is as follows:
Exercise prices
per share
$12.99 to $14.12
$14.13 to $18.16
Stock options outstanding
Stock options exercisable
Weighted
average
remaining
contractual
life
(in years)
5.76
4.91
5.33
Number of
stock
options
2,343,083
2,424,644
4,767,727
Weighted
average
exercise
price
$13.64
$15.93
Number of
stock
options
446,688
767,721
$14.80
1,214,409
Weighted
average
remaining
contractual
life
(in years)
5.74
4.73
5.10
Weighted
average
exercise
price
$13.66
$15.99
$15.13
The weighted average fair value of the time-based stock options granted during the year ended March 3,
2019 was estimated at the date of 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 stock
0.0%
38.0% to 41.0%
1.9% to 2.4%
6.0 years
$12.99 to $18.16
options estimated at the date of grant
$6.58
Stock-based compensation expense in relation to the options under the Option Plan for the year ended
March 3, 2019 was $8.6 million (February 25, 2018 - $11.2 million). Included in the expense for the year
ended February 25, 2018 was $2.3 million recognized from the cancellation of 671,899 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.
68
(21)
Aritzia Inc.
Notes to Consolidated Financial Statements
March 3, 2019 and February 25, 2018
(in thousands of Canadian dollars, unless otherwise noted)
Director Deferred Share Unit (“DSU”) Program
Each eligible director receives a portion of his or her annual director retainer in DSUs. 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 $1.1 million as at March 3, 2019 (February 25,
2018 - $0.5 million), with an expense of $0.5 million for the year ended March 3, 2019 (February 25, 2018 -
$0.3 million), recorded as stock-based compensation expense.
Transactions for DSUs granted for the years ended March 3, 2019 and February 25, 2018 were as follows:
Outstanding, at beginning of year
Granted
Outstanding, at end of year
Vested, at end of year
Restricted Share Unit (“RSU”) Program
March 3,
2019
February 25,
2018
Number of
DSUs
Number of
DSUs
40,220
24,971
65,191
65,191
10,990
29,230
40,220
40,220
Effective October 3, 2018, the Company adopted the RSU Program for employees and consultants. RSUs
vest on the third anniversary of the award date and at that time, are redeemable for cash based on the
market value of the Company’s shares. The Company is required to record a liability for the potential future
settlement of the RSUs at each reporting date by reference to the fair value of the liability. The fair value of
the recorded liability in relation to the RSUs was $30 as at March 3, 2019, with an expense of $30 for the
year ended March 3, 2019, recorded as stock-based compensation expense. The amount of RSUs granted
for the year ended March 3, 2019 was 38,099 units and no units were vested as at March 3, 2019.
(22)
69
Aritzia Inc.
Notes to Consolidated Financial Statements
March 3, 2019 and February 25, 2018
(in thousands of Canadian dollars, unless otherwise noted)
14 Net income per share
a) Basic
Basic net income per share is calculated by dividing the income attributable to shareholders of the
Company by the weighted average number of multiple voting shares and subordinate voting shares
outstanding during the period. As all the classes of shares are subject to the same distribution rights,
the Company performs the net income per share calculations as if all shares are a single class.
Net income attributable to shareholders of the Company
Weighted average number of shares outstanding during the year
$
(thousands)
March 3,
2019
February 25,
2018
78,728 $
57,093
113,015
110,180
Basic net income per share
$
0.70 $
0.52
b) Diluted
Net income per diluted share is calculated by dividing the income attributable to shareholders of the
Company by the weighted average number of multiple voting shares and subordinate voting shares
outstanding during the period adjusted for the effects of potentially dilutive stock options.
Net income attributable to shareholders of the Company
Weighted average number of shares for net income per diluted
share (thousands)
Net income per diluted share
March 3, 2019
February 25,
2018
$
$
78,728 $
57,093
117,358
116,280
0.67 $
0.49
70
(23)
Aritzia Inc.
Notes to Consolidated Financial Statements
March 3, 2019 and February 25, 2018
(in thousands of Canadian dollars, unless otherwise noted)
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
Amortization of deferred financing fees
Realized foreign exchange (gain) loss
Unrealized foreign exchange (gain)
Lease exit cost (1)
Offering transaction cost recovery (note 1 and note 19 (a)) (2)
Interest income
Cost of goods sold
March 3,
2019
February 25,
2018
510,135 $
21,248
429,969
17,807
531,383 $
447,776
Personnel expenses
March 3,
2019
February 25,
2018
177,152 $
11,540
147,708
17,240
188,692 $
164,948
Finance expense
March 3,
2019
February 25,
2018
4,636 $
185
4,821 $
5,029
192
5,221
Other (income) expenses
March 3,
2019
February 25,
2018
(3,003) $
(1,250)
5,725
(171)
(1,696)
(395) $
2,750
-
-
-
(860)
1,890
$
$
$
$
$
$
$
$
(1) The lease exit cost of $5.7 million related to an expense for the exit of a lease commitment for the
planned repositioning of one of the Company’s flagship boutiques. However, the Company was later able
to secure a long term lease extension for its original flagship location.
(2) Offering transaction cost recovery of ($115) in Fiscal 2018 was recorded in selling, general and
administrative expenses.
(24)
71
Aritzia Inc.
Notes to Consolidated Financial Statements
March 3, 2019 and February 25, 2018
(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
March 3, 2019
February 25,
2018
$
31,592 $
44
31,636
1,291
(44)
39
1,286
26,310
(492)
25,818
2,273
270
1,829
4,372
Income tax expense
$
32,922 $
30,190
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
March 3, 2019 and February 25, 2018 of 26.9% and 26.4%, respectively, as follows:
Income before income taxes
Expected income tax expense
Increase (decrease) in income taxes resulting from
Non-deductible stock-based compensation
Charitable contributions
Foreign tax rate differences
Changes in substantively enacted tax rates
Other
March 3, 2019
February 25,
2018
$
$
111,650 $
87,283
30,000 $
23,060
2,942
(269)
238
39
(28)
4,468
-
766
1,829
67
Income tax expense
$
32,922 $
30,190
72
(25)
Aritzia Inc.
Notes to Consolidated Financial Statements
March 3, 2019 and February 25, 2018
(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 March 3, 2019 and February 25, 2018 are as follows:
Deferred tax assets
Deferred lease liability
Stock-based compensation
Financing and share issuance costs
Accounts payable and accrued liabilities
Charitable contributions
Other
Total deferred tax assets
Deferred tax liabilities
Goodwill and intangible assets
Property and equipment
Other
Total deferred tax liabilities
Net deferred tax liability
March 3, 2019
February 25,
2018
$
20,258 $
295
1,281
1,254
153
2,619
25,860
(22,788)
(15,427)
(41)
17,067
135
1,558
596
-
2,631
21,987
(20,869)
(12,485)
(38)
(38,256)
(33,392)
$
(12,396) $
(11,405)
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)
March 3, 2019
February 25,
2018
$
$
1,286 $
(296)
990 $
4,372
332
4,704
Of the deferred income tax balances, the Company expects $4.4 million of the deferred tax assets to
be recovered within 12 months and $4.0 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.
(26)
73
Aritzia Inc.
Notes to Consolidated Financial Statements
March 3, 2019 and February 25, 2018
(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 boutiques and eCommerce website.
The following table summarizes net revenue by geographic location of customers:
Canada
United States
March 3,
2019
February 25,
2018
609,070
265,226
$
548,728
194,539
874,296
$
743,267
$
$
The Company’s non-current, non-financial assets (property and equipment, intangible assets and goodwill)
are geographically located as follows:
Canada
United States
March 3,
2019
February 25,
2018
316,344
67,358
$
291,270
57,471
383,702
$
348,741
$
$
74
(27)
Aritzia Inc.
Notes to Consolidated Financial Statements
March 3, 2019 and February 25, 2018
(in thousands of Canadian dollars, unless otherwise noted)
18 Commitments and contingencies
a) Operating leases
The Company conducts operations from leased boutiques, distribution centres and administrative
offices. For the year ended March 3, 2019, the rent expense under these operating leases was $117.0
million, including $5.3 million of contingent rent (February 25, 2018 - $103.3 million, including $2.0
million of contingent rent).
Leases for certain premises of the Company 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 rent based on a percentage of sales, are as follows:
Less than 1 year
Between 1 and 5 years
More than 5 years
Total
$
$
83,551
356,517
235,354
675,422
Subsequent to period end, the Company entered into additional operating leases, increasing the total
minimum lease commitments by $20.4 million.
b) Product purchase obligations
As at March 3, 2019, the Company had purchase obligations of $45.6 million (February 25, 2018 -
$24.2 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 March 3, 2019, the Company had open letters of credit of $43.1 million (February 25, 2018 - $20.9
million).
19 Related party transactions
Prior to the August 2018 Secondary Offering, the Company was ultimately controlled by Canada Retail
Holdings, L.P., being the Company’s ultimate parent and the Berkshire Shareholder. Effective August 7,
2018, upon completion of the August 2018 Secondary Offering, neither Canada Retail Holdings, L.P. nor
any other entity maintained ultimate control of the Company. Subsequent to the year ended March 3, 2019,
upon completion of the March 2019 Secondary Offering and Share Repurchase, the Berkshire Shareholder
sold its entire investment in the Company. As a result, effective March 8, 2019, the Company is ultimately
controlled by AHI Holdings Inc., an entity controlled by a director and officer of the Company.
(28)
75
Aritzia Inc.
Notes to Consolidated Financial Statements
March 3, 2019 and February 25, 2018
(in thousands of Canadian dollars, unless otherwise noted)
The Company entered into the following transactions with related parties:
a) Total reimbursements to Berkshire for travel, lodging and other costs for the year ended March 3,
2019 was $59 (February 25, 2018 - $66). As at March 3, 2019, $nil was included in accounts payable
and accrued liabilities (March 3, 2019 – $nil).
In connection with the March 2019 Secondary Offering and Share Repurchase, the Company incurred
an aggregate of $2.5 million in professional fees and other costs, $185 of which are costs incurred on
behalf of the selling shareholders. As at March 3, 2019, $2.5 million was included in accounts
receivable, which represents the full amount being reimbursed by the selling shareholders
participating in the Share Repurchase, including the Berkshire Shareholder. Also, in connection with
the March 2019 Secondary Offering and Share Repurchase, $0.7 million in costs relating to the
Company’s IPO, previously included in accounts payable and accrued liabilities, was extinguished.
b) During the year ended March 3, 2019, the Company paid $4.1 million (February 25, 2018 - $3.6
million), for rent of premises and $0.9 million (February 25, 2018 - $0.4 million) for the use of a leased
asset wholly or partially owned by companies that are owned by a director and officer of the Company.
As at March 3, 2019, $71 was included in accounts payable and accrued liabilities (February 25, 2018 -
$100) and $52 was included in prepaid expenses and other current assets (February 25, 2018 - $nil).
c) During the year ended February 25, 2018, the Company purchased $8.3 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.
d) 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)
March 3, 2019
February 25,
2018
$
$
3,478 $
3,695
3,117
7,358
7,173 $
10,475
(1)
Included in the expense for the year ended February 25, 2018 was $2.3 million of expense recognized from
the cancellation of 671,899 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.
76
(29)
Aritzia Inc.
Notes to Consolidated Financial Statements
March 3, 2019 and February 25, 2018
(in thousands of Canadian dollars, unless otherwise noted)
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
21 Financial instruments and risk management
March 3, 2019
2018
February 25,
$
(1,545) $
(34,457)
(1,714)
(217)
(6,181)
4,498
(Restated –
note 2)
941
(5,155)
(2,432)
300
15,640
3,719
$
$
(39,616) $
13,013
4,470 $
-
6,799
271
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.
(30)
77
Aritzia Inc.
Notes to Consolidated Financial Statements
March 3, 2019 and February 25, 2018
(in thousands of Canadian dollars, unless otherwise noted)
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
Long-term debt (net of deferred financing fees)
March 3,
2019
February 25,
2018
(Restated –
note 2)
100,897 $
4,355
-
112,475
2,413
414
62,736 $
74,624
67,292
118,587
$
$
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)
March 3, 2019
$
75,000 $
-
February 25,
2018
118,738
414
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 boutiques in the U.S. The Company’s foreign exchange risk is
primarily with respect to the U.S. dollar and the Company has limited exposure to other currencies.
Foreign currency forward contracts are used, from time to time, to mitigate risks associated with
forecasted U.S. dollar merchandise purchases sold in Canada.
As at March 3, 2019, a $0.01 variation in the Canadian dollar against the U.S. dollar on net monetary
accounts in U.S. dollars would, with all other variables being constant, have an approximate favourable
(or unfavourable) impact of $0.3 million on net income.
78
(31)
Aritzia Inc.
Notes to Consolidated Financial Statements
March 3, 2019 and February 25, 2018
(in thousands of Canadian dollars, unless otherwise noted)
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 $0.9 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.
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
March 3, 2019, the Company had available credit of $100.0 million (February 25, 2018 - $70.0 million)
under its revolving credit facility, of which $nil (February 25, 2018 - $nil) was drawn, and had no
outstanding letters of credit (February 25, 2018 - $15.9 million of outstanding letters of credit, which
reduced the availability under the revolving credit facility). Any 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 March 3, 2019, the Company also had available
credit of $75.0 million under trade finance agreements (February 25, 2018 – $75.0 million), of which
$43.1 million of letters of credit were outstanding (February 25, 2018 – $5.0 million).
(32)
79
Aritzia Inc.
Notes to Consolidated Financial Statements
March 3, 2019 and February 25, 2018
(in thousands of Canadian dollars, unless otherwise noted)
The following table identifies the undiscounted contractual maturities of the Company’s financial
liabilities as at March 3, 2019:
Within one year
After one but
not more than
5 years
After 5 years
Total
Accounts payable and accrued
liabilities
Assumed interest on long-term
debt (1)
Long-term debt
Total
$
$
62,736 $
- $
- $
62,736
2,668
-
5,952
75,000
-
-
8,620
75,000
65,404 $
80,952 $
- $
146,356
(1)
Based on interest rates in effect as at March 3, 2019.
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
Company currently funds these requirements out of its internally generated cash flows and Credit Facilities.
The Company is subject to financial covenants and collateral pursuant to the Credit Facilities presented in
note 10.
80
(33)