Operator

I would like to turn the conference over to Alex Limosani, Manager, Investor Relations and Corporate Finance at Groupe Dynamite. Please go ahead.

Alex Limosani

Thank you, and good morning, everyone. Joining me on the call are Andrew Lutfy, Chief Executive Officer and Chair of the Board, Stacie Beaver, President and Chief Operating Officer, and J.P. Lachance, Chief Financial Officer.

This morning, Groupe Dynamite released its financial results for the 13-week period ended May 2nd, 2026. The press release and related disclosure documents are available in the investors section of our corporate website at groupedynamite.com and on SEDAR+. We will begin the call with short remarks by management, followed by a question-and-answer period with financial analysts only. A replay of this webcast will be available shortly after the conclusion of the call.

Before we begin, I would like to refer you to slide 2 of our Q1 2026 investor presentation, also available in the investors section of our website, for a full statement on forward-looking information and to the presentations appendix for a reconciliation of non-IFRS to IFRS financial measures. I will now turn the call over to Andrew Lutfy.

Andrew Lutfy

Thank you, Alex Limosani, and good morning, everyone. I appreciate you taking the time to join us today. As I reflect on our Q1 results, what stands out is not simply the strength of the quarter, but the trajectory of the business and the progress we've made over many years. Groupe Dynamite is a stronger, more capable organization with a proven ability to scale, enter new markets, and drive profitable growth.

The Q1 reflects that progress. Comparable store sales increased 22.6%, gross margin reached its highest level in four years, and adjusted EBITDA margin expanded to 36.8%, up 730 basis points year-over-year. Importantly, this follows a record 2025 and demonstrates that our growth is not coming at the expense of profitability. We continue to drive both simultaneously.

Looking at Q2 to date, we're pleased to see comparable store sales tracking in the +9% CAD or 11% in constant currency, supported by continuing strength in the U.S. While we remain mindful of the broader macroeconomic climate, we are encouraged with the momentum across the organization.

These results are the product of strategic decisions we have made consistently over many years. We have invested in brand elevation rather than promotions, top-tier assets rather than pursuing growth at any cost, agility rather than bureaucracy, and people rather than organizational complexity. At the same time, we have remained disciplined in capital allocation, focusing on investments that generate attractive returns and strengthen the long-term earnings power of the business. The United States continues to be and will remain an important growth engine.

We now operate across 41 states, recent openings in markets such as Las Vegas and Hawaii have expanded our reach to both local and international customers. We have also successfully entered the U.K. through Garage. Oxford Street was more than a store opening. It validated that our brands and operating model can travel internationally. It reinforced our belief that the capabilities we have built over the past five decades can resonate well beyond our home markets.

What underpins this success is a highly differentiated operating model. As we often say, we strive to take the fashion risk out of fashion. Agility remains one of our core competitive advantages. In an industry where trends shift rapidly and consumer preferences evolve continuously, speed matters. It is also one of the reasons we have chosen not to pursue a wholesale model. Maintaining direct proximity to the customer allows us to move faster, react sooner, and preserve the agility that differentiates us. That agility has enabled us to protect margins, manage inventory effectively, and capitalize on opportunities as they emerge.

Garage continues to connect with customers through authenticity, speed, and cultural relevance. It continues to gain market share across North America and now internationally. Dynamite continues to strengthen its position through compelling product, disciplined execution, and greater on-brand lifestyle engagement. Together, our brands serve distinct customers while benefiting from a shared operating platform that enhances efficiency, scalability, and profitability.

Equally important is the culture that supports our performance. Our shared success program reinforces an ownership mindset throughout the organization. When employees think and act like owners, decision-making improves, accountability increases, and performance follows. Today, more than 7,200 colleagues, many of which shareholders, contribute to our success across North America and the U.K. Their commitment, discipline, and entrepreneurial mindset remain key competitive advantages.

Looking ahead, our priorities remain clear. We will continue investing in our brands, high-return store growth, digital capabilities, talent development, and, of course, technology. These investments are about building a stronger, more resilient business that can continue to outperform over the long term. Our brands are healthy, our balance sheet is strong, our teams are executing at a high level, and we believe the opportunities ahead are among the most compelling in our company's history. We enter the balance of fiscal 2026 with confidence and a clear focus on creating long-term value for shareholders. With that, I'll turn it over to Stacie Beaver.

Stacie Beaver

Thank you, Andrew. Good morning, everyone. Q1 was a strong start to fiscal 2026 and came in ahead of our expectations. Across both Garage and Dynamite, customers responded positively to our assortments, our marketing, and the consistency of the experience we are delivering across channels.

At the core of our performance is our ability to remain agile in a dynamic environment. Our competitive advantage continues to be our ability to read and react to our business quite rapidly. By leveraging our supply chain and closely monitoring customer demand, we are able to make informed decisions in real time, chase into winning styles, and manage inventory with discipline. This agility is further supported by our U.S. distribution center as it approaches full ramp-up, improving speed, efficiency, and service levels across our growing U.S. business while providing additional scale to support future growth.

Our physical fleet continues to be a significant driver of growth and customer acquisition. This quarter, our premium real estate, localized execution, and a compelling in-store experience drove exceptional productivity across the fleet. Sales per square foot reached CAD 1,001, representing an increase of 32.4% compared to last year.

These results reinforce our disciplined real estate strategy. We continue to prioritize high-quality locations where our brands can maximize visibility, productivity, and customer engagement. During the quarter, we opened five new stores, including three in the U.S. and two in the U.K. More specifically, Bluewater Shopping Centre in Dartford, England, and Oxford Street in downtown London. We remain encouraged by the early response in the U.K. and continue to see strong customer engagement as we build the business. These results continue to reinforce our disciplined real estate strategy and confidence in the quality of our pipeline.

Turning to digital, e-commerce sales increased 35.7% during the quarter, supported by growth in both traffic and conversion. This performance reflects the investments we have made to improve the online shopping experience, including enhancements to site navigation and functionalities that make it easier for customers to discover and shop our assortments.

Looking ahead, we continue to see opportunities to strengthen our digital capabilities. Our focus remains on creating a more personalized experience for the customer and leveraging AI and technology to improve relevance, engagement, and conversion across all channels.

Product remained a key driver of our results this quarter. Across both brands, customers responded well to our assortments and to the newness we introduced throughout the season. For Garage, our color drops resonated well with the customer and created meaningful brand moments throughout the quarter. The Garage community continues to grow, supported by strong engagement across our ambassadors, influencers, and other social programs. We are seeing that strategy translate into increased brand awareness and customer engagement across all markets.

At Dynamite, dresses remained a key category driver throughout the quarter, supported by strong product execution and focused marketing initiatives. Our unfiltered content series featuring Sienna Miller, along with targeted customer events, helped drive engagement and support traffic to the brand. These efforts, combined with strong product performance in the category, contributed to the healthy sell-through and continued momentum for the banner.

Looking at the quarter overall for GDI, performance was balanced across both stores and digital. Together, these channels contributed to approximately 19% growth in total transactions. Strong customer demand and our pricing power supported an increase in average unit retail of approximately 15%. These results demonstrate the strength of our assortments and the value proposition we continue to deliver to our customers.

This strong customer response is also reflected in our customer metrics. We continue to see meaningful expansion of our active customer base year-over-year by attracting new customers and increasing the retention and frequency among existing customers. As a result, average customer lifetime value increased meaningfully year-over-year as well as quarter-over-quarter.

As we look at the remainder of the year, our priorities remain unchanged. We will continue to focus on disciplined execution, delivering compelling products, and investing in the customer experience to drive profitable growth across both brands. Supported by our agile operating model and the strength of our teams, we believe we are well positioned for fiscal 2026 and beyond.

Before I conclude, as always, I want to thank our more than 7,200 field office and head office associates. Their commitment, agility, and passion are what make these results possible. Every day, they bring our brands to life for our customers and continue to differentiate us in the marketplace. I'm incredibly grateful for their contributions and proud of what we've accomplished together this quarter. With that, I will turn it over to Jean-Philippe to walk through the financial results.

Jean-Philippe Lachance

Thank you, Stacie, good morning, everyone. Total revenue for Q1 2026 increased by 37% to CAD 310.6 million, driven by comparable store sales growth of 22.6%, or 24.7% on a constant currency basis, contributions from new store openings, including two locations in the U.K., and continued momentum across both banners.

Staying on the top line, online revenue increased by 35.7% to CAD 50.6 million, reflecting continued strength in our digital channel and balanced growth across stores and e-commerce.

Gross profit for Q1 increased by 48.8% to CAD 209.3 million, with gross margin expanding by an impressive 530 basis points to 67.4%, the highest level in four years. This performance was mainly driven by lower tariffs compared to last year, as well as by controlled merchandise cost increases, lower markdowns, and the continued strength of our pricing strategy.

Turning to expenses, SG&A for Q1 2026 increased to CAD 102.2 million compared to CAD 74.7 million in Q1 2025. This increase was primarily driven by the company's growing scale and activities, including higher wages and salaries, selling and marketing investments, and incremental operating costs to support our growth initiatives, including the U.K. launch and continued investment in IT and software.

As a percentage of sales, adjusted SG&A decreased by 190 basis points to 30.5%, compared to 32.4% last year, demonstrating operating leverage as revenue scaled.

Moving down the P&L, operating income increased by 80.1% to CAD 79.8 million. Adjusted EBITDA increased by 71.3% to CAD 114.4 million, representing an adjusted EBITDA margin of 36.8%, up by an impressive 730 basis points year-over-year. The margin expansion was driven by 530 basis points of gross margin expansion and 190 basis points of adjusted SG&A leverage, underscoring the strength and scalability of our luxury-inspired business model.

Net earnings increased by 89.4% to CAD 51.7 million, supported by higher revenue and margin expansion, partially offset by higher SG&A and depreciation and amortization. Adjusted net earnings increased by 101.8% to CAD 57.3 million, and adjusted diluted EPS increased by 100% from CAD 0.25 per share to CAD 0.50 per share in Q1 of 2026.

Turning to cash flow, we generated free cash flow of approximately CAD 4 million in Q1, reflecting the timing impact of significantly higher tax payments during the quarter versus prior year, while we continued to invest in the business, including new stores, store optimization, digital, and operational infrastructure.

From a balance sheet perspective, we returned capital while maintaining significant financial flexibility. Our net leverage ratio was 1.01x at quarter end, and we ended Q1 with approximately CAD 292 million available under our credit facilities, providing flexibility to continue investing in growth, manage market volatility, and return excess capital to shareholders when appropriate.

We also continue to deliver strong capital efficiency. Return on assets reached 38.6%, compared to 23.8% last year, reflecting improved profitability and more effective use of our asset base. Return on capital employed increased to 74.4%, compared to 44.5% in the prior year, highlighting the strength of our model and our disciplined approach to deploying capital.

Turning to capital allocation, during Q1, we repurchased 461,200 shares under our NCIB for a total of approximately CAD 38.6 million. In addition, we completed an approximately CAD 51 million repurchase for cancellation from our principal shareholder in connection with the previously announced secondary offering. We view both actions as disciplined capital allocation decisions consistent with our focus on returning capital to shareholders while maintaining flexibility to fund our growth initiatives and deploy capital toward high-return opportunities.

Looking ahead to the remainder of fiscal 2026, our strong Q1 performance gives us confidence in the full-year outlook, while we remain balanced in our approach given the dynamic macro environment. We are reiterating our comparable store sales growth guidance of 11%-14%, as well as our total revenue growth guidance of 22%-25%. Q1 performance reinforces our confidence in the year, while our unchanged top-line outlook reflects a disciplined planning approach and continued focus on consistent execution.

From a real estate perspective, we continue to expect 24-26 gross new store openings in fiscal 2026, including five locations in the U.K. We are revising our expected net new store openings to approximately 8-10, reflecting the acceleration of two planned closures tied to fleet optimization. This is consistent with our disciplined capital allocation approach and our focus on deploying capital toward the highest return opportunities. We remain focused on upgrading the quality of our fleet, investing in higher growth markets, and prioritizing locations where we see the strongest long-term revenue and return potential.

From a margin perspective, we are increasing our adjusted EBITDA margin outlook to a range of 38.25%-39.5%, compared to our prior range of 37.75%-39.25%, mainly due to the strength of our gross margin in Q1. This represents a 50 basis points increase to the low end of the range and a 25 basis point increase to the high end of the range. This revised outlook reflects three key drivers.

First, we expect gross margin strength primarily in the H1 of the year, including Q1 and Q2, supported by IMU expansion, our pricing strategy, disciplined inventory management, and more importantly, lower tariff pressure compared to last year. Second, we expect SG&A leverage to contribute throughout the year as we scale revenue while managing costs with discipline. Third, we expect incremental efficiencies from the ramp-up of our U.S. distribution center as the facility continues to support our growth and improve operational efficiency.

Turning to capital expenditures, we continue to expect CapEx of CAD 100 million-CAD 110 million for fiscal 2026. CapEx remains our top capital allocation priority, with most of this envelope directed toward growth initiatives, including new store openings, store optimization, and continued investment in digital and operational infrastructure.

While the macro environment remains dynamic, our focus on middle and higher income consumers, accessible price points, and strong brand positioning leave us well positioned within consumer discretionary. Our operating model is built to navigate uncertainty, supported by disciplined inventory management and our open-to-buy chase driven approach with over 50% of inventory dollars left open to read and react. We remain focused on advancing our brand elevation initiatives, investing in our platform, and executing with discipline. With that, I'll turn the call over to the operator to open the line for questions from our financial analysts.

Operator

Thank you, sir. Ladies and gentlemen, if you do have any questions at this time, please press star followed by one on your touchtone phone. You will then hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by two. If you're using a speakerphone, you will need to lift the handset first before pressing any keys. Please go ahead and press star one now if you have any questions. First, we will hear from Brian Morrison at TD Cowen. Please go ahead, Brian.

Brian Morrison

Good morning. Thank you very much. Jean-Philippe, maybe we can just talk on the color of comparable store sales growth trends throughout Q1. You did say 28% growth through the first two months. Maybe walk us through that, and then what you've seen in Q2 to date. I think you said 9% growth, 11% constant currency. Can you maybe just walk through that as well and provide comfort in the high single-digit rate that's implied through guidance for the remainder of the year, please?

Stacie Beaver

Hi, Brian, it's Stacie. I'll take the question. Q1, we put up a +22.6%. The 28% you're referencing is what we called out the first eight weeks of the quarter. To be noted, we were ahead of Easter at the time, Easter had happened, but we hadn't lagged against it, which I think is a known known in the industry. We're still very excited about the 22.6% we put up.

When I look at Q2, we've called out the 9%. What I want you guys to know is that the two-year stack from 2026 on Q1 would be a 35.6%, and we're still seeing growth in that two-year stack as we go into Q2. Again, still optimistic.

Brian Morrison

Sorry, can you just give us some comfort on why you see high single-digit rates being maintained with the stronger comparable store sales that you're going through in the H2 of the year?

Stacie Beaver

I think we're still seeing great customer reaction. Our customer active base is up. Our frequency is up, acquisition and frequency is up. She's coming back more. She's spending more. Her lifetime value is more to us. We still think the customer is resonating with what we're putting out there. Again, you noted.

Brian Morrison

Stacie, your—

Stacie Beaver

Oh, sorry. Go ahead.

Brian Morrison

I was just going to say, your comment on 15% AUR during the quarter, do you feel that you still have ability to take prices or IMUs or lower promo? Do you feel you have the ability to take this higher?

Stacie Beaver

Yeah, I think we still believe in our pricing power. I think we're putting the quality back into, or elevating the brands in general, and she's resonating with it. Our UPT is not changing and her lifetime value with us is growing.

Brian Morrison

Thank you.

Operator

Next question will be from Irene Nattel at RBC. Please go ahead, Irene.

Irene Nattel

Thanks. Just to continue beating the same-store sales horse. In order to get to the higher end of your guide for the year, you would need to see an acceleration in the two-year stack as we move through. Can you walk us through what you think the drivers might be that would end up with, say, that 11% versus the 14%, or sort of consistent versus a step-up in the two-year stack?

Stacie Beaver

Let me go. Yeah, I think there's a lot of conversation around the comps. I just want to call out the total sales being at 37% for the quarter. Again, we're opening aggressively. We're seeing the U.S. perform exceptionally well. You guys can see the difference between Canada and the U.S. That's where that comp number could be impressed with the overall sales. Our new stores are outperforming as well as the U.S. seems to be extremely strong right now and maintaining from where we left or exited 2025.

Irene Nattel

Thanks, Stacie. Just a follow-up. When you look across the offering, can you talk about where you're seeing some strong sell-through on a category basis, where there might be a little bit of softness, if there is any, and I know we hate to use weather, but what role weather may have played, because I don't know about anybody else, but it was a long time coming on spring/summer this year.

Stacie Beaver

It definitely was sitting up here in Montreal. Category-wise, not that different from what I've spoken to in the past. I'll start with Dynamite. Significantly driven off of dresses, which is a key category we want to stay behind. I would also say, the tops business in total has picked up for that brand and is resonating really well. They did a good job on hitting on a couple key items that seem to be very trend apparent, i.e., the anorak jacket and the capri.

For Garage, also consistent in their fleece category, continues to perform, and we believe we're taking market share in that off-duty, as we call it, or even on duty, introducing more activewear she can actually work out in. Big key items there would be consistently, you guys have seen our fleece cami, but also the booty short and then everything fleece-grounded.

Only category I would say is soft, because it's soft across both, so when we see that, I trend to think it's a macro element, is denim, and there's just not much new in that category right now. Denim shorts is picking up with the weather, but as a trend, we're not seeing much in long leg denim right now from either side. Other than that, everything looks very strong.

Irene Nattel

Thanks, Stacie.

Operator

Thank you. Ladies and gentlemen, out of consideration to other callers on the line today and time allotted, we do ask that you please limit yourself to one question. Thank you. Next will be Stephen MacLeod at BMO Capital Markets. Please go ahead, Stephen.

Stephen MacLeod

Thank you. Good morning. I just had a question about the store outlook for 2026. I know you referenced it in your prepared remarks around the net new openings. The net new openings being down year-over-year, well, not down year-over-year, but down relative to previous guidance. Is that something you expect to continue into the next fiscal year, or is that just isolated to this year specifically?

Jean-Philippe Lachance

Good morning, Stephen. Thank you for the question. You are correct. We've added two store closures to our guidance compared to prior quarter. Those two stores were actually on our list for closures. We simply decided to accelerate those. Those two closures would have happened next year. They've simply been pulled forward to this year as we continue to optimize our network.

Now to be clear, those two stores were profitable. They simply were not profitable enough to our standards. We've decided to do the right thing for our business and close those two stores a little bit sooner than expected. This year, that brings your total amount of closures or the guidance to 16 closures, which is certainly on the high side. As we continue to optimize our network, in the next couple of years, you should expect this number to be lower. As a result of that, our net new additions should be higher than the eight to 10 we're calling out this year, as we're taking the opportunity this year to really optimize the network. Does that answer the question well?

Stephen MacLeod

Yes. Thank you.

Jean-Philippe Lachance

You're very welcome.

Operator

Next question will be from Adrienne Yih at Barclays. Please go ahead, Adrienne.

Adrienne Yih

Great. Good morning, thank you for taking my question. Jean-Philippe, on the gross margin, you materially beat expectations in your Q1. I think the last time annual guidance was for the couple hundred basis points of total EBITDA expansion, half of it would come from GM. It looks like you handily beat that in the Q1. Can you help us with what happens in Q2 and then shaping for the H2 of the year? Then Andrew, could you just talk about your target household income? She's a very higher upper end. We're not seeing any impact in this cohort, CAD 100,000 and up thus far. Seems pretty resilient. Any thoughts on your cohort and the resiliency in that spend? Thank you.

Jean-Philippe Lachance

Hi. Good morning, Adrienne. I'll start with the first part of your question. You are correct in that gross margin was very strong in Q1. It was actually stronger than we had internally planned. We're very pleased with the performance of our gross margin.

To give you a little bit more color on the gross margin for Q1, our IMUs were very strong. Certainly, the tariff situation year-on-year was more favorable, which certainly that part we knew, and also our markdown rate was a little bit lower than expected. These three things together really contributed to a healthy gross margin rate in Q1. It is that strength in our gross margin in Q1 that actually had us revise the full-year outlook on adjusted EBITDA margin.

If I take the midpoint of the range, we've basically increased our EBITDA margin range by, call it, 40 basis points compared to prior guidance, and I would attribute the whole 40 basis points to the strength of the gross margin. In prior earnings calls, again, taking the midpoint of the range, we were looking for 200 basis points improvement year-on-year. I did say half of it would be coming from GM and half of it from SG&A. In this case here, I would attribute the extra 40 basis points to gross margin alone. SG&A continues to be very healthy and where we want it to be, but the gross margin is really surprising us to the upside in Q1. I'll leave the second part of the question to Andrew.

Andrew Lutfy

That was, good morning. Good morning. That was regarding the health of the customer, if I'm not mistaken.

Adrienne Yih

Yeah.

Andrew Lutfy

Yeah. Listen, we're not seeing any issues with the customer. Listen, our historically low markdown rate has gotten even lower, there doesn't seem to be any pushback in terms of pricing, supply, demand, all that kind of stuff. Listen, I very much believe in this K-shaped economy. That top 20% of consumers is still seemingly in a good place, still in a good place in terms of disposable income.

The U.S. is definitely on fire. SpaceX is now bigger than Canada in terms of market cap. Listen.

Adrienne Yih

I hear you there.

Andrew Lutfy

Spain. Elon Musk is the new Spain.

Jean-Philippe Lachance

Yeah.

Andrew Lutfy

Yeah. No, from our vantage point, the customer is still in really good shape. Listen, I still look at the two-year stack and feel very good about where we are and the performance of our new stores. It's great. We open new stores, and there's lineups that go literally around the block and through the shopping center. The customers are just ecstatic to see us, these new stores keep over-performing in these new markets, it's really great.

Adrienne Yih

Great. Thank you very much. Very helpful. Best luck.

Andrew Lutfy

Thank you.

Operator

Next question will be from Mark Petrie at CIBC. Please go ahead, Mark.

Mark Petrie

Hey, good morning. Thank you. Just a follow-up actually on the topic of pricing. Just curious about any color about how that gets absorbed or reacted to across regions. Just curious if you've seen any different reaction to price increases, particularly in Canada, just given maybe a longer legacy with the brand.

Andrew Lutfy

Yeah. Hey, good morning. No, not really. I would say insofar as pricing or even if you look at markdowns or whatnot, no, we don't see really any regional issues, I must say. Happy to report. No. Listen, the Canadian economy is just not as strong as the U.S. economy, I think it's really more broadly that, it really doesn't show up in the assortments or the merchandising mix or even promotional activity or other.

Mark Petrie

Okay. Thanks for that. All the best.

Andrew Lutfy

Pleasure. Thank you.

Operator

Next question will be from Vishal Shreedhar at National Bank Financial. Please go ahead, Vishal.

Word Shreedhar

Hi. Thanks for taking my questions. Wanted to get your perspective on the online growth. Still very strong relative to the business, but slower than the prior two quarters. Is that seasonality or anniversarying the stronger growth, and what e-commerce growth rate should we expect? I know you gave us a penetration rate target, but through the course of the year, as you even anniversary higher growth from that business, what should we expect?

Stacie Beaver

Hi, good morning. It's Stacie again. I'll take that. We're happy with the year-over-year growth and feel like it's healthy at almost 36%, and it's a split between traffic and conversion. Again, like to see that there's balance there. We think that increased performance is coming from, including how she's navigating the site, the functionality, all things we're working on, but we know we have more opportunity there and shifting more technology towards AI and relevance for her to engage and convert.

I'm happy with the quarter. Last year, we were up 21, again, a two-year stack on digital there is at 57. What we're actually trying to get is that penetration number going up. That didn't move in Q1. It held pretty flat. As you guys know, we're trying to chase to that 25% penetration. We do think through the assortment mix we're going to be offering and the double-down on technology and that user experience and her journey in total, that we're going to get there. I was relatively pleased with how Q1 delivered on digital.

Operator

Did that answer your question, Vishal?

Word Shreedhar

Thank you.

Operator

Next question will be from Chris Li at Desjardins. Please go ahead.

Chris Li

Good morning, everyone. Hey, Jean-Philippe, you did a good job sort of quantifying and calling out the gross margin drivers for the quarter. My question is, as you look into the H2 now, once you've lapped the tariff impact, the other factors you mentioned in terms of lower markdowns and cost management, do you expect those growth to continue to persist? How should we think about the gross margin rate in the H2 of the year? Thanks.

Jean-Philippe Lachance

Hi. Good morning, Chris Li. Thank you for the question. Certainly, we would not expect Q3 and Q4 to show improvements of 530 basis points like we've just delivered in Q1. Again, I think you've hit it on the nail, whereby year-over-year, we have an easier comparison for both Q1 and Q2, especially knowing all the tariff noise that we had to go through last year.

For Q2, we do expect another strong quarter in terms of gross margin as a rate of sales. It might not necessarily be the full 530 basis points year-over-year improvement, but it will be quite healthy. Moving on to Q3 and Q4, and especially distribution center is now pretty much fully ramped up. That also brings benefits to our P&L. As a result of that, we do believe Q3 and Q4's gross margin are likely to be higher than prior year as a rate of sales. It will certainly not be the same magnitude as the H1 of the year, but we do see a better gross margin year-over-year for H2 as well. For the whole year, it basically positions us very well to deliver a good number for the full year. Yes, H2, we also expect some strength in terms of the gross margin as a rate of sales.

Chris Li

Thank you and all the best.

Jean-Philippe Lachance

Thank you.

Operator

Next question will be from Martin Landry at Stifel. Please go ahead, Martin.

Martin Landry

Hi, good morning, everyone. Want to touch on Canada versus U.S. Your Canadian sales were up 7% year-over-year. A bit of a slower growth than what we've seen in the past quarters. Can you talk a little bit about the two brands, Dynamite and Garage? I think in your opening remarks you did say that Dynamite performed well, but love to add a little bit more color on that, and any trends you can talk to us about in terms of basket versus traffic would be super helpful for Canada.

Stacie Beaver

I think overall, again, as I mentioned at the beginning, we're excited by the +37% comps overall. We're also turning faster. If you guys caught the turn this quarter was at 9.69x. As we look to our allocation of assets, the U.S. always wins there too with a more accretive margin. We're running a little tighter, probably in Canada, but it's the traffic piece that's a little slower, but when she's coming in, she's converting, and that's why I go back to the customers responding.

There doesn't seem to be a pushback in AUR, because obviously we questioned that. Transactions being up in both countries and the business being up in both countries leads us to believe it's a demand. At the beginning, I'm never allowed to say weather because I can't control it, but we're hoping to see an uptick in the weather that can different in a product category, in an AUR pushback. We're not running more markdowns in Canada than the U.S. The businesses are actually in parallel. We're just seeing the U.S. greatly outperform, and that's in comps and aggressively in the new stores.

Martin Landry

Okay. Thank you and best of luck.

Stacie Beaver

Thanks.

Operator

Next question will be from Michael Glen at Raymond James. Please go ahead, Michael.

Michael Glen

Hey, good morning. Just what components of gross margin, would you say are inflationary right now? Do you see inflation in product cost? Are you seeing much inflation in freight? I know there's a lot of positive things happening in gross margin. What's actually a headwind for gross margin right now?

Jean-Philippe Lachance

Hey, good morning. I'm sorry, you cut off a little bit on our side for two or three seconds. Can I please ask you just to repeat the question quickly?

Michael Glen

What components of gross margin or of cost of goods sold, whether it be product cost or freight, are you seeing the most inflation on right now?

Jean-Philippe Lachance

In terms of rates, I would say where we're seeing the most inflation is probably around the freight component. This being said, as a percentage of total cost of goods sold, this is certainly not the majority. This inflation piece is certainly something we are comfortable dealing with as part of our ongoing AUR strategy and IMU strategy. We are seeing a little bit of inflation in certain pockets of the cost of goods sold, but this is nothing that we can't deal with given the magnitude of the impact we're seeing right now. Does that answer your question well, Michael?

Michael Glen

Product cost overall just remains stable for you?

Stacie Beaver

Yes. Product cost is remaining stable.

Michael Glen

Okay. Thank you.

Jean-Philippe Lachance

Thank you.

Operator

Next question will be from Mauricio Serna at UBS. Please go ahead, Mauricio.

Mauricio Serna

Great. Good morning. Thanks for taking my question. Maybe just on the quarter-to-date commentary of 9% comp, could you break that down into AUR and transaction growth? Could you remind us what's your leverage point on the comp sales just given your continuous store opening program? Thank you.

Jean-Philippe Lachance

Hi, Mauricio. Good morning. The 9% quarter-to-date comp that we've provided, AUR certainly is the main driver of that number at the moment, which is similar to what you've seen also in the prior quarters. I wouldn't say there's a major shift here. The components in terms of their contribution align with what you've seen.

Then on the second part of the question, the leveraging aspect, certainly as we continue to deliver same store sales in line with our annual guidance, that definitely creates opportunities for us in terms of getting better as a rate of sales. Certainly that 9% that we talked about or 11%-14% for the full year, that is more than enough to provide us with operating leverage at the SG&A level. I will also remind everyone that the 9% number that we've quoted for Q2 to date, that is in CAD. In constant currency, that would be 11%.

Mauricio Serna

Got it. Very helpful. You expect that to continue to be driven by AUR for the remainder of the quarters?

Jean-Philippe Lachance

As we think about the full-year guidance, 11%-14%, certainly AUR will be a key component of that. As any good retailer would say, traffic and transactions is incredibly important, and that will make an impact on the full-year number as well.

Mauricio Serna

Thank you so much.

Jean-Philippe Lachance

Thank you.

Operator

Next question will be from Luke Hannan at Canaccord Genuity. Please go ahead, Luke.

Luke Hannan

Thanks. Good morning. I just wanted to follow up on the AUR conversation. I know part of the strategy in being located in these higher-tier shopping centers was, I guess, helping to sustain the pace of AUR growth that you've had of late. I'm curious to know when it comes to the competitive set that you're seeing in those shopping centers, has the rate of magnitude, I guess, of their price increases or any of their portions of the assortment that might overlap with yours, has the pace of price increases there changed at all given the geopolitical backdrop?

Stacie Beaver

Sorry. No. I would say to answer your question on AUR, again, we're looking at pricing power, not overpricing the product. We're elevating the product. There's a reduction in markdowns. We think the product also being driven by brand heat, which is also up, and the transaction growth at +19. Again, I'm not concerned about the AUR.

As far as the competitive set, depending on who you're looking at, we're still well in the mark and ticket per ticket, we're still under most. Most of those U.S. retailers are still highly promotional, so their ticket is one thing, their out-the-door price is another. We don't play that high-low game, out-the-door price, we're probably higher to the mix of the real estate where we're going when you compare us to an Alo, a Lululemon, those likes, we're still, as we like to say, the cheapest house on the nicest block. We are still feeling very confident about our AUR strategy go forward.

Luke Hannan

Great. Thank you very much.

Operator

Next question will be from John Zamparo at Scotiabank. Please go ahead, John.

John Zamparo

Thank you. Good morning. I wanted to ask about your relatively newer vintage of stores specific to the U.S., and I wonder if you can quantify average store sales in year one for openings in, say, 2024 or 2025 or early 2026 so far, and what type of growth do you see as those new stores enter year 2?

Andrew Lutfy

Good morning. Hey, I'll take that. Well, it's funny you should ask because we were actually just looking at that. Listen, I'm happy to report that whether we look at the more recent vintages or the ones of two, three, four years ago, what's incredibly promising is they all have more or less the same pump on a year-to-date basis, on an annual basis. The good news is the beta volatility from different vintages is incredibly low. They are remarkably similar, so that's great.

Even as we look at the 2025 vintages that we've opened up, now, of course, there's only a few that would be lapping this year. They as well are pumping up. I think it stands to reason that this consistency would be true because, listen, you've got a consistent set of eyes, consistent leadership running the real estate strategy. This is an area of responsibility for which I deeply am involved in. There's consistency in the strategy, in the standards, in the people running the standards, and that discipline is providing consistent results, which is great.

John Zamparo

That's helpful. Thank you.

Operator

Next question will be from Jon Keypour at Goldman Sachs. Please go ahead, Jon.

Jon Keypour

Hey, good morning, everybody. Thank you for the question. I was just wondering if you guys could size, by quarter in 2025, what the tariff impact was to gross margin, and if possible, what the flip side of that benefit was specifically from tariffs in Q1 gross margin this year.

Jean-Philippe Lachance

Hey, good morning. Thanks for the question. We haven't broken it down specifically, but the best color I can give you is the following. If you look at Q1 and Q2's gross margin last year compared to the prior year, you'll see that for the H1 last year, gross margin was down 200 basis points year-over-year, if memory serves. If you look at the H2 of the year last year, which had no tariff impact, or almost none, your gross margin as a rate of sales year-over-year was actually the other way around, up 200 basis points last year.

Tariffs are definitely the biggest driver in that significant shift between -200 H1 and +200 H2. Hopefully that gives you a good idea of the magnitude of the tariffs that we had to go through in H1 last year, whereby in H2, there was almost none.

Jon Keypour

Okay.

Jean-Philippe Lachance

Thanks.

Jon Keypour

Yep, definitely.

Operator

Thank you. At this time, we have no other questions registered. Please proceed.

Andrew Lutfy

Okay, thank you. Well, listen, thank you everyone. Appreciate the call. Listen, I could feel the energy on the line is certainly a little less enthusiastic than prior calls. I just want to put it out there. Listen, we're delivering on the guidance. As a matter of fact, we're raising the guidance. We're very comfortable with our numbers. We're very excited with the new store openings and our business. We're very enthused with where we're going digitally and fundamentally our strategic plans and ambitions.

The team is in a good place. Notwithstanding the mood, which is a little softer on this call, I could promise and assure you we're actually far more excited internally and looking forward to a very strong year. With that, I thank you and I wish you all a wonderful day and a wonderful week.

Jean-Philippe Lachance

Thank you.

Stacie Beaver

Thank you.

Operator

Thank you. Ladies and gentlemen, this does indeed conclude the conference call for today. Once again, thank you for attending. At this time, we ask that you please disconnect your lines.