Stifel analyst Martin Landry thinks the Sept. 28 release of Aritzia Inc.’s second-quarter 2024 financial results will be “important to re-establish investors’ confidence following two quarters of negative surprises.”
“Given investors’ confidence is at multi-year lows we believe it would not take much for investors to revisit ATZ,” he added. “A successful ramp-up of the GTA distribution center, healthier inventory levels and positive comments on the outlook for the fall would go a long way. Recent industry readthroughs suggests better than feared demand trends, increasing our confidence in Aritzia’s ability to achieve its FY24 guidance. ATZ’s shares do not appear to have found a bottom yet touching new lows daily.”
Mr. Landry is expected revenue of $522.97-million, which is essentially flat year-over-year and in line with the Street’s expectation of $521.75-million and the company’s guidance. He expects a 2-per-cent decline in same-store sales growth to be offset by 4.5-per-cent network growth.
“Despite stable revenues, Aritzia is expected to experience a 1,300 basis points EBITDA margin contraction driven by several factors including (1) inflationary pressures on product costs and labor, (2) transitionary dual warehousing costs and (3) a normalization of the promotional activity,” he said. “This translates into an adjusted EPS loss of 4 cents, in-line with consensus estimate of a 2-cent loss.”
Acknowledging these results are “not encouraging,” Mr. Landry thinks recent industry comments made by Aritzia’s peers point to “better than feared” demand trends.
“Amongst the six apparel retailers we analyzed, five have experienced sustained or accelerating demand trends in August,” he said. “While the apparel industry remains volatile and demand varies significantly from one retailer to the next, we are encouraged by these comments, which suggests that demand trends might be better than feared. Remember that beginning in June, Aritzia had begun to experience a deceleration in traffic trends, which pushed the company to revise its FY24 guidance. Hence, with these positive read-throughs from peers, ATZ’s guidance appears increasingly achievable.”
“Improving supply chain was amongst the main themes discussed by apparel retailers in Q2/23. American Eagle, Urban Outfitters and Abercrombie & Fitch have experienced significant improvements in inbound costs and lead times, which has led to (1) better flexibility to manage inventory levels, (2) lower markdowns levels and (3) healthier inventory position. In Q1FY24, Aritzia’s inventory position was still elevated, up 62 per cent year-over-year but the company expects inventory growth to more closely align with sales trends by the end of Q2FY24. Hence, as inventory levels continue to normalize, we would expect ATZ to benefit from similar tailwinds, which should result in margin improvement.”
Also seeing website traffic beginning to accelerate, Mr. Landry made a modest adjustment to his fiscal 2024 revenue expectation, maintaining a $40 target and “buy” recommendation for Aritzia shares, touting “significant growth potential” and an “impressive track record.” The average on the Street is $35.88.
“At 12 times forward consensus EPS, (vs 21 times historically), ATZ’s valuation is not demanding and provides investors with a healthy buffer in case expectations are too high for next year,” he said.