Aritzia Inc ATZAF

RBC

[retiredcf]

Their upside scenario target is $50.00. GLTA

September 21, 2023

Sector Perform

TSX: ATZ; CAD 21.78

Price Target CAD 41.00 ↓ 46.00

Aritzia Inc.

Threading the needle: fine-tuning outlook ahead of Q2 results, PT to $41

Our view: Fine-tuning forecasts ahead of Q2 results to reflect further evidence of consumer spending headwinds, notably in Canada. While Q2 should mark the worst of margin compression as transient expenses begin to normalize/roll-off in H2, slowing consumer demand, notably on discretionary items, is likely to continue to weigh on sentiment and conviction to own. Accordingly, we are fine-tuning our forecasts and moderating our target valuation, resulting in a revised PT to $41 (-$5).

Key points:

Forecasting EPS loss -$0.04, consensus range -$0.01 to -$0.04 (average: - $0.03) when ATZ reports Q2 September 28. Q2E revenue decline -3.1% Y/Y to $509.4 MM consistent with guidance “flat to slightly down” and includes FX tailwind +150 bps. Forecast revenue decline and cost headwinds driving GM% and SG&A deleveraging, with Q2E GM% pressure -750 bps greater than Q1A -545 bps as ATZ cycles incremental airfreight, which was a bigger offset on Q1 results. Components of F24 margin headwind should be resolved as we move through H2/F24/F25: i) 150 bps from IMU, ii) 150-200 bps of new economies of scale initiatives, iii) 125 bps transitory costs related to new DC, plus, iv) operating leverage and other initiatives.

Moderating our F25 outlook against the backdrop of accelerating consumer spending headwinds and economic growth forecasts. Near- term balance of risk favours US over Canada:

• Canada: softening labour markets and rising debt-service burden are key headwinds to household consumption in Q3 and beyond, most notably in discretionary categories. RBC Economics forecasts a -0.6% decline in Canadian household consumption in Q3 (Q/Q annualized), highlighting that “Aggressive interest rate increases over the last year and a half will continue to ripple through to consumers, pushing household debt payments (and delinquency rates) higher.”

• US: consumer spending more resilient, but there too, headwinds are accelerating, notably: i) excess pandemic savings largely depleted, ii) tighter credit conditions, and iii) rising consumer delinquency rates despite strong labour markets.

  NCIB primarily used for anti-dilutive purposes. According to regulatory filings, ATZ repurchased 197k shares in Q2 for $6.9 MM. Share repurchases likely de minimis for the foreseeable future given capital commitments and uncertain demand backdrop.

  Trimming target EBITDA multiples from 12.5x to 11.5x EBITDA to reflect sector multiple compression, consumer spending headwinds and related impact on earnings visibility, PT to $41 (-$5). SP rating reflects long-term opportunity balanced by sector exposure, relative upside potential.