ARITZIA INC.
Much Needed Stability Is A Step Forward
Our Conclusion
Exceeding modest Q2 expectations and maintaining full-year guidance is
unremarkable, but we do believe it de-risks a negative scenario and is a
good step toward re-building investor confidence. We continue to be cautious
on consumer demand in the coming quarters, though are encouraged by
strong results from U.S. store openings. Our F2025 estimate rises slightly
and our price target stays at $30. ATZ remains Neutral rated.
Key Points
Sales Growth Trends Remain Mixed: Revenue of $534 million was up 2%
Y/Y and modestly better than guidance of “flat to slightly down”. This is again
the outlook for Q3, and trends QTD are consistent with Q2. E-commerce sales
were down 1% (including FX), which actually modestly lagged web traffic
growth in the period. Lagging product “newness” is clearly a drag on sales, and
the comp store sales decline of 4.3% implies stores were down about mid-5%.
Given the accelerating pressures on consumers (higher rates, student debt
repayment, slowing job market, etc.), we remain generally cautious on the
sales outlook and forecast 6% growth in F2025 (lapping an extra week).
E-commerce Growth Has Drivers: The company has launched buy online,
pickup in store, and ship from store in Canada, with the U.S. following in early
2024. We expect this will support sales growth and margin realization given
improved inventory utilization. Importantly, the company is also progressing
toward active digital marketing and is building a team to support this work. We
believe this is a positive step and will be accretive to the business.
New Store Trends Are Strong: Management highlighted the strong
performance of recent new store openings, including store paybacks that are
tracking under one year (vs. target of 12-18 months). Clearly this is a very
strong result and one that bodes well considering substantial store growth
coming in the next 18 months. However, we estimate that about 40% of
F2025 square footage growth will come from flagships, which will likely carry
less attractive sales productivity and store economics.
Product Issues Being Addressed; Brand Isn’t “Broken”: With the
company returning to its historical product development cadence,
management expects to be in a “strong position” on product newness for
spring/summer 2024. New styles for fall 2023 are resonating with clients,
which supports our view that the brand is not broken, but we still expect the
innovation imbalance will remain a headwind on the sales recovery in H2.
Margin Recovery Intact For F2025: Management also reiterated its outlook
for “meaningful adjusted EBITDA margin improvement” in F2025. The key
drivers include +150bps from initial markups (IMU), +150-200bps from smart
spending initiatives, and +125bps from transitory costs subsiding. We remain
confident that margins will expand materially next year, though we continue
to believe the trajectory in sales growth remains the biggest risk to the
company rebuilding its EBITDA margin.