Our view: Investors are likely relieved that ATZ reported a slightly better than expected Q2 print (albeit down substantially Y/Y) with F24 guidance unchanged. ATZ’s LT growth opportunity is virtually unmatched in the space, underpinned by accelerating brand penetration, store and eCommerce growth runway in the US, and category expansion. But given the spectre of higher-for-longer interest rates, decelerating consumer spending, and RBC Economics’ forecasts of tepid GDP growth and household consumption in 2024, investors will likely remain on the sidelines until the backdrop improves.
Key points:
F24 a year of transition and investment, return to growth expected in F25, return to F23 net income forecasted F26: Q2 results were a ribbon better than expected, but magnitude of investments in F24 combined with marked deceleration in consumer spending trends points to a 50% decline in net income this year before a return to growth in F25. F24–F26 forecasts essentially unchanged.
SSS and eCommerce pulling back, new stores delivering better than expected results: Deceleration in consumer spending/traffic drove Q2 SSS -4.3%, and similar declines are anticipated in H2; eCommerce revenue -1%. But two boutiques opened in H1, delivering better than expected sales and on track for 10-month payback vs. targeted 12–18 months, reinforcing that new store openings are the most predictable element of ATZ’s growth. F24 openings back-end loaded (3 of 8 stores to open very late in Q4), F25 should be more balanced: 4 in Q2 and 7 in Q3 for total square footage growth of 20% including repositioning/expansions of 3 flagship stores in Manhattan (5th Avenue, SoHo, and Flatiron).
Cost and cash flow headwinds should be transient, B/S solid: F24 margin headwind should be resolved as we move through H2/F24/F25: i) 150 bps from IMU; ii) 150–200 bps of Smart Spend initiatives; and iii) 125 bps transitory costs subsiding. F24 capex $220 MM, early expectations for similar level in F25. NCIB reserved for anti-dilutive purposes in NT. Adjusted net debt/LTM EBITDA of 1.5x in F23A rises to 2.2x in F24E, 1.8x by F25E.
Maintaining SP rating, $41 PT: Once again, we thought a lot about what to do with our rating given the 31% share price decline since the Q1 release. We came to the same conclusion as we did at Q1: with the challenging macro backdrop, ATZ is likely to remain a “show me” stock despite our view that the LT opportunity is real. We still believe post- COVID ATZ is a much stronger player with substantially better and lower- cost real estate opportunities, revenue 2x pre-COVID levels, and enhanced brand awareness. As we move through H2/F24 and into F25, as the macro backdrop becomes clearer, and if the margin evolution occurs as management outlined, a compelling buying opportunity could emerge.