October 12, 2022
Aritzia Inc.
To the nines: Q2 and F23 outlook strong and better than expected, target to $56 (+$3)
Our view: Both Q2 and outlook stronger than forecast underpinned by strong consumer demand for the company’s Everyday Luxury apparel that shows no sign of slowing Q3 to date. We maintain our thesis that ATZ has an exceptional growth runway as it continues to seed the US market, grow its omnichannel presence and expand assortment into new categories. Q2 results and Investor Day on October 27 should raise investor comfort around ability to navigate a consumer spending slowdown. SP reflects sector exposure/valuation/relative upside potential. Target +$3 to $56.
Key points:
Nudging forecasts higher on better than expected Q2 and upward revision to sales guidance. Our F24E normalized EPS $1.98 implies four-year EPS CAGR +25%. We maintain our highly favourable view of ATZ's ability to drive the business forward, notwithstanding looming recessions. Forecasts primarily underpinned by new unit growth, and rising brand awareness in the US driving strong omnichannel performance. F23 sales outlook revised upward by $115 MM-$125 MM to $2.0B-$2.05B, midpoint 9% and 12% higher than forecast heading into the quarter. GM% outlook -100-150 bps unchanged and reflects SC disruption and inflationary pressure but also includes i) pressure from expedited freight 250-300 bps and ii) cycling of prior year COVID relief subsidies, implying positive underlying GM%.
Recession: let’s get on with it! Shallow or deep. Short or long lived. Technical or declared. Whatever the qualifiers, it’s coming. But in our view, the slowdown and uncertainty that surrounds it is more likely to impact valuations rather than earnings and demand trends at Aritzia. Management is not seeing any adverse signals in its core KPIs (average order value, basket and traffic). In our view, this speaks to the resilience of Aritzia's core customer demographic and is consistent with the latest view from RBC Economics, predicting that “lower income Canadians—many already adjusting to the loss of pandemic support—will be hit hardest.”
Investor Day should provide clarity on the path forward. ATZ will present its strategic and financial plan at its inaugural Investor Day on October 27. In our view, the fact that Aritzia is hosting a high profile investor event against the backdrop of sobering macro headlines and uncertainty around the outlook speaks to management’s confidence in the strategic vision and the markets they address.
Unique positioning underpins strong performance, but investor concerns around recession holding back share price. Performance of ATZ prior to, during and through COVID reinforces our views around the strength, sustainability and upside potential of the company’s unique business model. However, as an apparel retailer, equity markets are concerned about sustainability of demand against the backdrop of rising rates/ compressed consumer disposable income and recession.