Post by
retiredcf on Oct 06, 2022 8:10am
CIBC Raise Target by 23%
EQUITY RESEARCH
October 5, 2022 Earnings Update
ARITZIA INC.
Investor Day And Q2 Preview: U.S. Growth Remains The Focus
Our Conclusion
Aritzia will host its first Investor Day on October 27. We expect the company to highlight its long runway of growth potential in the U.S. and its plans for the continued building of brand awareness, SKU expansion and omnichannel capabilities. We expect new three-year financial targets to be introduced, and while macro uncertainty clearly looms, we believe double-digit revenue growth, margin expansion and robust free cash flow are achievable. We also roll forward our valuation to F2024 (from F2023) and raise our price target to $59 (from $48). Aritzia is Outperformer rated.
Key Points
U.S. Growth Potential Remains Robust: Aritzia’s U.S. segment is the key
driver of the near- and medium-term growth, and we expect this will be the primary point of focus of the Investor Day and multi-year strategic plan. At one point, we expected 100+ stores in the U.S. (44 today), and we continue to see potential for at least that many. By point of comparison, we estimate LULU’s store productivity is not dissimilar to ATZ, and the LULU U.S. store network sits at 331 and is still growing at ~10/year.
Channel Mix Shift Supports Margin Expansion: We believe the natural
sales mix shifts underway in Aritzia’s business present a material margin
tailwind over a multi-year period. With e-commerce margins above store
margins and U.S. exceeding Canada, we believe this implies 150+ bps of
GM% expansion potential through F2025. Lower freight costs will flow through at some point as well. Regarding SG&A, we expect ATZ will continue to methodically invest to support both the short- and long-term growth potential of the business, and this will limit opex leverage despite the strong top-line growth.
Other Growth Levers Will Continue Or Potentially Accelerate: Aritzia has
very successfully leaned on an improved omnichannel experience and SKU expansion as levers to drive organic growth. We believe both have runway, though see others with potential to be material contributors. The U.S. is clearly the most immediate opportunity. We believe it is likely Aritzia will look to grow both International and Menswear (through Reigning Champ). In typical fashion, we expect growth to be disciplined, but we do believe these previously blue-sky opportunities will come into greater focus. We also see accelerated marketing as a possible lever to support growth.
Macro Risk Looms, But We Expect It Will Be Mitigated: Given its
exposure to a higher-end consumer, we believe Aritzia is somewhat insulated from the impact of elevated inflation and halted government supports. Further, inventory levels are elevated across industries, and supply-chain issues continue to present a challenge for retailers. Again, we do not believe ATZ is immune, though we believe its significant use of expedited freight gives it a lever to reduce costs, and its strong demand and relevance with consumers will limit markdown risk. Last, while we expect price moves to help offset, the material surge in the USD presents a COGS risk, particularly in H2 but also F2024, and is only modestly offset by USD-denominated earnings.