Post by
retiredcf on Oct 13, 2022 8:26am
CIBC
EQUITY RESEARCH
October 12, 2022 Earnings Update
ARITZIA INC.
Sales Momentum Outweighs Margin Risks
Our Conclusion
Aritzia posted another stellar quarter led by broad-based strength across
both channels and geographies. Margin performance was healthy despite a headwind from expedited freight, but the top line remains the focus and Q2 revenue growth (on a three-year CAGR basis) accelerated from Q1 (+30% vs. +28%). Concerns about a slowdown in consumer spending, elevated inventories and a return to discounting across the industry have weighed on apparel stocks, but ATZ has showcased – once again – brand momentum is accelerating, particularly in the U.S. Our estimates are increased and our price target rises to $60 (from $59). Aritzia remains Outperformer rated.
Key Points
Revenue Outlook Raised; Still Likely Conservative: ATZ raised its F2023
revenue guidance, with Q3 ($565MM-$590MM) well ahead of consensus
($516MM) but in line for Q4. The outlook implies a 300bps moderation in H2 growth on a three-year CAGR vs. H1, which we chalk up to conservatism and some acknowledgement of the uncertain environment. Importantly, growth remains driven by new clients with no slowing in average order values or conversion rates.
Breaking Down The Uptick In Inventory, And Why We Aren’t
Concerned: Inventory increased 150% Y/Y with management noting that
83% growth is simply catch-up from sparse levels last year. The remainder reflects a pull forward in winter/spring inventory due to earlier ordering on account of supply chain concerns. These have proven overly cautious as conditions are beginning to improve (ocean freight times now seven to eight weeks vs. 11-12 weeks previously, but still double the pre-pandemic average). Furthermore, the majority of the inventory pull forward is in proven sellers, which reduces future markdown risk. We estimate last year’s inventories were $50MM-100MM light in Q2-Q4, and management clearly has no interest in leaving sales on the table again. And with sales momentum as robust as it is, we agree.
Margin Outlook Unchanged But Lots Of Moving Parts: Management left
its GM% and SG&A% outlook unchanged, and both continue to reflect
modest pressure from excellent F2022 results. There are multiple factors that could swing GM% materially in the coming 12-18 months – expedited freight costs are coming down (a 250bps-300bps headwind in F2023), while markdown activity will be ramping back up. FX is a mixed bag as a stronger USD presents a pricing headwind for the CDN operations but a translation tailwind for the growing U.S. business. Given purchases are largely locked for H2, it will actually be a slight tailwind, though we estimate it could be a 150 bps headwind in H1/F24 (at the current rate) given the company does not hedge any of its exposure. Lastly, as we highlighted in our recent Investor Day Preview, we estimate that the shifting sales mix toward the U.S. and e-commerce is a 150bps-200bps tailwind through F2026. This is all absent any move on pricing, which we believe remains an available lever.