Aritzia Inc.
(ATZ-T) C$48.83
Q2/F23 Preview: Margin Headwinds to Outweigh Demand Tailwinds
Event
Aritzia (ATZ) is scheduled to report Q2/F23 financial results on October 12 after market close.
Impact: NEUTRAL
Q2/F23 Summary: As it pursues its U.S. expansion, we believe the momentum in ATZ's business continued in Q2/F23. Our top-line growth forecast of ~30% y/ y is toward the high-end of management's guidance. Recall that ATZ's typical spring/summer sale period takes place in Q2. However, about halfway through its promotional period, it was clear that consumers were still willing to pay full price. Although we believe markdowns remained in check, higher expedited freight costs will weigh materially on the y/y gross-margin performance. This should prove to be a transitory headwind, albeit one that will contribute to a y/y decline in adjusted EPS. Our Q2/F23 EPS forecast of $0.32 compares with consensus of $0.33.
Weathering the Promotional Storm: As consumers manage the effects of inflation, several of ATZ's U.S. apparel peers have experienced a divergence in customer behaviour. Combined with challenging inventory planning, this has resulted in an acceleration of markdown activity. As ATZ pursues its U.S. expansion with a broad portfolio of brands, we believe it is well-positioned to manage markdowns through F2023. Its inventory balance is also weighted to proven sellers, that it can pack and hold if necessary. In addition, improving freight lead times/rates could prove to be a modest tailwind to its H2/F23 gross-margin performance.
Potential Near-term Catalysts: As detailed in our note Site Tour Highlights and Investor Day Expectations (linked), we believe that the disclosure of long-term targets at ATZ's investor day could act as a positive catalyst to the share price. In our view, management's strategic plan will turn investor focus back to the attractive, long-term growth potential of the business.
TD Investment Conclusion
We maintain our positive view of ATZ's runway for growth in the U.S., internationally, and in new product categories/segments. We will review our estimates, target price, and recommendation following the release of the Q2/F23 results.