Stifel Raise Target After generating “strong” results thus far in 2022, Aritzia Inc.’s momentum is likely to continue, according to Stifel analyst Martin Landry, citing “positive industry read-throughs.”
“While demand for apparel has slowed down in recent months globally, there is a clear delineation between the upper-middle class customer and the lower income customer,” he said. “Brands targeting affluent customers such as lululemon and Anthropologie are still posting strong growth. This is reassuring for Aritzia, which is also targeting affluent customers, and suggests that the impact of the economic slowdown could be muted in the near-term.”
Despite a negative initial reaction from the Street, the analyst pointed to Lululemon’s “strong” third-quarter results, released Thursday after the bell, that saw adjusted earnings per share rise 23 per cent year-over-year to US$2, exceeding the Street’s forecast by 3 US cents.
“Similarly to Aritzia, Lululemon has not raised prices significantly over the last year,” he said. “The company raised prices on roughly 10 per cent of their products this year, a very low level when compared to the rest of the industry. As shown by the results thus far this year for both companies, this strategy seems to have paid off. On the flip side, other competitors, which raised prices are now having to discount their products, creating a habit for consumers to look for discounts in the future. Lululemon continues to see strong sell through of full price products, and we would expect a similar dynamic for Aritzia.”
Mr. Landry also emphasized “strong” website traffic generated by Aritzia, enjoying an increase of 17 per cent year-over-year during the third quarter versus a 4-per-cent gain in the previous three months. He also pointed to the outperformance of high-end brands and “positive” Black Friday data points.
“Urban Outfitters (URBN-NASDAQ), reported in-line Q3FY23 results on November 21, for the three months ended October 31, 2022.” he said. “Despite an inline quarter, performance within the company’s higher-end segment was strong with the Anthropologie Group posting comparable sales growth of 13 per cent, while the Free People Group comp sales came-in at 8 per cent, both much higher than the overall group at 4 per cent. These results align with our view that high-end brands, serving a more affluent customer are less impacted by inflationary pressures and rising interest rates relative to ‘value’ brands.”
“Despite the challenging macroeconomic environment, spending during the 2022 Black Friday appear to have increased year-over-year. MasterCard SpendingPulse Advanced Estimates suggested that total retail sales (ex auto) grew 10.9 per cent year-over-year from November 24 to 27. More importantly, apparel sales are estimated to have grown by 14.4 per cent year-over-year, a positive read-through for Aritzia’s Q3FY23 results, which covers the Black Friday period.”
Citing “improved visibility on demand trends” and calling it a “best-in-class” retailer with “significant” growth potential, Mr. Landry raised his target for Artizia shares by $3 to $62, maintaining a “buy” recommendation. The average on the Street is $62.14.
“Aritzia has a long runway for growth, a healthy balance sheet and a proven track record, all appealing characteristics for investors,” he said.