Our view: Forecasting Q4/F23 EPS $0.36 (+5.1% Y/Y) when ATZ reports on May 2. With an offering that clearly resonates, and long-term growth trajectory underpinned by US expansion and online penetration, ATZ is well positioned in our view, particularly as return-to-work trends accelerate. In addition to the results themselves, investor focus for the quarterly release is likely to be around evolution of inventory levels and F24 guidance. Concerns around sustainability of demand against the backdrop of consumer disposable income headwinds, and transient margin pressure are likely to weigh on share price performance until visibility improves.
Key points:
Q4/F23E reflects solid top line performance offset by transient margin pressure. Q4/F23E EPS $0.36 reflects: i) top line growth +34.5% Y/Y to $598 MM, toward the high end of guidance range $580-$600 MM; ii) transient GM% pressure -250 bps Y/Y, in line with guidance reflecting higher warehousing costs due to inventory rebuild and normalizing supply chain lead times; and iii) higher SG&A. Importantly, mid-FQ4, management was not seeing any adverse signals in core KPIs, with sales growth on full price items > merchandise on markdown, which speaks to the resilience of Aritzia's core customer demographic. Calendar and weather effects likely a wash early FQ4, with one extra Saturday leading up to Christmas 2022 offset by unseasonable weather/precipitation across Canada in December. Of note, Canada retail sales announced this morning indicate that clothing and accessories (+11.1% Y/Y) and shoe (+21.7%) retailers were among the top four performers in February, along with health and personal care (+12.2%) and cannabis (+12.8%) retailers.
Inventory growth should begin to normalize in FQ4, and broadly align with sales trends by the end of H1/F24. Composition of inventory after the holiday rush in early January described as heavily concentrated in client favourites and well positioned with respect to spring selling season, giving management confidence that seasonal markdowns should be no greater than pre-pandemic.
NCIB continues but a much slower pace H2 vs H1. According to regulatory filings, ATZ repurchased 36.8k shares in FQ4 (H2: 158k vs H1: 1.5 MM), bringing F23 total to 1.685 MM (1.5% of total). Against the backdrop of rising uncertainty over discretionary consumer spending, share repurchases are likely to remain highly opportunistic, in our view.
Maintaining SP rating, $63 PT. In our view, the slowdown and uncertainty that surrounds probable recessions on both sides of the border is more likely to impact valuations rather than earnings and demand trends at Aritzia. Target multiples reflect heightened uncertainty and SP rating reflects sector exposure/positioning relative to other SMID-cap names.