Revised TargetsIf we toss out the CIBC low and the RBC high, the new consensus target is $50.00. GLTA
While Aritzia Inc. reported “impressive” fourth-quarter 2023 financial results with revenue growing 44 per cent year-over-year and earnings per share up 20 per cent, Stifel analyst Martin Landry expects the focus of investors to be on weaker-than-anticipated guidance for its next fiscal year.
“Aritzia is coping with three main issues: (1) inflationary pressures on product costs and labour. In our view, management has been slow to increase prices to offset inflation which creates a disconnect in gross margin in H1FY24. (2) Transitionary dual warehousing costs as the company ramps-up its new 550,000 sq.ft. distribution center in Vaughan, Ontario starting in August while still using 3rd party logistic suppliers until fully ramped-up in FY25. (3) a normalization of the promotional activity which was below historical levels in 2022,” he said.
After the bell on Tuesday, the Vancouver-based clothing retailer introduced 2024 guidance that includes revenues of $2.42-2.5-billion, up 12 per cent year-over-year at the mid-point but “slightly” below Mr. Landry’s estimate of $2.5-billion. Gross profit margins are expected to declined 2 per cent year-over-year with the majority of the pressure in the first half of the year with a 6-per-cent year-over-year decline projected.
With expenses also rising, Mr. Landry said the guidance “translates into a very weak H1FY24 as EPS estimates could be down by more than 70 per cent year-over-year.”
“Management tried to reassure investors by opening a discussion on EBITDA margins for FY25,” he added. “Management expects EBITDA margins to recover from FY24 lows of 12.5 per cent and reach at least 16 per cent in FY25. The margin expansion in FY25 should come from a reversal of temporary costs in FY24, mostly related to distribution and logistics. Management also reiterated its expectations for EBITDA margins to reach 19 per cent by FY27 as communicated in the company’s investor day held in October 2022. We still believe that Aritzia’s FY27 EBITDA margins targets are achievable. However, the volatility in EBITDA margin is surprising and larger than expected.”
“Our FY24 EPS forecast decreases by 35 per cent to $1.47 with most of the impact in H1FY24. Hence, the narrative surrounding Aritzia’s story could be negative for the next two quarter before seeing earnings growth return in Q3FY24.”
While he maintained a “buy” recommendation for Aritzia shares, Mr. Landry dropped his target by $12 to $50. The average on the Street is $55.
“We believe that Aritzia’s earnings volatility this year may give investors some pause,” he said, :As a result, we have reduced our valuation multiple to reflect the higher execution risk to return to previous profitability levels as well as a slowing revenue growth profile ... Despite near-term earnings pressure, Aritzia’s growth story remains mostly unchanged with a long runway in the United-Sates and internationally. The company is undergoing growing pains which are temporary in nature, and we see a path to a return to historic profitability levels. However, in the meantime, investors’ confidence has been shaken.”
Elsewhere, a pair of analysts downgraded Aritzia:
* BMO Nesbitt Burns’ Stephen MacLeod moved it to “market perform” from “outperform” with a $50 target, down from $60.
“While we continue to appreciate Aritzia’s unique market positioning and U.S. growth opportunity, the unexpected shift to a period of infrastructure investment is expected to weigh on F2024E EBITDA (we have reduced our F2024E estimate by 26 per cent), with margins only returning to F2023A levels by F2025,” said Mr. MacLeod. “Combined with moderating sales growth (F202 estimate up 10-14 per cent vs. up 47 per cent in F2023) and an uncertain macro backdrop, we see balanced risk-reward with the stock trading at a premium to historical levels.”
* CIBC’s Mark Petrie lowered it to “neutral” from “outperformer” with a $44 target, down from $60.
Other analysts making adjustments include:
* Canaccord Genuity’s Derek Dley to $50 from $65 with a “buy” rating.
“In our view, F2024 very much appears to be a year of investment for Aritzia, with notable margin pressure in the front half of the year, before stabilizing and margin expansion accelerating in F2025,” said Mr. Dley. “As a result, we expect the stock will be challenged over the next two quarters until margin pressures subside. That said, the outlook for F2025 remains generally on track with our expectations ahead of the quarter, and longer term, we believe Aritzia remains a best-in-class retailer for those willing to look through the next couple quarters.”
* RBC’s Irene Nattel to $60 from $63 with an “outperform” rating.
“ATZ delivered another very strong FQ4 print, ahead of forecast and consensus but combination of unexpected, transient margin pressure in F24, capex guidance more than 2 times prior forecast, and investor concerns around sustainability of discretionary consumer spending likely to weigh on investor sentiment until visibility improves,” he said. “To be sure, top line growth trajectory remains buoyant with Q1 guidance $450-460-million (up 10-13 per cent year-over-year) and F24 guidance 10-14per cent, underpinned by accelerating U.S. penetration, growth of omnichannel and expansion into new categories. PT to $60 (-$3), SP reflects sector exposure/valuation/relative upside potential.”
* TD Securities’ Brian Morrison to $50 from $62 with a “buy” rating.