CIBCHave a $44.00 target. GLTA
EQUITY RESEARCH
June 30, 2023 Flash Research
ARITZIA INC.
FQ1 Preview: Noisy Margins, Focus On Sales Momentum
Aritzia will report its FQ1 results on Tuesday July 11 after market close.
Management will host a conference call at 4:30 p.m. ET; dial-in number is
(416) 915 3239. The quarter ran from February 27 to May 28.
Looking Beyond Q1: With ATZ shares down 15% since Q4 results (vs. the
TSX down 2.4%), we expect the stock to be range-bound until Aritzia begins
to show progress on recapturing lost margin and top-line momentum
reaccelerates. We have higher conviction in ATZ’s margin recovery given
some of the costs headwinds are transitory (i.e., warehousing, pre-opening
lease amortization, distribution centre projects), but are more concerned on
the trajectory of revenue growth.
Not only will Aritzia be taking price at a time when promotional intensity is
likely to increase across apparel but there are ample signs of more cautious
consumer spending. Furthermore, we see the resumption of U.S. student
loan repayments beginning in October (interest will resume on September 1)
as another headwind to discretionary spending. This is particularly relevant
for ATZ given the importance of U.S. growth and materiality of revenues
(~half of sales vs. 34% in 2019), and borrowers tend to skew toward ATZ’s
core customer demographic — higher-educated (= higher income) and
younger (25-34 year-olds represent 33% of student borrowers). Net, we see
incremental risk to both back to school and holiday 2023 spending with the
potential for revenue growth to decelerate on a sequential basis come H2.
Q1 Preview: We model Q1 revenues of $463MM (mgmt. guidance of
$450MM-$460MM; consensus $461MM) with balanced growth between
channels, but stronger growth in the U.S. vs. Canada. Below the top-line, we
model 570bps of gross margin pressure due to warehousing costs related to
inventory management, normalization in markdowns, pre-opening lease
amortization and inflation, partially offset by a reduction in air freight. On
SG&A, we expect 430bps of expense deleverage due to both retail and
support office labour investments. This translates to EPS of $0.09 (Street
$0.08). The table in Exhibit 1 summarizes our estimates and consensus.