Our view: ATZ delivered another quarter of better than expected (albeit down substantially Y/Y) results, F24 guidance and F25 high level outlook unchanged. ATZ enjoys a strong LT growth opportunity, underpinned by steady store openings in new geographies that simultaneously drive eCommerce growth. But given reversal in consumer spending, and RBC Economics’ forecasts of tepid GDP growth and household consumption in 2024, we reiterate our view that ATZ is a name we are keeping on our radar.
Key points:
Signs of life in H2/F24, moving through year of transition and investment with return to growth expected F25, with return to F23 net income early F26: Better than expected Q3 revenue resulted in Q3 EBITDA $92 MM, 15% above forecast, 23% below Q3/F23. Magnitude of investments in F24 combined with tepid consumer spending nonetheless combine for forecasted 50% decline in F24 net income before a return to growth in F25. F24–F26 forecasts essentially unchanged.
Sequential modest improvement in SSS and eCommerce, new stores continue to deliver strong results: Q3 SSS eked out +0.5% growth vs Q2 -4.3%; eCommerce +5.5% vs -1%. Revenue growth in Canada +5% vs US +4% attributed to loyal Canadian customer base while ATZ is "getting famous" in US, trends improved slightly Q4 to date. 5 new boutiques opened YTD delivering better than expected sales, on track for 10-month payback vs. targeted 12–18 months. New store openings remain the most predictable element of ATZ’s growth and the key driver of forecasted 8.2% revenue growth in F25 with 11-13 new stores, which combined with repositioning of flagships should deliver 20-25% sq footage growth.
Cost, cash flow headwinds moderating, B/S solid: Margin headwind improved markedly in Q3, management reiterating 500 bps of margin gain in F25, reversing ~80% of F24 decline through: i) 150 bps from IMU; ii) 150–200 bps of Smart Spend initiatives; and iii) 125 bps transitory costs subsiding. F24 capex to $180 from $220 MM on timing of spend on DC initiatives, 2 boutique openings slipping to F25. ATZ repaid $100 MM that had been drawn, NCIB to be renewed primarily for anti-dilutive purposes in NT, but management may act opportunistically. Adjusted net debt/LTM EBITDA of 1.5x in F23A rises to 2.2x in F24E, 1.6x by F25E.
Maintaining SP rating, $40 PT: We maintain our SP rating on ATZ given the challenging backdrop, but are keeping ATZ firmly on our radar. Post-covid, ATZ a much stronger player with substantially better and lower-cost real estate opportunities, revenue 2x pre-COVID levels, and enhanced brand awareness. As we move into F25, as the macro backdrop becomes clearer, and if the margin evolution occurs as management outlined, a compelling buying opportunity could emerge.