Stifel’s Martin Landry considers Aritzia Inc. “a core holding for Canadian small/mid-cap managers with long-term compounder characteristics.”
In a research note titled The busiest store at the mall, he said he came out of Thursday’s Investor Day event in Vancouver believing the clothing retailer’s “strategy and market positioning will position the company for continued growth over the years to come” after its management set a target of earnings per share compound annual growth of over 20 per cent through 2027.
“Having reached its initial 5-year plan established in FY16 roughly 2-3 quarters later than expected due to the COVID pandemic, Aritzia is setting new targets to FY27,” he said. “Revenues are expected to range between $3.5 to $3.8 billion, representing a 15-17-per-cnet CAGR, while Adj. EBITDA margins are expected to be approximately 19 per cent. EBITDA margins appear conservative at first glance given potential for scale benefits, geographic mix and higher proportion of online sales. Online sales are expected to double and reach 45 per cent of total sales up from 35 per cent currently. Assuming that all the FCF generated is used to buyback shares, we estimate that Aritzia’s EPS could reach over $4.00 per share in FY27.”
Mr. Landry said Aritzia is currently experiencing “rapid” growth, due, in large part, to increasing brand awareness south of the border, noting its clients have triple in numbers over the last two years in the United States (and doubled overall).
“Ariztia’s competitive positioning to provide high quality clothes at attainable prices remains the key source of distinction for the company and management expects the strategy to drive growth over the coming years,” he said. “The strategy is simple and is focused on what customers see (i.e. the products, the stores and the surrounding services). Hence, Aritzia focuses its efforts and capital on elevating its brand through great quality products, beautifully designed stores and specialized customer service, rarely seen from the competition. In our view, this strategy resonates with customers and increases brand loyalty. U.S. geographic expansion.”
“Growing its real estate footprint remains Aritzia’s number one customer acquisition tool and the company is planning to continue its U.S. expansion. Aritzia plans to enter 18 new U.S. markets, an increase of 70 per cent from the 26 currently. When entering a new market, Aritzia’s has historically seen online sales increase by 80 per cent in the region. Hence, the geographic expansion should also drive e-commerce in the USA. Aritzia appears to be increasingly sought after by landlords given its recent successes, providing the company with not only more opportunities but also more negotiating power. Hence, Aritzia has been able to lower its leasing costs and thus improving store economics. Payback now ranges from 12-18 months (24 months in 2016), with some being under 12 months. Aritzia remains highly disciplined with its real estate strategy and all of its stores are profitable currently, an impressive feat.”
Maintaining a “buy” recommendation for the retailer’s shares, Mr. Landry raised his target to $59 from $57. The average target is $61.86.E
Elsewhere, RBC’s Irene Nattel increased her to $63 from $56 with an “outperform” rating.