October 27, 2022
Aritzia Inc.
Puff World: Capture the US, conquer the world; price target to $63
Our view: Presentation of ATZ's strategic plan and site visits was among the most highly attended investor event in recent memory. The event highlighted the long tenure and deep bench of management and reinforced our favourable view of company strategy, US runway and related halo effect on global brand awareness, online opportunity, and ability to sustain the growth trajectory. We are raising our forecasts, conservatively toward the low end of target range, reflecting our cautious stance on the cadence of growth as recession looms large. We are also raising our PT to $63 (+$7) and reiterate our SP rating on valuation.
Key points:
Getting (more) famous in the US — rooted in unique focus on product. Aritzia is uniquely positioned on the global scene with a high fashion product and high-touch customer service experience wrapped in an Everyday Luxury proposition and price point that clearly resonates. Focus over the next 4.5 years clearly on building critical mass in the US, deepening penetration in new and existing markets, leveraging premier real estate locations and store designs to deepen brand awareness, and in so doing, accelerate online traffic, both domestic and foreign. Ultimately, focus on near-term opportunity in the US is critical to raising the Aritzia brand profile and awareness internationally, and a likely springboard to formalizing an overseas strategy with a 5-10 year time frame.
Plan suggests financial targets higher than the trajectory implied by consensus and our forecasts going into the event. High-level drivers are largely consistent with recent commentary from management, notably 8-10 new stores annually in the US, augmented by 3-5 store expansions annually and ongoing strong but moderating growth in e-commerce. Cadence should be relatively linear across the horizon, with mix — notably accelerating US and e-commerce penetration — contributing to EBITDA margin target 19% in F27. (Details vs forecasts in Ex. 1.)
Deep commitment to advancing ESG agenda and disclosures. ATZ published its inaugural Community Report earlier this year and recently constituted an Environmental and Social Board Committee to advance work on disclosure and targets, notably around materiality and GHG emissions. Commitment to ESG is clearly at the forefront and we anticipate significant improvement in disclosures in the near to medium term.
Raising forecasts, PT to $63 (+$7). Raising forecasts, notably F25 with EPS +14% relative to our prior estimate, rolling valuation forward by one quarter and adjusting EBITDA target multiple by 0.5x to 13x to reflect greater level of uncertainty as we head into probable recession, adds 13% to our PT to $63 (+$7) (Ex. 8). In our view, muted share price reaction today reflects near-term concerns over the cadence of progress to objectives given the widely anticipated recession in the early part of the period.