Post by
retiredcf on Jan 12, 2023 9:41am
CIBC
As a long term investor, I just added a few more on the initial overreaction to the downside. GLTA
EQUITY RESEARCH
January 11, 2023 Earnings Update
ARITZIA INC.
Inventory Adds Margin Noise But Brand Momentum Reigns
Our Conclusion
Aritzia posted better-than-expected Q3 results led by excellent top-line
momentum in all regions and channels. GM% was below expectations driven by handling costs of elevated inventory, and this dynamic will weigh on Q4. Importantly, these are the costs of handling inventory arriving ahead of schedule to support a business that is growing faster than expected. Markdown activity remains on track and within anticipated levels. Our Q4 EPS forecast falls but F2024 remains unchanged, as does our $60 price target and Outperformer rating.
Key Points
Near-term Margin Pressures In Focus: ATZ now expects Q4 GM% to
contract 250bps Y/Y (vs. “stable” previously) with the reduction stemming
primarily from the costs of managing higher inventory levels. To be clear,
markdown activity remains within anticipated ranges, and we believe
promotional programs are consistent with normal and past levels. Though the cut is disappointing and leads us to reduce our EPS forecast by 19%, we believe these elevated costs should be considered transitory.
Cost Of Elevated Inventory Is More Handling Than Markdowns: ATZ
ended Q3 with inventory up 187% Y/Y, up from 150% growth in Q2.
Management once again highlighted that this growth is stemming from: 1)
rebuilding depleted inventory levels last year; 2) ordering goods for earlier arrival given last year’s supply chain challenges; and 3) the early arrival of goods given smooth supply chains. Management shared that inventory is up only 36% when including goods at the factory waiting to be shipped. These goods are not actually included in ATZ’s reported inventory figure but were elevated last year, and are more normal this year. Overall, while such substantial growth in inventory is never comfortable, we believe risks are cost based, not brand related (markdown).
Brand Momentum Remains Excellent: Though near-term margin pressure
and elevated inventory are front and centre, we believe the robust brand
momentum outweighs cost concerns. On a three-year CAGR basis, revenue growth accelerated 300bps sequentially from Q2, supported by strong levels of full-price selling and growth in new clients. New and expanded stores continue to perform well and the economics are excellent. We remain bullish on both store growth and e-commerce, driven by brand awareness and an improved online platform. Net, our F2024 revenue forecast rises to $2.55B, implying 16% growth on a 52-week comparable basis. Our EPS forecast is unchanged on more modest expectations for margins.
F2024 Margin Profile Will Be Noisy, But Fundamentals Remain Healthy:
We are currently forecasting modest margin expansion in F2024 despite
greater-than-expected pressures in F2023. We view this as conservative but appropriate given the uncertain environment and many moving parts. We view material headwinds as inflation, leases and FX, and tailwinds as mix, pricing, expedited freight and lapping inventory handling costs.