Aritzia Inc.
Swift adjustments: Transient F24 pressure to support growth, rebounds F25; outlook solid, PT to $60
Our view: ATZ delivered another very strong FQ4 print, ahead of forecast and consensus but combination of unexpected, transient margin pressure in F24, capex guidance >2x prior forecast, and investor concerns around sustainability of discretionary consumer spending likely to weigh on investor sentiment until visibility improves. To be sure, top line growth trajectory remains buoyant with Q1 guidance $450-460 MM (+10-13% Y/ Y) and F24 guidance 10-14%, underpinned by accelerating US penetration, growth of omnichannel and expansion into new categories. PT to $60 (-$3), SP reflects sector exposure/valuation/relative upside potential.
Key points:
Reducing F24E to reflect transient margin pressure, rebound in F25+.
Our F24E EBITDA margin 12.1% (down 380 bps vs prior published) and EPS $1.46 (-30% vs prior published) reflect: i) 13% top line growth to $2.48B toward the high end of guidance range $2.42-2.50B, ii) transient GM% pressure -215 bps Y/Y broadly consistent with guidance -200 bps reflecting inflationary pressures, normalized markdowns, pre-opening lease amortization and incremental warehousing costs, and iii) SG&A ratio +155 bps (guidance +150 bps) reflecting DC project costs, investments in talent and wage inflation. Looking ahead to F25, management is confident that product margin improvements, efficiencies and lower transient cost pressures should fully reconstitute EBITDA margin relative to F23A 16%, with upside. Our revised F25E EBITDA margin 16.1% is down 50 bps from prior and at the low-end of the indicated range 16%+.
Accelerating capex, NCIB reserved for anti-dilutive purposes. Capex guidance $220 MM in F24 (RBC CM previous estimate: $90 MM) to build scalable infrastructure, notably the construction of a 550k sq ft DC in the GTA, repositioning of three flagship stores in NYC, a new flagship in Chicago, expansion of support office space and other omnichannel investments. Adjusted net debt/LTM EBITDA 1.5x in F23A rises to 2.0x in F24E and subsequently moderates back to 1.5x by F27E.
Against the backdrop of accelerating investments and uncertainty over discretionary consumer spending, share repurchases will be de minimis and used primarily for anti-dilutive purposes for the foreseeable future. ATZ did not repurchase any shares during Q4 (1.6 MM canceled in F23).
Adjusting forecasts, rolling valuation basis forward results in PT to $60 (- $3). Maintaining SP rating. While our medium to long-term thesis remains solid and unchanged, near-term uncertainty around the sustainability of consumer spending and ultimate magnitude and cadence of F24 investments to the fund growth trajectory is likely to weigh on investor sentiment. Target multiples reflect heightened uncertainty and SP rating reflects sector exposure/positioning relative to other SMID-cap names.