Off-season: Cutting forecasts, MT/LT opportunity remains intact; PT to $46 (-$11)
Our view: Although FQ1 results were in line with expectations, slowing consumer demand/downward revision to guidance due to multiple cost headwinds, many of which should be transient, will likely further weaken investor confidence and conviction to own. But we think LT organic growth opportunity for ATZ is virtually unmatched in the space, underpinned by accelerating brand penetration and magnitude of store growth runway in the US, growth of omnichannel and expansion into new categories. PT to $46 on 12-14% reductions to our F24/25 forecasts, SP rating reflects long- term opportunity balanced by sector exposure, relative upside potential.
Key points:
Reducing F24/25E to reflect heightened impact of transient margin pressure due to moderating sales trends. Updated F24/25 outlook reflects the unfortunate reality that operating leverage works both ways. With consumer demand slowing in June, revenue growth now expected at 2-7% (modestly negative comps offset by new store contribution, extra week), EBITDA% headwinds now expected by management to be 600 bps in F24, +200 bps vs prior guidance, or ~10%. Revised F24E/F25E EBITDA -14%/-12% vs last published, with decline attributable to lower revenue growth.
Maintaining SP rating, price target to $46 on earnings revisions: We gave a lot of thought to what to do with our rating on ATZ. Although it will now be a "show me" stock, we reiterate our view that the LT opportunity is real. We were encouraged to hear that the store opened in Q1 is trending at/above expectations, with planned 15% square footage growth in F24 back-end loaded, and an additional 20% planned in F25. We believe ATZ has emerged from COVID a much stronger player, with substantially better and lower cost real estate opportunities, revenue 2x pre-COVID levels, and much higher brand awareness. We expect a sharp share price reduction to follow Tuesday's updated outlook, and likely a near-term re-set of the trading range lower. But as we move through F24 and if the margin evolution occurs as management outlined yesterday with the GTA DC opening in ~6 weeks, there could potentially be a compelling buying opportunity.
Cost and cash flow headwinds should be transient, B/S solid: Components of F24 margin headwind should be resolved as we move through H2/ F24/F25: i) 150 bps from IMU, ii) 150-200 bps of new economies of scale initiatives, iii) 125 transitory costs related to new DC, plus, iv) operating leverage and other initiatives not outlined in detail. F24 capex $220 MM, $100 MM for DC and support office expansion, balance for growth initiatives including eight new stores, repositioning of three flagship stores in NYC, a new flagship in Chicago and other omnichannel investments. Looking ahead to F25, infrastructure investments should moderate, pointing to improved FCF conversion. NCIB reserved for anti- dilutive purposes in NT, but CFO left the door open in H2/F24. Adjusted net debt/LTM EBITDA 1.5x in F23A rises to 2.1x in F24E, back to 1.5x by F25E.