Aritzia Inc.’s better-than-expected third-quarter 2024 financial results show “slight improvements with hopes for more to come,” according to Stifel analyst Martin Landry.
“As expected Aritzia lost market share during the quarter given a lack of product innovation,” he said. “This trend is expected to continue into Q4FY24 as the new spring/summer collection will mostly impact Q1FY25. We expect same-store-sales growth to return closer to historical levels in FY25, expecting a growth of 5.7 per cent, but our visibility is limited. Competition is intense in the apparel sector, and it’s not clear if the Aritzia brand is as hot as it was in 2021 and 2022. Store openings in calendar 2024 should help drive new customer growth and boost ecommerce sales.”
After the bell on Wednesday, the Vancouver-based clothing retailer reported revenues of $654-million for the quarter, up 5 per cent year-over-year and exceeding both Mr. Landry’s $621-million estimate and the Street’s expectation of $623-million. That was driven by same-store sales growth of 0.5 per cent, topping both the analyst’s projection of a 3.4-per-cent decline and the consensus of a 3-per-cent drop. Earnings per share of 47 cents was a decline of 30 per cent from a year ago, but it beat Mr. Landry’s 40-cent estimate and the Street’s 41-cent forecast due to higher revenues and lower expenses.
“Revenues increased faster in Canada despite all the store openings being located in the U.S. due to a slowdown in customer acquisition and reduction in spending by existing clients,” he said. “This trend appears to have reversed in Q4FY24 according to management.”
“Aritzia has had a slower innovation process in calendar 2023, which resulted in market share loss. However, management is excited about the new product line-up for the spring/summer 2024 collection, which is expected to represent 50 per cent of total products. This proportion is an increase vs. 25 per cent of new styles historically. This increase in newness should translate into an acceleration of same-store-sales growth, assuming the new collection resonates with customers.”
While the company revised its slate of new store openings, delaying its new Chicago flagship store into fiscal 2025, Mr. Landry thinks its guidance for the fourth quarter of 2024 appears “conservative.”
“Management increased its FY24 guidance for revenue growth by approximately 100 basis points but maintained gross profit margin guidance unchanged,” he said. “The unchanged margin guidance suggests EBITDA margin pressure in the range of 200-250 bps in Q4FY24, a larger decline compared to our previous expectations of flat margins year-over-year. We have revised our estimates slightly to reflect management guidance and have increased our FY24 EPS estimates by 1 per cent. Our FY25 EPS estimates is reduced by 4.5 per cent to $1.85 driven by higher interest expense from higher lease liabilities reflecting Aritzia’s strong store opening cadence.”
With those changes, Mr. Landry raised his target for Aritzia shares to $34 from $32, keeping a “buy” rating after introducing his 2026 estimates, which include revenue growth of 11 per cent and a 7-per-cent gain same-store sales. The average target on the Street is $33.44.
“We see significant growth potential for Aritzia, which should come from: (1) Geographic expansion in the U.S., where ATZ sees a potential for 100-plus stores vs. 48 stores currently, (2) Product depth expansion with additional sizes, lengths and colors, and (3) Category expansion including swimwear, intimates and men’s apparel,” he said. “While gross margins are expected to be under pressure in FY24, we believe these issues are not permanent. In addition, the U.S. expansion should be margin accretive as price points in the U.S. are the same as in Canada, providing an approximate 25-per-cent lift in Canadian dollars. Larger U.S. revenues also reduce Aritzia’s FX exposure as the company buys the majority of its products in USD.”
“In the last five years, Aritzia has experienced significant growth with EPS increasing at a CAGR [compound annual growth rate] of 23.5 per cent. The company has executed on an aggressive expansion plan in the United-States, where its brand awareness has increased significantly and where more than 50 per cent of the revenues are now generated.”
Elsewhere, a pair of analysts upgraded their recommendations:
* Raymond James’ Michael Glen to “outperform” from “market perform” with a $35 target, up from $32.
“Heading into Aritzia’s F3Q results, we acknowledge that we had some areas of concern, most notably with inventory, gross margin and the lingering impact of a mild fall/winter on markdown activity,” said Mr. Glen. “As such, we were recommending to investors to take a wait and see approach to the stock. That said, as we look through the F3Q numbers and assess the results (which were effectively ahead on all key metrics), we would state that Aritzia addressed many of our concerns head-on (particularly with inventory), and this provides a strong set-up as investors shift focus to a F2025 rebound scenario.”
* CIBC’s Mark Petrie to “outperformer” from “neutral” with a $37 target, up from $30.
Meanwhile, Canaccord Genuity’s Luke Hannan bumped his target to $38 from $36 with a “buy” rating.
“All told, there are several positive takeaways from the quarter, in our view,” said Mr. Hannan. “Most notably: 1) comparable sales growth remained positive despite tough comps (Q3/F24 two-year stack: 23.3 per cent), with overall sales trends improving in both Canada and the US sequentially throughout the quarter; 2) inventory was down 22 per cent year-over-year as a result of higher markdowns (though product margins remained healthy), a key driver for the $172-million of FCF generation during the quarter which allowed Aritzia to pay down the full amount of the $100-million outstanding balance on its revolver sooner than expected; 3) the company remains on track to achieve a more balanced mix of newness vs. proven sellers, with sales of new products during the quarter having doubled year-over-year; 4) payback periods for new boutiques continue to be 12 months or less; and 5) Aritzia remains on track to deliver 500 basis points of year-over-year adjusted EBITDA margin expansion next year. Altogether, these developments support our positive view on Aritzia’s growth prospects moving into next fiscal year, and should lead to multiple expansion as investors’ confidence in the company’s outlook continues to improve.”