Post by
retiredcf on Nov 04, 2024 2:04pm
CIBC
EQUITY RESEARCH
October 10, 2024 Earnings Update
ARITZIA INC.
U.S. Shines, But Noise Supresses Q3 Guidance
Our Conclusion
Q2 results came in well ahead of expectations but are offset by deferred
store openings and slower Canada sales momentum that supresses Q3
guidance. Though disappointing, these do not shake our bullish view on
Aritzia’s U.S. opportunity, and we are encouraged by the acceleration in
sales growth seen over the last year. Our F25 EPS forecast falls, though our
F26 estimate rises on higher revenues. We increase our target multiple to
25x on the increasing conviction of multiple years of 30%+ EPS growth. Our
price target rises to $60 (from $47) and ATZ stays Outperformer rated.
Key Points
Strong Q2 Results Driven By U.S.: Q2 results were well ahead of our
expectations driven predominantly by top-line strength in the U.S., which saw
sales climb 24% (up from 13% growth in Q1). This strength flowed through
the P&L and drove adjusted EPS of $0.21 vs. consensus of $0.15. Canada
was also ahead of forecast, though benefited by ~$10MM of revenue shifted
from Q3 due to an earlier Labour Day and Vancouver Warehouse sale.
Guidance Disappointment, But Silver Linings: Q3 revenue guidance of
$675MM-$700MM is clipped by $25MM owing to the Warehouse sale timing
shift and the non-recurrence of F24’s Digital Archive sale. Even still, it is below expectations with two drivers: 1) slower spend from the Canadian consumer, and 2) slippage of four store openings into Q4. We believe mild weather is likely a factor in the Canada slowness, but it still negates the strong U.S. momentum for now. The other disappointment is the shift of F25 EBITDA margin expansion to +400-450 bps (was +400-500 bps). The revenue range was only tightened so the primary driver here is higher SG&A. The drivers here are also understandable – earlier spend on high-return programs (app development, International website launch) and marketing around the flagship openings. Net, the lack of a bump in F25 guidance is disappointing given the momentum in the U.S. but we are not fundamentally concerned.
New Store Opportunity Remains Compelling: The company remains on-
track to open 12-13 new stores in F25 and we expect they will be in that
range again in F26. Square footage growth is substantially elevated in F25
(approaching 25%), but we still see multiple years of double-digit growth
ahead, with potential to ~triple the U.S. store count over the next decade.
Tariff Impact Modest: The U.S. plans to tighten De Minimis thresholds and
this will be a negative for Aritzia, which benefits by fulfilling ~70% of its U.S.
e-commerce orders from Canada. However, our estimates suggest the worst
case downside risk is still relatively modest at ~50 bps of GM%.
Buyback Should Start Next Year: Aside from short-term funding of
elevated inventory and capex, Aritzia has not held any debt for nearly three
years. With significant square footage coming online in the next two months
and capex expected to decline materially in F26, we believe the company is
well-positioned to resume share repurchases in calendar 2025.