Dressed for success: Strong Q3/Q4 momentum reinforce constructive view, PT to $73
Our view: Strong and better than expected Q3/F25 and momentum point to ATZ returning to strong pre-pandemic/pre-investment spending growth trajectory. ATZ is seeing growth across channels and regions, even in Canada despite cautious consumer spending. We are raising F25-F27 EPS forecasts by 9-18% to reflect Q3/Q4 momentum, pipeline of new store openings, returns on initiatives/investments in ecommerce, leverage on fixed costs. Reiterating constructive OP rating, price target to $73 (+$8) on upward revision to forecasts.
Key points:
Accelerating financial performance puts ATZ on track to deliver to F27 revenue target, margins trending nicely positive. Q3 revenue +11.5% Y/Y, SSS stable sequentially at +6.6% as reported, normalized timing of warehouse sale/absence of digital archive sale, accelerated to +16%/ +9.2%, led by US revenue growth 23.6% (+27% normalized). Canada revenue as reported -0.6% Y/Y, normalized +5%. EBITDA/EPS above forecast (Ex. 3) driven by revenue, GM% +430 bps reflecting lower markdowns, better IMU, lower warehousing, and cost savings. SG&A% +90 bps as forecast as ATZ invests to support growth.
Raising F25-F27E EBITDA/EPS forecasts by 4-9% and 9-18% respectively, on strong momentum and pipeline of new store openings. Revised F27E in line with 5-year target on revenue, 16% on EBITDA margin vs target "approximately 19%", pointing to potential upside if ATZ can deliver to targets (Ex. 1).
Early estimates indicate impact of potential tariffs should be manageable: Preliminary estimate is impact of 10% increase in tariffs on goods from China is ~30 bps to gross margin, excluding any mitigating initiatives.
Flagships delivering ahead of expectations: With recent opening of 3 new flagships ATZ has vaulted toward a higher tier of awareness and perception in US and int'l markets. Boutique openings key driver of adjusted revenue growth 17% in F25E with 25% square footage growth heavily weighted in late Q3/Q4, early indication is 10-12 new stores in F26. Openings extend TAM/brand awareness for both retail and ecommerce.
FCF accelerating, BS solid, favourable set-up for accelerating NCIB: ATZ delivering on cash flow inflection as capex moderates/earnings accelerate. At Q3, cash on hand $207 MM, adjusted net debt/LTM EBITDA 1.5x should position ATZ well to accelerate NCIB. Our model assumes 3 MM share BB (2.7%) in each of F26/27 contributing 3% to 2-year CAGR 32%.
Reiterating OP rating, PT to $73 (+$8): EPS/EBITDA target multiples 27x/12.5x reflect strong momentum and growing exposure to a larger TAM south of the border and relative strength of the US consumer backdrop.