A Dive Into Popular Fashion Brand Aritzia

(Jeff Bukowski)
(Jeff Bukowski)
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Last Thursday, a ROIC member called in for Justin to take another look at Aritzia, a Canada-based fashion brand that’s rising in popularity. After a quick look at a DCF model and exploring the numbers it got an interesting rating, so today we’re taking a closer look.


Company Overview

  • Aritzia Inc. (ATZ.CN) is a Canada-based design house and fashion boutique.
  • The company creates, develops, and designs retail fashion brands.
  • It’s range of women’s fashion apparel and accessories address various style preferences and lifestyle requirements for women.
  • Aritzia is a multi-channel retailer with a strong eCommerce business (1/3rd of revenue) and a growing U.S. footprint.

Q3 Highlights

Financial

  • Net revenue | Increased 62.9% YoY to $453.3 million
    • eComm revenue | Increased 46.9% YoY to $148.0 million (32.6% of total)
    • Retail revenue | Increased 72.0% YoY to $305.3 million, comparable sales growth of 58%.
  • Gross profit margin | Increased from 45.3% in Q3 2021 to 46.4%
  • Adjusted EBITDA | Doubled to $109.3 million from $54.6 million in Q3 2021
  • Net income | More than doubled to $64.9 million from $30.5 million
  • Adjusted net income | $0.61 per diluted share.

Outlook + Growth Drivers

FY22 Outlook

  • Revenue | $1.425B to $1.45B
    • Implied growth of +65% to 70%
    • Guidance revised from $1.25B to $1.3B
  • Boutique Openings
    • 7 to 8 new stores
    • 6 expansions/repositions

Growth Drivers

Aritzia plans to grow in these four areas.

  1. eCommerce and omni innovation
    • This includes enhancing digital experiences
    • Integrating online experiences with in-store experiences
    • Engaging service with customers
  2. Geographic expansion
    • Aritzia plans to open 7 to 8 new boutiques in the U.S. (according to Grace, one is opening in Miami)
    • Management has identified a minimum of 100 locations in the U.S. that meet the company’s exacting criteria (38 current U.S. locations)
    • New boutiques payback period: 12 – 24 months
  3. Product expansion
  4. Brand awareness and customer expansion

Valuation + Analysis

  • At $58.97 CAD per share, ATZ is trading around a $5.3 billion enterprise value.
  • Analysts expect Aritzia to grow revenue slightly more than management provided guidance and to continue growing in the mid-teens.
  • Analysts also expect EBITDA margins to be in the high-teens/low-20s for the next few years.
  • With these expectations, ATZ is trading ~22x forward EBITDA.
  • Pre-pandemic ATZ had ROICs in the mid-20s. Analyst’s project 35%+ ROEs over the next couple of years.

KR: Aritzia is trading at a fair forward EBITDA multiple. The key here will be capitalizing on the brand’s popularity and store growth. In the past 9 months, ATZ has been able to pay down debt and is in a favorable position to expand to new cities. Will Aritzia be able to generate high returns on capital in these new locations? Looking at the U.S. map, Aritzia has plenty of high-value locations for expansion (Phoenix, Las Vegas, Columbus, Atlanta, Miami, etc.).

JO: The valuation is reasonable enough so that the stock is undervalued on a discounted cash flow basis if you think they can 3x revenues in the next 5ish years. We do not have enough familiarity with the brand to have absolute confidence of this, but if you know that Aritzia will “take the U.S. by storm”, then this one could be a decent position.

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