Aritzia (OTCMKTS:OTC:ATZAF) is a fashion boutique that designs and distributes several exclusive brands including TNA, Babaton, and Wilfred. The retailer has 97 stores in North America, including 29 in the U.S. The stock has seen wild swings since the start of the year and is down 1% year-to-date. We believe that there is ample opportunity for growth within the U.S., especially through the eCommerce channel, and the stock has a lot of room to grow in the next few years.
(Aritzia Stock Market Chart – Seeking Alpha, 2020)
Aritzia has most likely already taken the worst of the pandemic – expect to see pre-COVID revenue figures very soon
Aritzia’s abysmal 50+% revenue drop in Q1/2021 can be attributed to many different factors, including the fact that only 30/97 stores were open at the end of the first quarter. Another factor is that British Columbia, a Canadian province that has 16 Aritzia boutiques, shut down quickly at the beginning of the first quarter and the company was not able to benefit from in-store revenues for most of the quarter (Aritzia Investor Presentation, 2020).
However, since the mid-point of the second quarter, 89/96 stores re-opened, and management believes the stores are trending at 55-65% of last year’s productivity levels (Aritzia Investor Presentation, 2020). Management has also stated that eCommerce is performing 50% to 100% better than last year, which is quite promising given that customers were given the option to visit physical stores again recently.
Aritzia also stated that net revenue “for the first five weeks of the second quarter was down approximately 25% to 30% compared to last year (Aritzia Investor Presentation)”, which signifies that Aritzia is well on its way to pre-COVID revenue figures.
We believe that the momentum generated store reopenings as of the mid-point in Q2/2021 could signify that earnings for the quarter could surpass last year’s quarterly figures. According to Yahoo Finance, analysts are predicting an average revenue estimate of $193 million, which is actually approximately $10 million higher than Q2/2020 figures.
(Yahoo Finance, 2020)
We believe that the possibility of a return to pre-COVID levels signifies two things: Artizia’s customers are extremely loyal to the retailer’s brands compared to Aritzia’s competition, and Aritzia is well on their way to achieving consistent double-digit revenue growth once again. Notable competitor Urban Outfitters recently reported Q2/2021 earnings and saw a 16.5% drop compared to the previous year. We believe that since Aritzia’s customer segments mainly involve young adults and teenagers, demand for the company’s products is relatively inelastic in comparison to other retailers. Moreover, since we saw a dip in COVID cases in lots of areas where Aritzia operates stores, especially British Columbia, consumer confidence, combined with the hope of schools re-opening, could have prompted many shoppers to load up on new clothing.
We are also quite pleased with analyst estimates for the current year, and following year estimates. Estimates of $1.12 billion in revenue for 2022 is certainly attainable given Aritzia’s plans to open 5-6 new stores for Aritzia’s fiscal 2021, and capitalization of eCommerce growth in North America. Aritzia also has a long history of consistent revenue growth due to “distinct market position, operational excellence and relentless focus on long term objectives (Aritzia Investor Presentation, 2020).”
(Aritzia Investor Presentation, 2020).
Aritzia plans their new stores very carefully – and this is an understatement
Industry trends seem to suggest that brick-and-mortar stores are becoming less relevant by the year and many retailers are struggling with lease or rent payments. However, Aritzia has used its strategic boutique placement to their advantage. In fact, Aritzia has never closed a store in its entire 35-year history, which signifies their planning success and strong return on invested capital.
(Aritzia Investor Presentation, 2020)
Aritzia saw the biggest jump in new American boutiques in FY2020 with five new locations. The average net capital expenditures for the new stores are around $2.5 million and payback targets are only two years. Aritizia has also “identified 100 locations in the U.S. that meet our exacting criteria (Aritzia Investor Presentation)” for new stores, which signifies that there is plenty of room for new boutique opportunities in the United States. We would not be surprised to see 30-50 new boutiques within the next 10 years and specifically the opening of numerous new boutiques in the next few years, given that leasing/rental rates in high-quality ‘AAA’ locations are low right now due to the pandemic.
We are pleased that “recent new boutiques [are] trending to paybacks [in] under 18 months (Aritzia Investor Presentation, 2020).” The continuous growth of boutiques can not only provide the company with new direct sales channels, but fully supports Aritzia’s biggest long-term goal of growing their e-commerce business. Boutiques have essentially become showrooms and a place for shoppers to experience Aritzia’s clothing in-person. We expect to see in-store conversion rates slowly decline going forward as more shoppers use digital channels to finish the purchasing cycle. We believe that Aritzia can use boutiques to convey their unique style to shoppers and allow them to find the right size of clothes – but it is not necessarily a bad thing if same-store sales drop in the near future.
Aritzia has financial flexibility despite the pandemic and is in a position to open new boutiques
(Aritzia Investor Presentation, 2020)
Much like revenue growth, Aritzia’s Adjusted EBITDA and net income figures have seen very consistent returns of the last five fiscal years, and there is potential for significant growth given that the company is in the expansion phase in the United States, and is really focusing their strategy on the growth of eCommerce. The company hopes to leverage social media outlets and influencers to reach a wider audience, and we believe this initiative can capture thousands of international buyers who are not currently aware of Aritzia’s products.
(Aritzia Investor Presentation, 2020)
Aritzia has plenty of cash to invest in new boutiques and grow its e-commerce business. Again, capital expenditures for a new boutique are only estimated to be around $2.5 million, therefore Aritzia could theoretically continue their consistent boutique growth by opening as many as 10-15 stores within the next 2-3 years. Aritzia’s current ratio sits at 1.1x and the company has notable debt figures of $75 million maturing in 2022, but worst-case scenario we wouldn’t be surprised to see Aritzia hold a fire-sale of 20%-30% off for products in their existing inventory in order to accumulate cash.
Once Aritzia reaches a mature stage, its stock direction would be unclear
The company does not currently pay a dividend and probably does not plan on doing so for the next few years. We are seeing similar growth trends to Urban Outfitters, who posted close to double-digit revenue growth for about a decade starting in 2005. Urban Outfitters’ revenue is 4x Aritzia’s, they have a strong cash position, but their market capitalization is almost identical in value. Once Aritzia reaches a mature growth stage, we believe that it would be extremely tough for Aritzia to penetrate the European fashion market given the numerous and prominent incumbents in the overseas space right now. Urban Outfitters has not seen much success in Europe, and we believe this will not change anytime soon.
It will be a long time before Aritzia’s growth starts slowing down, but this notion is definitely something to consider in the future. We also note that eCommerce is an incredibly competitive space, and Aritzia is reliant on a strong digital marketing team if it wants to see continued digital sales growth.
In summation, Aritzia has a fantastic management team that makes big decisions carefully and is focused on growing long-term objectives. We believe that Aritzia can continue to post double-digit revenue and boutique growth for the foreseeable future, and the company may have already surpassed pre-COVID revenue figures.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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