Aritzia ATZ
April 17, 2022 - 12:01pm EST by
swag95
2022 2023
Price: 44.98 EPS 0 0
Shares Out. (in M): 88 P/E 0 0
Market Cap (in $M): 5,070 P/FCF 0 0
Net Debt (in $M): 210 EBIT 0 0
TEV ($): 5,280 TEV/EBIT 0 0

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Description

Business Overview

Aritzia is a Canadian clothing brand that operates retail locations in Canada and the United States. The brand primarily serves a female audience ranging from teens to working professionals and has recently expanded into men’s clothing through its acquisition of Reigning Champ. The company has nine in-house brands that embody the Aritzia-coined category “everyday luxury” to varying groups: TNA, Wilfred, and Babaton who cater to teens, young women and working adults, respectively. Aritzia also boasts a differentiated corporate strategy focusing on hiring/promotions within the organization, leading to greater employee retention and improved sales outcomes further highlighted below.

Industry Overview

Due to Aritzia’s array of in-house brands, the company competes in several growing market segments including denim, athleisure, and business casual with an ability to quickly pivot to high-growth segments. Of these three segments (denim, athleisure, business casual), the athleisure market is the largest and fastest growing, projected to grow at a CAGR of 7.9% from 2021 – 2028. The growth in popularity of athleisure clothing was accelerated by COVID-19 tailwinds. In addition to athleisure, consumers are also increasingly conscious of the quality and longevity of garments, complimenting Aritzia’s offering of everyday luxury.

Through anecdotal discussions with consumers, it is clear that many view the retailer as operating in a vertical with limited competition. While Lululemon competes with Aritzia’s brands in the athleisure segment, having additional in-store segments that offer a unique combination of quality and price to women means the retailer operates in a vertical with relatively less competition than other brands/retailers.

Two prominent trends in Aritzia’s competitive landscape are omni-channel retail and the provision of an enhanced online experience. The omni-channel retail experience allows for the seamless transition between in-store and online shopping. Following pandemic shutdowns, the company also improved its digital experience significantly (including site personalization, introducing a digital concierge and more payment solutions) which has bolstered e-commerce sales.

Thesis

The upside of the security mainly comes from a bet on successful US expansion. Using precedent store saturation rates derived from Canadian regions and projecting out the success of the e-commerce segment into the US as well yields significant upside.

Aritizia has an average of 2.6 stores in every Canadian city it operates in (with an average of 370K residents per store) while the US is currently underpenetrated, with 2 stores per city, with an average of 800K residents per store. With ~50 additional US cities existing with over 300K inhabitants and no Aritzia store, there is significant room to expand in both existing and new cities. Using the averages of Canadian stores per city, we can expect Aritzia to open an additional 47-81 stores in existing cities (currently operating 68 US stores in 2021) and 102-134 stores in new cities.

The expansion opportunity is clearly large, but even with a controlled roll out of 5-7 store additions per year and growth in the company’s e-commerce segment, there is significant upside in the stock.

Using Google trends to examine the impact of store openings reveals that as Aritizia scales, new regions will demand e-commerce purchases at a greater rate, which will serve to increase profitability. Opening a storefront in Minneapolis (September 2019) resulted in a five times increase in online interestr, while each store in New York has increased the retailer’s online popularity as well. This means Aritizia storefronts act as the company’s own advertising: a rigourous focus on location and creating high quality stores encourages not only shop-in-shop sales, but drives brand awareness which translates into greater online sales (and higher margins) as well.

When examining the brand itself , it is unbelievable how talked about the clothes are amongst its target demographic. The company spends little on marketing (instead choosing to invest into high quality retail), but still receives significant organically driven referrals. In the long run, this strong brand builds loyalty and is more defensible in an increasingly online environment.

Business Highlights that Build Conviction in Succesful Store Openings

The success of the companyis further backed up by a variety of qualities that distinguish this business from other retailers:

·        Aritzia sells across different brands allowing it to weather changes in consumer preferences, while extending the CLTV(ATZ sells to both young teens and working professional women).

·        The retailer has a culture of high performance and execution that permeates to its in-store sales force. Store associates are paid on performance, and paid extremely well. High performing associates can earn over six figures, with the end result being high quality service, customer care, and retention of key sales associates for Aritzia. Store associates often text and call their high paying clients which serves to further build a relationship between the store and consumer.

 

·        Unique membership program rewards loyal customers. Aritizia has 80% of sales come from select customers who spend more than $5,000/year at the retailer. Doing so gives customers access to discounts, exclusive shopping experiences, and early access to clothing releases. These customers are sticky and keep coming back to the retailer.

·        The company looks to iterate on the 80% of successful items as opposed to constantly developing new products. Thus there exist “Aritizia staples” that serve to mitigate sales risk

This has allowed the retailer to earn the second highest sales per sqft. across comps ($1,411), only behind Lululemon ($1,657).

Drivers of Valuation

Using a 10-year projection period with same store sales growth and store build projections below, Aritzia is expected to yield a 5-year IRR of 8%-20%. Fundamentally, the continued success of a strong business will compound earnings at above consensus rates. Below is a summary table of valuation drivers and outputs for the base case projections of the company.

Risks

Supply chain and inflationary issues may hurt the business in the short term. Management has stated it is not looking to raise prices, while inputs on both the clothing and retail side will increase in price for ATZ. This may serve to compress margins unless the retailer sees greater e-commerce growth or decides to raise prices. While earnings may be impacted for the foreseeable future, over an extended holding period we expect these pressures to normalize.

As well, the US is a more competitive market than Canada, which may mean, over a 5–10-year period, Aritzia may see less success than in its home country. Ultimately, the market opportunity in the States is so large, there is still upside for the retailer even if it can access a fraction of the estimated expansion opportunity.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Upside will come from continued earnings growth during the holding period. New store openings driving greater e-commerce purchases will serve to expand margins in underdeveloped markets. Further expansion of products, brands, and international markets will drive upside in the long term.

A potential dual TSX/US listing could also drive greater attention to the stock.

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