A person walks past clothing retailer Aritzia on Robson Street in Vancouver, on March 30.Kayla Isomura/the Globe and Mail
Aritzia Inc. ATZ-T shares plummeted nearly 21 per cent on Wednesday after the Canadian retailer reported an upbeat quarterly profit but issued a disappointing outlook, making it another casualty of high inflation and stressed consumers.
The stock’s decline sent it hurtling toward an 11-month low and marked a severe setback for a retailer that had enjoyed strong approval from investors for its impressive growth and support from consumers who coveted its line of fashionable women’s clothing.
After the selloff, the stock is down 29 per cent in 2023, lagging Lululemon Athletica Inc. LULU-Q by nearly 50 percentage points.
Aritzia is also trailing general retailers such as Walmart Inc. WMT-N and Target Corp. TGT-N, suggesting investors are taking a grim view of its prospects as inflation compresses the company’s profit margins.
“We remain bullish about the long-term growth opportunity for Aritzia, though in the context of slowing consumer spending as well as substantial margin volatility, we take a more cautious view,” Mark Petrie, an analyst at CIBC World Markets, said in a note released before markets opened for trading.
Mr. Petrie now expects the stock will trade at a valuation of 20 times’ estimated earnings, down from a loftier valuation target of 28 times’ earnings.
He cut his price target for the stock, or the price at which he thinks it will trade within 12 to 18 months, to $44. That’s down substantially from his previous price target of $60.
The stock ended Wednesday at $34.15 in Toronto, down $8.95.
The company’s fiscal fourth-quarter financial results, for the three months ended Feb. 26, were largely better than what analysts had been anticipating.
Profits increased by 9.1 per cent, year over year.
Combined online and store sales increased by 43.5 per cent from the same period last year, and nearly 56 per cent in the United States where Vancouver-based Aritzia has strong ambitions for growth. The company’s U.S. stores now drive more than half of its sales, as new boutiques and expansions capitalize on strong demand for in-person shopping.
Aritzia reports record revenue in third quarter as clothing retailer sees growth in U.S., online
“And we still have a long runway of growth ahead of us,” Jennifer Wong, Aritzia’s chief executive officer, said during a conference call with analysts.
In addition to a larger footprint, she expects the retailer will double its online sales – which currently account for about 43 per cent of total sales revenue – by fiscal 2027.
Though profit and sales were strong, the problem with Aritzia’s quarterly report was that it came with a surprisingly dour outlook for the year ahead.
Aritzia expects sales will slow to a range between 10 and 14 per cent this year, down from growth of nearly 47 per cent last year, suggesting that the retailer is seeing consumer headwinds from rising borrowing costs and deteriorating economic activity.
At the same time, Aritzia expects that its gross margins – or revenue after deducting the cost of goods sold – will decline by two percentage points, largely because of inflation.
As a result, the company’s EBITDA margin – a profitability ratio that compares earnings before interest, taxes depreciation and amortization to revenue – will shrink to 12.5 per cent this year from 16 per cent last year.
Derek Dley, an analyst at Canaccord Genuity, had been expecting the EBITDA margin to expand to 16.8 per cent this year.
“We expect the stock will be challenged over the next two quarters until margin pressures subside,” Mr. Dley said in a note.
The bullish case is that Aritzia will raise prices in the second half of the year, offsetting inflation and putting gross margins back on track as sales hold up. If successful, investors have an opportunity to scoop up a long-term winner during a bleak stretch.
The share price, even after Wednesday’s debacle, has outperformed the S&P/TSX Composite Index by 115 percentage points over the past five years.
But there is a lot of uncertainty here: The North American economy is slowing and a recession could be brewing, putting additional pressure on consumers already struggling with price increases.
Aritzia may look tempting, but the economy will have the final word on the stock.