Aritzia's stock valuation trades at 58 times trailing 12-month earnings, according to S&P Global Market Intelligence. An Aritzia store is seen on July 13, 2021 in Montreal.Ryan Remiorz/The Canadian Press
Aritzia Inc. ATZ-T is delivering strong profit growth, fat margins and a successful U.S. expansion. Now comes the hard part: justifying the stock’s rich valuation.
The Vancouver-based clothing retailer, which operates 127 stores in Canada and the United States along with a thriving e-commerce business, has been dazzling investors.
The share price has rallied 63 per cent since the end of October. Aritzia’s latest quarterly financial results, released last week, support the big move.
Profit increased by 72 per cent over the same period last year, sailing past analyst estimates. Net revenue increased by 11.5 per cent, also beating estimates and underscoring the retailer’s appeal with consumers.
As for profit margins, they expanded by 4.3 percentage points over the past year, to 45.8 per cent, even as freight costs rose.
The results mark an impressive improvement since 2023. Just 18 months ago, the retailer was struggling with the impact of high inflation and rising borrowing costs as central banks raised interest rates.
Faced with slower consumer traffic, Aritzia slashed its revenue forecasts as it marked down prices to get its products moving.
In its fiscal first-quarter results, released in July, 2023, profits slumped 47.5 per cent from the previous year – a dismal result that sent the stock price plummeting 24 per cent in one day. By September, the stock had touched a three-year low.
The one thing going for the stock back then: It was beaten up and reflecting low expectations.
Now, Aritzia resides within an entirely different environment. It is a pricey stock that is reflecting upbeat growth prospects, and in the hyper-competitive U.S. market of all places. The shares rallied above $68 on Thursday, hitting another record high and expanding their rebound since 2023 to about 224 per cent.
If that’s not enough to make investors dizzy, consider the stock’s valuation: It trades at 58 times trailing 12-month earnings, according to S&P Global Market Intelligence.
That’s about double Lululemon Athletica Inc.’s valuation. It is even a little higher than Nvidia Corp. NVDA-Q, the chip maker associated with the rollout of artificial intelligence that has been hogging investor attention for the past couple of years.
Aritzia’s premium valuation means that investors have big hopes pinned to demand for the retailer’s popular leggings, sweat fleeces, Super Puff jackets and other stylish clothing. Is that reasonable?
Aritzia is still a relatively small retailer, with a market value of $7.4-billion based on the combined value of its shares. It’s no Starbucks, which implies that even modest expansion can have a big impact on its geographic footprint and sales.
It has opened 11 new locations and repositioned three boutiques over the past 12 months, which wouldn’t be a breathtaking pace of expansion at much larger retailers. Yet, it marked Aritzia’s largest number of openings in a given year and contributed to record square-footage growth of about 25 per cent.
“Even beyond the financial performance of these stores, they are a brand-propelling marketing vehicle for us,” Jennifer Wong, Aritzia’s chief executive officer, said during a conference call with analysts.
New store openings in the most recent quarter were focused on the U.S. market, which is currently driving about 55 per cent of sales.
The company is also ramping up its e-commerce presence – which accounts for a third of sales – with a new and improved website in the works and a mobile app coming next year.
The future looks bright.
Mark Petrie, an analyst at CIBC Capital Markets, expects Aritzia will generate a profit of $2.67 a share in its next fiscal year, implying growth of 44 per cent from his estimate for the current year. Luke Hannan, an analyst at Canaccord Genuity, expects profits will rise by about 40 per cent.
If they’re right, Aritzia’s valuation will fall fast, to about 26 times earnings based on the current share price. Look further out and bullish investors can make the argument that the retailer remains an attractive buying opportunity.
But a lot has to go right.
Consumers have to stay confident and the North American economy needs to remain buoyant as it navigates U.S. tariff threats and lingering inflation. And Aritzia itself must expand while maintaining margins and generating bigger profits – and fending off competitors.
When Aritzia’s share price was in the dumps in 2023, brave investors buying into the slump faced the risk that the retailer might not recover. Now, investors face yet another challenge: Aritzia has to live up to lofty expectations.