Jun 25, 2021
[7 min Read]
Despite claims that the Canadian fashion industry was hit hard by COVID-19, one company continued to excel given the economic conditions from the pandemic. Continued positive sales growth driven by high ecommerce penetration and successful operational strategies has made Aritzia a growing fashion house not just in Canada but emerging successful in the U.S fashion market as well. If you enjoy my analysis on ATZ, take a look at the rest of my portfolio and analyses here and give me a follow to be updated whenever I post!
Aritzia Inc. (TSE: ATZ) together with its subsidiaries, designs and sells apparel and accessories for women in North America. The Canadian-based design house and fashion retailer offers its products under Wilfred, Wilfred Free, Babaton, Tna, Sunday Best, Main Character, and many more brands each with its own vision. As a group, they are united by their commitment to superior fabrics, meticulous construction and relevant, effortless design. The company prides themselves on creating immersive, human and high personal shopping experience both in their boutiques and online with a focus on delivering everyday luxury.
As of May 2021, the company operates 101 stores in North America: 68 of those boutiques in Canada and the remaining in the U.S. The company's portfolio of boutiques is situated in premier real estate locations in high-performing retail malls and high streets in North America. Along with location, they have generated an attractive return on invested capital by enhancing elements of their existing boutiques through footprint, layout and assortment, and etc. In the retail environment, product placement and merchandise planning important in generating revenue per store as it has the power to influence consumer buying choices. If the store is able to get a quicker return on their invested capital required to open up shop, then they're able to generate profits faster that'll show in the company's reports. By having a disciplined real estate selection process and compelling boutique economics, the company has never permanently closed an Aritzia boutique in their 35-year history. As the company continues to expand, particularly in the U.S, they will continue the successful strategy they have laid out in Canada.
Focus: “Aritzia strives to deliver clothing and accessories that embody the perfect mix of high quality and artistic design”
Future Growth Strategies:
Earlier this month, Aritzia announced their acquisition of premium wear brand, Reigning Champ. Aritzia will acquire 75% of Reigning Champ based on a total enterprise value of $63M with the remaining 25% equity interest purchased through 2026. This acquisition will accelerate Aritzia's product expansion into men's line and diversifying their market audience. Co-founder and CEO of Reigning Champ said with “Aritzia's world-class infrastructure and expertise, this partnership provides an exciting path forward to elevate Reigning Champ to the next level as a premium athletic wear brand.” Reigning Champ is also expected to bring revenue numbers of $25M in 2021.
“Capitalizing on our world-class operational expertise and infrastructure, men's, merchandised independently, will become a meaningful part of Aritzia's platform through our Reigning Champ acquisition.” - Brian Hill, Founder, CEO and Chairman of Aritzia
Aritzia's 2020 financial report has shown strong revenue growth across all geographies and all channels - representing the 22nd consecutive quarter of positive growth in comparable sales. In their product, they saw exceptionally strong sales across all brands and categories while successfully launching a new brand, Ten by Babaton.
Aritzia's consistent performance reflects the company's growing brand awareness and affinity in North America, commitment to continued business and infrastructure investments, and their ability to execute on their powerful business model. The company's net revenue growth and measured boutique growth are a proven track record of their consistent growth to maintaining operational excellence and focus on their long-term objectives.
Going forward, Aritzia plans to formally launch their new Clientele App, a digital selling tool used by Aritzia style advisors as well as expanding their omnichannel capabilities. With the pandemic already accelerated their shift to the omnichannel shopping experience, they will continue to put their clients at their focus and personalizing interactions to exceed clients' needs and wants. By opening more opportunities for client interactions and making the brand more easily accessible across all platforms, Aritzia presents optimistic growth in an even more optimistic industry.
Furthermore, Aritzia is progressing with more boutique openings as their boutiques continue to be highly profitable and their most effective marketing tool to grow their brand awareness. Currently being under stored, opening up more premier locations in Canada and the U.S will capture new growth opportunities for them. With only 33 stores currently in the U.S, we can expect that more openings will only drive revenues up considering 34.4% of total net revenues in 2020 were obtained from the U.S (a 27.3% YoY change in U.S net revenues).
These PT upgrades come shortly after Aritzia announced their acquisition of Reigning champ to accelerate their expansion into men's products. I agree with these PTs and think they are very conservative and attainable in the coming months. These metrics help to support my case that Aritzia is slightly undervalued at its current trading price of approx. $36.00 and there is a potential upside of 11%-17% based on these upgrades.
Aritzia is a company showing healthy financials with growing revenues and has especially managed to capitalize on revenues through its eCommerce platform this past year. As the company has managed to survive the COVID-19 pandemic showcases the optimistic company outlook in the fashion industry while many fashion retailers declared bankruptcy during this time. Furthermore, Aritzia's product expansion into men's merchandise will complement its differentiated and unique positioning. Given their proven track record of strong and consistent growth, as Aritzia continues to expand, I believe their stock will be a great long-term hold of 5+ years.