Aritzia Inc.

Aritzia Inc. (TSX: ATZ) is an innovative design house and fashion boutique and offers luxury items within the segment. The Company conceives, creates, develops and retail fashion brands. The Group designs apparel and accessories for its collection of exclusive brands and sells them under the Aritzia banner. The category of products offered by the firm is blouses, T-shirts, pants, dresses, sweaters, jackets and coats, skirts, shorts, jumpsuits, and accessories. The Company has a strong presence at 95 locations across North America.

Q1FY20 Financial Highlights: ATZ announced its quarterly results, wherein the Company reported net revenue of CAD 111.389 million, significantly lower than CAD 196.699 million in the previous corresponding period (pcp). The decline was due to the result of temporary boutique closures due to COVID-19 throughout the first quarter resulting in significantly lower traffic, partially offset by eCommerce revenue growth. Gross profit plunged to CAD 13.061 million from CAD 85.561 million in pcp, primarily attributable to significant deleveraging of costs related to occupancy, warehousing and distribution centre from the loss of retail revenue. Gross profit margin shrank to 11.7% from 43.5% in pcp. The Company reported a loss from operation at CAD 31.429 million as compared to a profit of CAD 28.758 million in Q1FY19. Finance expense increased slightly to CAD 7.390 million from CAD 7.227 million in the previous corresponding quarter. Net loss stood at CAD 26.471 million as compared to a net profit of CAD 16.156 million in Q1FY19. Free cash flow stood at CAD 8.055 million as compared to CAD 16.917 million in the previous corresponding quarter.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Risk: The company might face a slowdown in demand as there might be a change in consumer behavior owing to COVID-19 pandemic. As the unemployment rate might increase in the near term, people might reduce their spending on discretionary items.

Valuation Methodology: EV to Sales based Relative Valuation (illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of ATZ declined ~33% in the last three months due to weak investors’ sentiment on account of COVID 19 pandemic. The business is categorized under the non-essential items, and hence, the demand was marred by lower traffic due to the closure of shops across the North America region. However, in the recent past, the company reported strong e-commerce growth, as most of the consumers are staying at home and preferring online- purchase. The company has reopened 89 boutiques and stated that sales had exceeded their expectations. Meanwhile, the demand from the eCommerce channel remained strong. The company has recommenced the constructions of boutiques. We believe, the opening of boutiques along with eCommerce channel, would drive the revenue in the near to medium term. We have valued the stock using EV to Sales based relative valuation method and peers like Dollarama Inc, Gildan Activewear Inc etc. and arrived at the potential upside in lower double-digit (in percentage terms). Hence, considering the aforementioned facts, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 18.65 on July 20, 2020.

ATZ Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Gildan Activewear Inc.

Gildan Activewear Inc. (TSX: GIL) is a vertically integrated designer and manufacturer of basic apparel, including T-shirts, underwear, socks, and hosiery. Its primary market is the sale of blank T-shirts to wholesalers and printers (printwear). The Group also sells branded clothing through retail and direct-to-consumer channels. The company markets its products through physical stores and eCommerce channels and through global lifestyle brand companies, and the US segment constitutes the major revenue for the company.

The company would disclose its second quarter FY20 results on July 30, 2020.

Q1FY20 Financial Highlights: GIL announced its quarterly results, wherein the company posted net sales of USD 459.1 million, reflecting a 26.4% decline on y-o-y basis. The company’s performance was impacted by the economic slowdown which resulted in lower demand of the core products, particularly in the imprintables channel, used for promotional, sporting, entertainment, and other large-gathering and cultural events. The gross profit declined 33.7% on y-o-y basis to USD 106.5 million due to a slide in the revenue. Furthermore, the company reported a fall in the gross margin to 23.2% from 25.8% in the previous corresponding period (pcp). The company posted an operating loss of USD 92.3 million as compared to an operating profit of USD 32.7 million, primarily attributable to an impairment of goodwill and intangible assets of USD 94 million, partially offset by a lower SG&A expense. Adjusted EBITDA stood at USD 50.2 million, reporting a 39.8% decline over Q1FY19. Net loss stood at CAD 99.3 million as compared to net earnings of USD 22.7 million in the previous corresponding quarter.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Risk: Lack of promotional and sporting events might dampen the demand for the company’s core products, particularly in the imprintables channel.

Valuation Methodology: Price to Earnings based Relative Valuation (illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The Stock of GIL corrected ~41% so far this year due to volatility in the equity market on account of COVID 19 pandemic. The company has impressive product-line and has a decent brand presence. However, closure of manufacturing facilities has hindered the operational performance of the company to a greater extent. The company expects a significant decline in the point of sale and shipments for the second quarter. Uncertainty surrounding the economy and the expected increase in the unemployment rate is likely to play spoilsport. Currently, the company is sewing face masks for a cooperative consortium of apparel and textile companies supplying non-medical face masks to the health care sector, which is likely to push the sales volume in the near-term. However, due to the lower ticket size of the product mentioned above, we do not expect any major improvement in the near-term cash flows, and we prefer to remain on the sidelines. We have valued the stock using P/E based relative valuation method and arrived at the potential downside in lower double-digit (in percentage terms). We have considered HanesBrands Inc, Roots Corp and Aritzia Inc etc., as a peer group for the comparison purpose. Hence, considering the aforementioned facts, we recommend a ‘Watch’ rating on the stock at the closing market price of CAD 22.59 on July 20, 2020.

GIL Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

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