Aritzia Inc.

Aritzia Inc. (TSX: ATZ) is an integrated design house of exclusive fashion brands that designs apparel and accessories for its collection of exclusive brands and sells them under the Aritzia banner.

The company reported that it would disclose its 2QFY21 results on October 14, 2020.

Q1FY21 Financial Highlights: Aritzia announced its quarterly results, wherein the company reported a 43.4% on y-o-y dip in the revenue to CAD 111.389 million. The decline was driven by a temporary closure of its 96 boutiques on account of COVID-19 pandemic, while a 150% growth from eCommerce segment partially supported the top-line. Gross profit tumbled to CAD 13.061 million, as compared to CAD 85.561 million in Q1FY20. The decline in gross profit was driven by a significant deleveraging of occupancy, warehousing and distribution costs from the loss of retail revenue, including higher markdowns as the company reduced its inventory exposure on account of the continuous shutdown. Gross profit margin plunged to 11.7% compared to 43.5% in the previous corresponding period. The business witnessed a 20.1% y-o-y decline in selling, general and administrative expense at CAD 43.511 million, supported by a CAD 13.8 million support as a Government subsidy. The company incurred a loss before income tax at CAD 37.601 million, compared to a profit of CAD 22.81 million in Q1FY20. Net loss stood at CAD 26.471 million, as compared to CAD 16.156 million in Q1FY19. The group reported cash and cash equivalents of CAD 224.313 million, while total assets stood at CAD 1,190.399 million.

Q1FY21 Income Statement Highlights (Source: Company Reports)

Risks: 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: P/CF Based (Illustrative)

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

Stock Recommendation: With the gradual opening of the retail segment, the stock appreciated ~58% in the last six months. The company has a niche market within the luxury segment and has innovated its product-portfolio over the last three decades. The company reported reopening of 89 boutiques from July 09, 2020, onwards, and operates at 55% to 65% of last year's productivity levels. The Management took prudent measures during the quarter and minimized non-essential operating costs and negotiated with suppliers and landlords for concessions, which reduced the company's near-term working capital requirement. In the recent past, the company reported strong e-commerce growth, as most of the consumers are staying at home and preferring online- purchase. We expect the trend to continue and e-commerce segment to drive the growth in the coming quarters. The company expects its capital expenditures for FY21 within the range of ~CAD 30 million to ~CAD 35 million. In order to support the near-term working capital needs, the group has secured a CAD 100.0 million revolving credit facility and have issued letters of credit amounting to CAD 75.0 million. We have valued the stock using the Price to CF based relative valuation approach and arrived at a target price, which suggests a double-digit upside potential (in % terms). For the said purpose, we have considered industry (Consumer Cyclicals) mean on the next twelve months (NTM) basis. Hence, considering the above factors, we recommend a 'Buy' rating on the stock at the closing price of CAD 17.68 on October 1, 2020.

ATZ daily price chart. Source: Refinitiv (Thomson Reuters)

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