Aritzia Inc.

Aritzia Inc. (TSX: ATZ) is an innovative design house and fashion boutique. The Company conceives, creates, develops and retails fashion brands.

Q4FY20 Financial Highlights: ATZ declared its quarterly results, wherein the Company reported net revenue of CAD 275.4 million, reflecting a growth of 6.3% on y-o-y basis. The increase was driven by 8.9% y-o-y comparable sales growth aided by strong momentum from the e-commerce segment. During the quarter, the Company reported the opening of five boutiques in the United States and relocated three existing boutiques in Canada. Gross profit stood higher at CAD 275.4 million, depicting a growth of 9.6%, while the gross margin fell by 90 bps, due to higher raw material costs and the impact from new tariffs, higher markdowns and higher warehousing and distribution center costs. Adjusted EBITDA stood flat at CAD 42.4 million, as compared to CAD 42.6 million, a year ago. Net income was reported at CAD 21.7 million, as compared CAD 18.7 million, a year ago, supported by a higher income from the operation, while higher finance expense remained a drag.

Q4FY20 Income Statement Highlights (Source: Company Reports)

Risk: Due to extended job losses and lower disposable income on account of ongoing disruption, lower consumer spending might hinder the Company’s business prospect.

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 remained resilient in the recent past and appreciated ~13% in the last one year, amidst a drastic fall in the broader equity market. The company is banking upon its e-commerce segment, as it has reported an exuberant growth in the recent past. We expect the e-commerce segment to drive growth in the near term as the people are expected to follow the social distancing norms. The group saw a ~150% surge in its e-commerce revenue since the physical store closure owing to COVID-19 Pandemic. The group has started phased reopening of its retail stores from 7 May 2020 onwards which is likely to drive the sales along with eCommerce Channel. Further, to weather the current pandemic, the company has reduced the compensation of the senior leadership team by 25% and the forfeiture of the Board of Directors of the cash portion of their fees. The company has further enhanced its credit facility by CAD 100 million, in order to support the working capital requirements. The stock soared ~54% in the last three months, outperforming the index by ~33%. We have valued the stock using EV to Sales based relative valuation approach and considered peers like Gildan Activewear Inc, Canada Goose Holdings and Dollarama Inc, etc., and arrived at a target price offering lower double-digit upside potential (in % terms). Hence, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 19.01 as on June 30, 2020.

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

Canada Goose Holdings Inc.

Canada Goose Holdings Inc. (TSX: GOOS) is a leading luxury apparel manufacturer company which designs, manufactures, distributes and retails premium outerwear for men, women, and children. The products are sold through select outdoor, luxury and online retailers and distributors across America, Europe, Asia etc. 

Recently, the Company informed the appointment of Carrie Baker and Kara MacKillop for the post of President, North America and Chief of Staff and EVP People & Culture, respectively. As reported, both of them would report to Dani Reiss, President & CEO of Canada Goose Holdings Inc.

FY20 Financial Highlights: Canada Goose announced its yearly results, wherein the Company reported revenue of CAD 958.1 million, as compared to CAD 830.5 million in the previous period. The increase was driven by higher DTC revenue on account of incremental revenue from new retail stores. Meanwhile, improved income from wholesale revenue due to a positive contribution from Baffin coupled with higher pricing, and higher-order values from international distributors. Gross profit for the year stood higher at CAD 593.3 million, against CAD 516.8 million in the previous financial year. However, gross margin shrank marginally to 61.9%, against CAD 62.2% in the previous year. Operating income slide to CAD 192.1 million, from CAD 196.7 million in FY19, due to an increase in selling general and administrative expenses and depreciation & amortization costs. Adjusted EBIT remained flat at CAD 207.4 million, as compared to CAD 206.9 million in the previous financial year. The Company reported an operating margin of 20.1%, as compared to 23.7% in the previous year. Net income, during the period, stood at CAD 151.7 million, as compared to CAD 143.6 million.

FY20 Income Statement Highlights (Source: Company Reports)

Risks: The unemployment rate is likely to increase on account of COVID-19 pandemic, which might change the consumer spending behaviour. There is a probability that consumers might cut down on discretionary spending. Any such scenario would affect the company’s business.

Valuation Methodology: Price to Cash Flow Based Relative Valuation (Illustrative)

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

Stock Recommendation: The stock of GOOS plunged ~33% so far this year, due to the global disruption on account of COVID 19. The business has well-established brands and reported a stable fourth quarter, despite the ongoing disruption, which is encouraging. The Company is likely to report a weak first quarter FY21 numbers due to the store closure across various geographies. The group is expecting negligible revenue during this period as 75% of the group’s stores were temporarily closed during the first seven-week of 1QFY21. Though the first quarter is historically the smallest contributor in the fiscal year and the group generates its business at the backend of the year. 1QFY20 contributed 7.4% of annual sales in fiscal 2020. The group has decent liquidity with a cash balance of CAD 119.7 million and undrawn revolving credit facility of CAD 239.4 million as on June 01, 2020. The group is focusing on marketing investments towards e-commerce and lowering its retail and manufacturing fixed rent expenses in order to improve performance and efficiency. The management is confident that demand is likely to return once the situation normalizes. The stock fell ~33% in the last six months, and we believe most of the negatives have been price in, and the current correction offers a decent entry point. We have valued the stock using Price/CF based relative valuation approach and considered and industry (Textile & Apparel) average and arrived at a target price offering double-digit upside potential (in % terms).  Hence, we recommend a ‘Buy’ rating on the stock at the Closing price of CAD 31.52 as on June 30, 2020.

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

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