Is Aritzia Inc. the Next Lululemon Athletica Inc.?

Aritzia (TSX:ATZ) is trading near its IPO price. Could this be your chance to buy the next Lululemon Athletica Inc. (NASDAQ:LULU), or is this stock destined for a gloomier fate?

| More on:

Aritzia Inc. (TSX:ATZ) has been trading flat for the two months that it’s been trading on the TSX as investors don’t know what to expect from this brand new fashion play. Could it follow Lululemon Athletica Inc.’s (NASDAQ:LULU) footsteps to be a terrific growth play in the stretch-pants business, or is the future gloomy for this company as the fashion industry is rather unstable as a long-term investment?

Should you buy with prices near the IPO price?

If you bought the stock right now, then you’d be paying very close to the IPO price of $16 per share. I believe the IPO price is very expensive, and the stock hasn’t really gone anywhere since it started trading on the TSX. Investors who jumped into the IPO are expecting the same level of growth the company enjoyed in its previous two years, where it saw great growth numbers.

It’s important to realize that fashion retail is a business that is very fickle, and one fantastic quarter could be followed by an abysmal one. The fashion business has huge ups and downs, and it’s nearly impossible to say whether or not Aritzia will be the next of the many fashion retailers to go down.

It’s difficult to predict earnings for fashion companies, and this is why there’s a higher level of risk involved. The risk is amplified further considering the high IPO price to go with high expectations on this stock.

Bold branding choices look to be paying off

Aritzia does have an interesting management team. They’ve made some unique and interesting branding decisions in order to increase interest in its products. The company owns the TNA brand, which it spun off into its very own store–a very interesting move. It adds a fresh take on a loved brand. The store-branding strategy seems to be paying off, as the company reported a very impressive 30.1% net revenue increase with a strong 16.9% sales growth for its latest quarter.

Aritzia has ambitious plans of expanding its business; it has 30 new stores planned to be opened by 2021 to beef up its U.S. presence.

The company takes pride in the fact that it has never closed a store in over 30 years–something I would not be bragging about if I were on the management team. If there’s a location that isn’t producing as many sales as the others, I would much rather shut down that location and find a better location. Keeping a store open regardless of how it performs is not a good strategy for increasing operational efficiency.

Could Aritzia be the next Lululemon?

It’s much too early to tell, but the biggest difference between Aritzia and Lululemon is that Aritzia has its focus on general fashion with less emphasis on sports apparel. I believe this makes the business a lot riskier, as non-sport-related fashion is more subject to fads, and like food items, these clothing items could spoil based on whether or not the item is in fashion.

Because of this large amount of uncertainty, I think Aritzia is a much riskier stock than Lululemon was when it was an IPO, and given the company’s expensive valuation, I would avoid Aritzia like the plague right now.

This stock is no Lululemon–not even close.

I wouldn’t touch this stock even if it were a lot cheaper because the Canadian retail space is a dangerous place to invest, and you could end up losing your shirt. It has no dividend, a dual-class share structure, unpredictable earnings, and it’s in a scary industry; just stay away.

 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette has no position in any stocks mentioned. The Motley Fool owns shares of Lululemon Athletica.

More on Investing

grow dividends
Investing

Here’s My Top 3 TSX Stocks to Buy Right Now

Even though the TSX has been rising, there are still some good bargains out there. Here are three top compounding…

Read more »

Target. Stand out from the crowd
Investing

Prediction: This Canadian Growth Stock Could Double by 2030

Alimentation Couche-Tard (TSX:ATD) is a top growth stock that could do well over the next six or so years.

Read more »

Businessman holding AI cloud
Tech Stocks

Could Investing $20,000 in Nvidia Make You a Millionaire?

Nvidia stock has made investors millionaires in the last 10 years. Is it too late to invest to become a…

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

money cash dividends
Stocks for Beginners

Have $500? 3 Absurdly Cheap Stocks Long-Term Investors Should Buy Right Now

If you're looking for cheap stocks, these three have a huge future ahead of them, all while costing far less…

Read more »

edit Woman in skates works on laptop
Dividend Stocks

3 No-Brainer Stocks to Buy Under $30

These three stocks all offer a huge deal for investors looking for dividends, as well as growth that will last.

Read more »

Business man on stock market financial trade indicator background.
Tech Stocks

1 Growth Stock Down 50 Percent to Buy Right Now

There are plenty of growth stocks in the market worth considering, but Shopify (TSX:SHOP) looks like one of the best…

Read more »

You Should Know This
Dividend Stocks

How to Convert a $300 Monthly Investment Into $338 in Monthly Income

If you want a certain amount in monthly passive income, invest a similar amount today and leave the rest to…

Read more »