Investors were greeted with news Thursday that Vancouver-based womenâs specialty retailer Aritzia Inc. was looking to list its shares on the TSX–a revelation that simultaneously puts the domestic IPO market in a better light while also providing Canadians another retail stock to buy beyond Canadian Tire Corporation Limited (TSX: CTC.A) and a handful of others.
Itâs indeed good news for an equity market thatâs forever criticized for being overly dependent on energy and financial stocks. However, before you pick up the phone to ask your broker to get you a piece of the action, itâs important to consider a few not-so-trivial concerns before jumping on the Aritzia gravy train.
IPOs generally donât do well
Aritziaâs growth story is undeniable. Started in 1984 by Brian Hill, itâs grown to 57 stores in Canada and another 18 stores in the United States. Utilizing a steady-as-she-goes growth process, the specialty retailerâs been adding an average of five new stores per year; it plans to continue that pace, opening approximately 20-25 stores over the next five years.
By 2021 Aritzia expects to generate adjusted EBITDA of $220 million on $1.2 billion in revenue with $300 million of it from online sales. Thatâs 25% of overall revenue–double what it did in fiscal 2016 ($65 million).
Investors are bound to be excited by these numbers, which–in many ways–mirror the pre-IPO performance of Lululemon Athletica Inc. (NASDAQ: LULU) when it went public in July 2007. While no longer trading on the TSX, Lululemonâs sales per square foot, according to its IPO prospectus, were $1,400–$65 less than Aritziaâs.
There arenât many retailers in North America that generate this kind of productivity from their stores, yet Vancouver is home to two of them. Who says Canadians canât do retail?
But letâs put aside all of the good stuff for a moment and consider why a tried-and-true stock like Canadian Tire might actually be a better buy over the next 12-24 months, despite Aritziaâs phenomenal growth.
History is littered with IPOs whose stock prices fizzled shortly after takeoff. Montreal billionaire money manager Stephen Jarislowsky wrote about IPOs in his 2005 book, The Investment Zoo: âNew issues are typically well promoted … My experience is that you can buy nine out of 10 new issues at a lower price a year or two later.â
Consider Lululemon.
Its shares were priced at US$18 (above the US$15-17 range) when it went public in 2007. On its first day of trading, Lululemonâs stock jumped 56%, closing at $28. By October 2007 Lululemonâs stock had hit $60. A year later it was trading below its IPO price, and as the North American markets bottomed in March 2009, Lululemon stock hit a low of $4.32–76% below its IPO price–a mere 19 months after going public.
Itâs fair to say that some of that implosion couldnât be helped. The worldâs financial markets were hemorrhaging, and Lululemon was simply going along for the ride. But itâs a good illustration of what Jarislowsky was talking about. IPOs are notoriously poor performers after the first-day pop.
So, unless you can get your hands on some Aritzia shares pre-IPO, let this be a cautionary tale as to why itâs best to wait.
Thereâs another reason to pass on Aritziaâs IPO.
Thereâs been almost no IPO action in Canada in 2016, and while that could increase the demand for Aritzia stock in the absence of any other quality offering, itâs possible that institutions will turn a blind eye to the âlatestâ growth story.
Frankly, I donât understand why itâs choosing this environment in which to go public. After 11 years Aritziaâs majority owner, Berkshire Partners, must really want to exit their investment.
