Investors were greeted with news Thursday that Vancouver-based women’s 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. It’s indeed good news for an equity market that’s 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, it’s important to consider a few not-so-trivial…
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Investors were greeted with news Thursday that Vancouver-based women’s 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.
It’s indeed good news for an equity market that’s 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, it’s important to consider a few not-so-trivial concerns before jumping on the Aritzia gravy train.
IPOs generally don’t do well
Aritzia’s growth story is undeniable. Started in 1984 by Brian Hill, it’s grown to 57 stores in Canada and another 18 stores in the United States. Utilizing a steady-as-she-goes growth process, the specialty retailer’s 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. That’s 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, Lululemon’s sales per square foot, according to its IPO prospectus, were $1,400–$65 less than Aritzia’s.
There aren’t 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 can’t do retail?
But let’s 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 Aritzia’s 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: “New 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.”
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, Lululemon’s stock jumped 56%, closing at $28. By October 2007 Lululemon’s 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.
It’s fair to say that some of that implosion couldn’t be helped. The world’s financial markets were hemorrhaging, and Lululemon was simply going along for the ride. But it’s 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 it’s best to wait.
There’s another reason to pass on Aritzia’s IPO.
There’s 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, it’s possible that institutions will turn a blind eye to the “latest” growth story.
Frankly, I don’t understand why it’s choosing this environment in which to go public. After 11 years Aritzia’s majority owner, Berkshire Partners, must really want to exit their investment.
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Fool contributor Will Ashworth has no position in any stocks mentioned. The Motley Fool owns shares of Lululemon Athletica.