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Aritzia Inc. vs. Canada Goose Holdings Inc.: Which Will Win?

Fashion retail is a difficult sector to analyze and invest in for a number of reasons. Among the various quantitative fundamental drivers of the business, two factors that are hard to measure and often give me headaches when looking at companies such as Aritzia Inc.  (TSX:ATZ) and Canada Goose Holdings Inc.  (TSX:GOOS)(NYSE:GOOS) are the following:

  1. Qualitative drivers such as brand perception and consumer sentiment surrounding the brands and products offered by these fashion retailers are often hard to capture, even with qualitative surveys and other forms of information gathering.
  2. The quality/value matrix relating to various brands or businesses in fashion retail often changes. Where the product falls in terms of quality vs. affordability largely depends on the ability of a fashion retailer to convince consumers that a product is of the highest quality or is affordable or has whichever mix of attributes best suits the strategic “box” that management wants to tick to determine pricing.

These qualitative factors are important to take into consideration, as brand equity and positive or negative sentiment with respect to the brands offered by fashion retailers play a pivotal role in each company being able to accurately price their offerings and forecast, budget, and turnover inventory effectively.

To put Aritzia and Canada Goose into perspective, I’m going to take a look at another very successful fashion retailer which was originally founded in Canada: Lululemon Athletica Inc.  (TSX:LLL)(NASDAQ:LULU). This company reflects both of the recent Canadian IPOs, albeit in different ways.

Lululemon’s business model relies heavily on brand perception, driving consumers to buy the company’s well-perceived product mix at a significant premium to other low-cost providers of athletic wear. In this respect, Canada Goose has done quite a good job of replicating Lululemon’s success in achieving the brand perception and brand equity necessary to price their parkas at the $1,000-per-jacket level.

Both Lululemon and Canada Goose have traded at significant premiums in the market (currently, Canada Goose’s price-to-earnings (P/E) ratio far exceeds that of Lululemon at 87 times earnings compared to Lululemon’s 25 times earnings).

Aritzia’s more modest P/E multiple (11 times earnings) is likely indicative of investor hesitation with respect to this brand’s ability to grow as quickly and profitably as its competitors. Lululemon’s shift to try to become more mainstream with its recently launched Ivivva brand has turned out to be a misstep; the company announced it will be restructuring Ivivva stores to its traditional Lululemon banners, converting the Ivivva brand to an e-commerce brand.

The acceptance of e-commerce and the rise of online fashion retail as an effective channel for traditional bricks-and-mortar operations to increase revenue is important. As such, mall-based fashion retailers and those focusing on the “old ways” of doing things may simply get lost in the mix.

I remain far more bullish on Canada Goose’s long-term growth prospects as compared to Aritzia; however, I would take caution with the fashion retail industry in general due to long-term headwinds that are likely to cause even the best brands some pain, as we’ve seen with Lululemon.

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

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