Aritzia Inc. (TSX:ATZ) shareholders can’t seem to catch a break, as shares continue to fall farther into the abyss. With shares down ~44% from all-time highs witnessed just over a year ago, it appears that no bottom is in sight, as investors continue to shun the fashion retailer.
The retail industry is ridiculously difficult to thrive in these days, and unfortunately for Aritzia, the nature of its business isn’t doing the stock any favours. In previous pieces, I’ve mentioned that high-fashion clothing is one of the worst retail sub-industries to be in as an investor. Unlike many other clothing companies, Artizia suffers from the fact that it consistently needs to come up with the “hottest” new designs to cater to followers of the latest fashion trends, which rapidly change.
Not only does it take a hefty design investment to be able to come up with new, fashionable articles of clothing, but such a design could become a dud at a drop of a hat. That’s not a formula for long-term success, especially when you consider the amount of excess inventory and discounting that may quickly follow.
Thankfully, Aritzia’s margins are already ridiculously high to begin with, so it’s not a crisis for the company. At least not yet, even though recent stock movements would suggest that.
As you would imagine, predicting where fashion trends are heading is no easy task. It’s pretty much impossible to tell what will be “hot” in the next month, season, or year. If a particular clothing design struggles from the get-go, then its fate could lie in the discount rack a lot sooner than expected.
An investment in Aritzia comes with a great deal of uncertainty, and clearly, investors are no fan of uncertainty.
When is it safe to buy shares of ATZ?
Fellow Fool contributor Will Ashworth seems to think that Aritzia is a great buy on dips — a strategy that has not worked out well up to now. But with shares falling further into value territory, it may make sense attempt to catch the falling knife if you’re interested in realizing short-term gains.
Despite Ashworth and me not being fans of the business over the long term, the stock may enjoy near-term gains triggered by an unexpected earnings beat. The business is unpredictable, but that could be a good thing for a company whose stock has been absolutely hammered since its IPO. An unexpected earnings beat could give the stock the boost it so desperately needs.
Bottom line
Aritzia has ambitious expansion plans, but then again, what recent retailer with an IPO in the last few years doesn’t? I’d take management commentary with a grain of salt, as the fashion retail business is ridiculously volatile. Aritzia probably not a stock you’d want to own for the long term if you plan on getting a good night’s sleep.
If you’re keen on picking up shares, it may make sense as a short- to medium-term trade, but probably not as a long-term holding because of the unattractive traits of the business.
Stay smart. Stay hungry. Stay Foolish.
