After a temporary uptick in stock prices in early 2023, several TSX companies are experiencing another round of sell-offs this March. Investors remain worried about an economic slowdown as a full-blown recession seems almost inevitable now.
While the stock market volatility will test even the most seasoned investor, it makes sense to consider buying quality companies if they are trading at a discount. One such TSX stock that could supercharge your equity portfolio in 2023 is Aritzia (TSX:ATZ). Let’s see why.
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Is Aritzia stock a buy?
Valued at a market cap of $4.4 billion, Aritzia stock is down 35% from all-time highs. Despite the recent pullback, ATZ stock has returned 123% to investors since October 2016.
A vertically integrated luxury design house, Aritzia is a multi-channel retailer with a sizeable presence in the U.S. Its increasing geographical footprint and widening e-commerce sales have allowed the company to increase sales from $980.5 million in fiscal 2020 (ended in February) to $2 billion in the last 12 months.
The COVID-19 pandemic accelerated Aritzia’s shift towards online shopping, which accounted for 38% of total sales in fiscal 2022. Comparatively, e-commerce penetration for the company stood at 23% in fiscal 2020.
Armed with a portfolio of premier real estate retail stores, Aritzia now has 114 boutiques in North America, 68 of which are located in Canada.
Due to its strong brand positioning, Aritzia has increased profits at a much higher pace compared to revenue. In the last four fiscal years, revenue was up by 19% annually, while adjusted net income surged by 24% each year.
Aritzia aims to fuel its top-line growth by increasing its retail presence. It has already identified 100 other locations in the U.S. where it can open boutiques and gain traction in the world’s largest economy. The retailer plans to open eight to ten new boutiques each year through 2027.
Aritzia estimates that an 8,000-square-foot store will cost the company $3 million but will generate $8 million in annual sales. On average, each retail store has a payback period of between 12 to 18 months.
Additionally, Aritzia expects sales from the U.S. markets to range between $3.5 and $3.8 billion by 2027, indicating average growth rates of 16% annually.
What next for ATZ stock and investors?
Analysts expect ATZ to increase sales to $2.5 billion in fiscal 2024. Despite an inflationary environment, Aritzia is forecast to report adjusted earnings per share of $2.09 in 2024, up from earnings of $1.53 per share in 2022.
So, ATZ stock is priced at 1.7 times forward sales and 18.7 times forward earnings. This valuation is very reasonable for a quality growth stock.
In Q3 of fiscal 2023, Aritzia reported free cash flow of $68.3 million, a decline of almost 60% year over year. Its inventory level almost tripled to $508.4 million in the November quarter, making investors nervous.
In the next four years, Aritzia is confident of increasing its EBITDA (earnings before interest, tax, depreciation, and amortization) margin to 19%, which should drive future cash flows higher.
Analysts are also bullish on the TSX stock and expect shares to increase by 50% in the next 12 months.
