Consumer cyclical stocks have recently felt the heat amid adamant inflation and recession fears. Women’s everyday luxury brand Aritzia (TSX:ATZ) has lost 25%, while performance luxury outerwear maker Canada Goose (TSX:GOOS) has lost 20% in the last three months. Online sales is going to be a big growth driver, and, thus, both are betting big on expanding their digital channels. Both have strong brand equity in their respective geographies and segments. However, considering their direct correlation with economic cycles, which one could be a better bet?
Aritzia versus Canada Goose
Aritzia is a vertically integrated luxury brand that operates 114 boutiques in North America. Apart from physical sales, it also has an online channel facilitating sales in over 200 countries. In fiscal year 2022, Aritzia’s e-commerce segment contributed 38% of its total sales.
In comparison, Canada Goose is also a vertically integrated performance luxury outerwear maker. It operates 45 retail stores along with 56 e-commerce markets. It has a more diversified revenue base, where North America contributes almost half, Asia-Pacific derives 30%, and Europe, the Middle East, and Africa contribute 22% of total sales.
Like Aritzia, Canada Goose also has its online sales channel as a key growth driver, making more than two-thirds of its total sales. While Aritzia has the U.S. as its crucial market, Goose has high hopes from China.
Canada Goose was early to adopt a direct-to-consumer strategy than many of its peers. In 2017, online sales contributed only 29%, which has now grown to 70%. This has evidently improved its gross margins, which stand way taller than Aritzia’s.
Goose reported gross margins of 67% in the last 12 months, while Aritzia’s stood at 42%. However, despite the margin edge, Aritzia has managed to grow much faster on the net income front than Canada Goose.
On the balance sheet front, both have manageable debt and a strong liquidity position. Interestingly, Goose has a much longer working capital cycle compared to Aritzia.
Higher inflation will likely weigh on the consumer cyclical industry in 2023. So, it will most likely be a double whammy for these companies with potentially lower revenues due to declining discretionary spending and margin pressure due to higher costs.
In the last five years, Canada Goose has notably underperformed Aritzia. The latter returned 220%, while Goose returned minus 37%.
Canada Goose has a diversified revenue base, which will likely aid its online channel as well. The company expects its revenues to grow by 20%, while adjusted operating profit is to expand by a handsome 38% compounded annually through 2028. Such steep growth will be fueled mainly by its e-commerce sales with improved channel mix and margin expansion. Moreover, its increased focus on women’s wear will also help top-line growth.
In comparison, Aritzia expects its 2027 revenues at $3.65 billion, implying a 16% growth compounded annually. While its channel mix is expected to incline over online, margins will still be relatively lower than Goose.
Although GOOS stock has underperformed ATZ in the long term, I think the equation will likely turn upside down in the next few years. Aritzia stock looks a tad overvalued compared to Canada Goose. Canada’s Goose’s channel mix tilting toward online selling and the Chinese reopening could materialize management’s long-term guidance. Its consistent margin expansion and faster revenue growth could create notable shareholder value in the long term, beating Aritzia.