After outperforming the broader equity markets for several years, Aritzia (TSX:ATZ) stock came under pressure in 2023. For instance, shares of this luxury apparel design house have corrected over 48% year to date, reflecting a slowdown in its sales growth rate due to the tough year-over-year comparisons. Additionally, the lack of newness in its offerings and a challenging macro backdrop hurting consumers’ spending on non-essential products further remained a drag.
Investors should note that Aritzia primarily focused on capitalizing on surging demand for its products to achieve robust sales growth. Despite grappling with supply chain challenges, the company ensured the ample availability of its most sought-after products. These strategic moves resulted in an impressive 74% and 47% increase in its revenue for the fiscal years 2022 and 2023, respectively. However, this approach also limited the company’s operational capacity, leading to suboptimal development of new styles and ultimately hampering its overall sales expansion.
However, the company has reverted to its established product development schedule with the normalized supply-chain environment. Moreover, Aritzia focuses on creating new styles to maintain freshness in its assortments.
With this background, let’s assess whether Aritzia stock is a Buy in October.
Growth to accelerate
While a slowdown in growth has dragged Aritzia stock lower, the company’s focus on bringing newness to its offerings and easing year-over-year comparisons suggests that its growth will likely reaccelerate soon. Moreover, its square footage expansion bodes well for future growth.
During the Q2 (second-quarter) conference call, Aritzia’s management stated that the company’s top-line momentum will accelerate with new boutiques opening. Notably, the company’s new boutiques continue to perform well and have a low payback period of approximately one year or less, which is encouraging.
Moreover, on the bottom-line front, Aritzia’s selective pricing actions, cost improvements, and opening of its new distribution centre will cushion its margins and earnings in the coming quarters.
Aritzia’s guidance supports bull case
Aritzia’s top and bottom lines have grown at a compound annual growth rate (CAGR) of 26% and 23%, respectively, in the past five years. While the ongoing headwinds will restrict its growth rate in the short term, the company maintained its medium-term outlook, which supports my bull case.
Aritzia expects its net revenue to increase at a CAGR of 15-17% through 2027. Moreover, its earnings growth could exceed its revenue growth rate during the same period. The company’s focus on opening new boutiques at a decent pace, strengthening its e-commerce platform, and increasing brand awareness is likely to support its growth.
Bottom line
While Aritzia’s top line and margins could remain under pressure in the near term, its investments to enhance client digital experience and square footage expansion position the company well to deliver strong growth across its e-commerce and retail channels. In addition, the company’s focus on cost efficiencies and subsiding transitory cost pressures will substantially expand its margins.
While Aritzia is poised to deliver solid growth, its stock trades at a discounted valuation. Aritzia stock is trading at next 12-month price-to-earnings (P/E) ratio of 18.2, lower than the historical average, representing a solid buying opportunity near the current levels.
