This Growth Stock Is Down 21%: Buy, Sell, or Hold?

The decline in Aritzia stock presents an opportunity for long-term investors to buy this growth stock at a discounted valuation.

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Shares of clothing and accessories company Aritzia (TSX:ATZ) underperformed the broader equity markets over the past year. While this Canadian stock got a significant lift from its solid third-quarter financial results and marked a recovery so far in 2024, it is still down over 21% from the 52-week high. The decline presents an opportunity for long-term investors to buy this growth stock at a discounted valuation.

Notably, Aritzia’s growth rate moderated in the second quarter (Q2) of the current fiscal year due to tough comparables, macro headwinds, and its inability to add newness to its products. Consequently, this exerted downward pressure on its share price. However, the company regained momentum in the third quarter (Q3), achieving a 5% year-over-year increase in net revenue. This achievement is noteworthy, especially considering the remarkable revenue growth of 38% and 63% during the third quarters of the two preceding fiscal years, respectively.

Furthermore, there was a modest improvement in comparable sales in Q3 compared to the decline witnessed in the second quarter. Moreover, this improvement was noteworthy considering a 23% increase from the same period last year. 

Looking ahead, the company faces tough year-over-year comparisons in Q4. However, the momentum in Aritzia’s business is likely to be sustained, led by the solid performance of its new boutiques. Further, its growth is expected to accelerate in the coming years as it scales its operations, which will position it well to deliver solid capital gains in the long term. 

Against this background, let’s look at the factors that will support the upside in Aritzia stock. 

Factors to drive Aritzia stock

Aritzia’s commitment to innovation, investments in technology, and data analytics enable it to understand consumer preferences better and optimize its product offerings. This approach enhances customer engagement, drives operational efficiencies, and supports margin expansion and bottom-line growth.

Further, Aritzia is actively introducing fresh styles and refining its product assortment to attract more customers. This will drive traffic and strengthen its competitive edge.

Aritzia’s revenue will likely get a significant boost from opening of new boutiques. Notably, the company’s management expects to expand its square footage by approximately 20% to 25% in the upcoming year. This includes opening of 11-13 new boutiques. Notably, Aritzia’s new boutiques have shown robust performance and exceeded the expected payback periods. Moreover, these new stores are likely to achieve payback in less than a year, much ahead of the company’s expectations of 12-18 months. 

The ongoing expansion of its boutiques is poised to drive revenue and profitability in the coming quarters. This will positively impact its share price. Furthermore, Aritzia is enhancing its online customer experiences and broadening its omnichannel offerings, positioning itself for future growth.

The company also opened a new distribution facility, which will drive operational efficiency and reduce inventory management costs, boosting its overall profitability.

Bottom line 

Aritzia’s revenue and earnings-per-share (EPS) growth is likely to accelerate in the coming years, benefitting from expansion of boutiques, omnichannel product offerings, and expense management. The company’s leadership expects its top line to increase at a compound annual growth rate of 15-17% through 2027. Further, its EPS growth rate is likely to be higher than its sales. 

Overall, Aritzia is well-positioned to deliver strong growth in the long term and deliver stellar capital gains.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Sneha Nahata has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Aritzia. The Motley Fool has a disclosure policy.

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