Aritzia (TSX:ATZ) is a Canadian clothing retailer best known for its retail stores. Focusing mainly on the Young Women demographic, Aritzia sells popular brands Babaton, Golden, and Little Moon. The company has attracted considerable attention recently because its growth has been very high and because it enjoys considerable pricing power.
It’s clear that Aritzia has many things going for it. It’s growing quickly; it enjoys high brand loyalty, and it has pricing power and high margins. These are things worth keeping in mind. However, the company also has a very steep valuation and operates in an industry characterized by fickle and changing tastes. Warren Buffett avoids fashion stocks because changing fashions undermine the durability of their competitive positions.
For similar reasons, I consider Aritzia a classic “too-hard-pile” stock: one that you would never short, but that faces too much uncertainty to be a great buy at the current price.
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High but decelerating growth
One thing that Aritzia has going for it is rapid historical growth. Over the last 10 years, it has grown its revenue and earnings at the following compounded annual (CAGR) rates:
- Revenue: 19.99%
- Operating income: 14.32%
- Earnings per share (EPS): 23.47%
As you can see, the historical track record has been pretty good. However, this year, the trend reversed, with the following CAGR rates being observed in the trailing 12-month period:
- Revenue: 5.24%
- Operating income: -30.5%
- EPS: -54.4%
The above metrics show that the performance in the most recent year was not as good as in the trailing 10-year period.
The question is, which period’s performance best reflects what Aritzia is likely to do in the future? If this year’s decline is a temporary problem, then ATZ might be a buy, but otherwise, it probably isn’t. Unfortunately, the question is very hard to answer. Fashion trends are notoriously hard to predict. It was only a few years ago that Canada Goose jackets were all the rage, now that brand is barely talked about and its stock is down over five years.
Is Aritzia undergoing something similar? I don’t know that it is for sure. For one thing, it is a clothing store company that sells other companies’ brands in addition to its own. For another thing, its clothing isn’t visibly branded; if it’s perceived as looking good it will likely sell. To get from these observations to a certain forecast of a growth acceleration for ATZ would be a challenge, though. So, I see ATZ as a classic case of Buffett’s “too hard” pile; a company too complex to be thoroughly analyzed.
A steep valuation
The difficulty in analyzing ATZ is a major problem because the stock is quite expensive going by multiples/valuation ratios. Based on its Tuesday closing price and trailing 12-month earnings, ATZ trades at:
- 44 times earnings
- 2.2 times sales
- 6.24 times book value
- 15.25 times operating cash flow
As you can see, the company’s valuation is quite steep. It isn’t worth the investment if the last 12 months’ earnings reflect future developments. So, an investor would need to know whether or not the company’s popularity will last in order to make an informed investment in it.
Investments in new technology
One thing ATZ does have going for it is its investments in e-commerce technology. It has an e-commerce store, which allows it to supplement its in-store sales. That’s a positive. However, factoring in the company’s valuation, growth deceleration and vulnerability to changing tastes, the stock is ultimately too hard to call.
