Aritzia Inc. (TSX:ATZ) stock continues to get hit hard as investors digest the company’s latest quarterly result and outlook. In fact, Aritzia’s stock price has fallen more than 10% since its quarterly release on October 10.
Is Aritzia stock a good buy today?
The macro affecting Aritzia stock
The consumer is weakening. Debt levels are high. And Aritzia is feeling the pinch – maybe the growth expectations that are baked into Aritzia’s stock price are too high. One thing is certain – this uncertainty is triggering a downward adjustment to expectations, driving the stock lower.
While interest rates are coming down, the problems in the economy remain. Heavy debt levels and a higher cost of living is weighing on the consumer. Will this continue to pressure consumer spending or will falling interest rates reverse this trend?
As we know, the stock market trades off of expectations. As a result, the market has been rallying on the expectation of lower interest rates to come. The question that we should ask ourselves, however, is whether it has gone too far? Is the market reflecting realistic expectations?
In turn, we should also be asking ourselves if Aritzia’s stock price is reflecting realistic expectations. I mean, it’s trading at more than 50 times trailing earnings. Also, it’s trading at 26 times this year’s expected earnings. This is high for a cyclical retailer. It’s even higher for a cyclical retailer that sells discretionary items at a time when this spending is at risk.
Aritzia’s Q2 beats expectations
Let’s get into the company’s second-quarter results. Revenue increased 15%, same-store sales growth increased 6.6%. And earnings per share (EPS) increased to $0.21, which was well ahead of expectations. This growth was driven by 24% growth in the U.S. business. The increase was due to square footage expansion, strong same-store sales growth, and e-commerce growth.
So here we are. While on the one hand, Aritzia is growing rapidly as it expands its square footage and consumers flock to the stores. On the other hand, the outlook is not so clear and with the stock factoring a lot of high expectations into its valuation, this has prompted a sell-off.
The Canadian consumer is struggling
The Canadian business accounted for 44% of Aritzia’s total revenue in the quarter. This was the weak spot for the retailer, with revenue growth slowing to the low single-digits. Softer trends in Canada have been driven by a more challenging macroeconomic environment.
Longer term, Aritzia is heading for continued growth and expansion as the brand continues to resonate with shoppers. But this is not without its risks. One thing I would caution investors about is that retailers can fall victim to changing preferences and fads. This is a risk that I would factor into my valuation of Aritzia shares. What’s hot one day might be totally forgotten the next day.
The bottom line
In summary, Aritzia has clearly done an outstanding job of growing and growing profitably. Looking ahead, a few things concern me. Firstly, retailing is a cyclical business. The consumer continues to struggle in Canada, and in the U.S., there may be difficulties ahead. This doesn’t bode well for discretionary purchases, such as purchases from Aritzia. Secondly, Aritzia’s valuation of more than 50 times trailing earnings is quite high given the uncertainties related to its future growth. I would continue to watch Aritzia stock, but I would wait to buy it.
