Aritzia Inc. (TSX:ATZ) has a strong economic moat, as its brands are sold exclusively through its boutiques and through its eCommerce website
SmallCapPower | July 22, 2019: Aritzia Inc. (TSX:ATZ) is shaping up to be a TSX-listed Canadian fashion powerhouse. On July 11, 2019, the Company reported Q1/20 revenue of 196.7M and adj. EBITDA of 35.4M. Today we will look at what could make the Company appealing as an investment opportunity.
Aritzia is a vertically-integrated, innovative clothing design company that designs women’s apparel and accessories for its exclusive brands in-house. This has resulted in a strong economic moat, as its brands are sold exclusively through its boutiques and through its eCommerce website aritzia.com. The Company currently has 12 exclusive brands that it sells. As of March 3, 2019, the Company operated 67 boutiques in Canada and 25 boutiques in the United States. Aritzia has strategically positioned itself in between fast-fashion (H&M/Zara) and Affordable Luxury (Guess/Coach), allowing the Company to implement consistent pricing, marketing, and product presentation. Additionally, as of 2016, the Company offers international shipping through its website.
Figure 1: Aritzia’s 12 Exclusive Brands
Source: (Investor Presentation, 2019)
Investment Thesis:
Rapidly growing, innovative design house with Millennial appeal. Aritzia has implemented a competitive merchandising strategy and eCommerce model that should allow for profitable market share growth. With its exclusive offerings of unique products and international eCommerce distribution platform, the Company should be able to profitably grow revenue both online and in stores. Aritzia has a unique mix of causal and formal attire that appeal to women aged 15 to 45.
Women’s apparel is a strong market segment in which to operate. Canada’s women apparel market is a $18.3B industry annually that has grown at a five-year CAGR of 2.5%. The U.S. women’s apparel market has annual revenues of US$138.8 B with a five-year CAGR of 1.9%. For comparison, menswear in Canada is a $10.6B industry and has grown at a five-year CAGR of 2.4% and in the U.S., it is a US$88.8B industry with a five-year CAGR of 1.7%. With the Company’s current brand loyalty and recognition, with celebrities such as Megan Markle promoting the brand, paired with its broad target market (ages 15-45), the Company has been able to build a strong customer base and following.
Aritzia has already demonstrated a strong track record of sustainable growth. With its expansion into the U.S., eCommerce growth and consistent sales growth, the Company has been able to evolve with changing market needs to effectively generate profit. Since FY2008, the Company has experienced a 17% CAGR in net revenue growth. Additionally, the Company has never closed a store in its 34-year operating history.
Financial Highlights:
Aritzia’s net revenue increased by 17.8% to $196.7M in Q1/20 from $167.0M in Q1/19. The Company experienced 19 consecutive quarters of revenue growth in a row with a CAGR of 7.9% over the period. The Company’s adjusted EBITDA increased by ~25% to $35.4M in Q1/20 from $28.4M in Q1/19. Additionally, the Company had an adjusted EBITDA margin of ~18%. These positive financial results can be attributed to the Company gaining significant eCommerce growth that was driven by the growing strength of Aritzia’s brand, in addition to the six new stores and three expanded stores opened in the quarter. As well, the Company’s expansion into the U.S has also played a positive factor, with revenue in the U.S. increasing by 38.1% over the same period.
Infrastructure Investments:
In FY2018, the Company successfully implemented a new point-of-sale (POS) system in all its boutiques and client care centres. This new system has allowed Aritzia to increase labour efficiencies, gain greater access to more reliable customer data along with a strong foundation to grow its omni-channel strategy. Additionally, the new POS system offers real-time visibility to inventory and sales data, allowing the Company to more effectively monitor its inventory to help maximize sales.
In August 2018, Aritzia opened its Greater Vancouver distribution centre. This is an expansion from the old 83,000 sq. ft facility to a new 225,000 sq. ft flagship facility with an upgraded management system. The new facility will mainly service the West Coast.
For F2020, the Company is planning on opening six new boutiques and expanding or repositioning three existing locations. The Company also plans to add 5-6 new boutiques per year to its boutique network and expand or reposition an additional 4-5 boutiques per year through to the end of Fiscal 2021.
Recent Press Release:
On July 11, 2019, the Company announced that the TSX had accepted its notice of intention to proceed with a Normal Course Issuer Bid (NCIB). This allows the Company to repurchase 3,624,915 common shares, representing 5% of its public float during the 12-month period commencing July 15, 2019, and ending July 15, 2019. Aritzia felt this was an appropriate course of action with its current cash on hand, after investments in store and strategic infrastructure, to help increase shareholder value. As of June 2, 2019, the Company had about $35.8M of cash on hand.
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