Aritzia posts sharp drop in earnings, cites slowing consumer traffic

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Aritzia Inc. ATZ-T reported slowing revenue growth and a 47.5-per-cent drop in profit in the first quarter, and downgraded its sales forecast for this fiscal year as the popular clothing retailer has begun to see consumer traffic slow down amid continuing inflation.

The Vancouver-based retailer reported revenue grew to $463-million in the quarter ended May 28, up 13.4 per cent compared with the same period the prior year. Net income fell to $17.5-million or 15 cents a share, compared with $33.3-million or 29 cents a share in the prior year. Aritzia reported that inflationary pressures led to higher product costs, among other factors affecting profitability.

The company has now revised its outlook for this fiscal year to reflect expectations of lower sales and gross profit margin. Aritzia now expects revenue to increase by 2 per cent to 7 per cent this year, down from a previous forecast of 10-per-cent to 14-per-cent sales growth. The outlook marks a sharp deceleration in growth, after revenue shot up by about 2.5 times over the previous two fiscal years while profits soared.

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Shares of Aritzia sank more than 20 per cent in morning trading on the Toronto Stock Exchange Wednesday.

Aritzia’s net revenues increased by 160 per cent from fiscal 2021 to 2023, and its stores continued to see strong consumer demand even as many other retailers were seeing inflation-weary shoppers pull back on purchases. But the company has now begun to see slowing demand, which chief executive officer Jennifer Wong attributed partly to macroeconomic pressures.

However, that pace of growth – at a time of supply chain uncertainty during COVID-19 – also meant that Aritzia did not offer enough new product designs as it focused on stocking up on top-selling items.

“In hindsight, this did cause us to be overly focused on existing items and developing newness through variations on these items,” Ms. Wong told analysts on a conference call Tuesday to discuss the financial results.

“While many of our key programs have continued to perform well, we’ve identified opportunities in the level of newness across our product assortment. We’ve identified that this, in addition to macro factors, contributed to the change in our sales trend beginning in the first week of June.”

The company is refocusing on product development, Ms. Wong added, and will begin to see the benefit of a more refreshed assortment in spring 2024.

Aritzia is also offering more product promotions than it has in recent years, as it sells off extra inventory. Executives noted, however, that net markdowns – including both the number of items sold at a discount and how steeply they are discounted – are still below pre-pandemic levels

Last week, ahead of the earnings report, Bank of America securities analyst Alice Xiao downgraded her rating on Aritzia’s stock from neutral to underperform, citing concerns about cost pressures amid decelerating sales.

“Our recent store and site checks showed a higher number of SKUs [stock-keeping units] on sale and at steeper rates of promotions during its summer sale than is typical for the brand; we expect progress working down inventory to come at the expense of margins,” Ms. Xiao wrote in a research note last week.