Many traditional retailers are struggling amid stiff competition from online players such as Amazon.com Inc. and the economic impact of the new coronavirus. So why is Aritzia Inc.’s share price up 31.2 per cent so far this year?
The Canadian women’s apparel retailer and designer has been around since 1984, when it opened its first shop in Vancouver. But the stock has been available to retail investors only since 2016, when Aritzia completed an initial public offering at $16 per share.
The ride hasn’t always been smooth, particularly in the first year of trading. And the shares fell 0.8 per cent Monday, closing at $25.
Nonetheless, the stock has delivered the second-best gains on the S&P/TSX Composite Index in 2020, behind Ballard Power Systems Inc. Aritzia deserves a closer look, especially as the retailer sets its sights on U.S. expansion.
David Ian Gray, principal at DIG360, a national retail advisory firm based in Vancouver, pointed out that part of Aritzia’s success is due to its strong foundation: It avoided the emerging fast-fashion trend, defined by low prices and quick turnover. Instead, it focused on the sizable niche of second-generation young Asian women in Vancouver with money to spend.
“This was the base that carried tremendous word-of-mouth – influencing before the rise of social influencers. More importantly, demand grew from non-Asians and a wider age range as the fashions were versatile enough to look good in professional jobs, as well as socially,” Mr. Gray said in an e-mail.
Aritzia designs its own clothing under a number of brand names, such as Babaton, Wilfred and TNA, underscoring its exclusive offerings. It has also been investing in e-commerce, which the company expects will generate 25 per cent of net sales in fiscal 2021.
The success of this approach was clear in its fiscal third quarter financial results, released last month. Profit increased 6.8 per cent year over year. Net revenue increased 10 per cent. Sales at stores open for at least 56 weeks increased 5.1 per cent, marking 21 consecutive quarters of growth. And the gross profit margin, though down slightly year over year because of currency headwinds and the rising cost of raw materials, was nonetheless impressive at 42.6 per cent.
Not bad for a retailer. And investors are catching on. After Aritzia reported its quarterly results on Jan. 9, the share price jumped 17 per cent in one day.
All eight analysts who follow the stock have buy recommendations. Among them is Mark Petrie at CIBC World Markets, who in January raised his price target (or where he expects the stock will trade within 12 months) to $27 from $23.
Part of the hike rests on the analyst’s belief that the shares will attract a higher valuation. He now expects the shares will trade at 25 times estimated fiscal 2021 earnings, up from 24.
But that’s not cheap. What’s more, the stock trades at 33 times trailing earnings, according to Bloomberg. So why bet on a stock that’s hardly a bargain?
The bullish argument rests on Aritzia’s strong growth prospects – particularly in the United States, where the company currently operates just 27 stores (compared with 67 in Canada) but sees strong demand for its products.
“We are still grossly undersized there compared with our Canadian business,” said chief executive Brian Hill on a conference call with analysts last month.
Though Aritzia has identified 100 suitable locations for stores in major metropolitan areas, the rollout is likely to be slow: Its five-year plan is based on just five to six store openings per year, which is in line with its previous steady pace of expansion.
Its 94 stores in Canada and the U.S. are up from 74 in 2016.
“There is a managed pace to the growth that has enabled the incredible string of positive gains,” Mr. Gray said.
U.S. expansion raises the usual questions about whether a Canadian company can succeed in a more competitive environment. But Aritzia has been in the country for years and has never closed a store, suggesting it has found a receptive market. The stock’s rise this year is a clear bet that the winning streak will continue.