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analysis

On today’s Breakouts report, there are eight stocks on the positive breakouts list (stocks with positive price momentum), and 22 securities are on the negative breakouts list (stocks with negative price momentum).

Discussed today is a stock that appeared on the negative breakouts list last week - Aritzia Inc. (ATZ-T).

The share price peaked at a record high in January but has since been in a downtrend. The company is set to report its quarterly earnings results at the beginning of July, and it may be another challenging quarter given continued supply chain disruptions, rising costs and store closures. The share price has recently stabilized in the mid-$30′s. However, if earnings results send the share price back down to the low $30′s, this may represent a buying opportunity for long-term investors.

A brief outline on Aritzia is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.

The company

Vancouver-based Aritzia Inc. is a vertically integrated designer and retailer of clothing and accessories.

In terms of its fiscal 2022 revenue breakdown (the company’s fiscal year-end was February 27), retail revenue represented 62 per cent of total net revenue and e-commerce revenue accounted for 38 per cent of total net revenue.

In terms of geographical revenue breakdown, in the fourth quarter 51 per cent of net revenue was from Canada and 49 per cent was from the U.S. At the end of fiscal 2022, the company had 106 stores located across North America.

Investment thesis

  • Strong leadership with a track record of successful execution.
  • Continued expansion in the U.S. with plenty of runway for further growth. Management plans to open between eight and 10 stores in fiscal 2023, mostly in the U.S. with only one of those boutiques planned to open in Canada.
  • Growing brand awareness.
  • Healthy balance sheet.
  • Valuation: While it is not a cheap retail stock, the share price is currently trading below its historical average, according to Bloomberg.
  • E-commerce growth. Longer-term, management’s goal is to increase e-commerce revenue to over 50 per cent of its business.
  • Potential key risks to consider: 1) two-thirds of its Canadian stores were closed in the first-quarter of fiscal 2023; 2) recession/economic slowdown; 3) low consumer sentiment; 4) supply chain disruptions/challenges; 5) inflationary pressures (e.g. high freight, materials and labour costs); 6) lack of buyers of retail stocks; 7) further potential multiple compression; and 8) decelerating year-over-year earnings growth.

Quarterly earnings and outlook

After the market closed on May 5, the company reported its fourth-quarter fiscal 2022 financial results (again, the company’s fiscal year-end was February 27). Reported revenue came in at $444-million, up 61 per cent year-over-year, and topping the Street’s forecast of $398-million. E-commerce represented 41 per cent of total net revenue, rising 21 per cent year-over-year to $182-million. Its retail business increased 123 per cent year-over-year to $262-million with same-store sales growth of 60 per cent. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) was $66.3-million, up 88 per cent year-over-year and surpassing the consensus estimate of $49.8-million. Reported earnings per share came in at 34 cents, up from 16 cents reported during the same period last year, and beating the consensus estimate of 24 cents. Inventory increased 21 per cent year-over-year, which management anticipates will satisfy customer demand into the fall.

Management provided its outlook. For the first-quarter of fiscal 2023, management targets net revenue of roughly $375-million. For fiscal 2023, management anticipates net revenue to total approximately $1.8-billion. Gross profit margin is expected to decline by roughly 1 per cent, noting supply chain challenges and inflation. On the earnings call, management indicated that they were paying for expedited freight in order to ensure adequate inventory levels were maintained. Chief financial officer Todd Ingledew stated that freight costs were two to three times higher compared to last year.

The share price tumbled 7 per cent the following day on high volume with over 1.3-million shares traded, well above the three-month historical daily average trading volume approximately 600,000 shares.

After the market closes on July 7, the company will be releasing its first-quarter fiscal 2023 financial results. Management will be hosting an earnings call that day at 4:30 p.m. ET. The consensus revenue, EBITDA and earnings per share estimates are $376-million, $63.7-million and 30 cents, respectively.

Dividend policy

The company does not pay its shareholders a dividend.

Analysts’ recommendations

This consumer stock with a market capitalization of nearly $4-billion is well covered by the Street. There are six buy recommendations and one “sector perform” recommendation (from RBC’s Irene Nattel).

The firms providing research coverage on the company are as follows in alphabetical order: BMO Nesbitt Burns, Canaccord Genuity, CIBC World Markets, RBC Dominion Securities, Scotiabank, TD Securities, and William Blair & Co.

Revised recommendations

In May, three analysts revised their target prices – all lower.

  • BMO’s Stephen MacLeod to $61 from $70.
  • CIBC’s Mark Petrie to $54 (the low on the Street) from $64.
  • TD’s Meaghen Annett by $2 to $62.

Financial forecasts

The consensus revenue estimates are $1.82-billion in fiscal 2023, up 22 per cent from $1.495-billion reported in fiscal 2022, and $2.1-billion in fiscal 2024. The Street is anticipating EBITDA of $324-million in fiscal 2023, up 12 per cent from $289-million reported in fiscal 2022, and $383.5-million in fiscal 2024. The consensus earnings per share estimates are $1.64 in fiscal 2023, up 7 per cent from $1.53 reported in fiscal 2022, and $1.99 in fiscal 2024.

For this fiscal year, revenue forecasts have been rising but earnings per share forecasts have dipped by a few cents. Four months ago, for fiscal 2023, the consensus net revenue estimate was $1.7-billion, the Street was forecasting adjusted EBITDA of $315-million, and the consensus earnings per share estimate was $1.66.

Valuation

According to Bloomberg, on a price-to-earnings (P/E) basis, the shares are trading at multiple of 21.9 times the fiscal 2023 consensus estimate. Based on the fiscal 2024 consensus estimate, the shares are trading at a P/E multiple of 18 times, below its five-year historical average of 20.4 times.

On an enterprise value-to-EBITDA (EV/EBITDA) basis, the shares are trading at 13 times the fiscal 2023 consensus estimate and at 11 times the fiscal 2023 consensus estimate.

The average 12-month target price is $67.45, implying the stock has 89 per cent upside potential over the next year. Individual target prices provided by six firms are: $54 (from CIBC’s Mark Petrie), $60, $61, $62, $66 and $70 (from Canaccord’s Derek Dley).

Insider transaction activity

Year-to-date, there has not been any buying or selling activity in the public market reported by insiders.

Chart watch

For most of 2022, the stock chart has been weak with the shares in a downtrend. The share price closed at a record high of $59.75 on Jan. 14. Since then, the stock price has been under pressure, falling nearly 32 per cent year-to-date.

Looking at key technical support and resistance levels, there is strong support around $30. On a recovery, there is a major ceiling of resistance around $40.

ESG Risk Rating

According to risk provider Sustainalytics, the stock has an ESG risk score of 16 as of Feb. 11, 2022. A risk score between 10 and 20 reflects a ‘low risk’ rating.

POSITIVE BREAKOUTSJune 27 close
BLU-TBELLUS Health Inc. 11.73
DOL-TDollarama Inc75.76
IBG-TIBI Group Inc. 14.12
ITP-TIntertape Polymer Group Inc40.45
MDNA-TMedicenna Therapeutics Corp.1.67
RBA-TRitchie Bros Auctioneers Inc80.48
TCS-TTECSYS Inc. 37.42
VMD-TViemed Healthcare Inc. 7.45
NEGATIVE BREAKOUTS
BBD/B-TBombardier Inc18.99
BU-TBurcon NutraScience Corp0.52
CRRX-TCareRx Corp.3.7
CTS-TConverge Technology Solutions Corp.5.46
CL-CNCresco Labs Inc. 3.52
ERE-U-TEuropean Residential REIT3.73
EXRO-TExro Technologies Inc. 1.17
MHC-U-TFlagship Communities REIT15.31
FOOD-TGoodfood Market Corp. 1.49
IAU-Ti-80 Gold Corp. 2.63
IVQ-U-TInvesque Inc.1.2
MOZ-TMarathon Gold Corporation1.54
ONEX-TOnex Corp64.96
SKE-TSkeena Resources Ltd. 7.62
SSRM-TSSR Mining Inc. 23.1
TBL-TTaiga Building Products Ltd. 2.25
TXP-TTouchstone Exploration Inc. 1.2
TC-TTucows Inc. 51.38
TUD-XTudor Gold Corp. 1.31
FORA-TVerticalScope Holdings Inc. 14.16
VGCX-TVictoria Gold Corp. 11.59
WFC-TWall Financial Corp. 11.5

Source: Bloomberg and The Globe and Mail

This is not an investment recommendation.

The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.

If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.

Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.

A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.

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