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Aritzia (TSX:ATZ) stock, which had consistently outperformed the broader equity markets for several years, faced some challenges in 2023. The shares of this luxury apparel design house have corrected over 48% year-to-date, mainly due to a slowdown in sales growth and a challenging macroeconomic environment affecting consumers' spending on non-essential products.
Aritzia had been capitalizing on strong demand for its products, resulting in impressive revenue increases of 74% in fiscal year 2022 and 47% in fiscal year 2023, despite supply chain challenges. However, this approach constrained the development of new styles, hampering overall sales expansion.
Growth to Accelerate
Despite the recent slowdown, Aritzia's focus on introducing new products and easing year-over-year comparisons indicates that growth is likely to reaccelerate soon. Additionally, the company's square footage expansion is a positive factor for future growth.
During a Q2 conference call, Aritzia's management expressed confidence that the company's top-line momentum would accelerate with the opening of new boutiques. The new boutiques have been performing well, with a low payback period of approximately one year or less.
Furthermore, Aritzia's pricing strategies, cost improvements, and the opening of a new distribution center are expected to support its margins and earnings in the coming quarters.
Aritzia's Guidance Supports Bull Case
Aritzia has achieved a compound annual growth rate (CAGR) of 26% in net revenue and 23% in earnings over the past five years. While near-term headwinds may limit its growth rate, the company has maintained its medium-term outlook, which supports a bullish case. Aritzia expects its net revenue to grow at a CAGR of 15-17% through 2027, with the potential for earnings growth to outpace revenue growth during the same period. The company's focus on boutique expansion, e-commerce platform strengthening, and brand awareness is expected to support its growth.
Bottom Line
While Aritzia may face short-term challenges in terms of revenue and margins, its investments in enhancing the digital customer experience and expanding its square footage position the company well for strong growth across e-commerce and retail channels. Additionally, Aritzia's focus on cost efficiencies and mitigating transitory cost pressures should significantly improve its margins.
Aritzia's stock is currently trading at a discounted valuation, with a next 12-month price-to-earnings (P/E) ratio of 18.2, lower than the historical average. This represents a compelling buying opportunity at current levels.
In conclusion, Aritzia stock has the potential to rebound and offer solid growth opportunities, making it a worthy consideration for investors in October.
