Aritzia: Undervalued Retail Fashion Powerhouse

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You whitethorn person noticed that Aritzia (TSX:ATZ:CA) boutique stores person been steadily showing up successful your aliases your important other's favourite shopping destinations pinch fashionable interior design. Aritzia boutique stores look to beryllium drafting postulation from some accelerated fashion go-to places specified arsenic Zara and H&M aliases luxury go-to places for illustration Nordstrom (JWN).

You are correct. Established successful 1984, Aritzia softly went from 1 shop only successful Vancouver to 113 stores arsenic of November 2022 some successful Canada and nan United States. Aritzia expanded into nan U.S. since 2008. Aritzia has grown into a world manner powerhouse pinch yearly gross northbound of $600 cardinal and marketplace capitalization of complete $4.5 billion.

Aritzia 2022 Annual Report

So, who is Aritzia? Aritzia is simply a vertically integrated creation location pinch a world level and an extended portfolio of exclusive brands for each usability and individual artistic known arsenic Everyday Luxury. Aritzia sells chiefly women clothing, but that is astir to change.

What are immoderate of nan strategies that person helped Aritzia travel this far?

Exclusive brands

95% of Aritzia's nett gross comes from its exclusive brands. Below is simply a snapshot of Aritzia's exclusive brands.

Aritzia 2022 Annual Report

Aritzia curated a portfolio of brands to supply high-quality products that meet different needs from its clients. For example, Wilfred features imaginative creation while Babaton gives a modern consciousness and TNA provides an innately cool feeling. This branding strategy has respective advantages specified as:

1. Clients can't bargain products from these brands anyplace else, which creates loyalty toward these brands and Aritzia itself;
2. As its clients turn successful age, they tin ever find a marque that fresh their style, which helps support that customer loyalty;
3. Having a diversified portfolio of brands, Aritzia doesn't dangle connected a azygous brand/category/style to succeed.

Vertical integration

Aritzia afloat controls its proviso concatenation from design, sourcing of earthy materials, action of manufacturers, cognition of distribution centers, marketing, cognition of boutique stores. This strategy serves respective advantages specified as:

1. Aritzia tin quickly analyse income information and latest inclination to supply feedback for creation to enactment connected apical of nan manner trend; Aritzia's boutique stores ever transportation proven sellers pinch caller seasonal items to create excitement;
2. Aritzia's integrated power of proviso concatenation provides it pinch elasticity and agility. For example, from nan action process of manufacturers, elasticity is captious for Aritzia. As such, Aritzia ever has a fistful of manufacturers from various countries that tin beryllium elastic successful acquisition bid size. For immoderate caller seasonal item, Aritzia tin bid a mini amount to motorboat successful prime boutique stores to measure demand. Within days/weeks, Aritzia tin stitchery income information and taxable a larger acquisition bid pinch its manufacturers to maximum nan imaginable gross from this caller item.
3. By controlling nan root of earthy materials, Aritzia not only maintains its precocious modular successful quality, Aritzia besides reduces its costs by removing nan mark-up connected earthy materials from manufacturers and leveraging measurement discount done Aritzia network;
4. Aritzia has 3 distribution centers successful North America pinch 2 successful Canada and 1 successful nan United States. Aritzia is astir to unfastened different distribution halfway (552,300 quadrate feet) successful Vaughan, Ontario, which is astir to beryllium nan largest distribution halfway for Aritzia to date, which thief execute further economics of scale;
5. Aritzia is very selective successful boutique shop location. In its history, Aritzia has ne'er closed a store. From clip to time, earlier opening a imperishable store, Aritzia whitethorn unfastened a pop-up shop to measure viability earlier converting it into a imperishable store;
6. Aritzia's boutique stores besides enactment arsenic eCommerce distribution centers that thief boost eCommerce sales. Clients tin cheque inventory for immoderate point astatine immoderate of Aritzia's boutique stores and determine whether to prime up astatine that shop successful personification aliases person that shop vessel nan product.

With its vertical integration, Aritzia has created a virtuous flying wheel. Its aspirational boutique stores, high-quality products, exclusive brands and personalized work pull caller clients. New clients emotion nan acquisition and nan products and go an influencer (Aritzia besides engages straight pinch influencers to present caller items and create excitement) to pull much caller clients. With higher gross and profits, Aritzia invests backmost to supply much assortment of products, much boutique stores, and amended services.

With this profitable proviso chain, it is only a matter of clip until Aritzia brings men's clothing into its portfolio. At nan extremity of nan day, erstwhile nan girlfriend/wife/daughter/mothers are shopping astatine Aritzia, it wouldn't beryllium a astonishment that they prime up immoderate men's deterioration for their important others.

In June 2021, Aritzia acquired 75% of CYC Design Corporation ("CYC"), a starring designer and shaper of premium diversion wear, Reigning Champ, to accelerate Aritzia's description into men's wear.

In 2022, Aritzia announced its 2027 strategical scheme featuring levers:

• Geographic description
• eCommerce acceleration
• Increased marque awareness

Aritzia already is doing a awesome occupation successful these 3 areas laid retired above. Through 2027, it is awesome to spot that Aritzia plans to enactment focused connected that it does best.

Key Performance Metrics

Aritzia is still increasing astatine a accelerated pace. Net revenue successful Q3 2023 grew 37.8% from Q3 2022 to $624.6 million.

As portion of full nett revenue, eCommerce gross grew 36.1% from Q3 2022 to $201.4 million.

Total nett gross and eCommerce gross maturation tin beryllium driven by simply opening caller boutique stores. However, 1 tin besides spot that comparable nett gross maturation % is besides impressive. Q3 2023's comparable nett gross grew by 22.8%. This intends that Aritzia's gross would still turn organically by 22.8% if nary caller boutique shop is opened aliases nary existing shop is expanded aliases renovated.

Aritzia's gross contributed from nan United States has grown importantly arsenic well. From first introduction into nan United States successful 2008, successful caller quarters, nan gross from nan U.S. made up astir 50% of Aritzia's full revenue.

Valuation Compared to Other Notable Retailors

Lululemon and Canada Goose are notable Canada based retailors. How does Aritzia look successful position of valuation compared to its peers?

To simplify nan comparison, I americium conscionable going to usage nan information from nan 4 astir caller quarters and usage nan marketplace capitalization as of March 4, 2023.

One tin spot that these 3 companies' nett income % is comparatively akin erstwhile not removing immoderate bonzer items that whitethorn person taken spot successful nan circumstantial quarters.

Aritzia is increasing astatine a comparatively higher complaint compared to Lululemon and Canada Goose. However, Aritzia has a comparatively cheaper valuation compared to Lululemon and Canada Goose.

In addition, successful January 2022, Aritzia's guidance has implemented a stock repurchase scheme to repurchase and cancel up to 3,732,725 shares representing astir 3.2% of weighted mean number of shares outstanding connected a afloat diluted basis. Implementing a stock repurchase scheme typically intends that guidance views its shares arsenic undervalued.

Risk and Concern

Although Aritzia looks for illustration a coagulated business that is increasing astatine a accelerated gait pinch a comparatively inexpensive valuation, I want to constituent retired respective concerns.

On Nov 30, 2022, Founder and Executive Chairman of Aritzia, Brian Hill, sold 1,500,000 shares astatine $51.6 per shares lowering ownership to 18.5%. Such waste sends a conflicting awesome to investors that nan Founder and Executive Chairman is trading liking successful nan business while Aritzia is buying backmost shares. In addition, fixed that this is simply a secondary offering meaning that nan 1,500,000 shares were sold from Brian Hill to different investors and that Aritzia didn't person immoderate proceeds, I americium not rather judge why Aritzia would salary $0.5 cardinal of expenses for this secondary offering.

In caller quarters, Aritzia has built up its inventory much than usual. As shown below, nan number of days that it takes Aritzia to move its inventory has accrued from 81.4 days successful Q2 2022 to 123.9 days successful Q3 2023. This whitethorn beryllium owed to over-estimation connected income velocity successful definite categories. In manner business, inventory tin go obsolete quickly.

Aritzia's web whitethorn beryllium capable to sorb nan excess inventory without immoderate important inventory write-off. We will request to observe nan coming quarters closely.

Conclusion

Aritzia stands arsenic a coagulated manner business pinch a virtuous flying instrumentality built connected its afloat integrated proviso chain. It is weighted comparatively cheaper compared to different well-known names specified arsenic Lululemon and Canada Goose. The costs by Aritzia for a secondary offering is questionable and inventory built-up is reasonably concerning if not addressed successful nan coming quarters.

Editor's Note: This article discusses 1 aliases much securities that do not waste and acquisition connected a awesome U.S. exchange. Please beryllium alert of nan risks associated pinch these stocks.

As a seasoned investor pinch a decade of acquisition and coveted designations of CPA, CA, and CFA, I bring a wealthiness of knowledge and expertise to nan table. My finance strategy is guided by a well-defined portfolio attack that balances a operation of GICs/Bonds, Index Funds, and prime Individual Stocks. I americium passionate astir sharing my insights and financial study connected a bi-weekly basis, keeping you up-to-date connected nan companies successful my portfolio and those that I intimately follow. Whether you're a seasoned investor aliases conscionable starting out, I'm excited to stock my expertise and thief you scope your financial goals.