Introduction

Fashion is hard. Retail can be fickle. Both are industries that are happy to punish companies that fall behind on trends; both are also industries that are influenced by a wide range of intricate factors that are often outside of a company’s control; supply chains dynamics, macro-economic conditions, and consumer preferences.

While many companies have struggled with and ultimately fallen victim to these factors, there are others that are able to overcome these challenges; by anticipating market trends, managing inventory wisely, and building a brand that has staying power and inspires customer loyalty, these companies are not only resoundingly successful businesses, but also make for resoundingly successful investments.

Think of Nike, which has been around for almost 60 years now, or Adidas, which has been around even longer than that. Think of Lululemon, as a more recent example of an incredible growth story in fashion & retail which has returned a more than 22% compound annual growth rate since its 2007 listing on the Nasdaq. All of these companies have overcome the challenges associated with their industry to grow enormously, both in profits and general brand recognition. For these brands, the fashion industry, often seen as a risky investment space, has yielded impressive returns to shareholders over their lifetimes.

So naturally, investors are interested in finding the ‘next Nike’ or, in the case of today’s article, a company often cited as the ‘next Lululemon’. Enter Aritzia (Ticker: ATZ), a female fashion brand carving its own niche in the ‘everyday luxury’ market. While the company enjoyed an immense runup in share price over the last several years, recent quarterly results and pressures from an unfriendly macro-economic environment have taken their toll on the stock.

But what about the underlying business? Let’s dive in and see whether current prices are indicative of yet one more failure in the fashion industry, or just a slight hiccup in what is otherwise an intact long-term investment thesis (& potentially an attractive buying opportunity).

**Disclaimer: I am not a financial advisor, planner, analyst, or any other certification related to finance. This article, and everything else from Hourglass Investing, is intended for research and entertainment purposes only. Please don’t make any investment decisions based solely on what you read.**

Aritzia

As of Writing:

• Market Cap: ~$2.4bn

• Gross Margins: 38.9%

• 5-yr ROIC: 14%

• P/E: 14.2x

• EV/S: 1.4x

• Revenues: $2.25bn (+36% YoY)

Note: As Aritzia is a Canadian co., all dollar values will be in $CAD, unless otherwise stated.

The Company

Aritzia started in 1984 in British Columbia, Canada, when founder Brian Hill spotted an opportunity in the mid-market fashion space. What he envisioned wasn’t quite luxury, but it also wasn’t just a trendy fast-fashion outlet. It was somewhere in between, and would appeal to a wider range of shoppers than luxury while not being beholden to fast-fashion like a low-end retailer. It came to be called the ‘Everyday Luxury’ market, a niche that Aritzia has pioneered over the evolution of its business.

From these humble beginnings as a singular, small boutique fashion store, Aritzia has grown into a Canada’s fourth-largest womens apparel retailer and has more recently began growing its brand awareness even more through an expansion strategy into the United States. Not only has the company grown its physical presence across North America, it has also grown its brand power and recognition among celebrities and consumers alike.

They’ve achieved this growth by distinguishing themselves from other clothing manufacturers and focusing on the luxury aspect of their brand by curating shopping experiences; they don’t just sell clothes, they sell the entire shopping experience. Their stores, or ‘boutiques’, are highly curated, designed to be aesthetically pleasing, and are purposefully placed in areas that not only receive a high traffic volume, but also attract the kind of clientele that Aritzia caters to. They strive to emulate this catered appeal inside the boutiques as well, with ‘Instagrammable’ lighting, ambiance, and décor that serve to blend fashion and design into a complete (and upscale) shopping experience that reinforces Aritzia’s ‘everyday luxury’ value proposition.

Luxury at Aritzia is not confined to the appearance or ‘vibe’ of the stores – it is literally woven (haha..) into every piece of clothing they design and manufacture. Aritzia focuses on creating high-quality pieces that toe the line between trendy and classy, ensuring articles of clothing aren’t just highly fashionable, but also timeless parts of a customer’s wardrobe for years. This approach ditches the ‘fast fashion’ cycle and instead leans into a more long-lived and sustainable approach to fashion.

While making high-quality clothes that last is certainly in-line with a more environmentally-friendly clothing cycle, sustainability as a whole has been a bit of stumbling effort from Aritzia. Much of their supply chain is undisclosed or information about it from management isn’t verifiable. Their social impact is questionable as well – while they take plenty of initiatives to support the arts and community closer to home, it’s unclear what the wages or working conditions are like for the workers of the third-party manufacturers abroad that Aritzia contracts for their clothing production. While they have begun making efforts on the ESG front, they frankly aren’t very thorough and there’s still too many question marks around the sustainability and social metrics. I think this does place Aritzia behind the eight-ball in terms of building a brand that even ethically-conscious consumers can feel comfortable shopping at, and a brand that isn’t constantly having protests outside its offices.

While their steady and consistent growth as a brand has attracted growing attention from customers, influencers like Kendall Jenner & Meghan Markle, and Hollywood stars like Jennifer Lopez & Emma Roberts, their most recent growth strategy attracted the attention of an entirely different group altogether – a 2016 IPO on the Toronto Stock Exchange now has investors eyeing up the boutique fashion brand (hence why I’m writing this article). Since going public, Aritzia has returned a 28% return over a period of almost exactly 7 years, good for a CAGR of ~3.5% and a $2.5bn market cap.

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The Business

Business Model

Aritzia’s business is incredibly simple to understand – the company operates a vertically integrated business model, with partial (for now) control over product distribution and full control over the design and retail parts of their business, which makes them far less vulnerable to muddied or overstretched supply chains, and allows them to be more agile towards changing trends and market conditions. Procurement and production, meanwhile, are farmed out to other parts of the world, namely in Asia but also some European, Middle Eastern, and Latin American countries, so the business isn’t fully independent and still relies on portions of the supply chain. Let’s dive into the parts of the supply chain that Aritzia does have control over and why they deemed these important enough to handle themselves.

Distribution

Aritzia currently has three distribution centers that help to process products and fulfill e-commerce orders as well as maintain inventory levels at their physical locations. Their primary distribution center in British Columbia, Canada, is 223K sq. ft. and is fully managed by Aritzia. This centre was remodeled in 2022 to expand its capabilities and efficiency, so as to accommodate rapidly growing ecommerce distribution needs without requiring additional space. The company’s other two distribution centers are managed by third-party logistics providers and are located in Colombus, Ohio (240K sq. ft), and in Ontario, Canada (150K sq. ft.).

Aritiza is making big moves to secure more control over their distribution centers – on top of the recent upgrades to their B.C. warehouse, they’re also expecting the completion of a new 550K sq. ft. distribution center in Toronto, Ontario in 2023, which will replace their 150K sq. ft. facility. On top of more than tripling their footprint, this centre will also be fully managed by the company, cutting out their third-party providers and giving the company complete control over a geography that’s crucial to the Aritzia’s success.

They will also be wresting control over the entirety of the Columbus, Ohio facility from their third-party partners in 2023, which will result in an additional 240K sq. ft. of capacity, and again will be managed directly by Aritzia. They also plan to retrofit this facility to improve their U.S. distribution capacity. Finally, they started construction on a new distribution facility in British Columbia this year, which will replace their current facility and be significantly larger, though Aritzia plans on maintaining this original space for offices and inventory storage (currently they lease space for inventory overflow – this move would thereby reduce leasing costs for storage space). That facility is expected to be operational in 2025.

These are some massive moves from Aritzia; in just one year they are going from 1 wholly-managed and 2 externally-managed distribution centres for a total of 613K sq. ft., to 3 wholly-managed centres for a total of 1.25m sq. ft. of distribution centre space, with an additional 157K on its way in the next couple years. This increased control over the distribution centres can result in a lot of benefits for Aritzia:

• Cost savings over time by avoiding third-party fees.

• Better relationships and direct negotiations with shippers for better rates and longer-term partnerships (especially given the larger capacity for storage at each facility).

• Full, end-to-end oversight over quality and customer experience, shipping, inventory, and demand needs that will ultimately make the business better able to manage risk and respond with more efficiency and agility to changing market conditions.

Design

Aritzia’s design focus is written into the business slogan – everyday luxury. This means a focus on their mid-market fashion niche: high-quality, casual appeal, luxury fabrics, and affordability. Timeless style is another crucial characteristic the brand focuses on, choosing not to blast their brand across their clothing and instead focusing on minimal & simple designs. The brand also strives to remain innovative and in-touch with current fashion trends across a variety of different styles, with each of Aritzia’s in-house and exclusive brands focusing on a different aesthetic and providing fashion for different environments. While all of these brands are centrally bound around Aritzia’s values of timeless style and modern designs, each one designs fashion that caters to a unique aesthetic or environment.

This ability to design products for a variety of uses and different environments allows Aritzia to be the go-to brand for its users, regardless of whether they’re searching for an outfit for work, a date, a stroll around town, or a ball game. On top of catering to a wide array of aesthetics with their varied brands, Aritzia is also able to appeal to a pretty wide customer base, ranging from females aged 15-45, according to the company, aided by the simple & minimal designs.

Designing their own products allows Aritzia to focus on the particular styles and aesthetics will appeal most widely to their diverse customer base and also allows better quality control and control over the product-centric focus that is so crucial to their brand.

Retail

Retaining control over all of their retail, in that they don’t sell any of their products to third-party fashion outlets, is by far the most important part of Aritzia’s business model to retain control over. While managing distribution and design are very crucial to their success as well, design especially so, it’s important for Aritzia to only sell its products through its own highly curated retail locations to maintain their brand. By ensuring their products are sold exclusively at Aritzia outlets, they can maintain complete control over the image that people associate them with; luxury, aesthetic, vibes, all that. If they were to sell their products to some crappy mall outlets in gross locations where there’s also GAP and American Eagle products being sold, their credibility as a luxury fashion company goes out the window and their brand would be eroded. So, how do they maintain their brand? Let’s check that out as we dive into Aritzia’s different business segments and their physical retail locations in particular.

Segments

Boutiques

Aritzia’s physical retail locations, which they call boutiques, are more experiences than stores. That is all to plan; the company focuses on carefully curating a manicured and aesthetically pleasing environment for their customers. It’s seriously impressive how much work goes into this aspect of their business – Aritzia is near Apple-like in their obsessiveness of their brand. Not only does this help to maintain their brand’s image of luxury among existing customers, but it also helps to generate a lot of brand interest and new customers. You can see why if you’ve ever passed by an Aritzia store:

When have you ever been in a store like that? I can tell you for a fact that I, at the very least, have never been in a store that fancy – it has a ton of pop that makes it stand out from other buildings on the exterior and an appealing atmosphere on the interior that makes it enjoyable for shoppers to spend lots of time there, all while permeating a sense of uptown aesthetic throughout with plants, classy design, and well-placed lighting.

The physical locations of a boutique are critical to Aritzia – they won’t expand just for the sake of expansion. A lot of time, money, and effort gets put into deciding where a new boutique will go. The areas need to be high-traffic enough but also in the right kind of neighbourhood – i.e., is the clientele that Aritzia targets shopping there? If not, then the company won’t expand there, even if they can get a great leasing deal in a high-traffic location, the kind of clientele is more important to their business.

Once the boutique’s location has been decided on, the interior is the next point of emphasis for Aritzia – not only do they want to attract new customers with a flashy storefront, but they want to keep them in the store longer and have them visit more often with a curated vibe that extends beyond just looking nice. They begin by retrofitting their stores significantly before opening, ensuring they’re distinctly Aritzia in design and aesthetic – lounge spaces, lighting, etc. Once the store has been opened, the work is not over – every year the brand collaborates with a range of artists that fit that aesthetic and showcase their work in-store, helping to add more flair to the interior. They also have highly curated playlists that play in-store, which may not seem like a big deal but is definitely indicative of the sort of effort that Aritzia is putting into every facet of the shopping experience in their stores.

Finally, Aritzia has also started expanding their highest-traffic retail locations to include in-store cafes. This is a more recent effort by Aritzia to build an elevated shopping experience where people can hang out and really spend time – most of their ‘A-OK Cafe’ locations are in Canadian boutiques, to date, with only two in the U.S. (Michigan & NYC). The cafes serve baked goods, a range of coffees and drinks, and even alcohol at a few of their locations. This all makes sense:

• Gives a place for boyfriends to hang out while their partners do some shopping.

• Additional revenue stream.

• Cafe atmosphere contributes to brand and aesthetic value of the boutique.

• Gives shoppers another reason to stay for longer (not rushed out because they’re hungry or thirsty).

• It’s been proven that shoppers under the influence are more willing to spend money while shopping.

Speaking of boyfriends, I have to include this video I came across of a guy playing an arcade slider in Aritzia. If you don’t have 30 seconds to watch the video, it’s a guy narrating his experience at an Aritzia store – while his girlfriend went shopping, he played an arcade game that Aritzia had designed specifically for their stores and were installed in most locations across the country, though whether that was the U.S. or Canada was not specified. Now, I had a tough time finding much information on this from the company itself; some sources seemed to suggest this was just a Christmas special, but I thought it was yet another pretty genius move (even if it’s only a temporary Xmas move) to keep people in their stores for longer without being rushed out by impatient partners.

As a final note on the boutique front and the amount of effort that Aritzia puts into building & maintaining their brand throughout their boutiques, Aritzia is cognizant of the effect that every single piece of inventory can have on their brand, hence why they almost solely sell in-house brands where they have the full control over the design process. 97% of their total revenues come from their exclusive brands, showing that while they do have some partnerships with third-party fashion providers (Doc Martens, Calvin Klein, Levi’s – i.e. only brands that fit their aesthetic), they aren’t reliant on these other fashion brands in any meaningful way and it only contributes a very small piece of the pie. Furthermore, their in-house brands are exclusive to Aritzia stores – they do not sell any of their brands to other providers, so as to maintain that control over their branding discussed above.

Between the cafe, their individual inventory pieces, the location of their boutiques, the in-store music, and the art on display, Aritzia is emphatic about creating a full shopping experience that attracts the kind of clients they want to maintain their brand recognition. And while this isn’t crucial to the business model – any brand can design and retail clothes – their focus on branding and the image they display to the public is how they stand out and ensure they don’t become just another fast-fashion fad.

In total, Aritzia has 115 boutiques across North America – 48 in the U.S. and 68 in Canada – with a goal of opening a further 8-10 boutiques annually through to 2027 for a target of 150 in total (that would account for about $1.2bn in total revs). In line with this target, there are 8 new boutiques planned for 2023 and 4 expansions of existing stores, all of which are in the U.S. (Aritzia’s primary focus for expansion). I’ll get more into the specific store economics in ‘The Fundamentals’ section, but each boutique contributes about $8m in revenue and take about 12-18 months to payoff (quicker due to the fact that Aritzia leases rather than buys their retail locations). As of year-end 2022, retail raked in $1.4bn for 54% YoY growth and a ~65% share of total revenues. This slowed significantly in the most recent quarter, part of the reason why the shares took such a hit, with retail growing only ~13.8% YoY, though still accounting for ~70.8% of total revenues.

Ecommerce

While Aritzia’s boutiques are only located in Canada and the U.S., their eCommerce segment, which the company launched in 2012, serves customers in more than 200 countries. The company tries hard to emulate their same branding through their online platform as well, which is simple and aesthetically pleasing as well, though their strong-suit is definitely in those physical retail locations. Currently, customers can shop by brand, current trends, iconic styles, by occasions (i.e. work, weekend getaway, working out, night on the town, etc.), and by clothing type (which searches across all their brands).

Continuing to build out the eCommerce platform is one of Aritzia’s top priorities for business expansion, and current efforts have been focused on “core optimizations”:

• User reviews

• Fit guides

• Improved search

• Universal landing page templates

• Checkout improvements

All of these are designed to make the online shopping more seamless and improve customer’s ability to discover and purchase items through the online shop, which ultimately increases total traffic to the online store, conversation rates, and order values.

Aritzia has been prioritizing an omni-channel approach (the Omni Project) to their business model through the eCommerce segment of the business, which allows store inventory to be visible through online shopping and enables online orders to be shipped from retail locations or picked up in-store, which ultimately allows for greater efficiency.

Aritzia is also not finished investing in their eCommerce segment – the company has plans for what they call an eCommerce 2.0, which will improve the existing online shopping platform with tailored product discovery for shopper’s unique preferences & styles and more seamless shopping that is akin to the in-store experience, as well as building new digital platforms, though no word on exactly what these will look like.

eCommerce contributed $770m in revenues (35.1% of total revenues) for FY ‘22 with 36.4% YoY growth, but like retail, this slowed significantly in the most recent quarter, with only 12.5% growth and contributing only 29.2% of total revs.

On an anecdotal note, I will say that looking around on Aritzia’s online shop, which I had to do a lot of while researching this article, I was unimpressed. It certainly is a nice looking website and, in theory anyways, well-organized. However, it was also glitchy and entire landing pages wouldn’t load pictures at all sometimes. It was much better on the mobile version, but the desktop had a lot of small glitches to it.

Products

Aritzia doesn’t just make pants, scarves, dresses, etc. and call it a day. Each of Aritzia’s in-house brands designs their clothing for specific styles – so while multiple brands may design a sweater, each design will cater to the crafting brand’s unique aesthetic. Aritzia fully relies on this brand approach – you will never see an Aritzia logo or label on the clothes. Every clothing item is specially design by one of the unique brands for a certain appeal, demographic, or aesthetic:

• TNA is more activewear focused, as well as lounge & casualwear.

• Babaton is focused on clothing that can be worn in professional environments and weekend utilitywear (sweats, travel clothes, etc.), as well as evening wear that ranges from more formal cocktail events to more intimate scenes. Also the brand behind the beautiful wool overcoats!

• Super World, the brand behind the iconic Super Puff jacket, is designed for everyday outside use while maintaining a casual style and includes puff bags, mitts, and hats.

• Wilfred caters to a fairly wide range of styles but is designed for romance – from cozy-looking knit sweaters for date night to the kind of outfits that might be worn on a fancy first date. There’s also an even more casual side, Wilfred Free, which is more ‘weekend stroll around town with your partner’ or date #10 (when things are a bit more relaxed) kind of aesthetic .

• Sunday Best is designed for college students (and those trying to relive the glory days). Oversized sweaters, cardigans, and sweats for the more casual days, and a somewhat tighter look for the nights out – skirts, dresses, and bodysuits.

• Denim Forum is all about – you guessed it – denim. Everything denim. Denim skirts. Denim dresses. Denim shirts & jackets. And all the denim pants you could ever want, from low- to high-rise, bell bottoms to tight to boyfriend fit.

• You may not have seen Talula before, unless your significant other wears it – it’s not typically the kind of clothing displayed in public. Bras, underwear, the like.

• Little Moon is all about the sort of dresses you’ll catch at outdoor weddings on anyone that isn’t the bride or bridesmaid, or at Instagram-worthy summer parties with the fairy lights strung up and white lace everything. You know the ones I mean.

• Auxiliary designs are primarily leather or merino/cashmere fabrics, with a very fancy, almost catwalk aesthetic.

On top of all these exclusive brands and their more targeted aesthetics, Aritzia also offers accessories from other brands, such as New Era hats or shoes from New Balance & Doc Martens. These make up only a very tiny portion of Aritzia’s total product offerings, but are clearly designed to allow customers to find items that Aritzia doesn’t make, such as shoes, that are still complementary to the aesthetic of Aritzia’s in-house products without needing to go shopping at another location. It helps, in combination with the wide range of styles that the in-house brands cater to, to make Aritzia even more of a one-stop-shop.

As with any fashion brand, keeping up with product trends is always a fine ride to line – it’s important to take full advantage of trends while they last, but it’s equally important not to be left holding the bag (inventory) when/if things go out of style. Aritzia is fairly methodical about their approach to this – they will certainly ride out fads and design trendy items for their seasonal lineups, but stock these items in smaller quantities while continuing to rely on their historical winners, only stocking trendy items in greater quantities as they prove themselves to be stickier fashion movements.

Unfortunately, a lack of product newness over the last several quarters has contributed, according to management, to some decline in total traffic both in-store and through their online shop. Several of the people I spoke to about this also commented that the last few lineups haven’t seen much in the way of new products get introduced. Management is aware of the problem and have adjusted to have more new products in the fall/winter lineups, but it does point again to how difficult the balance is for new/old products for Aritzia.

Acquisitions

Interestingly, Aritzia has really not grown by acquisition. My initial thoughts when I saw all their in-house brands were that these had been acquired and integrated into the total offerings. That is actually not the case, however, with TNA, Sunday Best, Denim Forum, Babaton, and Wilfred all being launched in-house from the get-go. Babaton was the first, starting in 1994, while Denim Forum, which started in 2018, is the most recent brand.

However, Aritzia knew when they were a little outside their wheelhouse and subsequently opted to acquire the most recent extension of their brands, Reigning Champ, which is Aritzia’s first foray into men’s clothing. Reigning Champ designs clothes that really match Aritzia’s overall aesthetic and generally simple designs, with products built for a wide range of activities: sports, lounging, casual class, outdoor, everyday, and officewear. Unlike Aritzia’s many in-house brands each focusing on a different aesthetic for women, Reigning Champ is a one-stop powerhouse for men to shop across a variety of styles, though their true specialty is definitely in athletic wear.

Aritzia made this acquisition a little over 2 years ago, in the summer of 2021, at an enterprise value of ~$63m and was expected to contribute around $25m in revenues that calendar year. The ultimate revenue contribution was $17m by February 2022, though the company expects the $25m to be accurate according to a full-year under Aritzia’s umbrella.

Customers

Aritzia’s target customer base is females aged 15-45, which is a fairly wide range. This is according to the company, though some people I talked to about the brand while researching this company balked a little bit at the idea of anyone older than 40 wearing this brand. Not that I’m a shopper there, but I don’t think this is unreasonable – sure, I’m sure ladies in the 40+ range aren’t wearing the short skirt product line from Sunday Best, but take a look at their CEO, Jennifer Wong! More on her later, but from some back of the napkin math on her age, she is at the very least 52 and absolutely rocks Aritzia pieces. The Babaton brand, which is focused on designing clothing for professional environments, can easily be sported by ladies beyond that 45+ mark, in this humble fashionista’s opinion.

I also heard a lot about ‘Aritzia Girlies’ while talking to some of my friends that were more intimate with the brand, having either worked or shopped there. Here is the description I got for what the hell an Aritzia girlie even is: “micro-influencer, uptown chic, tight bun or high ponytail, gold hoop earrings, runway vibes, sorority gal”.

From spending just about way too much time on the Aritzia website and even popping into a nearby store (I’ll confess I turned tail and ran after only a few minutes and many strange looks), I can confirm. I will say there was lots of stuff there that didn’t match that particular aesthetic – with Babaton and Denim Forum first and foremost among those brands that fit a very different style – but a lot of the clothes, especially Auxiliary, Sunday Best, Super World, and some Wilfred items very much fit that ‘Instagram vibe’. So, I would say the ‘Aritzia girlie’, aged from about mid-teens to late-twenties, is definitely a target customer base for Aritzia, but the brand is certainly not exclusive to that age group or aesthetic.

Interestingly, I did hear from many of the people I spoke to that Aritzia aged with their customers, in a sense – shoppers could begin at Aritzia in their teens and as their styles and clothing requirements evolved, they could continue to do their shopping with Aritzia. So as they go from high school to college, they can still shop at Aritzia. As they go from college to more professional environments, they can still shop at Aritzia. So for very passionate Aritzia fans, there’s no need to switch things up. The wide net Aritzia casts over a range of age demographics makes them less susceptible to changing fashion trends and individual tastes, gives them downside protection in times of macroeconomic instability (older professionals typically having more discretionary spending allowances), and creates a co-evolutionary style journey with their customers that builds long-lasting brand loyalty, in turn making each new customer that Aritzia gets more valuable than those of typical fashion retailers.

Expansion Strategies

Aritzia’s path to growth is super simple to understand, which is a nice bonus for investors.

1. Open more boutiques, especially in the U.S. – the Canadian market is quite saturated for Aritzia at this point, hence why all their newest and upcoming boutique openings are in the United States. Revs from the U.S. exceeded the 50% of total revs clip in 2022, which tells me they’re getting some operational leverage for this growth strategy. In the long-term, as they more fully penetrate the American market, they may begin to look towards international expansion. On top of simply expanding the number of boutiques, continuing to retrofit and add square footage to existing retail locations, as they’ve done, will help to expand revenues in a more organic way. Whether through new or expanded stores, this growth lever will ultimately benefit Aritzia through economies of scale, greater revenues, and a broader brand awareness.

2. Grow the eCommerce segment and make online shopping more personable and akin to their boutique experience. Crank up conversion rates and the average value on orders to increase margins (shipping & processing drag down margins on smaller orders). This will also expand their visibility in international markets and potentially drive a greater anticipation for Aritzia’s arrival in other markets like Europe.

3. Increase brand awareness – on top of making Aritzia stores available at more locations, enticing new customers to those locations will be a crucial growth point for Aritzia. They have a few ways of doing this, namely social media (given their target customer base) but more particularly by partnering with influencers like Emma Chamberlain, as well as operating a VIP program. This is all designed to not only expand Aritzia’s recognition among their target clientele, but also to encourage a returning and loyal customer base.

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The Team

Well, she doesn’t look great here for Aritzia. Jennifer Wong’s 100% approval rating is based off only 1 review, though this shouldn’t be surprising given the length of her tenure as CEO (more on her in a second) and the organization of the company as a whole, which would keep the vast majority of Aritzia employees from ever meeting Wong.

Only 57% of employees would recommend working at Aritzia to a friend and the company culture as a whole receives a 68% rating overall. Sifting through the reviews from employees on Aritzia was a tough pill to swallow for prospective investors – the vast majority of employees complained about a toxic workplace & culture, terrible managers, and a political, catty, and unhealthy (stress, long hours, working conditions, etc.) working environment.

Obviously I can’t verify any of these remarks really, and those people I spoke to on their experiences working for the company didn’t really reflect the Glassdoor reviews, but it’s still not a great look that the company is clearly having at least some of these issues at their boutiques. It wasn’t all negative though – many of the comments commended Aritzia’s in-house promotions and ability of employees to work their way up the ladder and succeed in larger roles within the company, though a lot of these same comments also mentioned the necessity of ‘drinking the Kool-Aid’ to do so.

Founder – Brian Hill

Brian Hill is the original founder of Aritiza and was, until very recently, the CEO. Hill stepped down from the chief exec role in 2022 to be replaced by long-term Aritzia employee, Jennifer Wong. He is still very much involved with the company’s long-term strategic direction, though, as the Executive Chairman of the Board of Directors.

Hill can serve as a beacon in the dark if you ever got a crap grade in class – he was actually kicked out of the commerce program at Queens University and subsequently graduated with an economics degree instead. He got his start in retail very early on, helping with odd jobs around his father’s luxury retail store, The Hills of Kerrisdale (which is still in operation today). Hill recognized many of the issues behind operating a third-party retailer for other fashion designers and brands, which ultimately helped to inspire Aritzia’s vertically-integrated structure. He started Aritzia in 1984, not long after finishing school, with the help of his brother. His vision for the company was to fill what he believed was a niche and unfulfilled opportunity in the market to provide a hybridized approach to fashion – a retailer that fell somewhere in the middle of being a luxury designer and a trendy outlet.

Since this was an untapped market, he had to launch in-house brands to fulfill his vision, which was the other guiding reason behind Aritzia’s vertically-integrated model. So, the earliest days of Aritzia began. Brian Hill ultimately led the company from its very inception to the company we know today – from store #1 to store #100+ with international presence and an eCommerce platform that extended his brand across the globe to the listing of his company on the TSX for a more than $1bn valuation. While Brian Hill has primarily been in charge of the fashion side of the business, the business side of the fashion has mostly been tasked to his now successor, Jennifer Wong.

CEO – Jennifer Wong

Jennifer Wong is another important Aritzia member with an inspiring origin story. After graduating with an economics degree from the University of British Columbia, she was immediately inspired to apply to Aritzia. With her only prior working experience coming at a mall outlet for baked goods, she handed in her application to Brian Hill, who told her the company wasn’t hiring. She went to the next location, handed in her application again, and was this time hired on as a ‘style advisor’ – basically a trumped up retail role. That was in 1987.

From there, she spent the next 35 years at Aritzia, climbing her way from quite literally the bottom-most rung of the organization to a manager, to a VP, to the COO and President positions, and finally to the tippity-top to take over the top job from the man who had once denied her application in May 2022. That’s pretty impressive stuff honestly, and Brian Hill now has nothing but high praise for Wong:

It hasn’t been a cruise control job for Wong as the CEO; since taking over the helm, she has had to steer the company through a post-pandemic spending burst, followed by a tough macro-economic environment and a >100% reduction in share price. But she seems well-qualified to right the ship; having executive oversight over and ultimately being a proponent for Aritzia’s expansion into the U.S. in 2005, the creation of the eCommerce platform in 2012, recent distribution center moves, and adopting SAP’s Enterprise Resource Planning software system for enhanced efficiency and insight into the business, Wong seems to understand the direction this company needs to move in to continue growing and succeeding. She was also the recipient of the Top 40 Under 40 award in 2008, which highlights the top young executives in the world of business.

I don’t think any of Aritzia’s recent struggles are due to Jennifer Wong or her inability to effectively takeover the job from Brian Hill, an opinion I have frequently seen bandied about online – given the immense control over the business and some of its key strategic initiatives that she’s had as Chief Operating Officer and President over the last number of years, I believe her ability to run Aritzia shouldn’t be in question.

Capital Allocation

Aritzia’s management is focused on all the right things, from a capital allocation perspective, to continue growing the business successfully. The majority of the company’s investments are going towards U.S. expansion and improving the eCommerce platform, but it’s good to see that the company is also continuing to allocate capital towards improving the operational backbone of the business and the critical infrastructure that will allow them to continue growing rapidly, ie the square footage in existing retail locations and building new distribution centres with improved capacity as well as retrofitting and taking over operations at existing distribution facilities. In addition to these moves, Aritzia management said on their most recent earnings call that they’ve identified 150 opportunities to improve cost efficiencies across the business that will result in ~$60m in cost savings and a ~2% margin improvement.

We’ve identified a list of approximately 150 opportunities that we anticipate will deliver annual run rate cost efficiencies of approximately $60 million beginning in the back half of the year.

The ‘Other’ segment in the chart above is meant for repaying debt as well as for returning cash to shareholders through a share buyback program, which the company announced in January 2023 had been initiated with the intention to buy back roughly 3.9m shares, or 5% of the total number of public shares. Buying back shares has been a consistent strategy by Aritzia; in 2022, the company bought back and retired more than 1.6m shares at an average price of $37.14 for a total of $60.2m in cash.

As to their 2023 goals, the company has already repurchased 232K shares at an average price of $35.36, for a total of $10m in cash. This isn’t great value, considering shares are now trading 64% below that average price, but 232K shares is only 6% of management’s targeted 3.9m shares to be repurchased. Hopefully they’re taking fully advantage of these depressed prices to repurchase a ton of additional shares at much better value.

Ownership

Some pretty strong insider ownership for Aritzia; while retail investors own the majority share at 45%, insiders still own a very significant 19% of the company, an impressive number for a company worth more than $2bn. Even more encouraging are the recent moves by insiders to eat up yet more of the stock – Aldo Bensadoun, the founder of popular shoe brand ALDO and a member of Aritzia’s board of directors since 2012, purchased more than $3m in stock towards the end of August at an average price of $24.5, while Brian Hill purchased just short of $4m in stock throughout August at roughly that same $24.5 mark.

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The Industry

Fashion is a gross industry, and I have to say that I don’t really love the consumer discretionary market either. This just normally isn’t the kind of stock I’d ever look at, to be honest. There’s a ton of cyclicality and reliance on customers to continue spending their extra money, if they have any to spare, on a product with lots of competing options at lower or higher prices, different styles, or from brands that are more in vogue, for whatever reason. It’s just a fickle, fickle world, and not a terribly attractive industry to be in. That said, there’s a lot of money that flows into it, and those companies that are able to succeed, with Nike, Louis Vuitton, Lululemon, Versace as examples, have a lot of brand loyalty and staying power against newer competitors in the industry.

Now, notice several of those examples were true luxury companies. Lulu and Nike are both activewear oriented. It’s yet to be seen exactly how Aritzia’s not quite mid-market, not quite luxury approach plays out, and whether this is a niche that a lot of people are really looking for in their lives or whether it simply gets the worst of both worlds – exorbitant prices without quite the value. It’s one of the dangers of basically starting a new market – yes, they don’t have to deal with competitors so immediately, at least until they prove themselves. But also, it’s hard to say whether the opportunity management sees in this corner of the market really exists in any scalable way. Only time will tell on that one.

Competition

While there are certainly lots of competitors in the overall fashion industry, to start comparing Aritzia to the Zara’s, H&M’s, Lululemon’s, Nike’s, or any of the true luxury brands would be an injustice. I have yet to hear about about a company that truly provides a nice comp for Aritzia. Yes, it is tempting to use Lululemon and I’ve seen many other people do so when discussing the stock. I’m not going to do so – the value props between the two companies are simply too different. While Lulu does offer some expensive activewear that competes with TNA’s activewear product lines, that’s where the appropriate comparisons stop. Aritzia’s other in-house brands are entirely different from Lululemon and make it impossible, in my mind, to really judge Aritzia fairly off Lulu.

Again on Aritzia having started a new market in the everyday luxury niche – there’s just so much unknown here, and it’s much more difficult to really get a grasp on Aritzia’s potential or what the company is up against when Aritzia itself is really Aritzia’s only true comp. I don’t feel it’s appropriate to compare Aritzia to other fashion companies, so I won’t, and heaven knows this article is going to be long enough already, so I’m just going to leave this ‘competition’ section pretty bland.

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The Fundamentals

At a Glance:

• Market Cap: $2.4bn

• YoY Revenue Growth: 13.4% – Q1’24 (down from 65.2% for Q1 ‘23)

• 5-yr EBITDA Margins: -16.8%

• Shares Outstanding: 111m (-2.6% over 5 years)

Balance Sheet: The Good

There’s a lot of negativity on Aritzia’s balance sheet. Like, a lot. But I’ll get into the more attractive things to be found on the balance sheet, though after a few rough quarters, these are fairly few and far between.

Investments Ongoing

Despite having two pretty tough quarters that’s seen Aritzia stock plummet more than 53% YTD, Aritzia’s management maintains their long-term outlook on growth and that the company’s expansion opportunities are still entirely on track. To this point they have not had to stall, delay, cancel, or otherwise hinder any of their boutique openings, distribution centre investments, or investments in the eCommerce platform. This points towards a healthy balance sheet that allows them to weather a macro-economic storm and a shifting environment that is more unfriendly towards consumer discretionary businesses without compromising on long-term goals.

Decent Debt Profile

For a retail company, Aritzia maintains a fairly healthy debt profile, with assets outweighing liabilities by more than $700m, though their debt/equity figure is just slightly above 1 as of Q1, meaning they could have a more difficult time paying off their debts if their financial struggles continue. Also, their net debt/EBITDA ratio has climbed to 2.8x, primarily due to the steep dropoff in EBITDA rather than a steep rise in debt. Typically this figure has hovered between 0.8-1.2x since 2018.

Balance Sheet: The Bad & The Ugly

Well, here’s where we really get into the meat of the issue with Aritzia, and the reasons behind the company’s near 60% drop since November 2022.

Massive Slowdown in Revenue Growth

From 74% and 47% YoY revenue growth in 2021 and 2022 respectively to just 13.4% revenue growth in Q1 of this year, a massive slowdown in revenue growth definitely contributed to the depressed share prices. However, it’s important to keep in mind that Aritzia was very much a beneficiary of the return-from-COVID spending spree, which created very tough comps for Aritzia to follow up on. I think shares maybe just took a bit too much of a run-up as analysts and retail investors came to think of 30%+ growth figures as the norm for the business.

Zooming out to historical norms, 13.4% is not very far below their typical YoY revenue growth, even pre-IPO. They achieved 17.6% & 12.2% YoY growth figures in 2019 and 2020, respectively, so I think the 15-17% revenue CAGR the company estimates as their future growth potential is more within reason.

Declining Margins

Aritzia’s EBITDA, Gross, Net Profit, and FCF margins have all declined from their 2019 figures. After all climbing to highs in 2022, margins have dropped back below those the company was sporting a little more than 4 years ago. This isn’t a great look – the company has emphasized through the last several earnings calls that this is largely the result of pressures they’re seeing across the board as a result of macro-economic pressures and their primary customer base simply purchasing less. There are also contributions from higher cost of goods and the operational expenses of investing in the long-term growth plans (distribution centres especially!).

As a result of fewer purchases, Aritzia is stuck holding elevated inventory levels, which they must then markdown and sell at depressed margins. However, management has indicated that further markdowns will not be required from current levels to sustain current margin levels. Aritzia management did state that improvements to the cost of goods and relief on some temporary pressures for different aspects of the business would result in margin improvements in the second half of the year.

Increase in SG&A Expenses as % of Net Revenues

Annual figures on SG&A expenses as a % of net revenues hovered around 24% pre-COVID era, but shot up to around 26-29% of net revenues in 2021-22. On a TTM basis, SG&A expenses have actually lowered somewhat to 28.2%, but as of the most recent quarter these expenses made up a whopping 33.2%.

While Aritzia has certainly targeted increased spending in SG&A to continue growing their business, especially in the U.S. and through digital marketing, the hope is that these efforts would pay off for Aritzia and revenues would grow even faster than SG&A expenses – the greater portion of SG&A as a % of net revenue would tell us otherwise, but a slightly deeper look actually tells us that SG&A expenses declined sequentially and the YoY growth in SG&A expenses was lower than the company had registered in the last 5 years.

So this is mostly attributable to the stagnation in revenue growth. The company likely pulled back spending for the quarter after realizing that their revenues were going to be much lower, and that fewer customers making purchases and a slowdown in new client growth, all due to macro-economic pressures, would make the SG&A somewhat useless spend anyways.

Decline in Net Income, EBITDA & FCF

Revenues and margins declining resulted in a reduction in the amount of net income (go figure) making it to the bottom line as earnings for Aritzia, which recorded a -48.3% drop YoY. The free cash flow levels have also taken a pretty significant hit, dropping from $273m in 2022 to -$8m in cash for the most recent quarter. Finally, the EBITDA dropped nearly 55% and relative to net revenues dropped more than 10% from 17.1% to 6.8%.

Massive Increase in Inventory & Declining Inventory Turnover

I’ll get a little more deeply into why inventory matters so much for Aritzia below in the KPI section, but for now just appreciate that it’s not a great thing for Aritzia to have a significant portion of assets tied up in inventory and that they had a 62.4% increase to reach $485m in inventory value as of Q1. Some growth in inventory is to be expected with the expansion of the business, but the growth in inventory value massively exceeds the growth in revenues.

Key Performance Indicators (KPIs)

Let’s get into the different metrics that investors, or anyone interested in following Aritzia’s stock, should be aware of and monitoring constantly to assess if a turnaround is in motion, or whether all the terrible things I just listed on the balance sheet are indicators of a more fundamental deterioration in Aritzia’s business and ability to succeed in the future.

Comparable Sales Growth

Comp sales is an important metric to monitor the more organic growth of the business – it measures the same-store sales growth, and helps to filter out how the core business is growing and how each individual boutique is growing outside of its expansion strategy. A positive figure means that store is appealing to a wider set of customers and/or increasing sales value with existing customers, that the company is benefitting from the economies of scale with a greater number of stores and more capable distribution centres, and that they are responding nimbly to changing fashion trends. Given the trend-sensitive nature of the fashion industry, this metric becomes especially important in gauging whether Aritzia is keeping up with the times or becoming complacent by relying on older designs.

Comparable sales growth was down significantly in the most recent quarter, largely as a result of what CEO Jeniffer Wong called a lack of ‘newness’ in their product lines, which impacted their sales. While she claimed that they are back on track to get more new product lines into stores for coming seasons, it was undoubtedly part of the impact on the most recent quarter’s comp sales figures. That said, while 4.1% doesn’t look that great after a 29.4% figure from Q1 of last year, 4.1% comp sales growth is actually still pretty decent when consider this is wholly organic growth.

Boutiques – New & Expanded

There’s a few metrics to watch for within their retail locations, including the number of new boutiques, the number of U.S. boutiques, retrofits on existing locations, and the payback period on their boutiques.

For the next several years, the number of new boutiques and the number of new boutiques in the U.S. will be identical, which makes this metric pretty easy to track – the market in Canada is saturated and the U.S. is Aritzia’s primary focus for expanding the brand, so this is where all the new openings are happening. Over the years, if their expansion into the U.S. is successful, the number of new international boutiques (outside North America that is) will be another metric to watch.

Retrofits or expansions of existing boutiques is important to watch as well, as this will point to their success in same-store sales growth and the need to expand the capacity of each individual store to keep up with demand. It also makes each store more valuable to the company, so this is an important growth lever for Aritzia to pursue in addition to new stores.

Aritzia is targeting 3-5 boutique expansions and 8-10 new boutiques every year. In 2022, they opened 8 new boutiques and expanded 4 existing ones, putting them right in line with these targets and their longer-term goal of doubling the number of U.S. boutiques by 2027 (that would put them at around 95 boutiques in the U.S. total). To continue with the Lululemon comp, Lulu expanded into the U.S. in 2003 and now has more than 400 locations across the country. While I don’t see that as being a super realistic goal for Aritzia, it does make ~100 stores by 2027 seem quite realistic to me.

Inventory Turnover & Days of Inventory Outstanding

The inventory turnover ratio refers to the rate at which a company goes through its inventory – it’s typically good for a company to cruise through its inventory levels and not be left with a ton of products that it must then pay money to store or markdown for lower margins. A high inventory turnover ratio is good, and indicates that a store has strong sales figures – Aritzia’s inventory turnover ratio from Q1 ‘24 was 2.4, a figure that has steadily declined over the last several years. Some of this is expected with the expansion of the business and the need to buy greater levels of inventory, and their inventory turnover ratio is still roughly inline with the inventory turnover ratio of Lululemon (2.2). Admittedly, however, as a much smaller business, Aritzia should be more agile and therefore better able to maintain a better ratio than a company nearly 20x its size.

Days of Inventory Outstanding is a similar ratio for monitoring inventory levels, but specifically measures the amount of time that a business’ capital is locked up in unsold inventory – i.e. the number of days that inventory remains unsold. The higher the ratio, the more days that Aritzia has spent money on a product that they subsequently aren’t realizing profits on. If it takes longer to sell products, a business becomes more capital intensive and lower margin, due to the need to markdown out-of-season products, and the business is not as quickly able to funnel profits into reinvesting in growth. So, not good, in summary.

Aritzia’s days of inventory outstanding ratio, as of the most recent quarter, is 153, which is quite high and reflects a general upwards trend in the figure for Aritzia over the last number of years, demonstrating they’re seeing longer and longer sales cycles on their products. Again, some of this can be expected with a larger scale, but Aritzia’s figure is startlingly close to Lululemon’s (~160) and should be much lower given the size of the business. That said, some of this may be short term headwinds attributable to the aforementioned lack of new products in Aritzia’s lineups over the last year.

Defense & Offense

Scale – Offense

A larger scale for their business is going to help Aritzia in a few ways. Firstly, their emphasis on distribution scale – a greater number of high-capacity and fully-owned facilities will provide negotiating power for larger and subsequently cheaper inventory purchases. They will also get more efficiencies from their eCommerce and omni-channel approach – simpler logistics on customer orders, shorter shipping routes, etc. all equals greater efficiency and slight margin improvements. This all results in more and more accretive value as the eCommerce segment is scaled alongside the distribution centres.

Secondly, as Aritzia expands the total number of boutiques and grows its existing locations, the subsequently greater capacity to sling products will justify even larger inventory orders, producing more efficiencies. The fixed costs from operating their distribution centres will be spread across a greater number of products, which will help to improve Aritzia’s margins. While these may seem like small things, all these efforts ultimately increase the profits making it to the bottom-line, where the company can then return to shareholders through share buybacks or reinvest back in the business for further growth and even greater scale. Scale is crucial to retail businesses, and especially for Aritzia as they make the move to expanding their distribution centre capacity, but the payoff can be enormous.

Pricing Power – Defense

The effort that Aritzia has put into creating a strong brand for itself by maintaining control of their exclusive in-house brands, operating their own design house, and carefully controlling their boutiques & the inventory carried within has paid off for the business; a strong brand and customer loyalty to that brand gives pricing power.

This pricing power was in evidence in the most recent quarter and was brought up by management during the earnings call; while the majority of pricing effects are planned for the fall/winter lineups, Jennifer Wong spoke about an item that they had already taken pricing action on:

So that’s some stellar news on Aritzia’s ability to raise prices and not only maintain the status quo on sales figures, but actually increase sales figures, even during a time when Aritzia’s average consumer is spending and purchasing less. Wong also mentioned that the company was very analytical in how they approached any price increases, emphasizing that each product was looked at individually and compared to similar sets from competitors, and that a decision to raise prices was ultimately made relative to these factors and the company’s cost basis for the product. Furthermore, price increases for this year were targeted in the low-single digit range, so they weren’t significant price increases.

Expand Offerings – Offense

Continuing to expand the brand’s offerings and product lines will be another key strategy for growth that management hasn’t specifically talked about. They’ve already demonstrated their willingness and ability to launch new in-house brands to cater to more specific trends, such as Denim Forum to address a growing popularity in denim products, so continuing to do this for new (but stable & proven) trends will be key.

Menswear could potentially be a product line they look at emphasizing – it will likely never be a priority focus for the company, but it could provide a nice extra revenue stream (particularly from the boyfriends waiting for their partners in-storea). While it’s tough to gauge how successful the Reigning Champ acquisition has been so far, an expansion into menswear in general could be akin to Lululemon’s own menswear addition – an investment that paid off handsomely, with men’s clothing generating 1/4 of Lululemon’s total revenues.

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The Investment

Valuation

Based on TTM Figures:

EV/S: 1.4x

P/S: 1.1x

P/E: 14.7x

EV/EBITDA: 8x

Put simply, Aritzia is very cheap right now. The real concern here is whether this is more of a value trap than a cheap opportunity – if Aritzia has another down quarter and the business fundamentals continue to slide, it could look expensive even now. However, I don’t actually think the long-term thesis is broken; I also don’t think the earnings they’re about to report will be fantastic, but if shareholders are focused on the long-term and can be patient with the stock, then the story remains the same – ride out the U.S. growth story and profit from what is really just the beginning of Aritzia’s brand awareness in the much larger market south of the border.

Aritzia has maintained that this growth story is still intact, and they continue to make long-term investments into the company to support that – this year’s slowdown has not stopped them from continuing with that long-term mindset. If their goals for 2027 are achievable, here’s a rough look at what the company would look like:

• Double the eCommerce platform → $1.54bn

• Grow retail segment >50% → $2.1bn

• Double the U.S. business → ~100 stores

• $3.5 – $3.8bn in net revs

• 15-17% net revenue CAGR

• $1bn in cash

This would be pretty impressive growth by the company overall. Even the low-end of their guidance for a 15% CAGR on revenues would see them making $3.8bn in revenues by 2027 (also roughly in line with doubling eComm. & growing retail by ~50%), and if they’re able to right the ship a little bit in terms of current margin, inventory, and macro-economic pressures, as well as building up the cash reserves with their targeted cash levels here, returning to a P/S ratio of ~2 would be quite realistic (this is the level they’ve historically traded at, approximately, besides their boom years in 2021-22).

In that case, the company would trade at a market cap around $7.6bn, a CAGR of 33.4% for shareholders who got in at the current $2.4bn market cap. Now, granted, this is management’s expectations for the business and it is mostly their job to get people hyped up on buying the stock, but I could honestly see these being pretty realistic numbers given the investments Aritzia is funneling into their eCommerce platform and opening up new boutiques in the U.S.

Analysts

Not bad from analysts here – out of 9 analysts covering the stock, only 1 of these is keeping a truly bearish attitude. 4 are holding, which is unsurprising given the uncertainty surrounding the stock and the fact that analysts are largely out not to lose money. But I’m impressed by four analysts thinking this stock is going to do well enough to outperform the market or warrant buying over the next 12 months. Here are the price targets that the analysts are eyeing, and the returns relative to the current share price of $21.57:

Low: $20 → -7.3%

Average: $34.38 → +59.4%

High: $41 → +90.1%

Analysts here are generally seeing a lot of upside and pretty limited downside, from current levels. As always, I will reiterate that analysts make mistakes like the rest of us humans and are rather short-term oriented in view, but I will also confess I’m surprised to see them take this stance. Analysts are normally quite risk-averse, so the fact that there’s so few bears on the stock may indicate professionals are seeing opportunity here.

Risks to Share Performance

Copycats

Jennifer was spitting fire at the competitors during the most recent earnings call. I actually laughed so hard hearing this during the earnings call, which I initially listened to live, and reading the transcript while researching this article let me enjoy this little treat yet one more time. And while she says this in a way you might not normally see from the CEO of a publicly traded company, her point is valid; undoubtedly, Zara, H&M, and whatever other sh***y company will be working to replicate Aritzia’s more successful items, like the Super Puff icon.

Cheaper options will always exist – if you’re looking to invest in the cheap knockoffs and low-grade versions of iconic styles, than you don’t invest in Aritzia – much like shoppers who are looking for okay-looking but cheap items don’t shop at Aritzia. But for those shoppers that are looking for a great fit, high-quality fabrics, and superior design wrapped up into a unique shopping experience, there’s no real replica for Aritzia. And that’s what eliminates any true threat from copycats – they may come close to replicating the look, but never the quality or brand.

That all being said, if a more established brand with equal-quality products, like Lululemon itself potentially, decided to start competing with Aritzia’s specific product lines, this could be a concern for the business. Still, here is another advantage of many in-house brands and styles catering to different aesthetics; even if another brand is copying their Super Puff jacket, they still have a bunch of other stylish brands in their stores PLUS the real Super Puff, so I think they’d still have an edge here – but it is definitely one of the risks with making a fashion investment.

Sustained Macro-economic Pressures

If pressures on consumers last for a while, which they seem likely to do, then the prolonged lack of any significant discretionary allowance for Aritzia’s primary customer base would result in several down years for Aritzia’s business, and would likely force them to halt their longer-term investment plans and simply hunker down in order to simply survive the macro-economic storm. This, I think, is the biggest concern for Aritzia’s business; their balance sheet has been strong enough to see them through the last several years – COVID, labour pressures, a rollercoaster return to normality, and now macro-economic challenges – they have withstood it all. But they can’t maintain their expansion strategies, which is key to their long-term success, in a constantly negative and challenging environment in which their customers turn into strangers. Their balance sheet simply can’t withstand that indefinitely.

Red Flags

Declining Performance

Obviously. It’s never great to see a business have even one, let alone 2 consecutive rough quarters that see pretty significant declines nearly across the board, especially in most of the key metrics you look at to analyze a company’s health: margins, top- and bottom-line growth

Inventory

Declining figures in all their key inventory metrics is discouraging to see, especially in conjunction with a huge increase in the total inventory on the balance sheet that far exceeds revenue growth. This is one I will be watching especially closely to monitor Aritzia’s turnaround progress. If these inventory issues remain elevated without any sign of improvement, I think this is likely a thesis breaker.

Fashion in General

Fashion is risky. It’s also hard to really follow and keep up with to a degree that investors are able to comfortably say whether the business behind their investment is keeping up to date on trends or quality. This is especially true if you’re a guy and you’re investing in Aritzia – I’m deeply grateful for the help of my many patient friends, many of whom were all too willing to talk about Aritzia, that helped me to research and write this article. Unfortunately for them, they have now unwittingly signed up for a regular harassment from me on Aritzia’s newest product lines, pricing, and markdowns. Lucky them.

Green Flags

Easing Pressures

According to management, many of the pressures that resulted in poor share performance are expected to dissipate in the back half of this year (ie Q3 & Q4). Namely, huge capital expenditures into distribution centres will be complete, SG&A pressures will ease up, and increased costs as a result of the braoder labour shortage will be largely in the rearview.

Ownership

Aritzia posts very strong insider ownership (~20%), which is a great green flag, as are big buys from insiders at prices that are elevated from the current share price. Obviously those insiders, one of which is Brian Hill and probably the man most intimately familiar with this business in the world, view current prices as attractive for the long-term aspects of the business and aren’t expecting any more significant downturns into the future.

The low level of institutional ownership in the stock is also a bonus; investors are often able to get a bargain on stocks that don’t have huge support levels from institutional holders, and can also often get a decent valuation expansion if they pick the right company that does eventually receive that institutional support.

Celebrity Endorsement

I’m not really big on celebrities, but there’s no denying that having them endorse your brand is a great sign. This is especially true in an industry like fashion, where trends can be rather fickle, and also especially true for a brand like Aritzia. Their slogan of ‘Everyday Luxury’ has a lot more credibility to the quality and ‘luxury’ part of that equation if people regularly see Meghan Markle, Jennifer Lopez, and Hailey Bieber jaunting about in Aritzia products, despite surely being able to afford more expensive clothing. It’s also makes for great organic marketing by boosting Aritzia’s visibility, building brand image, potentially influencing the purchasing decisions of those celebrities’ fans and, depending on the celebrity, reaching new demographics.

Payback Period on New Boutiques

Due to the lower costs associated with simply leasing the properties for their boutiques, the payback period on their investments into opening a new boutique is only 12-18 months, which is pretty dang good, especially when considering all the investments into the design and retrofits of their boutiques prior to opening. This quick payback period allows Aritzia to maintain a healthy and investment-grade debt profile while still continuing to pull a major growth lever by expanding their retail locations.

Long-term Investments

I love the long-term investments that Aritzia is making into their business and their commitment to continuing to do so even with a couple rough quarters. They’re investing in infrastructure by expanding their existing boutiques, upgrading the point-of-sales system, and improving distribution capacity, and they’re investing in steady and consistent penetration into both the United States and eCommerce markets.

None of these are short-term decisions -in fact, the capital expenditures required for these investments are partial contributors to some of the decline in key metrics over the last couple quarters – but they continue to make them anyways. They’ve not announced a temporary halt in investments to chase tiny margin improvements to gain shareholder approval, either. This demonstrates, to my mind, a management team that is definitely aligned with long-term oriented shareholders by investing in the success of the business and not in the short-term propping up of share prices, and this approach from management is only further emphasized by their share buyback program.

Fresh Blood With a New CEO

I am extremely bullish on Jennifer Wong and her ability to run Aritzia – I was particularly encouraged by the story behind Aritzia’s 2007 adoption of SAP’s enterprise resource planning (ERP) system – the Board of Directors was reportedly against it at the time for the cost reasons, but Jennifer Wong, who was then COO of the company, fought hard against the Board’s decision and ultimately got the ERP integrated into Aritzia, a move which is now unanimously lauded as the correct decision for the business. Her analytical approach to the business combined with her deep understanding of its inner workings from the bottom-up will help her to steer this company exactly where it needs to go, and where she knows it needs to go.

Is Aritzia the Next Lululemon?

Let me first preface that I normally don’t touch stocks that are ‘the next x’, because they are typically inferior to the very company that they’re trying to replicate. However, I think it’s safe to say that in the case of Aritzia being the ‘next Lululemon’, the comps are being made for very different reason; Lululemon and Aritzia directly compare on very few specific clothing items. While TNA and Lululemon produce very similar goods, and Lululemon has stretched into providing similar lines to Aritzia’s more outdoorsy products, the rest of the brands are very different. Lulu is focused mostly on activewear and much less on professional and/or uptown sort of clothes, so they’re very much operating in different niches.

Where the comparison does come in, really, is that these are both businesses that started in British Columbia, Canada and experienced solid success within Canada before beginning to expand into the U.S. and ultimately coming public. Not only are their stories so appealingly similar that it begs the comparison, but how those stories played out are similar too; Lulu lost 80% of it’s value within a few years of coming public on the Nasdaq, mostly as a result of the Great Financial Crisis. Aritzia lost 41% of its value after coming public, though this was more just normal IPO stuff. Lulu took another >50% hit in 2013 – Aritzia is currently in the midst of another >50% hit.

Now, we have to hope that the rest of the story carries out the same. While Lululemon bounced back from its drops, it’s too soon to tell if Aritzia will be able to do the same. If they are, and their U.S. expansion starts to build a revenue portfolio that looks a little bit like Lululemon’s above, then current prices on Aritzia will look like an absolute bargain, a contradictory play on the popular sentiment of a beatdown stock that rewards shareholders wildly. The chart above doesn’t include it, but U.S. revenues we’re roughly 50/50 with Canada revs in 2011 – just four years later, the U.S. portion of the business was 3x the size of the Canadian market. Aritzia’s U.S. revenues hit almost exactly 50/50 with Canada revs in 2022. If the long-term thesis on the potential of U.S. markets to propel Aritzia far beyond its current size, as we can see it did with Lululemon, then Aritzia has a lot of room for growth ahead of it.

The Short Story

I don’t love fashion stocks and the fact that Aritzia is a fashion company is, to my mind, one of the biggest risks here. It’s just hard to keep up with, and all the conventions of analyzing a good business can be washed down the drain if the company fails to keep up with trends, which is hard for me to judge considering I’m very much the opposite of what Aritzia would call its target customer. And on top of that, Aritzia products certainly aren’t required spend – that’s the nature of a consumer discretionary stock, but frankly that’s just not one of my favourite industries to be in for its cyclicality and its reliance on fickle whims of its customers. So, that all scares me, and so do the extremely negative reviews from Glassdoor, all with fairly consistent complaints; toxic work culture, micromanagers, a lot of political backstabbing, not treating employees very well.

Then there’s the poor sustainability and social metrics, which I do believe hinders a company and places them firmly behind on the times. Ethically-conscious customers are unlikely to shop at a place that isn’t great about transparency on various parts of their supply chain or what they’re doing to minimize their environmental impacts specifically. And all that is before ever getting into the balance sheet, which at the moment, doesn’t look great. There’s good indication from management that the pressures on balance sheet, SG&A, etc. will ease with time, and that these are just running parallel to the broader macro-economic pressures on Aritzia’s customers and other cons. discretionary businesses. But it still just doesn’t feel great to see a company decline consistently across most of its major metrics.

BUT, there’s also so much to like about Aritzia that it’s hard for me to completely walk away from this name, despite all the risks of fashion and my dislike of a work culture employees don’t enjoy working at. Firstly, its growth levers are super simple to understand; open more stores, make current stores bigger, control more of the distribution, benefit from economies of scale, and improve eCommerce & omni-channel approaches. On top of being easy to understand, if the company is able to realize its long-term growth targets then shareholders could realize some very appealing returns on their investments, especially at current valuations.

And that valuation right now is quite appealing. Of course, it’s difficult to tell whether this is simply a falling knife, but recent insider buys definitely help to dispel my fears – some of the people most intimately familiar with the stock are continuing to purchase huge sums of shares of the company and clearly don’t believe it’s going to fail. A lack of institutional ownership is also a big bonus for finding some extra value now and potential value expansion further down the line if Aritzia is able to achieve that institutional support line.

The new CEO, Jennifer Wong, is another strong suit for me – I am very impressed by the moves she oversaw in her time prior to becoming CEO and am very optimistic on her ability to succeed in the top job. One thing that strikes me is she has constantly been at the helm of projects that improved Aritzia’s resiliency and efficiency, moves that give me some hope that she may increasingly focus on environmental and social transparency to ensure their brand is keeping up with the times – their brand, after all, is the single-most valuable asset that the company has.

In summary, I think Aritzia has enough good things going on that I like their future prospects, and I don’t think the long-term investment thesis is broken – that thesis being riding a potentially huge growth story as a small, so far under-appreciated Canadian brand as it sets out to find success in the United States. I don’t think this company is the next Lululemon, and the difference in brand, market, and target customer makes it wrong to assume that – but it has the potential to follow a similar growth trajectory, take advantage of a lot of the same growth levers, and perhaps provide similar returns to its patient and long-term oriented investors.

Report Card

Final Grade: B

Til next time, happy investing folks!

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