Good morning, Jason Kirby here filling in for Chris Wilson-Smith who is away. Never, under any circumstances, underestimate the American consumer’s eagerness to shop. Ahead of Aritzia’s second-quarter results due out this afternoon, we’ll look at how the Canadian retailer is banking on U.S. shoppers, in particular Gen Z and millennial women, to keep on spending and power its turnaround. First though…
In the news
- The Japanese parent of 7-Eleven will shed much of its non-convenience-store business and refocus on its core brand, the company said today, as it seeks to stave off an increasingly aggressive takeover effort by Alimentation Couche-Tard Inc.
- U.S. regulators will slap TD Bank with an asset cap on its American retail banking operation, adding to financial penalties for anti-money laundering failures. The bank told its executives about the details of the non-financial penalties in a conference call last night, Tim Kiladze reports.
- Six months after Royal Bank of Canada fired Nadine Ahn as its chief financial officer over an alleged undisclosed personal relationship with a colleague, which she denies, Canaccord Genuity Group has hired her into the same job. Andrew Willis has the details.
- If Donald Trump wins the 2024 U.S. presidential election, and follows through on his promise to wall the country off from the global economy with trade barriers, Canada would be in for a world of hurt, Adrian Morrow reports, with smaller exports, weaker GDP and steep job losses.
Clothing retailer Aritzia's store on Robson Street in Vancouver on March 30, 2023.Kayla Isomura/the Globe and Mail
In focus
What success looks like. Literally.
With its Super Puff jackets, Effortless pants and fashionable activewear, Aritzia has emerged as one of the hottest apparel brands in the U.S., having already conquered Canada. Launched in Vancouver 40 years ago, the chain has managed to cut through a crowded retail space, relying on a shrewd combination of value and quality – “everyday luxury,” the company calls it – to win over young women.
But fashion ebbs and flows, and a year ago, Aritzia appeared to have ebbed. Growth had slowed sharply, it struggled with inventory problems and its stock plunged 60 per cent. One year, and a renewed focus on U.S. growth later, Aritzia’s share price is back up 115 per cent, making it one of the best performing stocks on the TSX.
Which is why this afternoon’s second-quarter results are being so closely watched by investors, both for what they say about the company’s strategy, and America’s retail landscape.
What went wrong?
One of the big drags on Aritzia’s stock price last year was the looming prospect of a U.S. recession – one that loomed and loomed but never arrived.
Aritzia, along with the entire retail sector, still felt the crunch at a time when shoppers pulled back because of high inflation and interest rates. Making matters worse, the company fell behind on new product development because it focused on new store openings. Stale inventory piled up, and the company turned to discounts to clear its shelves. When the company lowered its outlook for sales and earnings, investors bailed.
So then what went right?
Analysts have credited Aritzia for moving quickly to streamline its inventory. But the company has also stuck to its ambitious American expansion plan, and American shoppers have obliged by sticking with Aritzia. In its most recent update in July, the company said it added five new boutiques over the previous year. It also plans to open eight to 10 U.S. boutiques each year until fiscal 2027, bringing its total store count to roughly 150 that year.
The U.S. is already a bigger market for the company than its home turf. Over the last 12 months, sales in the the country climbed by 9.4 per cent to $1.2-billion, while revenue in Canada grew at a slower 2.9-per-cent rate to $1.1-billion.
There are a lot of retailers on either side of the border that would scream for results like that right now, especially with so many in duress. So far this year, more than 5,200 retail shops in the U.S. have closed, outpacing the number of store openings, according to Coresight Research, which tracks retail activity.
Why today’s results matter
In a note to clients, analysts at TD Cowen said the second quarter will be important for confirming Aritzia’s turnaround plan is on track, while analysts at Canaccord Genuity said broader U.S. retail sales trends “lead us to believe Aritzia could also raise fiscal 2025 guidance, which would be well received by investors considering the broader cautious consumer backdrop.”
It’s that backdrop that is the big question. In August, retail sales beat expectations to climb by 0.1 per cent from July, while that month’s retail numbers were also revised upwards to 1.1 per cent. This wasn’t what anyone was expecting at this point. Consumer confidence in the U.S. is in the doldrums ahead of the election, even though the Federal Reserve has begun to cut interest rates.
It all makes the job of Aritzia’s CEO, Jennifer Wong, a 37-year veteran of the chain who got her start as a salesperson, all the more challenging. Investors expect her to keep pushing the chain’s expansion forward, building a brand in the U.S. that’s as popular as it is in Canada, even as everyone else keeps predicting the U.S. consumer will hit a wall.
Charted
For more than two years, Canada was a landlord’s dream, with asking rents for properties rising at annual double-digit rates. Not anymore.
The latest Rentals.ca report for September shows asking rents increased by 2.1 per cent, the smallest year-over-year change since the fall of 2021. On a national basis, the average asking rent of $2,193 was still 25-per-cent higher than three years ago, but some big cities are now seeing big declines. Two-bedroom properties in Toronto fell 10.5 per cent from last year. In Vancouver, the decline was 10.7 per cent.
Granted, these changes only relate to new rental agreements, and the relief will take time to filter through to existing tenants, but the trend for rents is at least moving in the right direction. That is, unless you’re a landlord.
Morning markets
Global markets were mixed amid cautious trading as investors awaited U.S. inflation figures for September while Chinese stocks clawed back some of yesterday’s losses. Wall Street and TSX futures pointed lower ahead of the economic data that could signal the U.S. Federal Reserve’s next interest rate moves.
Overseas, the pan-European STOXX 600 was down 0.23 per cent in morning trading. Britain’s FTSE 100 slipped 0.26 per cent, Germany’s DAX declined 0.1 per cent and France’s CAC 40 gave back 0.3 per cent.
In Asia, Japan’s Nikkei closed 0.26 per cent higher, while Hong Kong’s Hang Seng rose almost 3 per cent.
The Canadian dollar traded at 72.74 U.S. cents.