A shopper exits Aritzia on Robson Street in Vancouver on March 30.Kayla Isomura/the Globe and Mail
Aritzia Inc.’s ATZ-T share price has been sliced in half this year as inflation and product markdowns weigh on the retailer’s profit margins and earnings. As the company prepares to release its latest financial results, can investors hope to see a turnaround for the stock as so many others in the sector struggle?
Aritzia, known for its fashionable line of women’s clothing, is set to report its fiscal second-quarter results on Thursday after markets close. The event will mark the first time the company has weighed in on its performance since July 11, when it reduced its full-year outlook for sales and profit margins.
The day after that announcement, Aritizia’s share price tumbled 24 per cent, and analysts slashed their 12-month target prices by an average of about 30 per cent, making a difficult start to the year look significantly worse.
Aritzia isn’t alone here. A number of North American retailers, including Target Corp., Victoria’s Secret & Co., Footlocker Inc., Nike Inc. and even deep-discounter Dollar General Corp. have been struggling through a difficult environment for consumers that has walloped share prices this year.
Some observers believe that the backdrop for retailers remains challenging.
“We expect the consumer outlook to continue to weaken as excess savings are depleted, student loan repayments restart and labour income growth keeps slowing,” Ali Jaffery, an economist at CIBC World Markets, said in a note this month following the release of a relatively upbeat report on U.S. retail sales for August.
In the latest consumer confidence survey from the U.S. Conference Board, released on Tuesday, the reading on expectations – which gauges the short-term outlook for incomes, business and labour market conditions – fell to a level that historically has signalled a recession within one year.
Luke Hannan, an analyst at Canaccord Genuity, expects Aritzia’s revenue in the second quarter fell 4.3 per cent compared with the same period last year, while profit margins decline partly as a result of product markdowns.
For the full fiscal year, he expects that Aritzia will report a profit of 87 cents a share, down from $1.86 last year.
What may be particularly frustrating for investors is the fact that Lululemon Athletica Inc. – a rival retailer that also appeals to young women – has largely escaped this sort of carnage.
Lululemon’s net income rose 18 per cent in the second quarter and profit margins expanded because it has not felt the pressure to mark down prices on its line of activewear. Its share price is up 19 per cent this year, outperforming Aritzia by 73 percentage points over the same period.
Still, Aritzia has a few things working in its favour.
For one thing, the brand continues to resonate with young shoppers. In Piper Sandler’s survey of teen preferences, released in the spring, the investment bank ranked Aritzia as the fourth most-popular clothing brand among U.S. female teens in upper-income families – behind Lululemon, American Eagle and Nike.
That’s the highest ranking for Aritzia over the past four reports.
As well, corporate insiders at Aritzia are buying the stock, suggesting that executives and directors – who know the business better than anyone – see better days ahead.
According to INK Research, Aritzia tops the list of insider buying activity at Canadian companies over the past 60 days, in terms of net dollar value of the shares purchased. The buying activity is ahead of TC Energy Corp. and Telus Corp., two stocks that have also fallen on hard times this year but may look attractive at current prices.
Lastly, some analysts expect that Aritzia has been working through its inventories of unsold clothing. That should reduce the frequency of marked-down prices and bolster margins over the second half of the company’s fiscal year, especially if consumer demand holds up.
Martin Landry, an analyst at Stifel, expects it will. “Amongst the six apparel retailers we analyzed, five have experienced sustained or accelerating demand trends in August,” he said in a note.
Aritzia’s second-quarter results could suggest that the worst is over.