October Focus Stock – ATZ

Updating our Aritzia views.

Aritzia has been a core holding in our Global Equity Growth portfolio for the past 18 months, having increased our position to a 4% target weighting from 2% during the depths of the pandemic. The position has performed particularly well in the past year with the shares up 125%. We have always been fans of Aritzia, first adding the name in the fourth quarter of 2018, and summarized our investment thesis in May 2019, when we highlighted the benefits of Aritzia’s direct-to-consumer (DTC) approach and its U.S. expansion opportunity.

”We are most bullish on Aritzia’s growing U.S. presence. The company has 25 locations, although currently those locations are mostly located on the West Coast.  The company has 12 stores from Seattle to San Diego, with the remainder mainly in Chicago (5) and New York City (5). This leaves ample room for growth, with blue sky potential in major markets. As Aritzia’s brand recognition grows in the U.S., it can more profitably add locations on an infill basis. For example, while St. Louis, MO, with a 2.5 million metro area population, could easily support multiple locations, the company can open in much larger cities such as Phoenix, Miami and Houston before looking at 2nd and 3rd tier cities, effectively de-risking its investment in distribution.”

Two years and a pandemic later, Aritzia’s U.S. expansion strategy is playing out stronger than expected. First off, the pandemic has accelerated the adoption of eCommerce, with Aritzia’s DTC operations benefitting from this shift. Secondly, its brand strength, balance sheet and the fact that it is “under-stored” allows the company to stay on offence while other large mall retailers are on the ropes. This combination of factors helped Aritzia grow first half FY22 U.S. revenue 73% from the same period two years ago. eCommerce revenue increased 169% over that timeframe.We can evaluate Aritzia’s brand strength using Google Trends. Google Trends benchmarks weekly search activity to the highest level in a selected period. Figure 1 shows the 3-year trend for U.S. Google searches. The two spikes in the middle represent Black Friday searches in 2019 and 2020, indicating peak search interest in Aritzia. Interestingly, recent U.S. search activity has trended towards levels close to Black Friday even though Aritzia has not had any promotional activity in 2021. We believe this indicates increased interest in the brand and expect searches on 2021 Black Friday to achieve record levels.


Figure 1. Aritzia United States Search Trends (Oct 2018-Oct 2021)

Source: Google Trends

Management also contends that in addition to strong store-level economics from all its locations, local eCommerce sales also benefit, increasing 100-200% from the opening of a physical store in a new market. Using Google Trends again, we can view state-level interest and corroborate this with management’s claims.* The map below (Figure 2) works as a heat map, with darker blue states indicating a higher proportion of search activity. For the more data-focused reader, we also present the top 10 states and the states ranked 31-40 as many of the states at the very bottom, such as 50th ranked Montana (pop. 1M), are insignificant from a market perspective.

Note that the top 10 districts are all states where Aritzia has solid store coverage (relative to population). For example, Aritzia has nine locations in California, with stores in the Los Angeles/OC, San Francisco and San Diego Metro area/suburbs. In contrast, Aritzia has no stores in Florida (yet… a Miami store is coming soon) but has a relative search interest of about 1/6 of California.

Figure 2. Aritzia United States Search Trends by State

Source: Google Trends

*state-level interest is calculated as Total searches for Aritzia/All searches on Google in that state, then normalized to 0-100.


In 2016, a 3rd party study of potential new store locations commissioned by the company identified 125 potential new locations across North America. We assume a strong majority (~90%) were in the United States, providing management line of sight to triple its current U.S. store base from 34 to 100. The next stores in the U.S. will be in low hanging fruit markets like Miami (pop. 6M) and Las Vegas (pop. 2.5M), which are slated to open in next six months. Certainly, other major markets such as Atlanta and Tampa are planned. However, longer-term opportunity remains in secondary and tertiary markets, such as Columbus, OH (pop. 2.2M) or Jacksonville, FL (pop. 1.6M).

We can size the potential market by comparing the U.S. opportunity to Canada, where the company is mature from a geographic coverage perspective with 68 locations. Aritzia generated just under C$700M in sales the past year in Canada, which should increase to ~$C750M when the pandemic is fully lapped. The U.S. population is  ~8.5x larger than Canada. Thus, if Aritzia were to achieve a similar penetration rate in the U.S., its revenue potential would be C$6-6.5B versus a current run rate of C$500M. It is aggressive to assume similar penetration given the more competitive shopping market in the U.S., but achieving penetration rates of even 1/3rd that experienced in Canada would yield a C$2B revenue opportunity.

Aritzia’s quarterly results are skewed by seasonality and now, for the past six quarters, even more so by the pandemic. We note that the company achieved record sales per location in both Canada and the U.S. in its most recent quarter despite its 2nd fiscal quarter falling in the June-August period (typically its 2nd weakest quarter). There was likely some pent-up shopping demand as the North American economy mostly re-opened however, typical seasonality (and corporate guidance) indicate upcoming new quarterly highs on the chart in Figure 3.

Figure 3. Quarterly Sales per Store Location by Country

Source: Company Reports, MWG

Expanding the Total Addressable Market

If we assume U.S. stores are more productive due to less saturation and the benefit of higher eCommerce penetration, then Aritzia could open 150 locations in the United States with high economics to achieve a $2B sales run rate (assume $14M sales per U.S. location versus $11M in Canada). Assuming an increased pace of store openings of 10-12 locations per year, would yield a 10-year inventory of new locations.

Looking at historical results helps frame the Aritzia opportunity today, but highlighted below are three other long-term opportunities for Aritzia:

  • SKU Expansion – Aritzia believes it can double its SKU count over five years thanks to the unlimited nature of shelf space available online. While many SKUs will be a simple expansion of colours or sizes of existing designs, the company sees the opportunity to expand into new product categories such as intimates and swimwear.
  • Men’s – Aritzia is expanding into menswear with its SuperPuff jacket and through the acquisition of Reigning Champ. While progress will take place incrementally, Aritzia can selectively grow this segment over time.
  • International – We believe Aritzia could look to Europe as its next growth leg once it fully develops its premier locations in the United States. A store network in London, Paris, Milan, Munich, and Barcelona would significantly grow Aritzia’s European presence, allowing it to leverage eCommerce primarily to service the continent.

Valuing Aritzia

We believe Aritzia shares should continue to increase in value. Earnings per share could reach $2.00 per share by FY24/25. If we include the cumulative $4.00 of free cash flow per share generated in the interim, applying a 30x multiple to earnings, would yield a $64 target price in 2 years’ time. Discount that back at 8% and a current price in the mid-50s is a “back of the envelope” fair value. This target price assumes upwards of 55 locations in the United States.

This would give Aritzia a market cap of ~$6B. However, it is a brute force exercise to apply a target multiple to a predicted earnings estimate. It is difficult to capture the true growth potential and risk of a company, even more so when Aritzia has grown at a high return on equity and should start to see further benefits of scale. When compared to the $50B market cap of Lululemon, however, it’s easy to envision more upside. In summary, the thesis we outlined two years ago seems to be playing out and there remains a lot more opportunity ahead.

This Focus Stock is written by our Head of Research, Jamie Murray.

The purpose of this is to provide insight into our portfolio construction and how our research shapes our investment decisions. As always, we welcome any feedback or questions you may have on these monthly commentaries.

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