I Anticipate That US Expansion And Digital Initiatives Will Strengthen Market Position

Key Takeaways

• Aritzia's U.S. expansion and new boutique openings promise substantial revenue growth and increased brand awareness.
  
• Investment in digital initiatives and marketing is projected to enhance sales, improve customer engagement, and boost net margins.
  
• Aritzia's growth strategy involves significant risks, including reliance on U.S. expansion, marketing spending, potential supply chain issues, and new store performance challenges.

Catalysts

Designs, develops, and sells apparels and accessories for women in the United States and Canada.

• Aritzia's geographic expansion strategy, particularly in the United States, has shown strong performance and presents significant growth potential through ongoing boutique openings. This is likely to drive revenue growth.
  
• Development and planned launch of a new mobile app and enhanced eCommerce site are expected to bolster digital sales and improve customer engagement, contributing to increased revenue.
  
• Continuation of flagship store openings, which have driven significant buzz and brand awareness, could enhance retail sales and brand equity leading to higher revenue.
  
• Investments in digital marketing and successful marketing campaigns associated with flagship openings are anticipated to drive traffic and sales in both physical and online channels, potentially improving net margins through increased sales at reduced markdown rates.
  
• Strong product assortment and optimized inventory management have resulted in lower markdowns and gross margin improvement, which is expected to continue, enhancing net margins and overall earnings.

Aritzia Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Aritzia's revenue will grow by 16.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.2% today to 13.0% in 3 years time.
• Analysts expect earnings to reach CA$525.1 million (and earnings per share of CA$4.5) by about January 2028, up from CA$132.4 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.3x on those 2028 earnings, down from 57.9x today. This future PE is greater than the current PE for the CA Specialty Retail industry at 16.0x.
• Analysts expect the number of shares outstanding to grow by 1.05% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.62%, as per the Simply Wall St company report.

Aritzia Future Earnings Per Share Growth

Risks

• Aritzia's reliance on significant expansion in the United States market may expose it to geopolitical risks and economic changes in that region, potentially impacting revenue and earnings growth.
  
• The company's increased marketing expenses, while fueling growth, may not yield a sustained return on investment, potentially affecting net margins if the incremental increases in sales do not continue.
  
• Although recent performance has been strong, any potential supply chain disruptions or increased tariffs could raise costs, negatively impacting gross margins.
  
• Continued reliance on new store openings for growth carries execution risk, as underperformance in these new locations could adversely affect overall revenue and profitability.
  
• The Canadian market's previous weakness and macroeconomic challenges may linger, possibly affecting revenue stability and growth domestically.

Valuation

• The analysts have a consensus price target of CA$72.25 for Aritzia based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$79.0, and the most bearish reporting a price target of just CA$65.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$4.0 billion, earnings will come to CA$525.1 million, and it would be trading on a PE ratio of 19.3x, assuming you use a discount rate of 6.6%.
  
• Given the current share price of CA$67.86, the analyst's price target of CA$72.25 is 6.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.