Aritzia Inc ({{TSX:ATZ) is in a strong position according to broker Stifel GMP, which has started coverage of the Canadian women’s retailer with a Buy rating and a $57 price target.
The company, which operates across 110 stores in North America, has found a balance offering clothes across all age ranges, the broker said, with twelve brands crossing various life stages.
Stifel estimated that earnings per share could double over the coming four years with significant growth potential coming from geographic expansion in the US, increased product depth, category expansion and margin improvements.
The broker said there was potential for 100 plus stores in the US against the 42 currently whilst ranges could be extended by size and color and offerings extended to men’s clothing and swimwear for example.
Stifel highlighted Aritzia’s top tier profitability, with EBIT margins 410bps higher than its peer average reflecting strong sales/square foot and limited promotions.
Marketing spending at less than 5% of sales is also much lower than peers, suggesting strong customer loyalty, it said.
While gross margins are expected to be under pressure in full year 2023, the broker said these issues are not permanent.
Logistic challenges are abating, which should reduce the need to air freight textiles and benefit margins it said, while the US expansion should be margin accretive as price points in the US are the same as in Canada, providing an approximate 25% lift in Canadian dollars.
Stifel also highlighted the group’s strong balance sheet with $179 million of cash and no bank debt leaving the potential for further share buybacks.
Potential downsides include changing fashion tastes, an economic slowdown and possible transition issues as it outsources its distribution in Ontario.
Aritzia stock traded at C$46.49 on the TSE as of Tuesday afternoon.