Aritzia Isn’t a Good Fit

Always hunting for a bargain to benefit our clients, we review each day the stock prices that have dropped the most substantially. When doing so, we ask if the problem causing the sell-off is transitory or a material change to the business. We’ll invest in the former but avoid getting involved with the latter.

When we saw Aritzia contract almost 24% on July 12, it caught our attention.

Aritzia is a British Columbia apparel company with just over one hundred stores. During Covid, some Canadian companies were able to do well – Aritzia was one of them. They’ve grown revenues by over three-hundred percent the last three years. The company’s fundamentals checked most of our boxes. Low debt, decent profits, and path to future growth. Right now, our neighbours to the south account for more than half its revenue and it is in the U.S. where the company plans to expand further.

If the bullish analyst estimates on future profits prove to be correct, the stock is a great purchase at this price. However, we’ve learned from experience to never invest in a company because of analyst projections. They’re not always correct and often subject to revision. Instead, we need to develop our own clear and understandable investment thesis first and then review the analyst estimates second. Our concern here is that the analyst estimates are wrong. We’ve seen it happen too many times before where a company will release weak earnings and the next day, future estimates are quickly slashed.

Aritzia recently suffered a dismal quarter with management cutting its own revenue and profit forecast. And then the analysts did so as well the morning after. Management said on its conference call that it noticed a change in the customer beginning the first week of June. The culprit was said to be macroeconomic factors.

This could be due to higher interest rates. After all, anyone that has renewed their mortgage is likely in shock by the new interest rate they’re paying. In Canada’s May retail sales report, data suggested the consumer is prioritizing things like groceries at the expense of consumer discretionary items, such as clothing.

We often overlook transitory problems that will work themselves out over time. In fact, it’s something we look for when buying a stock for our clients. Problems with an retailer – particularly an apparel retailer – are different. It’s very difficult to determine if a problem is transitory or permanent given how quickly fashion styles change. By the time we know for sure, the stock will have taken off to the moon or fallen much, much further below today’s price.

Because of these uncertainties, we passed on this investment opportunity. It’s nevertheless a stock we will continue to watch and may revisit in the future should conditions warrant.