Canadian fashion retailer Aritzia (Tokyo Stock Exchange: ATZ) (OTC: Atsaf) is an exciting and high quality strain. Arizia’s recent sales growth has been impressive, growing 37.8% year-over-year in the most recent quarter, a relative recovery for the stock compared to most growth stocks that have fallen sharply from their highs. There is power. That said, let’s take a look at Arizia’s quality by analyzing key profitability metrics, examine its ratings, and see why we think Arizia is reasonably priced.
Arizia creates value for shareholders
Great companies often have great management teams who can effectively allocate capital to profitable projects and create value. Aritzia is one such company.
To better understand the effectiveness of management, let’s look at the numbers. The metric we want to focus on is economic spread, defined as:
Economic Spread = Return on Invested Capital – Weighted Average Cost of Capital
The idea is pretty simple. When a company’s return on invested capital (ROIC) is greater than its cost of the same capital, the company is creating value for its shareholders through well-thought-out projects. Otherwise, the company is destroying value and you’d be better off simply investing in risk-free bonds.
For Aritzia, we use the last 12 months of ROIC. The economic spread is:
Economic Spread = 17.1% – 7.5%
Economic Spread = 9.6%
Aritzia is therefore considered a “value creator” as it has positive economic spreads.
Arizia’s Valuation Is Reasonable
Aritzia currently has a P/E multiple of 27.4x and a modest earnings yield of 3.65%. That valuation may seem high for a retailer that could be hit by a recession. However, Aritzia compensates for its high multiples with its growth potential and resilience.
In fiscal 2023 (through next month), Aritzia is expected to report earnings per share (EPS) of C$1.82, implying growth of 19%. Analysts forecast around 18% growth (C$2.16 EPS) next year. This translates into forward P/E ratios of 25.3x and 21.4x for fiscal 2023 and fiscal 2024, respectively. As you can see, if ATZ sustains this growth rate, future earnings multiples will decline rapidly, justifying its current valuation. It’s also worth noting that Aritzia has the potential to significantly exceed expectations, as it has done in the past. This helps further justify that assessment.
Additionally, Aritzia is historically undervalued, trading at a price-to-sales ratio of 2.5x compared to a five-year average of 3.05x. This is especially true considering his current gross margin of 42.5% is higher than his 5-year average of 40% (meaning more sales could turn into profits and actually should push prices up). – sales multiples).
Is Aritzia Stock a Buy, According to Analysts?
According to analysts, Aritzia has a strong buy consensus rating based on 3 buys, 1 hold and 0 sells allocated in the last 3 months. Aritzia has an average price target of C$61.56, suggesting a 36.7% upside potential.
Takeaway
Aritzia is a solid stock and currently looks reasonably priced due to its high revenue growth and relatively low price-to-sales multiple. It is also a value creator based on high returns on invested capital and should continue to grow as it continues to expand into the United States.
Stocks look attractive over the long term based on these factors.
Disclosure
