Canadian fashion retailer Aritzia (TSE:ATZ) (OTC:ATZAF) is an exciting and high-quality stock. Aritzia’s revenue growth has been impressive lately, growing 37.8% year-over-year in its most recent quarter, and the stock has been relatively resilient compared to most growth stocks that are down significantly from highs. That said, let’s analyze a key profitability metric to showcase Aritzia’s quality, and let’s take a look into its valuation to see why we think Aritzia is reasonably priced.
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Aritzia Creates Value for Shareholders
Great companies often have great management teams that can effectively allocate capital to profitable projects and create value. Aritzia is one of those companies.
To get a good picture of management’s effectiveness, let’s take a look at the numbers. A metric we like to look at is the economic spread, which is defined as follows:
Economic Spread = Return on Invested Capital – Weighted Average Cost of Capital
The idea is very simple; if a company’s return on invested capital (ROIC) is greater than the cost of that same capital, then the company is creating value for its shareholders through well-thought-out projects. Otherwise, the company is destroying value and would be better off simply investing money into risk-free bonds.
For Aritzia, we will use its ROIC for the trailing 12 months. The economic spread is as follows:
Economic Spread = 17.1% – 7.5%
Economic Spread = 9.6%
Therefore, since Aritzia has a positive economic spread, it’s considered a “value creator.”
Aritzia’s Valuation is Reasonable
Currently, Aritzia has a 27.4x P/E multiple, implying a tiny 3.65% earnings yield. Its valuation may seem high for a retail company going into a potential recession; however, Aritzia makes up for its high multiple through its growth potential and resilience.
For Fiscal 2023 (which ends next month), Aritzia is expected to report earnings per share (EPS) of C$1.82, implying 19% growth. Analysts then project about 18% growth for the next year (C$2.16 EPS). This brings its forward P/E ratios for Fiscal 2023 and 2024 to 25.3x and 21.4x, respectively. As you can see, if ATZ keeps up this growth rate, its forward earnings multiples will come down quickly, justifying its current valuation. It’s also worth noting that Aritzia can significantly beat forecasts, as it has done in the past, helping justify its valuation further.
Additionally, Aritzia is trading at a 2.5x price-to-sales ratio compared to its five-year average of 3.05x, making it historically cheap. This is especially true when you consider that its current gross profit margin of 42.5% is higher than its five-year average of 40% (meaning that more of its sales have the potential to turn into profits, which should actually boost its price-to-sales multiple).
Is Aritzia Stock a Buy, According to Analysts?
According to analysts, Aritzia earns a Strong Buy consensus rating based on three Buys, one Hold, and zero Sells assigned in the past three months. The average Aritzia stock price target of C$61.56 implies 36.7% upside potential.
The Takeaway
Aritzia is a solid stock that appears reasonably priced right now due to its high earnings growth and relatively-low price-to-sales multiple. It’s also a value creator based on its high return on invested capital, and it should grow going forward as it continues to expand into the U.S.
Based on these factors, the stock looks attractive for the long term.
