Canadian fashion store Aritzia (TSE:ATZ) (OTC: ATZAF) is an exciting and high-quality stock. Aritzia’s revenue growth has been impressive of late, rising 37.8% year-over-year in the most recent quarter, and the stock has been relatively resilient compared to most growth stocks that have fallen significantly from highs. With that said, let’s analyze key profitability metrics to show Aritzia’s quality and look at its valuation to see why we think Aritzia is reasonably priced.
Aritzia creates shareholder value
Large companies often have great management teams that can efficiently allocate capital to profitable projects and create value. Aritzia is one of those companies.
To get a good picture of management effectiveness, let’s look at the numbers. The 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 the 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 the money in risk-free bonds.
For Aritzia, we will use her ROIC for the last 12 months. The economic distribution is as follows:
Economic shift = 17.1% – 7.5%
Economic shift = 9.6%
Therefore, since Aritzia has a positive economic spread, it is considered a “value creator”.
Aritzia’s assessment is reasonable
Currently, Aritzia has a 27.4x P/E multiple, implying a tiny 3.65% earnings yield. His valuation may seem high for a retail company entering a potential recession; however, Aritzia makes up for its high multiple with 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 growth of 19%. Analysts then forecast growth of around 18% for next year (C$2.16 EPS). That 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, the revenue multiple will drop quickly, justifying its current valuation. It’s also worth noting that Aritzia can significantly beat forecasts, as it has done in the past, helping to further justify its valuation.
Additionally, Aritzia trades at a price-to-sales ratio of 2.5x compared to a 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% (which means that more of its sales have the potential to be turned into profit, which should actually push its price up to – multiple sales).
Is Aritzia stock a buy, according to analysts?
According to analysts, Aritzia earns a consensus rating of Strong Buy based on three buys, one hold and zero sells assigned in the past three months. Aritzia’s average price target of C$61.56 implies a potential upside of 36.7%.
To take away
Aritzia is a solid stock that seems reasonably priced right now because of its high earnings growth and relatively low price-to-sales multiple. It also creates value based on its high return on invested capital and should grow in the future as it continues to expand in the US
Based on these factors, the stock looks attractive in the long term.