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Aritzia (ATZ) Stock | TSX: ATZ

Covered by Stratosphere

Everyday Luxury

Aritzia ("ATZ") is an "everyday luxury" brand that designs and sells high-quality and aesthetic clothing primarily targeted for Gen Z and Millennial women. ATZ is vertically integrated, meaning it controls the in-house design, merchandise planning, sourcing, production, and retailing functions of the business.

Virtually all (over 95%) of Aritzia's revenue is generated from the design and sale of its exclusive brands, including but not limited to: Babaton, Wilfred, Tna, and Reigning Champ (which ATZ acquired through its 75% acquisition of CYC Design Corporation, the owner of Reigning Champs, a men's premium athletic wear brand). ATZ employs an omni-channel approach, selling its products online through its eCommerce platform and through its network of 100+ boutiques located in prime locations across the US and Canada.

Stratosphere Score

8

Growth

8

Valuation

10

Quality

6

Margins

6

Dividend

0

Balance Sheet

8
Adrian Iwanicki

Author

Adrian Iwanicki

Equity Analyst

Investment Thesis

  1. ATZ is a clothing designer and retailer of ATZ-branded exclusive brands sold at its corporate stores and online store. The company blends fast fashion with luxury to serve the middle market called "everyday luxury". The company is well-known for its strong brand reputation, high-quality products, and timeless yet relevant styles and designs.

  2. The company is vertically integrated, controlling every step of the design, creation, and retailing functions. ATZ has full control over its brand image, which is its main competitive advantage. ATZ has done well appealing to younger demographics through its house of brands and tapping into influencer marketing for high-ROI advertising.

  3. The company's single most important growth driver is its planned US expansion. ATZ has over 100 US prime retail locations identified as potential future boutiques. The customized and curated design of each boutique enhances the shopping experience for customers.

  4. ATZ's primary sales channel remains its physical footprint, but this does not mean the company will quickly become obsolete in our technology-fueled world. ATZ's retail channel still represents 2/3 of total revenues today. The retail and eCommerce channels are highly complementary to each other given ATZ's foray into digitizing its operations early last decade.

  5. ATZ has some potential risks, but we believe it effectively tackles them day in, day out. As a fast fashion luxury brand, ATZ must constantly stay on its feet to take advantage of trends that suit its image. If it fails to do so, missing one or two major trends could hurt its reputation as a brand. We think ATZ has done a superb job of capturing major trends thus far, and its experienced and innovative in-house design teams will be able to shield the house of brands from obsolescence.

Key Company Metrics

A set of metrics we constantly keep updated to monitor the investment thesis.

Competitive Advantages

Full Vertical Integration

The single most important challenge every fashion brand faces is continued relevance over long periods of time. While few brands — like Louis Vuitton or Hermes — have been able to withstand the test of time, many are left in the dust and eventually wither away into total irrelevance.

The most iconic apparel brands have been able to stay relevant for decades on end by focusing on several key traits: constant innovation (creating new and relevant styles), relentless focus on design and quality, exclusiveness, and timelessness. This is what has made brands like Louis Vuitton, Hermes, and even Nike, Adidas, and Lululemon highly successful.

ATZ focuses on, and has been able to integrate all of the above because of its fully integrated design house and retailing functions.

Here is how we believe ATZ satisfies all the criteria:

  • Constant Innovation: ATZ's design teams are constantly in touch with new fashion trends, operating as a luxury fast-fashion clothing designer and retailer. ATZ is deeply committed to its image of being a provider of "Everyday Luxury". In order to live up to this image, ATZ runs a house of exclusive brands made to look highly appealing today and in the future, from the design to the fit.

  • Design & Quality: Each independent ATZ brand has its own in-house design teams. These teams focus on supporting high-quality fabrics (i.e., a commodity as almost any designer can purchase high-quality materials) with superior design and fit (ATZ's own "flavour" and value proposition). ATZ also partners with "best-in-class" mills to fit-test new products twice prior to mass production. As a bonus, the unique look and feel of each of ATZ's boutiques is conducive to a "customized" shopping experience tailored specifically for ATZ customers. These stores help bring the point home around ATZ's focus on quality and design.

  • Exclusiveness: Over 95% of the clothing items sold in-store and online through ATZ's sales channels are exclusive brands. ATZ's boutiques and eCommerce platform are the only channels through which customers can purchase ATZ products. In the words of ATZ, this strategy allows the company to "ensure that [it has] the right product, at the right time, at the right price, in the right quantity and in the right place".

  • Timelessness: ATZ employs styles and colours in a way that could produce multiple outfits. ATZ's neutral-colour bias, high fabric quality, superior fit profile, and ability to mix-and-match with other ATZ or non-ATZ clothing help the company stay relevant over the long run.

House of Brands

ATZ should be thought of as a "house of brands" with decentralized, autonomous design teams. The company develops its own brands, "treating each as an independent label with its own creative team and aesthetic".

This diversified approach is important to ATZ as a fashion brand that seeks to stay relevant for a long period of time. Fashion is unpredictable; having several well-known brands is the key to navigate an ever-evolving industry.

ATZ management appears to have figured this out. Each independent label — such as Babaton, Wilfred, The Group by Babaton, and Tna — targets a subtly different age group and / or purpose of wear.

For example, Wilfred is seen as a more versatile brand while professional clothing is usually sought from Babaton. Tna focuses on athleisure and athletic wear and Sunday Best leans into a younger demographic looking for "trendier" pieces.

Without this diversification, ATZ would remain susceptible to rapid changes in fashion and lack the agility and flexibility to pivot into better-performing clothing designs and categories. The Gap, for example, failed to stay relevant among Millennials and Gen Z due to the lack of innovation and refusal to either set trends or follow the trends.

ATZ's diversification of its independent, autonomous brands should shield the company from rapid changes in fashion and allow it to remain relevant for a long period of time. In other words, one independent brand might underperform in a given period while another outperforms greatly as trends and customer needs change.

The singular performance of any of ATZ's independent brands likely cannot be predicted over a medium- to long-term horizon because of the nature of fashion. The management team likely understands this, hence the decentralized positions of each label and the wide variety of clothing categories and items therein. This approach should theoretically improve the versatility of the entire house of brands by remaining flexible and agile at the top level while ensuring that quality is never compromised.

Given all the above, the company gives itself the best chances to succeed in the fast-changing fashion scene.

Growing Brand Reputation

ATZ was founded in 1984 by Brian Hill — founder, former CEO, and current Executive Chair — in his family's 70-year-old department store located in Vancouver, Canada. The company's origins explained the success ATZ has experienced to date. From the get-go, ATZ was placed only in prime shopping locations (the first boutique was opened in Oakridge Centre, an upscale shopping mall in Vancouver) focused on providing exceptional clothing supported by a unique shopping experience.

ATZ's brand reputation has always been strong, but it did not hit its current level of popularity until the last decade.

Over the years, ATZ worked on expanding its collections and diversifying across its independent, exclusive brands. Along the way, ATZ produced several "hit" clothing items that took the market by storm after celebrities were spotted wearing them. Some may call it luck, but it does not appear to be so.

Here are some examples:

  • ATZ's Tna Super Puff jacket was spotted being worn by Kendall Jenner, Emma Roberts, Bella Hadid, and Ariana Grande in 2018. This item now has "fashion icon" status.

  • Megan Markle was found wearing a burgundy ATZ dress in 2017 during her first public event as Prince Harry's girlfriend. In 2018, Markle was seen wearing an ATZ trench coat.

  • In 2021, ATZ's faux-leather Melina Pants went viral on TikTok. After going viral, ATZ fully sold out of the Melina Pants collection many times over. Today, they remain highly sought-after as a wardrobe staple.

The brand was historically well-known for its Tna-branded leggings and winter clothes. Today, ATZ sells just about everything women need in their wardrobe and some (ATZ's move with Reigning Champs to attack the men's market). As implied above, the company is also able to produce hit items time and again, not only maintaining, but constantly growing its reach and brand reputation.

It may seem that ATZ only grows organically by waiting until a new item is spotted on a celebrity or goes viral on TikTok. However, ATZ leverages strong influencer partnerships with both mega and micro celebrities.

In the past, ATZ partnered with Kendall Jenner, Hailey Bieber, Sophia Ritchie, among others. Each of these individuals are highly influential among their own audiences. These efforts have been successful.

In 2019, Brian Hill spoke of the importance of leaning harder into the micro-influencer ecosystem. This is a similar approach employed by Lululemon, which partners with influential "leaders" in local communities that have strong relationships and reach within their niche.

By using a similar approach, ATZ can increase the ROI of "advertising spend" by filtering through niche micro-influencers who already embody the ATZ image and influence an audience that would also fit the target market profile ATZ is looking for.

ATZ is only gaining prominence now as store counts continue to swell across the US, ATZ's main growth market. It appears these efforts have been paying off handsomely.

Opportunities Ahead

  • ATZ's primary and most important growth driver ahead is its US expansion plans. The company has already grown its US location count from 18 in FY2016 to over 40 today. This boutique count is still well below the Canadian location count of 68. ATZ's management has 100+ prime real estate locations identified across the US that meets ATZ's stringent exacting criteria. The company has historically been diligent with new store openings, ensuring each location is well-suited to target the intended consumer groups and will avoid diluting ATZ's average payback period on new openings of 12-24 months. Considering ATZ carries little debt, management prudently approaches expansion, organic growth is plentiful, and the rapidly growing interest in ATZ products among US consumers, we believe that not only could ATZ expand beyond 100 US locations late this decade, it will do so in a value-creating manner for shareholders.

  • ATZ is an innovator that will continue to innovate, no matter what. The company's target is to double its product offerings by FY2025. ATZ has already laid out how it plans to tackle this ambition. By FY2025, ATZ's product offerings will hold more depth (new sizes, lengths, and colours), breadth (new styles), and categories (men's, swim, and intimates). This should help maintain ATZ's status as an innovator and uphold its image as a strong and relevant brand. We think these efforts will allow ATZ to grow at healthy organic rates as it expands its geographic footprint.

  • ATZ's early adoption of digital sales of its products and seamless omni-channel approach should help the brand reach customers across North America and abroad. In markets where boutiques do not yet exist, customers can enjoy ATZ products by purchasing on Aritzia.com. Over time, high-traffic areas, unpenetrated physical areas will likely see a boutique open. These boutiques would likely have rapid payback periods given the brand awareness that ATZ was able to accomplish with its eCommerce channel. We also see this channel as the key to expanding internationally. While management is solely focused on expanding within the US, we believe a broader international expansion could be on the horizon in several years if the US expansion continues to proceed with success.

Risks

Retail Footprint

While we see no imminent risk with ATZ's key brick-and-mortar physical footprint, we believe there are a few possible risks that may arise over the next several years.

For one, poor in-store shopping experiences due to poor customer service or overcrowding within stores could dilute the brand. Secondly, the focus on prime locations means that ATZ cannot expand its footprint forever. Lastly, retail locations could be mis-identified as prime locations that also contribute to the dilution of the ATZ brand.

Our view is that ATZ's retail footprint is complemented well by its digital sales capabilities, and the stores enhance brand image and most customers' shopping experiences. We think things will likely stay that way.

General Fashion Risks

Fashion is susceptible to quick changes, and we believe ATZ may be particularly vulnerable long-term as a designer that sits between "fast fashion" and "luxury".

While it has traits of both, we think it sits closer to fast fashion than luxury. This means that ATZ's relevance of a brand is not geared as much to its premium image as it is to its ability to catch onto trends quickly.

If ATZ becomes too complacent with its position in the market and its designs down the line, it risks losing both the benefits of being an agile fast fashion designer and its image as an "everyday luxury" designer.

After all, "luxury" is subjective and relative — items can only be considered luxury if it is out-of-reach for the common consumer and generally in limited supply.

Fast fashion also faces some scrutiny for creating tons of waste and exploiting cheap labour. ATZ is technically a fast fashion designer that could be considered as "part of the problem".

Our view is that ATZ has shown no indication of losing either of these images by staying true to its core mission — providing high-quality products that look great at any given point in time. It has executed well for decades, which we believe has proven its staying power. the company is also in tune with its environmental impact, seeking to constantly improve its footprint and leverage ethical suppliers.

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