Trying to reignite some discussion on ATZ. When I moved countries to live in Toronto in 2020, I literally saw every other girl wear clothing with the TNA logo and last year I gifted a Super Puff jacket to my wife as well. Their stores seem to always be busy, so it seemed worth a deep dive for me. My thesis is that ATZ is where Lululemon was around 2014-2016, however it does trade pretty close to fair market value.

They hosted an investor day presentation in October 2022 which was long and detailed. They laid out their vision for FY2027 (next 4 years) in terms of store openings, revenue, EBITDA margins and capex. Hence, I tried running a DCF valuation for ATZ.

Current Price: CAD$ 47.32 Figures are in CAD

Revenue

โ€ข โ?Revenue has grown from $743 million in FY2018 to $1,831 million for the 12 months ended August 2022. It is roughly the same size which Lululemon was in FY2015. Management guidance is $3,500 million to $3,800 million in revenue by FY2027 with a CAGR of 15-17%. Two things need to happen for this 1) increase in store count driving the retail revenue and 2) more than doubling of ecommerce revenue. โ€ข โ?Store count has grown from 85 in 2018 to 113 as of August 2022. Stores are located in Canada and USA. Growth is entirely coming from the USA. Canadian market for Aritzia seems saturated. Their Canadian stores has remained around 67 for the last 4 years. Management expects only modest growth from Canada. May be some expansions of current stores but nothing more. Management expects to launch 8-10 new US stores each year reaching close to 150 stores by FY2027. Historically they have only opened 5-6 stores per year so this is aggressive but 8-10 stores isn't too big a stretch. The average revenue per store is CAD $8 million. Net investment per store is $3 million store. The pay back period is 12-18 months per store. These seem to be good store level economics. Further they also see an uptick in ecommerce revenue whenever they launch a store in a new city. โ€ข โ?Ecommerce sales have grown to $624 million for the TTM August 2022. The pandemic seems to have super charged this division. Management expects ecommerce revenue to reach $1,600 million by FY2027. โ€ข โ?If overall revenue needs to reach $3,500 million by FY2027, and $1,600 million comes from ecommerce, $1,900 million would need to come from retail stores. This means the revenue per store would need to be (1,900 / 150) = 12 million. Up 50% from the current levels of $8 million over the next 4 years, i.e., ~8% increase each year. They are likely taking into account price increase and product mix changes here. โ€ข โ?Overall the guidance seems mildly aggressive but given that ATZ outperformed their previous guidance post its IPO, it does not seem unreasonable. Note that ATZ has not at all explored the possibility of opening stores in Europe, China, Australia which are all big markets for Lululemon. Emerging markets all have increasing affluent populations which are attracted towards North American brands. Management is very focused on first becoming big in the USA and then expanding internationally. Any growth from international markets beyond FY2027 is definitely a big plus. โ€ข โ?Note that their entire MOAT is their brand popularity with millennials and rich Gen Zs. Their brand is mainly fueled through social media mentions by their customers. TikTok has been a big engine for them. Still, not my favorite MOAT.

EBITDA

โ€ข โ?Historical average EBITDA margins have been close to 16%. (I take stock compensation as an expense.) In FY2022, they benefited from Covid relief etc. โ€ข โ?Management expects 19% margins in FY2027. Does not seem overly aggressive. Lululemon, which is considered a competitor, has 25% EBITDA margins. โ€ข โ?Don't think they will benefit from economies of scale for SG&A expenses in the next 4-5 years as historically SG&A has been steady ~20% of revenue. While, they have doubled revenue in the last 4 years, they have also doubled their support staff from 659 in FY2019 to 1,487 in FY2022. โ€ข โ?Note that they do not use traditional media for brand marketing. They mainly rely on social media mentions and influencer marketing. This might be a cheaper form of marketing.

Capital Expenditure

โ€ข โ?They are investing a new distribution facility in Vaughan which will open by FY2024 and another one is in the works in Western Canada. โ€ข โ?Management expects to spend $500 million in capex over the next 4 years - majorly on store openings. It seems around $300 million should be store openings. If they open 40 stores, that will likely cost 40 stores * 3 million per store = $120 million. So the $180 million likely goes to current store size expansion and refurbishment / maintenance.

Working Capital

โ€ข โ?Historically net working capital has been low. But inventory level have ballooned as of August 2022. Management is trying to pre-order a lot of stuff to get ahead of any supply chain issues. The inventory levels should become lower in the next 2-3 years as global supply chain issues resolve.

DCF Value

At a 8% discount rate, and 3% terminal growth rate my DCF gives a value of $48.7 per share. This means that the stock is trading ($47 per share) at fair market value and their isn't much margin of safety in case I'm wrong.

July 2022 would have been an ideal time to invest - but doesn't matter in the long term I guess.

Disclosure: I hold a very small position in ATZ and this post is only for educational purposes. Please do your own research before investing.