Aritzia shares fall as much as 13% despite record quarter-end sales
Aritzia Inc. (ATZ.TO) shares fell as much as 13 per cent on Thursday, despite posting record quarterly sales, as higher inventory levels weigh on investor sentiment.
The Vancouver-based clothing retailer released its quarterly results Wednesday. It said net sales for the third quarter ended Nov. 27, reached $624.6million, which is the highest ever recorded quarter and an increase by 38 per cent over the previous year. Strong sales in the United States – where 50 per cent of Aritzia’s sales now come from – and e-commerce growth fuelled the record results. The U.S. accounted for 33% of Aritzia’s total sales two years ago.
Despite the positive sales momentum, Aritzia shares slumped in trading on Thursday morning. As of 11:15 am ET, shares in the retailer had fallen nearly 8 percent. ET Thursday trading at $47.27 on Toronto Stock Exchange.
Many retailers have struggled with higher inventory levels due to supply chain issues and the inflationary environment.
Aritzia claims inventory levels reached $508 million in the third quarter, an increase by 187 percent compared with the same period last year. However, Aritzia notes that inventory levels in the third quarter were $508 million higher than last year and had a negative impact on sales.
The company now expects gross margins – the amount of profit made on goods measured as a percentage – to decrease by approximately 2.5 percentage points on a year-over-year basis in the fourth quarter, due to higher warehousing costs related to inventory levels, ongoing inflationary pressures and foreign exchange headwinds.
Jennifer Wong, Aritzia’s chief executive officer, said that based on what she knew at the moment, they made the strategic choice to order future season purchases earlier to build our inventory base due the unprecedented sales growth, reduce supply chain risk and ensure we can fuel the strong demand for our product. The company received its inventory earlier than anticipated due to improved freight timelines and supply chain issues.
Wong insists that the company’s markdowns for its next quarter will not be greater than those of pre-pandemic.
Wong stated that the inventory is highly concentrated in client favorites and “we are confident with its composition” and had enabled strong sales growth.
Analysts believe that the strong sales momentum will outweigh worries about rising costs and increased inventory levels.
“Though near term margin pressures and high inventory are prominent, we believe that the strong brand momentum outweighs costs concerns,” Mark Petrie, CIBC Capital Markets analyst, wrote to clients on Thursday.
“New and expanded stores continue their performance well, and the economics remain excellent. We remain positive on store growth as well as e-commerce. These are driven by brand awareness, and an improved online platform.
In a note to clients on Thursday, BMO Capital Markets analyst Stephen MacLeod says the higher levels are not expected to drive discounting – a key concern for investors when it comes to retailers with bloated inventories – and reflect the company’s strategic decision to order future seasonal product earlier.
MacLeod stated that “While inventory remains elevated, revenue growth is still robust.”
“On-order inventory was higher than last year, while this year there has been more product received or is currently in transit. This could lead to increased warehousing costs but not to markdowns that exceed pre-pandemic levels.
Many retailers are seeing stocks drop due to worries about overstocked inventories.
Lululemon shares dropped 9 per cent Monday after the company issued a press release saying it expects gross margins to decline It will decrease by between 0.9 percent and 1.1 percent in the next fiscal quarter. Lululemon increased its total sales forecast due to strong holiday traffic, resulting in the decline.
Alicja Siekierska works as a senior reporter for Yahoo Finance Canada. Follow her Twitter @alicjawithaj.
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