Aritzia shares plunged as high as 13% despite record quarterly 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.
On Wednesday, Vancouver-based clothing retailer Zara reported its quarterly results. The net sales for the third quarter ended Nov. 27, reached $624.6 millions. This was the highest ever quarter in the company’s history and an increase 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. Two years ago, 33% of total sales came from the U.S.
Despite strong sales momentum, Aritzia stock fell in early trading Thursday. The retailer’s shares were down almost 8 percent as of 11:15 AM. ET Thursday trading at $47.27 on Toronto Stock Exchange.
As supply chain problems improve and inflationary pressures increase, many retailers are struggling with high inventory levels.
Aritzia reports that inventory levels for the third quarter were $508 million. This is an increase of 187 percent compared to 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.
On Wednesday afternoon, Aritzia’s chief operating officer Jennifer Wong stated that “Given the information we had at the time, the strategic decision was made to order future seasons buys earlier to build back inventory due to unprecedented sales growth and mitigate supply chain risk, as well as ensure our ability to fuel strong demand for our product.” The company received the inventory earlier than expected, as supply chain problems were less severe and the freight timelines improved.
Wong claims that markdowns by the company in the upcoming quarter won’t be any greater than pre-pandemic levels.
Wong stated that the inventory is highly concentrated in client favorites and has allowed for strong sales growth.
Analysts agree that strong sales momentum outweighs concerns about higher inventory and costs.
“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 is rising, revenue growth remains strong,”
“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.
Stocks have been falling at several retailers due to concerns about overstocked inventory.
Lululemon shares dropped 9 per cent Monday after the company issued a press release saying it expects gross margins to decline In the upcoming quarter, it will drop between 0.9 to 1.1 percentage points. 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.