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Aritzia stock tumbles as much as 25% after full-year outlook disappoints

Analysts have downgraded the stock over worries about margin pressure, rising economic uncertainty

NEW YORK, NY - JANUARY 16: A corporate logo for Aritzia hangs outside their store on 5th Avenue on January 16, 2022, in New York City.  (Photo by Gary Hershorn/Getty Images)
Shares of clothing retailer Aritzia fell as much as nearly 25 per cent on Wednesday. (Photo by Gary Hershorn/Getty Images) (Gary Hershorn via Getty Images)

Shares of clothing retailer Aritzia (ATZ.TO) fell nearly 25 per cent in intraday trading on Wednesday, after the company issued an outlook that was below expectations and some analysts downgraded the stock over concerns about margin pressure and rising economic uncertainty.

While the Vancouver-based retailer released strong fourth-quarter results after markets closed on Tuesday, its full-year outlook came in below analysts' expectations and included a decline in gross margins, an increase in expenses, and slower revenue growth. Shares of Aritzia closed the trading day on the Toronto Stock Exchange at $34.15 per share, a decline of nearly 21 per cent compared to Tuesday's close.

"We remain bullish about the long-term growth opportunity for Aritzia, though in the context of slowing consumer spending as well as substantial margin volatility, we take a more cautious view," CIBC analyst Mark Petrie wrote in a note to clients, downgrading the stock from "outperformer" to "neutral." He also revised the 12 to 18-month price target on the company's stock from $60 per share to $44 per share.

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"After two years of outsized revenue growth, [fiscal 2024] will represent a more modest pace," Petrie wrote.

Aritzia has been on a tear the last two years, with sales surging, particularly in the United States. The company says net sales in the fiscal year ending February 26 reached $2.2 billion, up from $1.5 billion last year, an increase of 47 per cent. Growth in the U.S. has been especially strong, with sales there accounting for more than half of the company's net sales in the last year. In the year before the COVID-19 pandemic struck, the U.S. represented just 34 per cent of the company's net sales.

Chief executive Jennifer Wong said in a statement alongside earnings on Tuesday that the focus for the upcoming fiscal year will be "on scaling our infrastructure to match our recent tremendous growth and make strategic investments to fuel our future growth and achieve our long-term goals."

"This year is a year of investment," chief financial officer Todd Ingledew said on a conference call with analysts, adding that the company will spend on expanding its distribution centres, opening new stores, and expanding office space to support its e-commerce operations.

The retailer now expects net sales to be in the range of $2.42 billion to $2.5 billion next year, representing an increase of between 10 per cent and 14 per cent compared to fiscal 2023. Operating expenses as a percentage of revenue are expected to rise 150 basis points. Gross profit margin (the amount of profit made on goods measured as a percentage) is expected to decrease by 200 basis points due in part to ongoing inflationary pressures.

"Though we do not believe slower revenue growth belies issues with the Aritzia brand, we expect moderating consumer spending will represent a headwind to upward revenue revisions," Petrie wrote.

BMO Capital Markets analyst Stephen MacLeod also downgraded the rating on Aritzia's stock to "market perform" and lowered its price target from $60 to $50 per share, describing the company as going through "growing pains."

"Aritzia is coming off a two-year period of phenomenal growth," MacLeod wrote in a note to clients. "However, this growth has necessitated the need for incremental infrastructure investments."

"The shift to investment led to a disappointing margin guide relative to expectations."

RBC analyst Irene Nattel also lowered the price target on the stock, from $63 per share to $60 per share, but maintained a "sector perform" rating on the company.

"Although performance of Aritzia prior to, during and now, post-COVID reinforces our views around the strength, sustainability and upside potential of the company's unique business model, the unexpected hit to (fiscal 2024) margins is likely to exacerbate investor concerns," Nattel wrote in a note to clients.

"As an apparel retailer, equity markets are already concerned about sustainability of demand against the backdrop of rising rates/compressed consumer disposable income and recession."

Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.

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