After a tough year, Aritzia banks on U.S. expansion to keep growth humming

Improved financial performance at Vancouver-based retailer Aritzia sent the company's stock soaring on Thursday morning by more than 20 per cent, though some experts warn the company isn't out of the woods after a challenging year saw the company's red-hot hype start tosimmer down.

The clothing chain announced its latest quarterly earnings on Wednesday after the markets had closed. The financial results were an improvement compared to the last two quarters, but the company still isn't performing as well as it did at the beginning of last year.

Aritzia announced its net income had tumbled 39 per cent compared to the same period last year. Net revenue for its third quarter reached $653.5 million, up from $624.6 million a year earlier.

"I think what this earnings report suggests is that while they may be [a strong brand], they're not bulletproof," said analyst Doug Stephens, founder of Retail Prophet.

100 potential U.S. locations

At the beginning of 2023, Aritzia was on a winning streak. The company was raking in moneyand had just posted its highest quarterly net revenue on record a trend driven in large part by the brand's growing popularity in the U.S.

As the company aims to recapture its previous momentum, it's staked much of its future success on expansion into the United States a strategy that Stephens warned carries both opportunity and risk.

Opening new stores helps drive both revenue and hype, the company's chief financial officer said during an investor call Wednesday, and Aritzia sees much of its potential for growth south of the border. The company says it's identified more than 100 possible locations in the U.S.and plans to open eight to 10 new U.S. stores a year in the next few years.

"They can't just look at international growth as being the cure-all that will fix all their problems," said Stephens.

Despite recent headaches, the company's CEO Jennifer Wong struck an optimistic note during an investor call Wednesday. She said the company has made strides in clearing out excess inventory and is promising a greater variety of new products for the upcoming season to lure customers back into store.

"I'm very excited for our spring collection to hit the store and I look forward to introducing everyday luxury to more and more clients," said Wong.

Aritzia an 'outperformer'

In a note to investors, CIBC analyst Mark Petrie rated Aritzia as an "outperformer" and noted the brand has managed to continue growing despite a more cautious consumer environment. But whether it can recapture its lost sense of "newness" will be a key test in the upcoming quarter, he said.

"We believe brand/competitive risk is lower than we did a couple of quarters ago, though we acknowledge it has not fully passed," he wrote.

Aritzia has previously blamed "missed opportunities" in getting new product into stores, along with a difficult consumer environment. The brand has also been challenged by a glut of excess merchandise that's recently pushed them to put more items on sale.

"The fact is you can't have 'accessible luxury' and an increase in markdown activity because it devalues the brand," said Liza Amlani, principal and cofounder of the Retail Strategy Group,

She noted the brand's recent, first-ever online "archive sale" a tactic to help clear out excess merchandise may have been successful but shouldn't be repeated too often.

The brand will also continue to face economic headwinds, with RBC predicting last month that Canadians' purchasing power will continue to weaken in the next year amid higher debt payments and ongoing inflation. The trend isn't expected to improve until the second half of 2024, according to economists with the bank.