Business Focus:

Aritzia (ATZ): ATZ operates as an apparel company that focuses on building brand and style rather than just trends. ATZ has gained significant traction and loyalty among consumers in recent years, especially among the young demographic due to its effective social media strategies by leveraging social media (mainly TikTok and Instagram) and influencer strategies. the company demonstrates great execution by not only resuming sales growth, and store expansion but also managing inventory in a more efficient manner. Investors now expect the worst is now behind the company, ATZ is trading at a fair multiple, and we think the company could potentially see a re-rating by the market if ATZ could demonstrate solid execution and resume its previous growth trajectory of double-digits.

Lululemon (LULU): LULU operates as a global consumer brand that targets yoga and fitness enthusiasts. The company has been a compounder for many years until recently, making the company’s valuation attractive in recent years. The current slowdown in sales growth was due to a combination of a slowdown in consumer spending and intensifying competition with lots of start-ups and emerging brands coming into this field. However, We think the brand of LULU is strong and still has a long growth runway, especially in the international market where its growth prospect is still in its early days.

Financial Performance:

In terms of valuation, LULU has always been trading at a premium relative to both ATZ and most consumer brands due to its consistent operating results over the years, well-recognized brand, decent track record of growing the business organically along with strong balance sheet and stock buyback history. While ATZ’s growth has also been really impressive over the years, especially during the pandemic, however, the company’s growth has slowed down in recent years due to a combination of weak consumer spending and tough comparisons from previous years. ATZ is on the path to resume its growth trend. Both are trading at a fair valuation compared to their historical averages given the consumer discretionary sector overall is under pressure. LULU is trading at a slight premium relative to ATZ, but we think the premium valuation made sense given its established brand recognition, and a better margin profile.

Financial Metrics and Forward Estimates:

The table below compares the financial metrics and stats between LULU and ATZ. LULU is multiple times the size of ATZ, but growth going forward is still quite healthy. Both companies are forecasted to see a recovery in EPS next year. LULU’s profitability is more attractive in terms of net margin, gross margin, and return on equity (ROE), while also employing less leverage compared to ATZ.

Source: 5i Research, Koyfin

Investment Outlook:

Both ATZ and LULU are solid consumer brand companies in this field. Although the fashion industry has been tough to be successful over the years, both have managed to perform well by focusing on building a brand rather than a fashion trend. Both could do well from these levels given the recent drawdown in share price. On a growth basis, both companies are quite similar in terms of outlook with expected growth in revenues of around double-digits next year. That said, LULU is balancing both capital return and expansion, while ATZ is currently prioritizing growth especially in the US market.

Comparing ATZ and LULU can be summarized by whether an investor places more importance on valuation and quality. ATZ is cheaper than LULU due to a weaker fundamental profile. That said, growth for both companies will be dependent on the health of consumer spending over the next few years, we are a big fan of both companies and would be comfortable holding both for the long term.

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Employees, directors, officers, related companies, the i2i Fund and/or partners of 5i Research do not have a financial or other interest in ATZ and LULU at the time of publishing.