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Aritzia looking to new stores to boost business as it reports Q3 net income drop

Vancouver retailer says third-quarter results compared with a net income of $71M a year prior
An Aritzia store in Vancouver. | Rob Kruyt, BIV

Executives at Aritzia Inc. are leaning on a slew of new and upcoming stores to help boost business in its upcoming fiscal year.

"Our new stores are our most consistent growth driver, historically delivering predictable revenue growth and propelling our brand," Todd Ingledew, chief financial officer of the Vancouver-based retailer, said on a Wednesday call with analysts.

His remarks come as Aritzia reported its net income tumbled by 39 per cent in its third quarter, as it remained in expansion mode with a particular focus on the U.S. The company opened a new boutique in North Carolina in its third quarter, and by the end of the fourth will have added stores in Indiana, California and Illinois.

In total, Aritzia plans to open 11 to 13 new boutiques next year, including a Chicago flagship, and expand four or five, including two Manhattan stores.

The boutiques are meant to introduce the chain and its "everyday luxury" ethos to the lucrative U.S. audience.

However, chief executive Jennifer Wong warned that expanding in any market comes with challenges.

"As we become more well known and get more famous in the U.S., certainly we are coming up on competitors' radars," she said on the same call as Ingledew.

But Wong added that Aritzia has "always operated in a competitive environment" and should take attention from rivals as an opportunity to "double down" on marketing and communications to ensure consumers understand the company's brand proposition.

"We still continue to see no one that can compete with us on the breadth of our products or on the quality, care and attention that go into our products or our boutiques," she said.

Wong has seen several signs of success from new stores, including their adeptness at beating Aritzia's payback period expectations. 

A payback period is a measure businesses use to calculate how long it takes them to recover the cost of an investment, which in this case is the cost associated with store openings.

Aritzia's newest boutiques are on track for payback periods of a year or less, ahead of the company's 12-to-18-month expectations.

In more recent months, the company has also benefited from Black Friday, which Wong said broke several Aritzia records with its strong sales, as well as the cold weather, which has driven consumers to purchase its popular Super Puff coats.

Yet Aritzia reported its net income dropped to $43.1 million in its most recent quarter compared with $70.7 million a year prior.

Net income for the period ended Nov. 26 amounted to 38 cents per diluted share compared with 61 cents per diluted share in the third quarter of the prior year.

Its adjusted net income was $52.7 million, a 31 per cent drop from $76.6 million in the third quarter of its fiscal 2023.

Irene Nattel, an analyst with RBC Dominion Securities, said in a note to investors that she considered the results a "thread above forecast, despite overall weaker consumer spending."

While Aritzia said it benefited from lower warehousing and freight costs, it blamed the drop in net income on higher markdowns used to optimize its inventory levels and pre-opening lease amortization costs for flagship boutiques.

The company also highlighted that it used much of the quarter to experiment with its first ever digital "archive sale," which marked down products by up to 80 per cent in October.

"The event went better than planned, allowing us to profitably clear more product early in the season and to test additional inventory clearing strategies as we grow to date," Wong said.

The sale, she added, had not triggered any "material cannibalization" to regular price or seasonal sales.

Though the company has yet to announce another, she said "we think that this will be something that we could use in the future."

This report by The Canadian Press was first published Jan. 10, 2024.

Companies in this story: (TSX:ATZ)

Tara Deschamps, The Canadian Press