The Canadian Investor - 20 Step Checklist for Stocks & Dive into Aritzia

Episode Date: March 28, 2022

In this episode of the Canadian Investor Podcast we discuss some useful metrics when researching stocks and then we review Aritzia as an investment. Tickers of stocks discussed: ATZ.TO, LULU   Our Website Canadian Investor Podcast Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Sign up to Stratosphere for free 🚀 our platform for self-directed stock investing research. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense.See omnystudio.com/listener for privacy information.

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I am Brayden Dennis, as always joined by Simon Belanger. Did we have one of the most requested episode formats that I can think of, which is us going through a mental model and checklist of metrics and qualitative things to look at for specific companies. And then Simone, you're going to lead the discussion on the highly requested Aritzia, the clothing company only listed on the TSX. It's been a good Canadian story. So this encapsulates so much of what you guys have been wishing that we do. So I'm pumped for this one. Yeah, I'm excited, too.

Definitely people have been asking about Aritzia. And like you said, some of the metrics we look into when we review companies. Very excited to talk about it. I tweeted about it last weekend, got lots of replies, a lot of people very interested in the company, a lot of fans of the company as an investment as well. So it'll be interesting, our discussion, and hopefully it'll help people get a better idea of what it is in terms of a business and what we think about them. I like these styles of episodes because we don't talk about the current market stuff because it's nice to take a step back, think about our mental models. And the reality is,

is that the market in the short term is a lot of noise. And so if you're new to the show, we release episodes on Mondays and Thursdays. Thursdays, more current events keep you up to date. And then Mondays, more mental models, investing concepts. And that's more signal than noise. And I think that that's really important. I will kick this off with a list of metrics that I typically look at for every company. Some of them are not applicable if the company may not be profitable or something, but keep that in mind. So first, I always look at revenue growth. It's just the absolute must look at. So from the income statement, I'm looking at revenue growth. I'm looking at EBITDA growth, which is earnings before interest, taxes, depreciation, and amortization, and free cash flow growth. And lastly, I also look at the growth

runway, and I make a scale of one to five. And I'm taking basically like a qualitative factor and putting it into quantitative because the past in terms of growth is important, but what about the future? And I try in my quant model to factor that in. On a multiple side, I'm looking at the typical multiples, price to earnings, PE, price to sales, EV to EBITDA is probably the best one to use that is enterprise value over earnings before interest taxes, depreciation, amortization. It helps correct for a lot of the nuances that are not seen and it helps correct some of the problems in accounting. So I really like that metric. That's EV to EBITDA. With multiples, of course, of course, it is just a frame of reference. It's just to get an idea of how the company trades. It

is not the be all end all evaluation. For margins, gross margin, EBITDA margin, free cash flow margin, those are all pretty straightforward. The balance sheet, I'm looking at current ratio, debt to equity, cash and cash equivalents, net debt. We'll jump into this actually with Aritzia. So I think that there's going to be some more context there. Profitability, return on equity, return on invested capital. Those are great to look at. And then for a capital allocation perspective, how is the share count? Is it trending up or down? How are they diluting shareholders? Are they buying back stock and reducing the shares outstanding? If they pay a dividend, what's the dividend growth? Are they growing it? What's the yield on it? What's the payout ratio? So that's like an if they're paying a dividend. And this list, Simo, if you type in a

ticker on Stratosphere, this list is start to finish in order with 10-year historical data visualizations. So this is literally me building what I would look at. And so if you want to see this for every company, it's really easy to do. Yeah, yeah, definitely. You know, Stratosphere is great for that. And clearly, you know, I've used a combination of Stratosphere and the actual investor relations side and the financial statements. Because obviously, you know, you still find some really good stuff in the financial statements and the investor presentation, just to get a sense of the direction that the company is going, some of the issues that may have happened in the previous years.

So you get a lot of context. And clearly, as well, I always encourage people to listen to some earnings calls because you do get a good sense of what management is thinking and also just their demeanor when they are answering some questions from analysts. You know, some analysts I find and ask some stupid questions sometimes, but some do ask some very good questions and just understanding how they're answering that. good questions and just understanding how they're answering that. And oftentimes it's a good indication whether they understand really well their own business when they answer these questions. I like that you said that for going in the IR for each company, because it requires some context in terms of like per company metrics that are important. I cannot possibly extract, you know, key company metrics for there's more nuance to the world than that. And so, of course, looking at those specific company metrics are important.

And listening to the conference calls is something that I know you have always been banging the drum on. It's important, man. And so, like, not a paid promotion, the quarter app on your phone, you can get those calls right on your phone. It's like Spotify for earnings calls. And it's nice. Like, I like it. And I know you like using those conference calls as well. It really does give you some context into who management is.

It's like it's amazing. It's a really good tool. Yeah. And you can skip right to the questions if you only want to listen to the question period, which is fine, too. And you don't have to make up a fake email address every time you go on the website to listen to a conference call. How many fake email addresses did you make? I just invent something at gmail.com. That's usually something I'm sure maybe some random people get these emails.

Did any of the IR websites make you verify your email? No, no. I'm trying to think. No? They're just like bypass. They're all using the same platform. That's so funny. All right.

Well, let's get into Aritzia, and then this will give some more context because I just flew through some metrics. We have listeners on this podcast of the widest range. We have people who are just dipping their toes, you know, managing their own portfolio, which is awesome. Congratulations. You're killing it. Just keep it up. Focus on the longterm to literally CFAs who manage money professionally. And so those folks know what these margins are, but some people don't. And that's why it's important for us to go through an exact example and give some more context because, you know, everyone can benefit from that. So I think that the format of this show just makes a lot of sense. Yeah, yeah, exactly. Now let's start with an overview of Aritzia. And I don't know if we mentioned the ticker,

it's ATZ on the Toronto Stock Exchange. I know you mentioned it's only listed on the TSX, which it is. So Aritzia is a Canadian women's fashion clothing company. It was founded in Vancouver in 1984 by Brian Hill, who is actually still the CEO today. Brian Hill has approximately 20% equity still in the business. So he's a major shareholder. Always something good to see

because clearly he has vested interest for the company to do well so his his incentives are definitely aligned with shareholders he has a lot of skin in the game here aritzia went public on october 3rd 2016 on the tsx it's still a relatively new company on the tsX compared to when they were founded. They qualify their brand as everyday luxury. In one of their investor presentation, they actually have a pyramid of the fashion market. I obviously I'll try to explain it. I know it's a podcast. Maybe I can also just retweet that after the episode is out so people have a better understanding of what I'm talking about. But essentially, the pyramid goes as follows. The top is luxury goods or luxury clothing. Second level is sub

luxury and then everyday luxury, which that's where Aritzia fits in, according to them. Then you have mid market underneath, then fast fashion underneath that and then discount clothing at the very bottom fast fashion discount clothing i'm thinking here potentially like h&m or even old navy is that kind of what you're thinking as well brayden yeah maybe i mean they all kind of have different value props i think but yeah maybe in the same market yeah and when I was researching like I obviously this is a women clothing company so I did you know I asked around I asked my wife I know I even tweeted out to get some the comments of what people were thinking about I also you know I asked my wife I'm like oh how do you compare Ritzia with Zara for example and she's like oh it's better quality

than Zara and tends to be more expensive too yeah exactly i looked at the price is definitely more expensive as well so i don't know where zara would fit in there i'm probably thinking like kind of mid-market slash fast fashion first of all it is zara for one correction no yeah they're like basically fast fashion it's like maybe in the realm of mid-market but it's pretty much fast fashion yeah the reason why i wanted to go and just have that discussion with you is just so people that are not familiar with the brand they can kind of try to you know place it and have a good idea of where it fits in the fashion market they have a total of nine in-house

brands as well now we'll touch on of nine in-house brands as well. Now, we'll touch on those nine in-house brands in a second because it's a really important model. It's very different from what I have seen. I literally got my girlfriend to sit down because she's in fashion. She does fashion blogging. I got her to sit me down and explain how this model works because there's multiple in-house brands and they sell the brands only at Aritzia locations. But I just wanted to rewind and talk about Brian Hill for a second because he's founded the company. He opened the first location in 1984, but he has had his whole life in fashion out of Vancouver, Canada, because his dad, Jim Hill, founded luxury retail company called the Hills of Kerrisdale. And Brian worked at that store his whole life

and his whole adolescence growing up, doing whatever tasks that his dad got him to do. And so he comes with this lineage and his whole career from the time he was just a teenager has been in this business. So he has been deep in this business. And if there's anyone who understands women fashion, it's the people who are at Aritzia. Like, and that's the vibe that I've been getting and told from women. Like I have no context. Like you have literally two guys here talking about women's clothing and we're like, how do we make money off this? There's no better management team in terms of like a life in fashion and particularly women's fashion in that like everyday luxury potentially luxury market women's clothing so i just think that that kind of context is pretty important here

yeah no that's great context uh thank you for adding that in and you know it also shows that even if he had less than 20 percent in equity even if it was like one percent just with that kind of background you can tell that you know it means a lot to him that the company succeeds yes and like he's been doing it since 82 like this guy's in it like you know i just don't see it's one of those founders where like he's just gonna keep going and that's what you really want to see, right? Yeah. I was going to say, I have no insight on that, but it feels like you'll never retire.

Yeah, yeah. That's just the feeling I get. I tend to agree. He'll just kind of work forever and he loves it clearly. So no, that's great. So in their most recent investor presentation, which was updated this January, they mentioned they had a total of 106 boutiques in north america so 68 in canada and 38 in the u.s that's an increase i'm just going on memory

here about five compared to the previous year obviously their fiscal year of 2022 is not done yet they just released q3 a couple months ago so Q4 will be released in the next month and a half or so, if I remember correctly. So typically each year they're looking at adding about like five to six, you know, six, seven, eight boutiques. Most of them being in the U.S. because they are looking for U.S. expansion right now. But they seem to be very strategic when it comes to opening boutiques. They've also repositioned some in the past. That's what I've noticed as well. So it's not a growth at all costs. I think they're being very systematic. And the majority of their boutiques are located right now along the US and Canada, East and West Coast. Very few stores in central or south of the U.S., for example. They

do have some, but you can really see where they focus that expansion. I'm assuming they will be opening more and more in the central and south U.S. They do have a few, so I can see that being part of their growth strategy. They have clients in over 221 countries around the world. Order through their online site. From a clothing perspective, here's what I came away with after I looked at reviews online. And like I previously mentioned, I did post on Twitter in January if people had feedback on their experience with Aritzia clothing. Just because like Brayden said I'm a guy I've not shopped there myself it's for women's clothing and some people had direct experience with it

and others it was through women in their lives that may have shopped there so you mentioned you talked to your girlfriend and essentially the overall feedback I got and I may be off a little bit but essentially this is what I came away from talking to different people but also looking at reviews overall their clothing seems fairly expensive not crazy expensive but definitely more on the expensive side can be overpriced for certain items that typically would be cheaper like t-shirts I'm thinking here clothing is overall good quality and tends to last clothing can go out of style relatively quickly their target demographics seems to be women in their 20s or 30s and overall people seem to have a good customer

service experience with them so I don't know Brden, if you have anything to add on that. I do. Yeah. The vibe that I have gotten is one really positive reviews. So let's get that out of the way. Like really positive reviews. People seem to love their clothes. They seem to think that the quality is good and willing to pay that, like what I want to call like maybe eight out of ten, maybe even eight and a half out of ten on price for clothing. Now, I think what you're getting at too, and that's also the feedback that I've gotten, is like, yeah, you can drop 150 bucks on some pants that are going to last a really long time. And then on your checkout, you might leave with some $80 t-shirt that Ritz has super high margin on. And that item is probably not worth it in terms of price. And so I think that that's probably built into their model. And so I think that that's been across the board where

it's like, if you know what you're looking for, you can get really good deal based on how good the quality of some of their key pieces are from their in-house brands. And so that's what I have been told. The overall vibe I have been given has been overwhelmingly positive from women. That's one thing that I'll say. Yeah. Yeah. And that's what I was trying to portray with some of the items I mentioned. Kind of the overall sense is that same for me. Overall, it seems like very positive. But for the most part, you know, it's a bit more on the pricey side.

Tends to be good quality. And what about the demographics? Are you kind of in the same boat where it's like in women's in their 20s and 30s? 20s, 30s. And then the tail ends of those would be the younger, like teen, and then in the 40s would be smaller markets, but still have presence there. I'd say 20s to 30s is probably a good summation of their customer, yeah. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now.

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When I think about their capital allocation strategy, I don't have a really good fair judgment. What they have done that I wanted to comment on is they've kept the share count relatively flat given their growth curve, which is nice. And obviously they're not paying a dividend, which I, two thumbs up basically there, why would they? But no, I don't think I have enough experience on the name yet. And so this is one that we'll continue to look at. And the reason that you and I are looking at it and so intrigued is like, is this a model for the growth curve at the hockey stick? When, if we look, Lululemon didn't do men's clothes. So that addressable

market hadn't been tapped into yet. And they were largely a Canadian brand. When they really started to explode in the US, and what is it, like a third of their revenue? No, not that much. A fifth of their revenues is men's now? Like sizable. Well, I don't know. Yeah, yeah, yeah.

It's definitely increased. So it's one of their fastest, if not the fastest growing segment for Lululemon, for sure. Yeah. Right. Is there one of their fastest, if not the fastest growing segment for Lululemon for sure? Right. So the reason that we find this so interesting is it's like the model's already out there, which is like the best in class Lululemon, which is, you know, broke through into the U.S. market and had really good close, like customer obsessed type customers. I don't know if Aritzia has that, but the vibe I'm getting is that they may. And so I think that that's why both of us have been intrigued in this name. And I think a lot of people are. Yeah. Yeah. And just one thing, man, quickly, I mentioned about the share account too, is it actually, like you said, it stayed very stable and you'll notice anyone who checks out their recent statement, you'll see that there was a little bit of, you know, it might look

like a share issuance, but it was actually a swap some share classes for another share class. So it didn't actually increase the share count. So you'll be able to see those if you looked at their most, I'm not sure if their most recent statement, but you'll be able, it usually gives you a breakdown of the past couple of years, right? When you look at the share count. So just a quick note there. In terms of looking at some other things here that I will look at, I do like to just have a quick look on Glassdoor. So Glassdoor, for those who are not aware, it's a site where employees who work for various companies can go on there and just provide their experience of working there and also what they think about the company, if they would refer it to a friend, if they also like the CEO. Those are kind of the two big things you can have a quick look without actually subscribing to their service. So in terms of working there, Glassdoor reviews are, I mean, they're okay.

I compared their reviews to Lululemon because lululemon here like you mentioned i think it's the top of the class when it comes to clothing and fashion companies at least in my view the samples are large with over 1500 reviews for aritzia and more than 5000 for lululemon so we're not talking about like just 10 reviews that can be you know thrown out the window because of sample sizes these are pretty good sample sizes 64 percent of employees would recommend it to a friend as a workplace versus 88 percent for lululemon 82 percent approve of the ceo versus 91 percent for lululemon the overall rating for ritzia is 3.7 stars out of 5 and 4.4 out of 5 for Lululemon. So clearly the numbers are below Lululemon. I don't think they're bad per se. I've seen way, way worse in terms of reviews.

And clearly, you know, fashion sometimes they're not necessarily the highest paying job. So that might have a bit of an impact on those reviews. But overall, I think it's, you know, they're okay. Like I said, they're not outstanding, but they're good. They're all right. And then you compare it to just an absolute unicorn of success as a publicly traded stock in Lululemon, the hundred bagger Lululemon. Yeah, I would say that the reviews here are okay. And then you compare it to the gold standard and it's like, yeah, they're all right. Yeah, yeah, exactly. Now I'll move on to the numbers and I know you'll kind of go into more details about what you look in terms of numbers. So I'll be comparing a lot again to Lululemon just to give more context. And again, Lululemon to me,

it's just the one that, you know, the top in the market. So currently Aritzia has a market cap of $5.3 billion. They've grown their revenues at a compound annual growth rate of 8% over the past five years. I'm using the full fiscal year data here. So clearly it does not include fiscal year 2022, which is currently in Q4. They haven't reported Q4 just yet. They did have a drop in revenue in fiscal year 2021, which included most of the actual calendar year of 2020. So it does make sense here because a lot of the headwinds for COVID were felled during this fiscal year.

That fiscal year, their fiscal year starts essentially on March 1st, to give people an idea. So if you exclude fiscal 2021, their revenue growth was in the range of 11 to 17% for each of the three previous years. They had just shy of a billion of sales in fiscal 2020, so prior to COVID. In their most recent Q q3 release they increased their full year 2022 guidance and tightened their range to 1.425 billion to 1.45 billion so on the low end it would be a 45 increase from fiscal year 2020 so it would be much greater obviously if you're looking at fiscal year 2021 but again i think that would be misleading because of all the headwinds that they had for COVID. felt in the last two years. And sometimes people get really excited, but oftentimes it actually helps to look a year before COVID started to get an actual better base to compare.

That two-year stack is really important for these types of businesses. I mean, like, how are you going to really look at comps when malls, which is like their bread and butter, were just not closed for just roughly guessing, like 60% of locations based on the geography split on their revenue. And so those stacks just don't make any sense to make. If anything, you look at the decline for closures and you're like, damn, that's pretty good numbers on the e-comm, right? Like, so there are maybe some accelerated adoptions to e-comm, some of that direct consumer benefits that, you know, when it's all said and done, maybe it's not such a bad thing for their business, but it's really hard to tell right now. Yeah. And it really seems like a lot of their

customers value the in-store experience. And I'll kind of explain that with the following numbers here. So if you look at, you know, pre-lockdown fiscal year 2020, their split with in-person versus online was about 77% in-person, 23% online. Then when COVID hit, it was basically 50-50 because like you mentioned, lots of store closures. So people just didn't have the option. And when they opened, oftentimes it was limited capacity. That's what they mentioned. And then if you're looking at this year, now it's gone back to a 64-36 split between retail and online. So it's kind of shifting back a little bit.

My sense is that it may kind of stabilize around there. I don't know about you, where I think it may stabilize to higher levels than pre-COVID, but lower than what we had when lockdowns were fully on. That's right. I believe the steady state is somewhere in between. That makes complete sense for me, given the nature of their business and perhaps some accelerated adoption from some of that consumer behavior shifting online and being willing to do clothing online, which is still something that I personally, unless I know exactly what my size is at that specific clothing company, I'm really hesitant to do clothing online

because like, dude, like i don't even care what the shirt looks like it's all about the fit like dude if i look in shape i'm good like i don't care what's on the shirt man just hug my biceps a little and we're off to the races simone that sounds good no i'm like that too i tend to like to go in person but I do buy a lot of Lululemon stuff, for example, and I know that usually medium for me fits really well. I have returned stuff from them from buying online before, but I would say like 90% of the time I'm good to go. So that's kind of how I approach it. I know you were at one point, well, I mean, we're kind of forced to be not in the gym, but are you regularly back in the gym yet? No, not yet. I'm basically working from home. I've got a nice little setup now. So working

out from home. You got the dumbbells at home and stuff too? Mostly bands, but I have elastic bands that go to like up to like a hundred pounds when you combine them. Holy. Oh yeah. They're pretty heavy duty. And then I have a pull-up bar. I have, I do a lot of mobility work too. So I mean, I like going to the gym, but I've kind of got used to doing it at home too. Yeah. Yeah. At some point, I mean, the novelty wears off a little bit. I'm doing like a lot of functional stuff that you're talking about as well. The reason I ask is because I know you're in really good shape. So anyway, we digress. We digress. So now where it gets really interesting with Avritia is their Canada slash US revenue split. So for the first three quarter of fiscal

year 2022, which you're currently in, that's why I'm just using the first three quarters, it was 56-46 Canada versus US. And that's compared to 68% for Canada for the same period last year so it's really starting to get very interesting here what's interesting about last year it's nothing to worry about but their US sell actually declined 23% while Canadian sales had only declined 13% compared to 2020 so the US sales actually saw a bigger decline in the percentage basis than the Canadian one. That's something I found just interesting. I wouldn't make too much of it personally, just something to keep an eye on. You want the US sales to keep increasing because most of their growth is clearly going to be coming from there. I just found it

interesting. That is interesting given also like closure policies too, right? Like, or is this for this year? No, that was for fiscal year 2021. But it's funny where it actually picked up towards the Q4 fiscal year 2021. It's something to monitor. I mean, it is certainly something to monitor because I think that that is kind of like a pinnacle of the investment thesis is the US growth. So, I mean, you have to monitor that, I think, right? Yeah, exactly. You definitely want that US growth to keep increasing, that's for sure.

And like you mentioned, and we mentioned previously, Shared Dilution has been minimal over the past few years. They have gross margins of 44%. that's good for a clothing company but lower than lululemon again we'll be comparing to them a lot which has 58 gross margins for additional context a company that i think is probably on the bottom end of the spectrum here is gap which has about 40 margin so it is definitely better than gap gap as different brands i totally understand that but i just wanted to give people a bit of a context here because it's easy to just compare it to lululemon and just be like oh it's really crappy but you know you have to put things into context given that gross margin which is lower than i would expect to be honest given that gm it speaks

to i think why customers actually appreciate paying more. Because clearly, cost of goods sold for this clothing is higher than competitors based on how much the clothes cost compared to a gap or something. So that is something that I can't tell if it's good or bad based on the investment thesis. Because maybe the investment thesis is based on the fact that customers love it the investment thesis is based on the fact that customers love it because they think the quality of the clothes is really good. And based on that cost of goods sold number, that kind of lines up. Yeah. Yeah, exactly. And then return on invested capital here, it's typically in the mid-teens. Again, that's compared to 28% for Lululemon. So

you can see a pretty big difference. Net income for the first three quarter of fiscal 2022 was 123 million compared to 69 million for the same period of fiscal 2020. Again, I'm comparing to pre-COVID because I think it's a better basis for comparison. Free cash flow for the same period more than doubled versus fiscal year 2020. And that it was 302 million for the same period more than doubled versus fiscal year 2020. And that it was $302 million for the first three quarter.

The balance sheet here. So the inventory has been stable in 2021. That is one thing they did mention on their earnings calls that I listened to. So I listened to the last earnings calls for Q3 of 2022. And I also listened to the last year, you know, Q4 call, which essentially is the full year, full fiscal year call. And that's one of the things they've been keeping a good eye on because they mentioned something interesting when the pandemic started. Their focus was to reduce their inventory because they thought that their sales may be impacted by COVID and therefore did not want to have too much inventory on hand. But then they quickly saw that their business

started picking back up and they were experiencing some supply chain issues. Surprise, surprise. Of course, it's easy to say in hindsight. So they've been putting increase important on having good inventory levels i mean if you look at these supply chain comments are just across the board so i don't think anyone's safe at this point like it's literally just it seems like it's almost become like a they should just include it in the conference call when the operator has to say their generic statements for every single company at this point like you know you know, I'm tired of hearing it. It's just across the board, you know? Yeah, yeah, exactly.

That should be a supply chain segment. Yeah, like part of the operator, like that, like, robotic person voice at the beginning. Yeah, yeah, exactly. And as of November 28, 2021, their cash had more than doubled since the beginning of 2021 to $ 306 million. So that's really good to see. Not surprising because they are generating quite a bit of cash flow. They had a quick ratio of 1.28, which is very solid because it is over one. So that just means that their

current assets outweighs their current liabilities. So you want this to be as high as possible and just means that, you know, they're not at risk of being insolvent or anything like that. I'm sure you can elaborate on that, you know, a bit further on. I know you might. Although they do have liabilities, they do not have any debt. Mainly their liabilities, the majority of it is because of lease liabilities. So very nice looking balance sheet here. I did get a tweet from someone who said, oh, what do you guys look when you look at balance sheets? And, you know, you can't really, it's not a black and white answer, unfortunately. So it really depends on the type of business. It also really depends on,

do they have debt? Do they have interest payments? What proportion of their revenue goes towards interest payment? Things like that. A lot of things go into that. Obviously, a company that is a utility, while it's pretty typical to see high levels of debt for a utility because they have very stable cash flows, but a clothing company like this, I think I'm very happy at looking at it and not seeing any debt. There are good and bad balance sheets, but when I'm first doing some investigation, like what I'm going to talk about here at The Metrics, like some of this surface level analysis that you guys I know have been looking for when first looking at a company

is hunting for red flags on the balance sheet. I'm just in red flag hunting mode. Does anything look super weird? Do they just have like an egregious amount of debt? You know, I'm looking for red flags, not trying to say like it's a good or bad that analysis may come after I'm in literally red flag hunting mode. Now you pointed out they are in a net cash position. And so that like right away, I'm tending to lead like that's a nice looking balance sheet. If they're in a net cash position, like that's a good place to be, right? Like more cash than debt liabilities. That's the kind of balance sheet that you really want to see from really nice companies. So you like to see that from this company as well. As do-it-yourself investors, we want to keep our fees low. That's why Simone

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questrade.com for details. That is questrade.com. Here on the show, we talk about companies with strong two-sided networks make for the best products. I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away.

Find a co-host at airbnb.ca forward slash host. That is airbnb.ca forward slash host. That is Airbnb.ca forward slash host. In terms of valuation, it trades at a bit less than four times sales based on their guidance for fiscal year 2022. Their PE is around 35 to 40 times fiscal year 2022 earnings. Again, just using what they're guiding in terms of actually just projecting their earnings in terms of what they had for the first three quarters. The price to free cash flow is around 15 times. Again, we're just projecting here what we saw for the first three quarters of the year. So overall, the valuation, I think it's I mean, I think it's reasonable. It's not cheap. That's

kind of the sense I got comparing to the growth. Keep in mind the growth will be quite substantial this year compared to even two years ago. So it'd be interesting whether they can keep up going in the future. I'm sure they'll provide an update on their guidance for fiscal year 2023 when they release their upcoming earnings. Yeah, for the numbers, I'm going to go through like basically my list that I had up above there. I share a, like spoiler alert, I share a similar sentiment on what you just said on like, it trades at, you know, a pretty reasonable multiples, especially on the forward looking and given the growth, given the margins, I'll talk about that.

So, and let's just caveat here, these numbers, Simone and I might have like a percent difference on some numbers here on our notes, but we should be in relatively same ballpark. So for those metrics we were talking about, revenue growth, you have average high teens. If you look at top line growth, typically you had upwards of 25% growth in 2016 and 2017. Free cash flow growth has been explosive. I mean, keep in mind the base effects here. They're doing over anything in 2019. They did, I don't know what on fiscal, maybe that was 2020, but they did over a hundred million free cash flow for that year. And now like on this year's run rate, I expect

that again. But if you look back like five, six years ago, we're in like the 20 million in free cashflow production ballpark. So that's going to look explosive on free cashflow. Just keep in mind on base effects, but I mean, you got to give it to them. This is a pretty profitable biz. I'm going to give it a, I said here, I'm going to make a little rating out of 10 here. I'm going to give it a seven and a half out of 10 on growth. Simon, do you want to comment on my little out of 10 on growth here? pretty much everyone in the industry in a similar fashion. So I think, you know, you don't want to give excuses to businesses. But if there's, you know, if there's one year where they're allowed the pass, I think it was fiscal year 2021, or really that big year in terms of lockdown when it was completely new for everyone. So I think I agree with that, especially what we're seeing

this year, it's pretty, pretty amazing growth, right? 45% even compared to two years ago. So I would be a 7.58 out of 10. I think that sounds about right. Yeah. Okay. Let's look at multiples. It trades at 37 times earnings on the PE, 15 times EV to EBITDA. It looks like they're converting almost all that to free cashflow because you said 15 times on free cashflow as well, which is, you know, very reasonable, I think, and if not cheap and four times sales. So, you know, I look at these multiples and think it's not a cheap stock. I think we share a similar sentiment, but it's also not an expensive stock. I don't think given the growth or opportunity for growth in the US, this seems pretty reasonable. I am giving it a 7 out of 10

on valuation. Yeah, I think that's about right. I think it's a very reasonable valuation for a company specifically considering the growth and the fact that, wow, they're profitable. Yeah, yeah, we love to see it. Let's look at margins, gross margins in the 40s. I think it's dipped into the high 30s at some point. EBITDA margin, you're looking at around 20%. It's clothing, so it's not going to see the 94% SaaS gross margins, but they're doing okay here for clothing biz. It's important to look at comparables for competitors on margins, of course, but I don't look at this biz and think, wow, go look at that margin profile,

given that it's a luxury good. It doesn't wow me. I'm actually going to give them a four out of 10 on margins. I don't know if that's the bull or bear case because it speaks to maybe why customers like it so much. Yeah, I think that one is hard to evaluate. I expected them to be higher, much higher than Gap. I expected them to be much higher than gap. So I think I'm about there to four or five out of 10. That's something to keep an eye on, at least for them to keep that stable, but hopefully increasing it by a couple hundred basis points over the next few years would be good to see. On their balance sheet, 149 million cash. That's the number I saw. Net cash position. We've already talked about this. When you look at all the liquidity around

the biz, I'm thinking 8 out of 10 on the balance sheet. It looks pretty good. Yeah, their cash is actually up to like $300 million or something now. Just it's the recent quarter. So it's probably I didn't pull the data. So yeah, all those metrics, I think, you know, the current ratio, which when I mentioned quick ratio, originally, I was talking about the current ratio. Now I just realized that I knew you were but I didn't want to call you out. I think the balance sheet Yeah, it's very good looking. I think you know, clothing retailer or not, I would agree with you, I think probably eight, nine out of 10, no debt. Yeah, really good balance sheet. Looking at profitability above 20% on return on equity over double digit return on invested

capital. They're profitable on net income and free cash. So the business is relatively profitable. They do have still a lot of growth ahead of them, would hope in the u.s so when it comes to profitability it's not the metric i care about the most but you got to give it to them i'm gonna say eight out of ten on those metrics yeah yeah i think i agree with that i mean i like the fact that they're growing but not at all cost because we've seen i don't know you remember when target expanded to canada and then they were oh man that was a disaster that was such a misstep yeah and they were trying to open these stores and they did some really poor planning supply chains weren't properly in place so i remember the stores were like half filled you'd go there and be like okay

everyone was excited and then it really didn't pan out because people got used to going there and not having what they wanted to see in the stores. So I'd rather see a company like Aritzia, which is doing a very, you know, systematic expansion and making sure that the new stores are opening are actually doing well. This seems to be the strategy they're doing. And they're not afraid, you know, if they do open a store, it's not working out at replacing that store or replacing it for another location. So I do like to see that. Last year, you're going to talk about their conference calls from their, I guess, their fiscal Q3. And then we will switch gears to a checklist on qualitative and then run

it through Aritzia again, just for some context. Sure. Yeah. So like I mentioned, I listened to two of their conference call, the recent Q3 conference call. They mentioned, like I think I alluded to, their inventory levels were steady, but they were feeling headwinds on both supply chains and hiring. Hiring is another thing that I think we'll be hearing more and more on various conference calls along with supply chain issues. They're currently diversifying their supply chain on a geographical standpoint, which should help them in the longer term. Their hiring was more difficult due to a tight labor market, which is no surprise, like we all know and they restated that they are looking

to buy back up to five percent of their outstanding shares during that call so it's very interesting that they are looking to returning shareholder capital to shareholders through share buybacks and i did mention it's up to five percent so it could be less than that but they restated that and their most recent conference call which is not a surprise because you know they are having a quite an astounding year when you look at the growth yeah things are accelerating based on what i was seeing so uh yeah we'll see we'll see i think another one i haven't listened to a call what's brian like i mean pretty standard in terms like of ceo yeah mean, he knows his business.

That's the impression I got. Yeah, I'd hope so. He's been doing it for a while. Holy. Yeah, exactly. I mean, I did like when I looked at Q4 for fiscal year 2021, I did like them acknowledging that it was their hardest year in history and that because of the various issues. hardest year in history and because of the various issues and i think you know obviously a lot of companies got passes because of covid but i do like to see that you know management acknowledging

that so that was something that i did enjoy hearing is just taking ownership of it and obviously the tone has changed quite a bit with the most recent conference call because it's going quite well but they're not shy of just saying where there's some challenges ahead. So they were good with that too. Yeah, it's definitely been tough. I mean, they've been thrown the whole book of issues. Let's look at 12 qualities that I look for in every company. And then we'll go through them for Aritzia.

Okay, so starting off with number one here, switching costs. Number two, network effects. Number three, the durability of the company. Number four, revenue stability, revenue quality. And now we have pricing power, a bottleneck business, which I'm going to talk about, a secular trend, optionality, capital lightness, organic growth, the management slash CEO, and lastly, the regulatory landscape. Let's go through them quickly. We'll rifle through them for Aritzia, and I'll go first, and then you comment. Switching costs, I see zero switching costs for clothing. So by the way, this is kind of like what we've been hinting at, which is like, sure, the numbers look great, but it's a clothing business and clothing businesses are not the typical compounders, durable businesses we like to talk about. That's why this section is so important. I don't see any switching costs for a clothing company.

Yeah, no switching costs either. no switching costs either if a competitor comes by and they offer you know the same kind of clothes for better value i guarantee you a lot of their customers will probably switch no problems let's rate them out of two because there's like a kind of there's a zero there's a kind of and there's a two which is a yes so i'm going zero i think you are as well network effects i mean maybe maybe is this a stretch i think that's a stretch i don't think there's any network effects here there's some network effects for like the brands like nike where the swoosh can't be missed so the more people that wear that swoosh it's like they are literally walking advertisements. And I look at that as like a network effect. But and again, maybe making a

yoga stretch here. But these brands are not they're not branded like you don't see you'd have to look at the tag to see it's from Aritzia. You know what I mean? I mean, maybe the one way I could see network effect, actually, I'll take a different, completely different approach than you, is the number of stores and the proximity and how easy it is to visit those stores. So especially for a clothing company,

we talked about door numbers, about retail sales versus online. So I think there is actually quite a bit of value of having that network of stores readily available for most of their clients. I just question if the more people that buy Aritzia, looking at like a pure play network effect, the more people that buy Aritzia, does it make Aritzia better? Yeah, maybe not. I'll give them a one. I'll give them a one.

Okay. You're going one, I'm going zero. Durability. We're going through a clothing company, right? For these qualities. The durability of a clothing company, I do not believe exists. Even for the clothing, you and I are both wearing head to toe. We're walking advertisements for our beloved Lululemon.

I know we don't stop talking, but I'm sorry. And in advance, I'm sorry for not shutting up about it. I don't see any durability for any clothing company, for me personally. Yeah, I mean, I think most companies, I don't think there's durability. I think that brands as powerful as Nike or Lululemon, I think there is some. Yes. Well, there's not none. There's not none.

I just mean like i'm looking out decades right yeah yeah i think for you know for clothing company as a rule i think it's very low but you know the top ones do have some but again i don't think it would be a five out of five we're going out of five right no zero out of two zero one zero, or yes? Okay. Okay. Well, yeah. So I'm going to give them a zero probably on durability. Yeah. Okay. Okay. Yeah. Yeah. I agree. All right. Revenue stability. And when it comes to recurring purchases, you could make the case, do they publish repeat customer stats? Probably somewhere. Probably. I can recall. Yeah. If we look at the wardrobes, the closets of the women I know, I would give them a pretty decent revenue stability mark. Just my anecdotal call it what you want. I'm going one out of two here.

But on the other hand, if I look at it, if someone has a decrease in income, it could be one of the things that they are going to cut is, you know, that kind of mid luxury or I can't remember now what they were referring to in their slides. But everyday luxury is probably something they would cut from their budget. Pricing power. I believe that they do have pricing power and far in excess of inflation i think garicia has some great pricing power yeah so what two for you yep yep yep yeah i think maybe 1.5 1.5 okay okay wow this scale this is literally like whose line is it anyway it's like the points are the categories are made up and the points don't matter. 1.65. Yeah. Going to six decimal places. It's pie.

Bottleneck business. Now, this one needs some explaining because you're not going to find it in the list of votes and qualities online if you Google that. But a bottleneck business is a type of business that I really like to look at, which I think of it like as a toll booth. If you want to play, you have to pay. Visa and MasterCard are a perfect example of that. It's such a bottleneck for like e-commerce to happen. You got to kind of go through the rails. If you look at a legitimate toll road, that's kind of like a bottleneck where customers don't

have another option. Like they kind of get funneled into the bottleneck. I do not believe any clothing company, you're kind of forced into paying to play. It is completely consumer discretionary from that perspective. So I do not consider it a bottleneck business. Yeah. Yeah. Same zero here. Is it part of a secular trend?

This I maybe do not have enough context about it to really give it a rating. Yeah, I would probably agree with that. I mean, it is fashion. So I would tend to say probably not so yeah like the tam of fashion yeah it's not a high growth no exactly so i think i would go zero here but i'm going at it from an uneducated basis yeah optionality they do have optionality inside of clothing i mean i think that they have tons of optionality. Can they open up brand new markets? I don't know about that. Probably not. So maybe a one out of two.

Yeah. Yeah. I think I would agree with that. Yeah. Capital lightness. I don't know the franchise. Is it franchise model? What is it? Wow. That's a good question. I did not look at that. I think they're corporately owned, but that's one of the things I did not check. Yeah. Yeah. I think they are. Yeah. I don't believe it. owned, but that's one of the things I did not check. Yeah. Yeah. I think they are. Yeah. I don't believe it. Anyways, opening new stores is somewhat capital intensive, but it's not crazy.

I mean, inventory and I mean, it's somewhere in the middle, right? It's not super capital light, but it's not like, you know, building manufacturing capacity. Or a utility or something like that. Yeah. So I think probably a one out of two here yeah organic growth i do believe that the entire story is growing organically so that's good for me yeah yeah same there's a lot of organic growth obviously there's a lot of growth coming from new stores but they are increasing their same store but that's organic growth i thought organic

oh i always thought about organic like same store sales type of deal same store but that's organic growth i thought organic oh i always thought about organic like same store sales type of deal same store sales growth no like new store openings i consider organic growth like non-organic growth would be buying a competitor or something oh fair enough yeah i think we're saying the same thing in different ways we're saying the same thing yeah same store sales growth would be part of the organic growth picture, right? It's like the Costco model. It's like, yeah, they have this like typical organic growth per warehouse, but then they're also opening X amount per year. And it's kind of easy to understand and follow. The management CEO, Brian Hill, 30 out of two, this guy literally will seemingly run this business in fashion until he cannot physically any longer yeah no i think this

it's a two out of two i do hope that at some point if he's tired of running the actual business he maybe takes a step back and you know gets an operator to run the business yeah but still is involved at some point i think that's something to just keep an eye on. I don't think it will be coming anytime soon. I don't know how old he is, but if he founded that in 1984, let's assume that he's not a young whippersnapper either. So yeah.

So I think that's probably just the one thing I'd be on the lookout. He looks great though. His Wikipedia page, this is a handsome man. Brian, hell you, handsome man. Regulatory landscape. I do not believe clothing is up in the eyes of regulators. I'm okay with this in terms of risk. No issue on

regulatory landscape for me. Yeah, if they would have had some, it would have been when they started expanding in the US, but now they're well established in the US. So I think we can put that well behind them. Yeah. Beautiful. Again, the list of metrics and the list of qualities. I didn't just come up with them. Well, I came up with them a long, long time ago and put them on stratosphereinvesting.com for you. So just go check it out. It's literally there for you in order at stratosphereinvesting.com. That is it, Simon. We have another show to record after this, just a quick one. And then, yeah, all good, man.

Hope you guys enjoyed it. Yeah. Yeah, yeah. Hit us up on Twitter, at CDN, for Canadian, at CDN underscore investing. Hit us up if you like this format. You know, we mess with all kinds of formats,

test stuff out, see what you guys like. The problem is, you guys just like whatever we make, which is also very nice. So we get very bad feedback loops on what works, but we love you guys. We appreciate it. So thank you so much for listening. If you're new to the show, Mondays and Thursdays, we do not miss any Monday or Thursday. When's the last time we missed an episode? Like 2019, maybe? Probably never. Yeah, early on, we weren't as like, we recorded once a week, but it was never the same day, I think. So it would like, it would come out like Thursday would come out a Tuesday, it was never like a consistent schedule. But yeah, I think since pretty much the pandemic

started, we've been consistent on one episode a week on Mondays and then since last fall, Monday, Thursday. Yeah. Yeah. Just pro tip. If you're making content like this, you've got to have it like booked. If it requires more than one person, it's got to be a set schedule because we used to text back and forth, be like, hey, dude, can you record on this

day? It's like, no, can you do this day? What a shit show. Do not do that set of schedule. Thanks so much for listening. We will talk to you in a few days. Take care. Bye-bye. The Canadian Investor Podcast should not be taken as investment or financial advice. Brayden and Simone may own securities or assets mentioned on this podcast. Always make sure to do your own research and due diligence before making investment or financial decisions.