The Canadian Investor - Is Aritzia Canada’s Next Fashion Growth Stock?

Episode Date: September 5, 2022

The TSX can provide great investing opportunities because it is often overlooked by US and global equity investors. Stratosphere.io analyst Adrian Iwanicki goes over the investment thesis for Aritzia and how it could be following in Lululemon’s footsteps with its US expansion plan. Tickers of stock discussed: ATZ.TO Check out our portfolio by going to Jointci.com Our Website Canadian Investor Podcast Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  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.

Welcome back into the show. This is the Canadian Investor Podcast, made possible by our friends and show sponsor, EQ Bank, which helps Canadians make bank with high interest and no fees on everyday banking. We also love their savings and investment products like GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs on a regular basis to set money aside for personal income taxes in April of every year. Their GICs are perfect because the interest rate is guaranteed, and I know I won't be able to touch that money until I need it for tax time. Whether you're looking to set some money aside for a rainy day or a big purchase is

coming through the pipeline or simply want to lower the risk of your overall investment portfolio, EQ Bank's GICs are a great option. The best thing about EQ Bank is that it is so easy to use. You can open an account and buy a GIC online in minutes. Take advantage of some of the best rates on the market today at eqbank.ca forward slash GIC. Again, eqbank.ca forward slash GIC. This is the Canadian Investor, where you take control of your own portfolio and gain the confidence you need to succeed in the markets. Hosted by Brayden Dennis and Simon Belanger. The Canadian Investor Podcast. My name is Brayden Dennis, as always joined by Simon Belanger. Simon and I are going to do a quick little chat here.

You know, banter. We don't even have anything on the slate here. You're going to fire off dad jokes, I guess, repeatedly. Simon, we passed episode number 200. We don't even have anything on the slate here. You're going to fire off dad jokes, I guess, repeatedly. Seymour, we passed episode number 200. Yeah. Hey, come on. Big clap.

Dude, that is a lot of episodes. There is multiple times that I thought there's no way we can continue to do this. It's just so much work. But you were consistent. I was consistent enough. And we were both consistent enough, I would say. And we have crossed a line that most people will never get to. Most people don't even get over 20 episodes because they realize, oh my goodness, this is a treadmill. I do not wish to step on. And it's a treadmill. I'm very glad that you and I stepped on together.

So I appreciate you, brother. Today, I'm going to interview Adrian, who is an absolute dog. Adrian is a wizard with financial market research, and I'm lucky that he works for my company, Stratosphere.io. We're going to talk about Aritzia today. For the most part, we're going to talk about a few things, but mostly Aritzia i'm gonna let him kind of talk you know explain what he came up with because you came to the conclusion you're like wow this is a really interesting business yeah uh canadian company vancouver roots the ceo and founder just moved into the chairman role there's been some switches there and he's like he sent me a message on slack he He's like, at today's valuation,

this is, in my opinion, one of the best opportunities in the Canadian market by far, given everything, including the valuation and the models that he's put out. And so this is the chat that I have with him. And I know you've read a bunch of his stuff as well. Yeah, yeah. And I met him in person in Toronto too. Really smart guy, right? Yeah,

he was at the Blue Jays game. Did you guys sit together? Yeah, for the most part. I mean, I was all over the place, but I think for the most part, we did walk back for a while. I think he took the Metro and I was walking back to my hotel. Oh, yeah. Yeah, yeah. So, we chatted for like a good hour, but definitely interested in hearing what he has to say. I don't know if you'll compare it. Is that when I drowned in pizza Nova slices? Yeah.

With wine boxes. Yeah. A wine box and pizza Nova. Yeah. Very classy. Yeah. Very classy. Yeah.

And I'll definitely be interested to see what he says. And especially, you know, if there's some comparison a little bit to Lululemon, like we had talked about, I know they didn't have quite the margins that Alulu did. And that was one of the things I highlighted. But the valuation has gotten a lot more attractive, I think, since we spoke about it. So it'll be interesting what he says. And yeah, I wouldn't sleep on it, especially if Adrian thinks it's a smart investment. Without further delay, here is my interview I did with Adrian from stratosphere.io. delay, here is my interview I did with Adrian from stratosphere.io. Okay, TCI, we have a fun little interview here. Adrian, welcome back to the show. It's always good to get you on here. I know the listeners last time enjoyed you being on here and they get to see your research on

stratosphere.io, which is a nice little thing. I have the pleasure of working with you every day and you kicked my ass in tennis last night. So that was good. How are you doing, buddy? Doing great. It's great being on the show again. It's really exciting. So today we are talking about Aritzia and Aritzia is probably at least well known to

people who have been to the mall in the past five years. It is a clothing business originated out of Canada here. It's been a phenomenal story and an interesting stock since they hit the public markets. And let's preface this with, this is two guys talking about a women's clothing store who we only get firsthand experience with the experience of Aritzia through our significant others. But we have been very interested in the business now for probably a couple months. And you did a deep dive on Stratford.io and we're going to kind of uncover what you've found so far. So I think that that's a good place to start. We can't start with Aritzia without talking about their origin story. It's a fascinating story out of British Columbia, Canada.

Can you give us some context on how the business was founded. Brian Hill was the founder. Where is he now as he's recently stepped down? Can you give us some context on the history of the business? Yeah, for sure. So the history of Aritzia actually dates back prior to Brian's founding of it in 1984. So Brian's family, particularly his father, was in the retail business selling luxury clothing and in a sort of department style type of store. And, you know, since he was a kid, when he was a teenager, he helped out his father a lot doing some, you know, basic tasks, folding clothing, cleaning windows and things like that around the store. But because his father had this successful business called Hills of Carisdale in Vancouver. You know, he was mentored

throughout his early years in the retail business. You know, fast forward a little bit, Brian then went on to university, he went to Queens. So he left his home province of BC, stayed in Ontario for a little bit. Once he graduated, he came back. And then that pretty much set the foundation for Aritzia the way that it is today. So in 1984, Brian started Aritzia. He opened his first standalone store in Oak Ridge Mall in Vancouver. And the reason why he opened that store was because he saw a gap between the luxury market and the more trendy sort of fast fashion market. He thought that that middle market was completely unpenetrated. So he and his brother set out and opened their first store. When they did that, they wanted to kind of move away from the style that

his father ran, which was, you know, he retailed external brands, third party brands. But because there were no brands that kind of penetrated that everyday luxury market, which is what Aritzia is today, it serves the everyday, quote unquote, luxury market. The only way to do that was to really start your own in-house brands. And that's what Aritzia was back then. And that's what it still is today. It almost exclusively sells its own in-house brands, which we'll talk about a little bit later. And that was really the only way to control everything and be a vertically integrated business. Fast forward to today, Aritzia is highly successful. Unfortunately, Brian stepped down as CEO and passed off the helm to Jennifer Wong. However, Brian is still on the board and he still

has a lot of influence over the business. So that is definitely a positive for the business. Something that just came to mind, which is quite interesting, is Jennifer Wong has been with Aritzia now for 30 years. And didn't she start as like a sales associate, like as just, you know, one of the like, you know, high school job type of situation selling like as a retail employee? Yeah. And here's the thing. She was actually rejected when she first gave in her resume. So at the time she started in 1987, so a little bit over 30 years at the business, but she went into the original location where Brian Hill was still working and she handed in her resume to him and he just pretty much looked at it, dismissed it. And he's like, yeah, we're not hiring. She persevered. And she, you know, I read an article about her and she said

that she couldn't take no for an answer. And luckily, there was another store already open at the time. So she just ran down the street, went to that other Aritzia boutique, handed in her resume and got her job over there. So it was really just a part time gig for her. And she started off as a style advisor. That's essentially what store workers were called at the time. I think they still are. And then she just kind of moved her way up the ranks. And here she is CEO 30 something years later. Really impressive story. Yeah, it's an impressive story, no doubt. And it got me thinking here because Brian was in the trenches as a retail employee on his dad's company at a very young age, he's been entrenched in that business and understands the ground level operations. And that rhymes with Jennifer's story a little bit as well. And it seems like the

company's now in good hands. She seems like the right person for the job, given her experience, her ability to execute key projects as an executive over her time in the last 10 years as well. And so it makes a lot of sense. 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. Questrade is Canada's number one rated online broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones, all commission free, so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees.

They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. That is questtrade.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. All right, let's get some context on who is Aritzia's customer because it's not you and I, as you know. Who is their target market and why are they so successful in this niche here?

Yeah, so Aritzia's customer base is actually quite broad. At the broadest level, you can say that it would be targeting primarily women between the ages of 15 and let's say 40. So early Gen Z to mid to late millennials. However, most of the branding, I think, is done towards teenagers and young adults. I think that's really who's really in the stores. Every time I go into the mall, that's who I see. I don't really see ages 30, 35 plus in there, mostly young adults, university students and teenagers. But I think what's important here is to recognize- Where are they getting all that money? It ain't cheap in there. Not at all. Not at all. But I guess if you really like a product, you'll find a way.

I think Lululemon has showed us that. Exactly. But yeah, I think it's really important to look at Aritzia as a house of brands. It's really not just one brand. Although they run Aritzia stores, the products that are in there are a multitude of different types. And these are, again, almost exclusively in-house brands. But each of those in-house brands targets a different sort of niche.

So I can run through the main ones. There are more than the ones that I'm going to talk about, but I think these run through the main ones. There are more than the ones that I'm going to talk about, but I think these would be the main ones that customers really recognize. So the first one would be Babaton. And Babaton is more of a, you know, it's more for younger adults in the professional world. Clothes that they make are more neutral, quote unquote, work appropriate, business casual, I guess you can say. So the customers going into Babaton looking for Babaton clothing are the ones that, you know, are a little bit older, they're probably not going to be teenagers. And you know, they started their careers, and they're looking for clothes to match that. Sunday Best, on the

other hand, that's another brand of Aritzia. Sunday Best targets more of the teenager and young adult demographic. These clothes are a lot more trendy, so definitely not as work appropriate. You wouldn't really wear plaid skirts and bomber jackets to work, at least in the office, maybe some other places you can. But Sunday Best is more about the trendy look. So just catching on to the latest trends and targeting that younger demographic. Wilfred, another brand, is probably the most versatile brand. It really just tackles everything. It hits almost every single age group and you can wear it pretty much everywhere, whether that's a casual night out, or if you're going out for dinner, or you want to throw on a piece to work. It's really appropriate

for everything. Then we got Denim Forum. That's mostly just jeans and jean jackets. And finally, TNA. I think a lot of people know Aritzia for TNA. I had no idea TNA was part of Aritzia 10 years ago. I had no clue, but it was really popular before Lululemon kind of took off with the leggings. But I know TNA was big on the winter jackets and athletic clothing back in the day. So that's really what they target, just athletic clothing, more comfortable clothing, as well as some winter attire. So yeah, I think considering all of this, it's really just a house of brands that targets many different age groups. And I think the brand overall is fairly versatile because of that. It kind of follows you as you develop between your teens and your adult years. So it's just kind of always there. This is anecdotal for sure. But the women I speak to, not just in conversations about like, I'm going to go buy this. It's the feel that they have for the quality and just that brand

recognition that if you're buying one of those Aritzia brands, it's nice. It's like, you know, it's not some fast fashion thing. You know, you're going to have it for a while. It's high quality. And just the anecdotal feel I get is that the people love wearing these clothes, whether it's the Babaton, the Wilfrids, or, you know, whatever else they're selling. And, you know, they have a whole long list, like probably like 10-ish brands, right?

There's Superworlds, like those big puff jackets, right? I'm just looking here on the website. So that gives us some important context on how they operate because the pieces are not labeled Aritzia. The pieces are labeled one of their brands that they exclusively own, right? Like it's not like you can't buy Babaton outside of an Aritzia property. You can buy them on a Babaton specific store and an Aritzia store, but you can't go buy it at the bay, right? And so that's important for the distribution channel to maintain the status and the signal that you get from shopping in those places versus, you know, it's the Nike playbook.

They're pulling all Nikes off of these discount retailers because they don't want to tarnish the brand and they want everyone to basically have to order that exclusively from Nike at higher margins and hopefully online at even higher margins. Would you say that that's a similar strategy? I think you're right on. I think what a lot of luxury brands and high quality brands do is they make sure that they control the experience. Guilty pleasure of mine is walking into those Aritzia stores. It's a phenomenal experience. It looks great. It makes you feel really good, but that's part of the experience. And that's what a lot of luxury stores do as well. On top of that-

Was that you trying on a fancy new dress for my birthday party or what? I mean, I can't say that I didn't look around. I tried to look for some men's clothing. It's not there yet, but hey, it's coming. It's coming. Men's clothing is coming. So maybe one day. You get this feeling as an investor and I don't own shares. Full disclosure, do you own shares? I do not, but my fiance does. Okay. Okay. I'm in a very similar situation. Investors get a very similar feeling to Lululemon, right? It's like this optionality. You have this huge growth story in the US, and you're just like, oh, it feels kind of like Lulu. And then now you look

at the breakdown on revs and the men's clothings, like a third of the revenue just off memory. And so you think of these kinds of large opportunities in the US, optionality to sell men's clothing at one point. It sounds like optionality, which is not a very common word you throw around with the clothing segment, right? You're thinking of a clothing stock and you're not like, ah, there's so much optionality. That's not something that comes to mind, but it certainly rhymes with the Lululemon story, including its origins and where they are today breaking ground in the US. Yeah, absolutely. And that's something that I looked into. When I was researching Aritzia,

a lot of it felt very similar to Lululemon, just from a qualitative standpoint. And then when I looked into the numbers, it actually looked quite similar as well. It gets really exciting when you sort of use that as an analog to predict the future for Aritzia. And although I don't really like using analogs, I think the path that Aritzia is on, I think it, you know, I think what Lulu has done in the US, I think that could rhyme, you know, substantially for Aritzia as well. But in terms of the qualitative, they've just been very similar. They started off in Canada, they expanded into the US, brand loyalty is paramount for them. They're targeting sort of the, you know, more micro celebrities for their

influencer marketing, and things of that nature. So it's a very similar story. And so when I looked at the numbers, the best analog that I could find for where Aritzia is at today is Lululemon back in 2010. So in 2010, Lululemon had pretty much split revenue between Canada and the US. So it was roughly the same. It was about 323 million for the year in the US and about 370 million in Canada for the year. So it was slightly below. Aritzia is in a different point today. In the latest quarter, 51% of the revenues were actually generated in the US, which is fantastic. But what I see today is that Aritzia might actually be in a better position. So when Lululemon hit, you know, 320 million in the US versus 370 million in Canada, they did that on 78 US stores and 44 Canadian stores. In contrast to that, Aritzia today has

more Canadian stores than it has US stores, yet the US revenues are a lot higher. So Aritzia today has more Canadian stores than it has US stores, yet the US revenues are a lot higher. So Aritzia has 42 US locations and 68 Canadian locations. To me, I think there's a couple of things at play here because we are looking at different time periods. So this is why I don't really like using analogs. But the one thing is that e-commerce was probably not as big back then. Aritzia developed that in 2012. And I think Lululemon did a similar thing. And then the other thing is Aritzia just has a lot more exposure, I guess, through influencers today.

Social media probably played a large role in that. TikTok as well. They've had a couple of hit pieces in 2018 with the Super Puff jacket, as well as the Melina pants in 2021 that took off on TikTok. So I think there were a couple of things at play here that kind of explain that disparity. But I think it's really fascinating to see that. So, you know, if we look at Aritzia as the 2010 Lululemon, in terms of valuation as well, Aritzia is nowhere near where Lululemon was back then. Lululemon in 2010, based on those revenues,

you know, now looking back in retrospect, they've done tremendous things. They're in the multi-billions of revenue a year. Lululemon in 2010 was trading at 36 times free cash flow, and they had EBITDA multiple of about 27 times. Aritzia, on the other hand, is trading at 22x free cash flow and 13 times EBITDA on a trailing 12-month basis. So it's worlds apart, but the opportunity is pretty much the same. Lululemon has done incredible things in the U.S. Their U.S. revenues now are five times higher than the Canadian revenues. Aritzia right now, it's still growing.

It's still one-to-one kind of between Canada and the U. But if we follow that analog, I think the opportunity in the US is really tremendous. I can't even describe where the stock might be in five to 10 years if they execute on this. Well, their latest quarter was comp sales on the US up 80%, right? So that is a growth stock out of this world trading at pretty low multiples. You got to think that there is some discount to security just trading on the TSX versus back to 2010, Lulu was trading on the TSX. They delisted it and only have the US listing now. There is some sort of premium or discount in this case to securities that just trade on the Canadian exchange, right? It's like when Mark Leonard talks about a US listing, he's like, no,

he wants less eyeballs on the stock, right? Because of the compensation structure with their employees. So he doesn't want that US listing premium. You could speculate that there's something similar happening here with the Aritzia listing being only on the TSX. All right. Let's talk about the scale of the business today. Sales, number of locations, how much cash are they generating, profitability. Where is the scale of the business today? Yeah. So the business is really large today. Starting off with the market cap, it's about 4.8 billion today on an enterprise value basis, which is just you would add the debt and subtract the cash. We're looking at about 5.1 billion. And the really interesting thing over

here is that while Aritzia is a retailer, and a lot of retailers have a lot of debt, Aritzia actually has no traditional debt. That debt number is really just the capital leases, which is, you know, just the rent that they're paying discounted back and put onto the balance sheet. So it's really just a bunch of accounting, but they don't hold any debt where they're, you know, investors gave them money and they're paying an interest payment every single year. So I found that fascinating. But yeah, it's a multi-billion dollar business today. And the fundamentals that support that are pretty spectacular as well. So looking at revenue in 2022, fiscal 2022, Aritzia recorded $1.5 billion in revenue. Trailing 12 months, that's $1.7 billion.

And that's an increase from $380 million in 2014. The boutique count, we have 68 Canadian locations. So that's close to like a 20% compound annual growth rate. That's nice. Yeah. Between 2014 and 2022, it's 19%. So yeah, it's pretty remarkable. In terms of the boutique count, so we got 68 Canadian locations today, 42 US locations.

And we have data going back to 2016. And at that time, there were 57 Canadian boutiques and 18 US boutiques. So not much growth on the Canadian side, but that's not unexpected. Lululemon of all, the population, and just the consumer spending that happens in the US is quite remarkable. And then on a free cash flow basis, in 2014, Ritzia generated about $20 million in free cash flow. Last year, in fiscal 2022, that was $270 million. And on a trailing 12- basis, that's 217 million, just a couple of things that have kind of pressured their margins over the last little bit, like an increase in inventory, they accelerated some of that to meet demand. They also increased capex by a little bit, but overall, no concerns. That free cash flow number,

I think is really high. That's a 10 times increase since 2014, which is, again, just a remarkable number. number I think is really high. That's a 10 times increase since 2014, which is again, just a remarkable number. The growth levers they can pull seem quite easy to understand for me. And as investors, we like to see that happen, right? It's like more locations, more penetration in the US, them continuing to optimize their performance indicators, which is like revenue per square foot and stuff like that. You mentioned yesterday before we were playing tennis that you were listening to the call, to the latest earnings call, and they found that increasing the footprint of actually each location does not erode efficiency of sales per square foot.

And so that's another initiative as well to actually expand the footprint of each location because they're finding success from that. And that's really uncommon, right? Like you have a pretty great business if you're able to not dilute efficiency by taking up more retail footprint, right? It seems like a really good business when you're able to kind of maintain that operational efficiency. So the story feels quite easy to understand in terms of growth levers, you know, more locations keep growing

this really smart marketing campaign that they continue to execute on. I talked about on the podcast yesterday, their partnership with like these really like superstar influencers. You know, you have like this girls in their young twenties that have audiences and reaches of, you know, like 50 million people. And that's pretty remarkable. Like across all of their podcasts, their YouTube, their Instagram, their Snapchat, we're looking at like probably 30 million uniques just from Amber Chamberlain alone in terms of influencers. They understand marketing for this demographic really well. Is that a fair assessment? I think they have a remarkable idea of who their customer is. And I think this campaign with Emma Chamberlain for the Fall 22 collection, I think this is brilliant.

She's got a following of about 16 million on Instagram alone. And then she's also big on YouTube and TikTok. I can't really comment on the effectiveness of that. I've never really watched her. I don't really know who she is, but what i've heard yes we're not her audience that's for sure exactly but yes she's doing the campaign for sunday best and that apparently is exactly who her her audience is it's that younger demographic that i was talking about earlier in the show i think they're fully in tune with who they got to be getting to put the word out and you know you know, I looked at these ads, I think they're going to be highly influential. There's there's no way that, you know, a following of 16 million of, you know, young adults are not going to look at, you know, this campaign and be like, yeah, I'm going to go shop somewhere else. I think they

will be highly influenced by this. And, you know, the uptake doesn't even have to be that large. If you get, you know, 2 million of the 16 million followers interested, and then they kind of spread the word, they throw some Aritzia clothes on, they enjoy it, they review it, they post it on TikTok. The network effects of that are huge. And I think Aritzia really understands that. And that's what they're trying to do with this. Can I give you some scale on the reach of her podcast? Okay, you can see here, I'm showing you my phone here right now. There is on Spotify, 150,000 reviews, okay? And Spotify reviews are pretty new. For some context, so 150,000 reviews, this podcast has 1.2 thousand reviews. So like 150 roughly call it like,

you know, 135 X the reviews on Spotify than this podcast. And this podcast consistently is the number one most listened to show in the finance category in Canada. And we're talking about closer to like 150x scale just for her podcast. That is just one channel that she's effectively reaching Aritzia's target demographic. And so call influencers some like icky word or a cringy word, whatever it is. This is how people are capturing attention. And the brands that are paying attention to it are the ones that are going to thrive in the next 10 years. 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. Questrade is Canada's number one rated online broker by

MoneySense. And with them, you can buy all North American ETFs, not just a few select ones, all commission free so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit 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.ca forward slash host. That is airbnb.ca forward slash host. All right. So let's shift gears. We've talked about the Lulu story. We've talked about who they're serving, some scale of the business. This podcast can't talk about a clothing stock. It's the reason Simone and I don't own Lululemon.

We don't own Canada Goose. We don't own Aritzia stock. Even though all of them have been fantastic Canadian growth stories, there is always a question about durability. It is impossible to predict fashion. And for me, it is impossible to predict fashion. Dude, I own like four t-shirts. Arguably, the most important risk to discuss for this is what is the durability of fashion brands? Can you just kind of speak to that? Because this is my hesitation point to getting from here to there, to being a shareholder, even though everything else looks amazing to play devil's advocate. Is there any durability? Like I have yet to be convinced of that. Do you want to speak to that? Yeah, I think that's a great point. And to me, that's the largest risk as well. If I didn't have this question about durability, I would probably make this one of the biggest holdings in my portfolio.

But I still need to do some thinking I need to do some digging. There are a lot of things with fashion that kind of scare me off like the seasonality. You know, especially with all these collections, you got the fall collection, the spring collection, you don't know what's going to hit what will you've got this inventory risk, you buy all the all these clothes, maybe it'll take off, maybe it won't. And then you know, you've got the question of how long can a brand like this last? How long will they continue to innovate before they become complacent? Because what we've seen with many brands like, like gap, for example, or H&M is they become complacent in one or two or three areas, and then the brand is pretty much done. So how do fashion brands avoid that? How do the anti-fragile ones continue going?

And what I found when I was researching Aritzia is there are four main traits that the timeless brands have, the ones that stick around for a very long period of time. Like for example, Nike, I wouldn't really consider that a fashion brand, but they've been around for a very long period of time. Like, for example, Nike, I wouldn't really consider that a fashion brand, but they've been around for a long time. Louis Vuitton is a great example. They've been around for, I believe it was since the 1800s. So it's just been a very long time. And, you know, in terms of fashion, that's, you know, that's the equivalent of like 1000 years of normal life. So the four main traits that the best brands in the world seem to have are timelessness, exclusivity, quality, and innovation. And in my research, and you know, while I was

doing some thinking, I believe that Aritzia has all four of those. So timelessness and the fact that they keep their products fairly simple, the colors are mostly neutrals, they don't have any crazy logos on them. And they seem to be pretty quick in terms of catching on trends. So a lot of these clothes can be worn for long periods of time, you can mix and match them with with other fashion brands. So that definitely helps. In terms of the exclusivity, we've talked about that earlier in the show. And, you know, 96% of the revenues that Aritzia generates is because of it's from its exclusive brands. Aritzia barely sells anything else. They have a couple of partnerships with like Vans and Levi's and a couple of other brands,

but most of the sales are from their in-house brands. And like you mentioned earlier, you can't find Aritzia anywhere else. It's only within the Aritzia brand. So they got full control over that. Quality. Quality is number one for Aritzia. Very similar to Nike or Lululemon. So they got full control over that. Quality, quality is number one for Aritzia, very similar to Nike or Lululemon. Quality is number one, and they will not sacrifice that. On the contrary,

if you look at brands like H&M and potentially Zara, I would say Zara is a little bit better than H&M, but the quality is just not there. You know, you can buy cheap articles of clothing. Some of them, I guess they look good, but the fit is not the same. And the quality is certainly not the same. So Aritzia wins on that. And then in terms of innovation, they got their autonomous brands, different design teams, they're on top of every single one of those trends for these different age groups that we talked about. So although the risk is always there, and I can't really predict where Aritzia will be 10 years from now. And you know, that's a major concern to me. I think they've set themselves up in the best possible way to be anti fragile and to be a good brand for the long term. The only thing is that they cannot become complacent, they need to

continue focusing on these four. And as long as they keep doing that, I think they should be okay. But in terms of predictive power, unfortunately, I don't have it not a fashion expert. But I think they did what they can. And they will continue to do that under the leadership of Jennifer Wong. She has a ton of experience and I think they'll do a great job. It also got me thinking, right? Like think of the brands of yesteryear. They had their logo smashed across the front of your t-shirt, you know, and that goes out of style and, you know, all of a sudden you're wearing Hollister, California across, you know, you're wearing last decade's brand and it's smashed across the front of your t-shirt. That doesn't have staying

power unless that brand continues to have staying power. But their pieces, what you mentioned are like timelessness and they're like high quality fashion pieces versus, you know, I'm wearing a brand or a lifestyle. I think that that's a quite fragile thing versus what Aritzia is doing. And so that leads me more bullish on their longevity versus Canada Goose, which is, you know, you wear that jacket and its coolness relies on the coolness of the brand, right? And I think Lululemon did a smart thing where like the branding is that really small little circle and it's a way it's usually like tucked away on the side or on the back. And it's just like subtly cool instead of like, you know, you don't see any shirts that say like Lululemon

across the front of it. It's not their style. They make it more subtly cool. And I think that that leads to more staying power, unless you're like Nike and you can just throw that swoop across and, you know, be cool for the next millions of years. I don't know how they do that, but they've certainly got that down to a T. All right. let's talk about the valuation today, what the outlook looks like, what the margins look like, some of those financials, and then just your opinions about the business moving forward overall. Yeah, so buckle up. There's going to be a lot of numbers over here.

In terms of the valuation, it's what I mentioned earlier. On a trailing 12-month basis, EBITDA multiple of about 14X and then a free cash flow multiple of about 22X. In terms of the margins- For context, for who's listening, given their growth rates, I look at that objectively as quite cheap. Same here. I totally agree. And I think looking at the margin profile as well, like the returns on capital and just the growth outlook, it's screaming cheap. And it kind of brings up the question, like, what is there that I don't know about? But, you know, other than the fashion risk, it's really difficult to find any major risk because of how

careful and how diligent they are with their expansion plans, especially. So in terms of their margins, and I'll compare this to Lululemon as well, like where Lululemon is today. Aritzia has a gross margin of 44% compared to Lululemon's of 57%. Aritzia has an operating margin of 16% compared to Lululemon's of 22. An EBITDA margin of 23 versus Lululemon's of 25. And then a net profit margin of 10% versus Lulu at 16%. So it's not far off. Lululemon does a better job on the gross margin for sure. But keep in mind, it is a lot more mature. It's a lot bigger. So economies of scale definitely play a role here as well. And then like we talked about yesterday, I think Lululemon has a smaller catalog of clothing while Aritzia, you know, there's a lot of seasonal products,

these things turn in and out. And just the style of clothing varies a lot more than Lululemon's, I would say. So that might play a role in the gross margin being lower for Aritzia. But overall, I think these are great margins. Yeah, the skew of fabrics for Lululemon is like that performance wicking stuff. They can just buy a ridiculous amount of volume of that stuff, achieve economies of scale versus a collection of different brands and fashion pieces. Lulu does have that distinct advantage of numbers of SKUs of fabric that they're ordering and using that to their advantage. It's the same way like Costco only has 4,000 SKUs no matter what. If something

comes into the warehouses, then they have to take something out because they want to limit the amount of SKUs to maximize their economies of scale and use the network effect feedback loop that they have. That's where they can flex their pricing power on suppliers. I do think Lululemon has that distinct advantage over a gigantic amount of SKUs between in-store and online for Aritzia. So I think that is worth mentioning. Yeah, absolutely. And that definitely explains the margin difference over there. But over time, Lululemon has improved their margin by quite a bit. So again, if we sort of follow that analog, then it wouldn't be surprising if Aritzia moves up, you know, more into the higher 40s, maybe low 50s, but that's probably a stretch. But you know,

if we look over 10 years, and they continue to execute, we might see some margin benefit at Aritzia as well. And then yeah, going into the valuation of the business and, you know, how that connects with the outlook and what I think the outlook is, you know, I think, as we mentioned, several times throughout the show, outlook and what I think the outlook is. I think as we mentioned several times throughout the show, the multiples, they scream cheap. A lot of this is probably because of the fashion risk. Again, they don't have a New York stock exchange listing or a NASDAQ listing. So the US probably is not really well aware of what this business is in the first place. And then they also don't really see the stock on the exchange. So there's probably a lot of investors kind of overlooking that around the world.

It eliminates flows just systematically by only having a TSX listing. Yeah, 100%. So the NASDAQ index flows and the S&P 500 index flows, that would be a big benefit that a lot of Canadian companies like to have. But if you choose to stay on the TSX, you won't really get that benefit. So in terms of the runway, here's what I'm really looking at. I think you can distill the growth plan into two main things. And management kind of talks about these same two things as their growth drivers over the next couple of years. The first one and the absolute most important growth driver that Aritzia has is the expansion

into the US. It is by far the most important thing. And if they do not execute on this, they're stuck with, you know, the Canadian market and whatever else they have in the US, that'll just turn into an organic growth play. So, you know, the stock will probably only increase by the amount of organic growth that they get. But management is dialed in on the US, they've identified about 100 locations that they think are suitable for their needs. And then they have a very, very diligent capital allocation approach where they, they take their time with opening these stores, they want to make sure that it is absolutely the correct area, the locality, not just the city, but the correct locality for them to push their premium brand. And this is a similar approach to Lululemon. You usually won't find a Lululemon

in a discount plaza. You'll find it in premium locations. And that's exactly what Aritzia is doing as well. So they've got their eyes on about 100 locations. Will this happen over the next five years? Given the pace that they're at, probably not. But I think that's a good thing. I think the most important thing is to not grow their way into higher revenue, you know, just by acquiring their way through that. I think the best way is to make sure that they're getting the payback on these investments. Aritzia management has alluded to that fact. And they say that when they start a new store, they don't buy the stores, they lease them, but they put in some CapEx to customize the store, some leasehold improvements and things of that nature. And the payback on that is very quick. It's between 12 and 24 months. So I think that's exactly what you

want to see out of a good management team. And I think they're fully dialed in on that. They know that to create shareholder value, they need to be diligent. They can't just acquire their way, take on tons of debt, make a huge bet. And then it turns out that, you know, the market opportunity was not what they expected. So they're kind of doing this in a very diligent manner, letting the market discover them, you know, putting their stores in these great markets. And then after that, letting the stores and the e-commerce do the work. On top of that, the other major growth trend is really just the organic growth. And in the previous quarter, they recorded, I believe it was 29% organic growth versus the same quarter last year, which is a remarkable

number. So not only are they expanding inorganically through these store openings, but they also have very high demand for their products. And that's both from a volume perspective and from a pricing perspective. So they're reducing the amount of discounting. When you say organic growth, you mean like same store sales growth, right? Like per location organic growth. That's correct. So what they are selling- 29%? Oh my God. 29%. That's astounding. Now keep in mind, this is a little bit higher than the trend over the last couple of years, but they do generally hit double digit organic growth rates. And they

couldn't really record it during COVID because a lot of stores were shut down. So there wasn't really anything to compare to. But regardless, I think 29% versus last year, we were probably mostly open by this time. So that's a remarkable organic growth rate. I'm looking here on Stratosphere for the KPIs that we track and that you recorded here. We have e-commerce revenue, Canadian revenue, US revenue, number of boutiques, both in Canada and the US and in total new boutique ads. So that's just jargon for stores and numbers of stores that they've expanded. And a couple of things stand out for sure, which is this e-commerce revenue growth. But, you know, many retailers have benefited from that explosion since COVID,

but this one even more so, I mean, like they doubled the e-com revenue in 2021 from 2020. So that's very impressive. And this US revenue is exploding. It was like 68 million in 2014, and now it's going to hit on a TTM close to 800 million in sales there. So tracking those numbers and the same store sales growth probably makes the most sense in terms of KPIs to track moving forward. Would you agree with that? 100%. And that's exactly what I use when I model this out. I look at it as what are the revenues

and what is each store contributing? So you grab the average number of stores in a period, you look at the sales that each geographic region generated, and then you can kind of see how each store is contributing to the top line. And the results are remarkable. That kind of takes away the inorganic aspect of it, because these stores are being added. And the numbers just keep going up. The organic growth is definitely there. And it's truly remarkable. Again, if you expand that outwards, and if we expand from 42 US stores today, and let's say we bring that up to, you know, a conservative number, maybe they open six to eight stores a year over the next five years or so, we'd be looking at possibly around 7580 stores in the US by 2027. When I modeled that out with a little bit of organic growth, and you know, kept margins pretty stable, I came out with free cash flow of about 500 million, which compares to about a little over 200 million today. So more than double, it's about two and a half times more. So I think that's a remarkable number. And then we have this very low entry multiple, at least optically, again,

I think we need to do a lot more research and really figure out if there's any other risks that we're missing here. But from the looks of it right now, I can't really find anything other than the fashion risk. And if we hold that multiple constant, we could be looking at an enterprise value, $10 billion in five years compared to $5 billion today. So I think there's really a great opportunity here. And it really just comes down to making sure that the US that they expand very well over there. The runway after that is still going to be very large. That still means if you know, if we use the Lululemon analog, that's still very early in the growth stage,

that would be 80 US stores versus 68 Canadian stores. And I alluded to the fact earlier that Lululemon has five times the stores in the US than it does in Canada. So, you know, if we look out another 10 to 15 years, again, like I said before, I think this could be one of the best risk reward bets that I really see out there today. This could be one of the most obvious stock picks ever, if we, you know, fast forward 15 years and kind of look back to today. So I think it's really remarkable. And then on top of that, they're really focused on product. They're expanding into men's. They purchased reigning champ to expand into men's. So very similar playbook to Lululemon again. And I think as long as they focus on the product and the US expansion goes well, I think

the opportunities are endless from a financial standpoint. That is both encouraging and very fascinating. Thank you so much, Adrian, for doing a deep dive. It's a name we've talked about quite a few times on the show. And, you know, it being a uniquely Canadian story makes sense for the podcast. And, you know, you're right. You've pointed out there are hesitations, but there's a lot of upside if they execute and maintain coolness, which I have to go do some mall channel checks and talk to the ladies in my life to figure out really how sticky it is.

And figure that out. Of course, none of anything on this podcast is investment advice. Do your own research. Hopefully, this gives you some understanding of the business, today's valuation, and the opportunities ahead. You can read what Adrian has summarized in more detail and with the actual numbers. Beautiful data visualizations. If you're the visual person, you can see that US revenue tick up over time and compared against the Canadian revenue. Those are the types of things that I like to see. It's very easy for me to track the story if I can see visually quickly every quarter and not try to visualize numbers in my head. Just see it right on the screen at stratosphere.io, as well as the report

is linked in the show notes of today's podcast. My man, Adrian, thank you for doing this, man. I was going to say, I'll see you in a bit. I'll see you on a Zoom call in like 48 seconds after this, but thanks for coming on, man. Yeah. Thanks for having me again. It was a lot of fun. Take care, buddy. 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.