TIP853: Aritzia (ATZ.TO): The Women's Apparel Brand Conquering the US, plus Nike, Lulu, and More w/ Kyle Grieve & Shawn O'Malley

In today's episode, Kyle Grieve and Shawn O’Malley discuss Aritzia, the everyday luxury fashion brand that has become one of retail's most impressive compounders. They explore how a small boutique in the corner of a department store grew into a brand with exceptional store-based economics, a spotless balance sheet, and a huge untapped opportunity across America. With the stock falling even as the business posts some of its best growth ever, they debate whether this is a rare chance to own a durable compounder or a hot brand nearing its peak. IN THIS EPISODE YOU’LL LEARN: (00:00:00) Intro (00:03:04) What Lululemon's struggles reveal about investing in retail brands (00:10:59) Why Aritzia's stores outsell most of their mall neighbours (00:15:37) How Aritzia turned a tariff headache into rising margins (00:25:32) Why some fashion brands fade while others keep compounding (00:27:57) The one competitive advantage behind Aritzia's decades of growth (00:53:48) Why management turned down cheap money when everyone else borrowed (01:03:33) The biggest risk that could end Aritzia's run (01:20:05) Valuation discussion on Aritzia (01:24:16) Intrinsic value of Aritzia (01:25:12) Whether Kyle & Shawn will add Aritzia to the Intrinsic Value Portfolio Disclaimer: Slight discrepancies in the timestamps may occur due to podcast platform differences. BOOKS AND RESOURCES If you are interested in a Community for investors to learn, share ideas, network, and join calls with experts: Apply for The Intrinsic Value Mastermind. If you are interested in more personal meet-ups, meeting superinvestors, and discussing investing and things that go beyond: Apply for The Mastermind: Inner Circle. Track ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Intrinsic Value Portfolio⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Portfolio Review ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Submit Tool⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Check out our previous Intrinsic Value breakdowns: Lululemon, Nike, Hermes, LVMH. Follow Kyle on ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠X⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ and ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠LinkedIn⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Follow Shawn on ⁠⁠⁠⁠⁠⁠⁠X⁠⁠⁠⁠⁠⁠⁠ and ⁠⁠⁠⁠⁠⁠⁠LinkedIn⁠⁠⁠⁠⁠⁠⁠. Related ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠books⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ mentioned in the podcast. Ad-free episodes on our ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Premium Feed⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. NEW TO THE SHOW? Get smarter about valuing businesses through ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Intrinsic Value Newsletter⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Check out ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠The Investor’s Podcast Starter Packs⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Follow our official social media accounts: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠X⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ | ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠LinkedIn⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ | ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠Facebook⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Try our tool for picking stock winners and managing our portfolios: ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠TIP Finance⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Enjoy exclusive perks from our ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠favorite Apps and Services⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. Learn how to better start, manage, and grow your business with the ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠best business podcasts⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠. SPONSORS Support our free podcast by supporting our ⁠⁠⁠⁠⁠sponsors⁠⁠⁠⁠⁠: ⁠⁠Monarch⁠⁠ ⁠⁠Plus500⁠⁠ ⁠⁠Netsuite⁠⁠ References to any third-party products, services, or advertisers do not constitute endorsements, and The Investor’s Podcast Network is not responsible for any claims made by them. Support our show by becoming a premium member! https://theinvestorspodcastnetwork.supportingcast.fm

• 0:00Speaker 00

  You're listening to TIP.

• 0:03Speaker 01

  Welcome back to the Investors Podcast, episode 853. Today, we're covering a business that I personally know better than almost any other, because I've owned it since 2020, and it's still actually the largest position in my personal portfolio, and that business is Aritzia.

• 0:16Speaker 02

  I came into this episode knowing you'd be pitching Aritzia and maybe feeling a little gun shy, because the last premium apparel brand that I fell in love with was Lululemon, and that just has not quite gone to plan for me.

• 0:29Speaker 01

  And I think that's why I'm really excited to dig into this one with you, Sean. You know, when you've held the stock through as many ups and downs as I have with Aritzia, you really have to ask yourself some of the hard questions, like, is this business getting better or worse? Or am I holding this because the thesis still works? Or because I've just gotten more and more attached to the specific name?

• 0:46Speaker 02

  I think they're really valid questions for both of us and also our third co-host, Daniel, to be constantly asking ourselves about every position that we hold in our intrinsic value portfolio. But the timing of our conversation today around Aritzia is definitely very interesting. The stock has been hit pretty hard recently, and yet, the business is putting up some of the best growth numbers in its history of being a public company. So either the market is seeing something we aren't, or it's handing investors a special chance to buy into a business that rarely looks cheap.

• 1:19Speaker 01

  I'm excited to find the answer to that question. Let's go.

• 1:26Speaker 00

  Since 2014, with more than 200 million downloads, we have interviewed the world's best investors, studied deeply the principles of value investing, and uncovered many compelling investment opportunities. We focus on understanding businesses and intrinsic value, investing accordingly, and sharing everything we learn with you. This show is not investment advice. It's intended for informational and entertainment purposes only. All opinions expressed by hosts and guests are solely their own, and they may have investments in the securities discussed. Now for your hosts, Sean O'Malley and Kyle Grieve.

• 2:11Speaker 01

  This is an episode that I'm very excited to do, because I've really wanted to cover this business for a while, but the timing just never seemed quite right. So I've covered many businesses on this podcast that we ended up skipping, simply because they were just too expensive. But Aritzia, the business that I'm about to cover, changes things up a bit. So the price is currently down about 31%, but Aritzia is a business that I already own in my personal account, and it's actually been there since 2020. Now, being a shareholder since that time hasn't been the easiest ride. You know, since owning it, I've gone through multiple drawdowns ranging from 30 to 65%. And I think it's one of those kind of classic case studies of why being able to maintain conviction is just so important if you really want to get those multi-bagger-like returns. It would have been so easy to just bail on the business during any of those drawdowns,

• 2:54Speaker 01

  just to save myself the pain of seeing how much money that I'd lost on the position. But I've really held my shares, other than a small trim earlier this year, and it's actually still the largest position in my personal account.

• 3:04Speaker 02

  I remember you giving a presentation to our mastermind community of investors last year about the business. And again, the timing was pretty interesting, because I was pretty bullish on Lululemon at that time and its valuation. And even though you made a really compelling case for Aritzia, which is not exactly a Lulu competitor, but they're, of course, both in the retail apparel industry, I just couldn't get comfortable with the valuation of the business. So Lululemon was definitely an easier sell to a cheapskate like me. It was trading very cheaply, I think, you know, 10, 12, 14 times earnings. And even with slowing growth, I still thought it was cheap enough to make a decent return.

• 3:47Speaker 02

  And so a few things have since gone against me with that bet, including the CEO stepping away and being replaced with two interim co-CEOs, a proxy battle with the company's founder, Chip Wilson, and then just a deceleration in sales in their core market of North America that honestly occurred much, much faster than I anticipated. So I feel a little burnt by retail. Maybe I'm a little bitter, especially because I thought I was buying Lulu with a pretty wide margin of safety, but still, things managed to go worse than I imagined. And my lesson, of course, is not entirely to avoid retail altogether, but it is that retail stocks can be a bit like playing with fire.

• 4:31Speaker 02

  Things can go from bad to worse very quickly in retail. But on the flip side, when a brand is surging, returns can be explosive. And Aritzia is at a minimum, sort of at a different stage in its lifecycle, where there's a much larger runway ahead for growth, instead of being in this situation where it needs to figure out how to reignite growth like Lululemon has been in.

• 4:54Speaker 01

  So Sean, I'm officially going to start a tally here about how many times Lulu comes up in this episode that's supposed to be about Aritzia. So I've set the over/under at 10. But joking aside, honestly, you know, like, I don't really blame you for not getting interested in this business. You know, it's one of the businesses that I've consistently considered selling just up until a few months ago, due to the specific valuation concerns. But when I really sit down and think about just how far the business has come since I bought it, it's pretty clear that in hindsight, the right move was not to sell my shares. Now, luckily, this was a business that I already really focused on using a long-term view with. So while the business has always seemed somewhat expensive, when you look at some of the growth numbers it's had, you know, it really brings things into perspective.

• 5:37Speaker 01

  So since I started buying it in 2020, they've had revenue growth of 22%. They've had an EPS growth of 25%, and cash from operations has grown at about 20%. So yes, while the multiple is expensive, about 33 times earnings, it's a business that I think really deserves somewhat of a premium valuation. If you can operate with those metrics over a multi-year time period, the market is just going to pay up for it. That's just the facts. Now, of course, maybe I'm a little bit biased, because I've done so well with it, but that's kind of how I see the business.

• 6:03Speaker 02

  Well, I think you're not terribly biased, right? I mean, we own some businesses inside the intrinsic value portfolio that aren't optically cheap on traditional valuation metrics. For instance, if you look at Airbnb, it's trading at over 38 times earnings, and Reddit is at 37 times earnings. So we're definitely not afraid of businesses that trade at a premium to the S and P 500's market cap. Although I think it is worth noting that we added these businesses at typically lower multiples, except in Reddit's case, where actually their growth has been so explosive that they've actually grown into a lower multiple. But needless to say, I think I see Airbnb and Reddit similarly to how you see Aritzia

• 6:45Speaker 02

  as being really compounders with a very long runway. And as we've learned from Buffett and Munger, when you have businesses like that in your portfolio, really, inaction tends to be the best course of action.

• 6:59Speaker 01

  That is the key to long-term investing, isn't it? So I think I attribute much of my ability to maintain composure during the peaks and valleys of Aritzia's history specifically to, you know, Buffett and Munger. But I think, as with all businesses, it's just, it's hard. And the one question you have to ask yourself constantly is, can this business just continue to grow? Is this business getting better or worse? And can I still make a decent return on this business, given the current valuation? So when it comes to Aritzia, you can probably assume I have a very high opinion of it, as I still hold it, and it's still a very large position in my portfolio. But when you look at businesses such as Alphabet and Airbnb inside of the intrinsic value portfolio, these are also businesses that have a pretty high weighting, both around 15%. So Sean, I know you know all about the itch that you can get, just to take a little bit

• 7:41Speaker 01

  of a profit from some of those winners that you have and reallocate it into other positions.

• 7:45Speaker 02

  It's a pretty tempting itch to scratch, but I do keep coming back to Peter Lynch's line, that selling your winners and holding on to your losers is a lot like cutting the flowers to water the weeds. And Alphabet was one of the first businesses that we added to our intrinsic value portfolio, and it's been our biggest position pretty much ever since. And we bought it when the market was convinced AI chatbots were going to kill Google search. And our average cost was around $178 a share. And today, it's trading at $355. So it's been roughly a double for us. And then Airbnb has been more of a slow grind up, but it's definitely still up about a third from where we bought it. And so the AI fears that gave us our entry point have largely faded, and the business

• 8:29Speaker 02

  has executed better than I expected. And so when a business keeps getting better, I've found that my intrinsic value estimates tend to chase the stock price up over time and not really the other way around. So my rule of thumb has become that a rising stock price on its own is not necessarily a reason to sell. A broken thesis is, though. And so, yes, Kyle, you could definitely add another tick to your Lululemon tally. I think there'll be a lot more, probably more than 10 today, because Lulu has very much been a painful reminder to me that stocks that look cheaper are not always the better place to put capital. And so I would love for us to start off here with Aritzia by looking at their business

• 9:11Speaker 02

  model, so we can really get a feel for if we are going to be paying a fair price if we decide to add the position. And so for context, Aritzia is a retail apparel business. But I know you, Kyle, you like businesses with competitive advantages, and the growth numbers that the business has shown over the last few years definitely make it clear that there's some sort of advantage working in its favor.

• 9:34Speaker 01

  Yes, I think you're completely correct there. So we'll be touching on competitive advantages much more later on in this episode. So let's go over what Aritzia actually is. So it's basically an amalgamation of different brands, primarily aimed at women in what they call everyday luxury. So you can consider them to be kind of a design house, as they actually have multiple brands under the Aritzia name. So if you see people walking around, a lot of times, they're wearing Aritzia gear, but it doesn't actually say Aritzia on it. So getting back to everyday luxury, it's a term that as far as I know, they actually created on their own. And I think it encompasses their belief that high quality, well-designed products with great services should be kind of attainable to pretty much everyone. Now, it's important to understand what Aritzia is and is not. So Aritzia is not Louis Vuitton

• 10:16Speaker 01

  or Hermes. They're not selling $10,000 jackets or $20,000 purses. So Aritzia definitely is not a luxury brand, but at the same time, you know, it's not a fast fashion brand either, like an H and M or a Shawn. Fast fashion often looks decent, but after you wear something a few times and it begins to fall apart, you recognize that the quality just isn't really there. Now, to be fair, most fast fashion businesses don't really try to pass themselves off as quality businesses. So just keep that in mind. But where Aritzia lies, I think, is somewhere in between those two. Yes, it has many different styles for many different occasions, but the quality of their apparel is quite good. My wife, for instance, still has leggings from them that she's had for over 20 years, which is from their TNA brand.

• 10:59Speaker 02

  I don't think Aritzia has really made it down to where I live yet. And that probably reflects how much of a runway they still have in the US. But my wife definitely knows the brand. And I'm sure after you pitched it, I've asked her more than a few questions about it. And I also know you have personal connections to Aritzia that maybe you can expand on, Kyle.

• 11:19Speaker 01

  Yeah. So the business was actually founded about a five minute drive from where I'm recording this episode right now in Carersdale. So it started with a business called Carersale Dry Goods back in 1914. So the business was kind of this department store. Now, John Hill, who was the grandfather of Aritzia's founder, purchased a secondary dry goods business in about 1947. So in 1960, he moved it to Carersdale and renamed it Hills of Carersdale. In 1970, he moved it to its current location where it still stands today. So by 1984, Brian Hill, the founder of Aritzia, started the Aritzia named brand inside a corner of that store. And in the same year, he opened his very first Aritzia location at a nearby mall. Aritzia then wasn't really the same brand that we know today. You know,

• 12:01Speaker 01

  there just wasn't any in-house brand. So they were really just focused on selling third-party brands. But by 1994, they had their first in-house brand in Tula Babaton.

• 12:10Speaker 02

  Yeah, the movement towards creating their own brands, I think, was a smart move and giving them more control over the pricing and margins that they earn. And the problem with the third-party model is that you have to rely on those other brands to remain relevant. And so a lot of that control is really outside of your hands. If you want to rely on a brand to help you stay with the times, so I bet many of the brands from the original Aritzia store no longer exist or just completely irrelevant today.

• 12:40Speaker 01

  Exactly. And knowing this, I think Brian decided to take the design in-house for his first brand. And that way, Aritzia, you know, they could design clothes in their own view that they still felt were relevant. And this is part of the reason that the business is still doing so well, you know, four decades plus later. So a few of the other advantages that I think Brian Hill created for Aritzia were in making the company vertically integrated. So when you sell another brand's merchandise, you often have to pay a middleman, which definitely is going to eat into your margins. With vertical integration, you manufacture the apparel yourself, resulting in an immediate improvement in those margins. But then there's the everyday luxury pricing point. So Aritzia, like I said, it's not priced like luxury, but it's also not cheap either. You know, a set of wool pants can cost you $180. Now,

• 13:22Speaker 01

  because they positioned themselves as an everyday luxury brand, they can charge those higher prices and still continue to attract more and more customers. To be fair, I don't think they really cheap out on the quality of their apparel either. But, you know, they're not going for the same customers as a fast fashion business, for instance.

• 13:37Speaker 02

  Well, so the thing is, being a middleman for other brands makes you a more diversified retailer. And if that's the goal, it's definitely not a bad thing at all, right? Just look at Walmart or Target. But unless you want to go head to head with those giants like that, designing your own clothes and then selling them mainly through your own stores and website can really be a great way to carve out a niche with customers that you can sort of dominate. And so really, the trade-off there is scope, right? Selling only your own brands probably caps how big you can get compared to a store that tries to sell a little bit of everything. But then in return, you get control, right? You get control of the designs, the pricing, the margins, and also how the brand is presented. So you aren't betting

• 14:20Speaker 02

  on someone else's brand staying relevant, which arguably gives you a better shot at lasting for the long haul. And every retailer really has to make that trade-off one way or another. And Aritzia seems to have pretty clearly chosen to prioritize control.

• 14:35Speaker 01

  Yeah, they really did. So I own a serial choir that I think can optimize its own margins by buying inputs completely in a different industry, but they're buying inputs like steel directly from those steel mills. So this allows them to bypass smaller steel distributors, who of course are going to charge higher prices. So I think certain businesses can really leverage their ability to skip the middleman. But there definitely are limits to how far you can take that advantage, as I think you just pointed out there, Sean. So the final advantage that I have to mention, I think Hill created, is the design house part of Aritzia. So I remember speaking with one of our community members about Aritzia, and he complained that he didn't like the brand because Aritzia wasn't plastered over, you know, all of their clothes. But Aritzia's strength lies in having these different brands that target kind of these different activities. You know, if you're exercising, relaxing

• 15:20Speaker 01

  at home, going out on a Saturday night, or need something nice to just wear to work, they have plenty of different brands to fit all of those needs. You know, for instance, Golden or TNA are more athletic inspired. Think of leggings for the gym, yoga, or cycling. And then for professional or event-specific use cases, you might look at a line from Babaton or 10.

• 15:37Speaker 02

  I remember when you first pitched Aritzia to our Mastermind community, I asked if you thought it was the Lululemon competitor. And your answer was really to say, not really. And while I do think there's a few product lines like Golden and TNA that are more direct competitors, I mean, for the most part, there really is not a much overlap with its product assortment and Lululemons. And so on that note, I'm curious, do we have much insight into the composition of revenues from each product line? Or is that not really how Aritzia chooses to break things out for investors?

• 16:12Speaker 01

  Yeah. So unfortunately, they don't. They do disclose revenue just by geography and then by retail versus digital. But outside of that, there just isn't that much disclosure. So I've been to many of the stores and they tend to do a pretty good job of having a mix of different items from their different design houses. And then it also really depends on the season. With winter coming up, they're obviously going to have a lot more jackets and cold weather items out compared to the summertime. Another thing that matters a lot when looking at Aritzia is where it's sourcing its inputs from. Because it does work in the US and it imports from all over the world, you can probably imagine that tariffs have been a pain for them of late, although I think they've executed really, really well and working around them. So the fact that gross margins have continued to steadily rise upwards while they've had to face these tariff pressures, I think really speaks to

• 16:56Speaker 01

  Aritzia's ability and price control and input cost control. But they definitely have been a little rocky over the last few years.

• 17:02Speaker 02

  So it is pretty impressive when you zoom out to see that their gross margins moved from 37% a decade ago to 46% today. And even more impressive is that their gross margins are still rising despite the closing of the de minimis exemption that allowed these small-ticket items to bypass tariffs, which as a Canadian company, they're now subjected to in the US.

• 17:27Speaker 01

  Yeah, that was a real bummer to hear, not only for Aritzia, but also for just other smaller Canadian businesses that have heavily relied on selling to the US. So the original exemption allowed goods priced below $800 to be duty and tariff-free. But with that removed, it definitely hit their margins temporarily as the duties increased their cost of goods sold, which of course contracted their gross margins. But I think Aritzia's done a really, really good job quickly changing some of its strategies to minimize the impact of this onto their business. So the first thing they did was simply to just take advantage of their US-based distribution center that they already had in Ohio. So instead of shipping goods from the US from its Canadian distribution centers, they switched to shipping from its US-based distribution center. And this allows them to bypass this exact issue. Now, another

• 18:09Speaker 01

  problem they've had is based on the fact that the US and China have been at odds, to say the least. So during the 2025 trade war escalation, China briefly faced a 145% tariffs, while Vietnam, for instance, was hit with only a 10% tariff. Aritzia ended up moving their production facilities very quickly to locations with just lower tariffs like Vietnam. Aritzia's CFO commented that the company shifted sourcing from China from about 30 to 35% in the past, and now it's just about somewhere in the mid-single digits.

• 18:38Speaker 02

  I mean, that's a really impressive degree of responsiveness and flexibility to be able to not only withstand that pressure, but also increase margins in today's environment, especially when Aritzia's next growth lever really is the US. Again, I just, I do find that to be very inspiring. And it looks like at least some companies are starting to get some of the tariff fees that they paid back, returned back to them. And so I remember you mentioning in our episode on Walmart that they had received $2.9 billion in tariff refunds. And that's a very nice financial boost, even if much of that money is actually being put toward helping lower prices for customers. And Walmart is definitely far

• 19:21Speaker 02

  from alone there. By one count, more than 100 public companies have now disclosed close to $19 billion in tariff refunds. And so Target got back almost $1 billion, and that added $1.65 a share to their earnings last quarter. And then Apple said its refunds added about two percentage points to its gross margins. And then Ford booked a $1.3 billion benefit from it. So the one that of course jumped out to me, and you can add this to your tally, Kyle, is Lululemon. Lulu received $135 million in refunds last quarter, and that added 86 cents a share to their earnings in a quarter where revenue actually

• 20:01Speaker 02

  fell off 4%. So it is a good reminder to strip out these one-time refunds before you get too excited about a company's financial results that they report any given quarter. But at a higher level, I want to better understand why Aritzia has been able to improve its margins so much over the last few years, in terms of whether that's due to them simply managing costs better internally, just benefiting from more scale and operating leverage, or whether they've been really successful with significantly raising prices, increasing the premium status of their products, or maybe they're just selling more of their higher-margin apparel items.

• 20:39Speaker 01

  Yeah, so it's obvious when you look at Aritzia's industry, most retailers just have pretty much no advantage, you know? Retail is incredibly cutthroat and Aritzia's competitors are literally right across the street or in the exact same malls. And then, you know, I can't really deny any of that. And as I already discussed, Aritzia, you know, it's not that cheap. It's not a business like Gildan that can manufacture t-shirts more cheaply than nearly anybody else out there. So what exactly explains the fact that this business has now been around for over four decades and that its compannish revenue at 20% and earnings per share at 26% since it IPO'd back in 2016? And the simplest answer that I can come up with is just brand. So the Aritzia brand is very, very strong and I've seen it with my own two eyes. So when I was in high school, all sorts of women were wearing their gear, which was the first time that I'd ever heard of them.

• 21:24Speaker 01

  Then in my early twenties, I would see ladies wearing the exact same garment of clothing so often, even I could tell certain Aritzia items without even having walked into their store.

• 21:32Speaker 02

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• 24:28Speaker 02

  Terms apply, subject to approval and eligibility. Bilt cards are issued by Column NA, Member FDIC pursuant to license from Mastercard International Incorporated. All right, back to the show. It was a pretty similar thing for me where it felt like for much of my life at this point, Lululemon was the premium brand women wanted to wear for athleisure, really almost regardless of age. And in recent years, that was increasingly true for menswear too. And that is what made me think that the brand has really transcended being a fad, which I don't think it is, but also their staying power hasn't proven to be as robust as I would have hoped either. So regardless of whether I made the right or wrong bet on Lululemon, which we're not

• 25:12Speaker 02

  here to litigate today, being the Peter Lynch fans that we are, I do think we always appreciate brands that we can touch and sort of feel and have some sort of emotional contact with. And it's not really a very scientific approach, but I do think these types of insights can really help drive your conviction in an investment. If you can feel the quality of the fabric that makes it special, that's why investment bankers go and do due diligence on hand, on site. And for me, it was my firsthand experience with wearing Lululemon products that I could really appreciate their quality and that helped me really decide on making an investment decision. And again, even though that worked against me, I don't think that negates the underlying idea of using your own consumer insights to inform your investments in the way that

• 25:57Speaker 02

  Peter Lynch discusses in One Up on Wall Street.

• 26:01Speaker 01

  Absolutely, I agree. Using those insights are a very, very key figure, I think, in success in investing. So I think piggybacking on that point that you just made, that's part of the exact same reason that I got interested in Aritzia in the first place. So I've spoken to plenty of women in Vancouver where the business is obviously founded and there's pretty much no women who have never heard of the brand. My mom, my wife, my little sister all know the brand very, very well. And they also know what exactly to expect from it, which is high quality clothes for a relatively premium price. Now, all this to say, women in Canada really, really love Aritzia. I've been at plenty of Aritzia stores in Canada, but also in New York and Hawaii. I like to do my own due diligence and make sure the stores represent the brand well and are hopefully, you know, busy and selling things. And to my delight, the stores are usually always very well kept and tend to be very

• 26:45Speaker 01

  busy as well, which obviously as a shareholder, I love to see. So I think that Aritzia's customers really do understand the brand, what they're going to get, and they really trust that the quality is sufficiently high enough to justify their premium price. And then on top of that, Aritzia conveys a certain message about those who wear it. Their apparel tends to be modern, well-fitting and up on all the latest fashion trends.

• 27:07Speaker 02

  One of the advantages that Lululemon has had is its ability to sell its own brand and really take control of how the brand is perceived. I know you like Lululemon as well, Kyle, so you are familiar with how well-kept those stores are too, and how they've relied on a network of actually yoga teachers that they sponsor as a way to spread the brand more organically, with the idea being that students will want to wear what they see their instructors wearing. And if Lululemon were to sell its apparel in other stores, I do think the brand's image would be at much higher risk of being diminished, simply because Lululemon is handing over control of how its products are presented and whether they're discounted or placed alongside less desirable brands.

• 27:52Speaker 02

  That really is the risk of selling through third-party retailers. And the point being, they might not treat your brand the way you'd like them to. And it's for that reason that Lululemon doesn't allow its merchandise to be sold by third parties, so they can control the customer relationship. And if you contrast that with Nike, Nike has long been sold across many different retailers, with sort of the idea being that they wanted Nike products to be almost ubiquitously available, kind of similar to Coca-Cola or McDonald's. But then Nike pretty famously shot themselves in the foot by getting a bit too greedy a few years ago, I'd say, and this is something we've talked about on the podcast before, but they decided they wanted to fully own the customer relationship and cut the middleman out.

• 28:35Speaker 02

  And so they tried to get customers to increasingly opt to buy their Nike products from Nike stores directly, rather than doing so from places like Dick's Sporting Goods or Nordson Rack, where they'd been used to shopping for Nike products for years and years and years. And what they learned is that customers were not as devoutly loyal to their products as they thought. And so Nike pulled its products from Foot Locker, for example. And then when they tried to reverse that decision, Foot Locker actually realized that these other brands could sell pretty much just as well as Nike in that same prime real estate that had historically been reserved only for Nike. So anyways, I'm probably getting lost on a bit of a tangent about Nike and Lululemon

• 29:17Speaker 02

  and that's not a surprise, but since I don't think I've ever seen any of Aritzia's brands and any other retailers, I'm going to assume that they don't allow third parties to sell their products either. And so basically, they're successfully running this first-party playbook of owning the customer relationship that Nike wanted to achieve and that Lululemon does, for the most part, do. And in Nike's case, they quickly gave up on. And so of course, this could also just be due to me not exactly being the most observant shopper when I'm at the mall with my wife.

• 29:51Speaker 01

  Sean, I think you're describing the husband bench when it comes to, you know, shopping at women's retailers. I think every mall has at least one of them. So, you know, it's right outside of the fitting rooms and it's full of guys just checking their phones. And I think you're correct, you know, Aritzia, yes, they don't sell its apparel in other stores. And this allows them to really manicure the brand as they see fit. It also lets them manage things like price, presentation, and then the margins that they get on their products. And this has all led to some very, very compelling store economics where they're generating about $1,000 per square foot. Now, just to give you an idea of how good that number is, Shopify conducted research using tenant data from Tanger and Simon Property Group, and they arrived at a range of about $400 to $700 per square foot. And this figure definitely matters because as I'll go over later,

• 30:35Speaker 01

  Aritzia's square footage is scaling well as they expand further and further into the US as well as repositioning, which basically means growing some of the Canadian boutiques into these larger and larger formats. And this also doesn't even include figures from its rapidly growing digital segment, which is inclusive of their e-commerce revenue. So just understand if I'm talking about digital, it also means their e-commerce segment. So just to wrap up this section on competitive advantages, I would really say that when it comes down to it, it's really, again, I can't say this enough, it's the brand that's basically their competitive advantage. So as long as Aritzia maintains trust with its customers and it preserves its brand, I think it can most likely continue to deliver the brand to more and more people who don't even know about it. So I'll touch on the growth levers Aritzia has a lot more later,

• 31:19Speaker 01

  but just to give you a taste, Canada currently has about 67 locations. The US has about nine times our population and currently only has 76 locations in the US. So the opportunity is very large to help spread the brand more and more into the US.

• 31:31Speaker 02

  Brand is always a fascinating competitive advantage. If your brand stays strong and still isn't known by everyone, it can be incredibly powerful because you can spread it like wildfire into new geographies and win over new super fans. But by the same token, if a brand falters or disappoints its customers, things can just go south very quickly. And so I don't think Lululemon has had one of these moments where it really burned its customers. But I'd also be lying if I said the brand hadn't lost some of what makes it special. And so leggings are roughly a third of Lulu's sales, and they fell about 20% last quarter as tastes shifted toward looser outfits.

• 32:13Speaker 02

  And by one estimate, Lulu's share of the athleisure market was actually down about 10 percentage points in August to roughly 44% with Aloe and Viori taking a lot of that market share between the two of them. So I would describe it as maybe a less broken brand and really more of a product engine. You know, the suite of products that they've rolled out have been stale and landed flat. And Lulu still owns really close to half the category. So it is their game to lose and people clearly do still love the brand. And the question is whether Heidi O'Neill, the former Nike executive who just took over as CEO this month, can make the product exciting again.

• 32:55Speaker 02

  And yes, I do see the irony there that Nike has been my example of another imperfectly managed retail brand. And now we have Heidi coming from there to try and save Lulu.

• 33:07Speaker 01

  Yeah, well, we'll see how that all works out here. So I'm not sure Lululemon's brand has really faltered either. Just like you said, I still see people wearing them all the time. So my primary worry with Lululemon, which I've had for the past few years, is just that the brand is incredibly well-known in its primary market of North America. And because the US was such an incredible growth story for so long for Lululemon, it's been largely saturated, meaning, you know, growth is becoming increasingly harder to come by. But we're going to go over why I think Aritzia has a little bit of a different growth trajectory than a little bit here today. So another competitive advantage that I didn't mention that I think Aritzia has is in its economies of scale. Now, I'm not under any illusion that they have the same advantage as a Costco or a Walmart, but the fact is they are buying very large amounts of inputs.

• 33:52Speaker 01

  And as the growth margins show, they are contingent on increasing that number, showing the ability to decrease their cost of goods sold as a result of the volume that they're purchasing. And their ability to have these growing gross margins also helps them with their growing capital efficiency metrics. So anyone who has been listening to my episodes with Sean here knows that I place a very high emphasis on capital efficiency because businesses with high sustainable capital efficiency that can reinvest nearly all of their capital back into a business are by definition compounding machines. And that's exactly what we try to look for.

• 34:20Speaker 02

  Well, if we try to just break it down by the two traits that matter most, like Kyle just mentioned, compounding requires two things in particular, the ability to turn a dollar of investment into some sort of profit, and then the ability to keep putting those dollars to work incrementally. And so if you sort of picture a machine that turns a dollar into 30 cents of profit recurrently each year, that is this idea of the capital efficiency part. And so you put a dollar of capital in now, and then you earn 30 cents a year for multiple years into the future. But the beautiful part about compounding is what happens with that 30 cents. If you can't build another machine, well, then you hold that 30 cents. And I don't know, you go buy a piece of candy.

• 35:05Speaker 02

  And so you sort of enjoy the rewards of it, but you're not putting money into building another machine. And so for some businesses, it's much easier to metaphorically build more of these machines by finding new projects to invest in, like adding new storefronts in retail. But if a retailer gets ahead of themselves and builds too many stores too quickly, believing there'll be more customers than there actually are, then they have to unwind those operations and that can be very costly too. So you put money into a machine that really isn't generating anything for you. That would be the worst case scenario for these companies that have limited reinvestment runways.

• 35:46Speaker 02

  There's just not many things that they can, you know, maybe the current business is profitable. They don't have a lot of ways to grow it profitably. And so the real strength of these companies that we think of as being compound machines, it shows itself over much longer periods of time, over maybe a 10-year period. If a business reinvested all of its profits at a 30% return on invested capital, then by year 10, that 30 cents of profit would be worth over $3 in profit per year. That's the power of reinvestment. And so these are the really special kinds of businesses that we want to own where they can deploy capital with attractive returns for many years to come.

• 36:29Speaker 02

  Otherwise, if they can't and they return the cash to us, sort of like the cash machine where they're giving you money back to go buy candy with, then the burden just falls back to you to then allocate the capital once more once the company has exhausted its most attractive business opportunities.

• 36:47Speaker 01

  Yes, and I think these are the exact types of situations that we're looking for with finding businesses to put inside of the intrinsic value portfolio. But, you know, it's really hard, you know, there's no doubt about it. First, you have the problems of returns on invested capital bouncing around on a year-to-year basis. So even on a business with an average return on invested capital of 30% over a 10-year time period, which I'll add, it's very, very hard to do, you're most definitely going to have years where it's both above and below that number, sometimes by a pretty wide margin. Then you run into the issue where the business might do things like distributions or buybacks like Aritzia does, just to offset any of their dilution. But I will say, when it comes to Aritzia, they do have a very, very good return on invested capital number. So by my calculations for the latest quarter,

• 37:30Speaker 01

  they have a return on invested capital a touch below 28%. But most importantly, the return on invested capital number seems to be rising over time. And this is a pretty decent proxy, which tells us that the business does have some sort of competitive advantage. Now, I wouldn't expect this number to rise too much over the next few years, but for me, a positive outcome would be that it just basically stays the exact same. To me, that still denotes the business has a competitive advantage because it's still earning a great return on larger and larger investment. In Aritzia's case, that simply means adding more stores and distribution centers, increasing the brand's strength, building out the digital infrastructure for e-commerce sales, and then finally just repositioning some of the stores that they already do own.

• 38:09Speaker 02

  Well, another thing interesting about Aritzia that you told me about was that their capex spend isn't very high. And yeah, the stores are nice inside, but they also don't own them. They do spend a lot on lease payments with payments over the last year totaling about $1 billion. But to build a regular store just means remodeling the interior. And so they've taken a more capital-light approach essentially that comes with its own pros and cons that we can get into. But maybe you could just outline some of the store-based economics for Aritzia's business.

• 38:46Speaker 01

  Sure, so I track a few things to make sure that Aritzia is allocating capital well. So first is simply capex. So in 2026, that number was about $237 million on about 143 boutiques for an average capex of about just $1.5 million per location. Now, yes, this number has gone up since the business IPOed. But remember, the two big growth drivers have been repositionings, which of course adds to the existing square footage of existing stores, and then building some very, very large locations in the US to increase its brand awareness. So the increase in capex per location doesn't really concern me at all. Capex as a percent of revenue has bounced around quite a bit between, say, 3% and 10%. Now, capex will increase intermittently when Aritzia has to spend a lot on its distribution centers.

• 39:30Speaker 01

  So the past few years, they've been expanding their distribution centers while building these massive flagship stores in New York and Chicago. So my guess is that capex will come down as a total number as they move more towards building these more normal-sized, smaller boutiques and don't have these gigantic outlays on their distribution centers.

• 39:47Speaker 02

  We spoke earlier about how important high capital efficiency and reinvestment is. And you showed a really good graphic earlier for our viewers on YouTube to see where management has stated that the average payback on new stores is 12 to 18 months. And so I think that's a really impressive number, right? To basically earn back the cost of building a new store within a year or a year and a half. And it shows us why building new stores is a really good idea if they're able to get those payback periods to continue to fall in that range as they expand. But the second part of the compounding equation is reinvestment, as we've discussed. So I know Aritzia does not pay any dividends, but how are they managing buybacks in their capital allocation strategy?

• 40:30Speaker 01

  Yeah, so they do have this very minor, what I would consider a buyback program, but it mainly functions just to keep dilution from share-based compensation as low as possible. So the diluted shares have still compounded at about 1% per annum, which, you know, it's not too bad, not most amazing either. So it's also worth noting that Aritzia's cash generation and cash positions have grown quite significantly over the years. So they currently have about half a billion dollars in cash on the balance sheets that could theoretically be deployed into something like buybacks. It's also worth noting that they fund these buybacks with internally generated cash flow and not debt, which I think both of us are probably a very, very big fan of. But if we look at all this from a capital allocation perspective, I think skipping the dividend and doing very limited buybacks is probably the most optimal strategy.

• 41:14Speaker 01

  The shares, you know, in its past haven't traded very cheaply, so reinvesting most of the business profits just makes a ton of sense. So I really like the capital allocation strategy that management is executing here when it comes to shareholder distributions.

• 41:27Speaker 02

  I think I'm with you there on skipping the dividend. When you have new stores that are paying for themselves, as I said, every 12 to 18 months, every dollar that's paid out as a dividend is a dollar that's not going into building out a new storefront, which are the best returning projects they have. And so ultimately reinvestment should be priority number one, and it clearly is. And the one place I'd push back maybe a little bit is on the buyback because right now it mostly exists to soak up dilution from stock-based compensation and diluted shares nonetheless are still creeping up about 1% a year, which means every year you own a little bit less of the overall company in percentage terms. And with roughly half a billion dollars in cash and then looking at the stock being

• 42:12Speaker 02

  down about a third from its high, this is sort of the moment, maybe intuitively, where you'd want to see them lean in a bit more on buybacks as long as it doesn't slow down their ability to roll out more stores. And with around a billion dollars a year in lease payments already acting like really a fixed debt obligation, I do like that they fund buybacks from free cash flow instead of taking on debt and kind of falling into that spiral. And on that note, since Aritzia is its own design house, M&A, I'm sure is really not a big priority for them, right? They're focused on building their own brands. But I did come across two relatively small deals that they've done over the last five years.

• 42:54Speaker 02

  And the first was with a brand called Reigning Champ. And funny enough, when we were in New York for our intrinsic value conference weekend in September, you told me a lot about Reigning Champ and that you also own a lot of a brand they own called Fred Segal. So what do you see as really being the rationale for these acquisitions?

• 43:17Speaker 01

  Yeah, so half of my wardrobe, I would say, is probably Reigning Champ. And I'd like that noted that I was a customer before they were acquired by Aritzia, although it's probably helped their cause since the acquisitions were announced. So if Aritzia wants to know if the acquisition was paid off, you know, just go check my closet. But all jokes aside, the way I see the Reigning Champ acquisition was purely kind of an option play, you know, it was super cheap at only $63 million and basically gives them some sort of exposure to menswear. The brand fit also makes a lot of sense as well. And if Aritzia ever wants to display men's apparel, they could theoretically just easily add Reigning Champ to their list of brands to help keep boyfriends and husbands more likely to buy stuff in stores than to just mindlessly scroll their phones while waiting around for their wives.

• 43:58Speaker 02

  So the Reigning Champ thesis is basically a hostile takeover of that husband bench that we've talked about.

• 44:05Speaker 01

  I think that's the bull case and, you know, I'd sit there for it. So the Fred Segal acquisition details were not quite disclosed, but it included things like the brand IP and a lease on the original flagship store. Now, from the looks of it, this was mainly a lease acquisition play. So my guess is that they'll retrofit the store and repurpose it into a flagship Aritzia store, which will also carry some of that Fred Segal brand. The space is about 29,000 square feet, so it's a very nice addition to the portfolio in what I've read is a quite historic location.

• 44:34Speaker 02

  I would say I probably have no problem with either of these deals. I don't think either of them carries too much downside, but Kyle, brace yourself because I'm going to maybe insult your wardrobe a little bit on air. I think the Fred Segal deal is the better of the two because it hands Aritzia this really big historic flagship space and a prime retail location that shoppers already know. And so it's also worth noting that Aritzia doesn't need to take on any new debt to fund either of these acquisitions, which probably isn't much of a surprise, given how small they are. But again, is, is really a testament to the kind of disciplined balance sheet management that Aritzia seemed to has.

• 45:18Speaker 01

  Yeah, so to your point on those acquisitions, you definitely did not hurt my feelings at all, but maybe my fashion sense has been a little tarnished. And, you know, you may be right here. Having been a long-term customer of Reigning Champ, I've definitely observed a few things about the brand. The first one is that it doesn't seem like Reigning Champ has made much of a push to expand its store count. So they only actually have four total stores, two in Vancouver and two in Ontario. And they don't really share any of their revenue or profit numbers, but I think they've definitely pushed more and more into the e-commerce front. But, you know, like I said, since they don't share their numbers, it's really impossible to tell how that's going. That's just kind of anecdotal from what I've seen from their online marketplace. So I've gone to the locations for Reigning Champ in Vancouver and they are definitely

• 46:00Speaker 01

  usually a lot less busy than the average Aritzia store. But the main location that I've gone to in Vancouver has been there for, you know, more than five years, so it definitely has some staying power. My other big observation is that their product lineup seems to be expanding quite a bit. So it used to be just things like t-shirts, pants and shorts, but they've really expanded to include pretty much most items that you can think of from socks to jackets to belts to even men's bags. So I think the brand is healthy, but is it growing anywhere close to the same rate as Aritzia? The obvious answer is an emphatic no.

• 46:29Speaker 02

  Well, given how slowly Reigning Champ's own store count has been growing, I do wonder if the bigger opportunity is for them to plug into Aritzia's distribution network. And Aritzia already has more than 140 boutiques and a website that ships over 180 countries. So carrying Reigning Champ and some of those stores or even just adding it to Aritzia.com, I would imagine that would put the brand in front of many, many more shoppers without them needing to build a single new store for it. And as we joked about earlier, it would give the husbands and boyfriends something to shop for while they're waiting for their wives at Aritzia. But I think I'd like to dig into maybe the debt question a bit more here.

• 47:10Speaker 02

  Because part of what attracted me to Lululemon was that it really needed pretty much zero debt to operate. And so that was true, at least until the last 12 months, where its net debt to EBITDA went from being negative and now is about 0.3x. So again, that was, that was part of the draw for me of looking at their industry-leading rates of return on capital, their strong balance sheet, their ability to self-fund their own growth. All of that was very promising on top of this more Peter Lynch anecdotal fact that I had a lot of consumer confidence in the quality of the brand and felt like it was very popular still with a lot of my friends and family. And so, and so I know Aritzia is pretty conservatively financed too.

• 47:52Speaker 02

  And I wonder whether that is part of what drew you into the investment in the first place as well.

• 47:58Speaker 01

  Yeah, so just to your first point there on whether Aritzia will carry Reigning Champ in its stores or online, I think it's really kind of hard to say, you know, they just started carrying some unisex and men's apparel in store. So I wouldn't completely rule it out, but as far as I've seen, they've pretty much kept the two brands completely separate. So we'll have to see how that plays out. I don't really have a preference either way. Now, as for debt, yeah, I think you're completely right. So Aritzia is most definitely conservatively financed, even more so compared to Lululemon. So long-term debt is currently at zero. There is no balance sheet item with any long-term debt. They also have access to about $400 million in liquidity, but the business doesn't really seem to need it at all right now. They've already deployed somewhere between 100 and 200 million into their distribution centers in Toronto, Vancouver and Columbus, Ohio.

• 48:41Speaker 01

  So the US distribution center apparently will need to be expanded at some point in the future, which could be another future use for that cash. So perhaps they'll draw down on some of that debt, but remember, Aritzia generates a lot of cash, you know, they just generated $800 million in cash from operations over the last year.

• 48:57Speaker 02

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• 51:08Speaker 02

  On Friday night, about 20 of us crowded around a long table at a family-style Italian spot near Times Square. Saturday, we did it again. And Sunday morning, a group of us were still debating Socrates over breakfast before everyone headed home. Many of the people at those tables had only known each other from our calls in the Mastermind Community. That is the community I host with Kyle Greve and Daniel Manca. Each week, we get together on live calls to dig into markets and individual businesses. We bring in fund managers, operators, and authors as guest speakers. And a few times a year, like New York this fall and Omaha every spring, we meet in person. If you want to think in decades alongside people who do the same, apply for free at

• 51:52Speaker 02

  theinvestorspodcast.com/mastermind. If your application stands out, I'll be the one to reach out to you personally. All right, back to the show. It feels like with the cash they produce and with a few of these larger flagship stores not being rolled out, they probably won't have too much need for those credit facilities. And so, of course, we love businesses where the business can self-reinvest without the use of significant leverage. And it gives them just a lot of wiggle room when things slow down and they're not desperately trying to repay debt to financiers. And retail, of course, is a notoriously cyclical industry. So you don't want to put yourself in this position where either your brand falls out

• 52:33Speaker 02

  of favor for a brief period of time, or there's just a contraction in discretionary spending. Then all of a sudden, you're in trouble with your debt covenants, or you're in trouble with making your interest payments. And so, when you first told me that Aritzia's stock was down about 30%, I assumed that maybe the retail environment might be softening, and that was what was contributing to the weakness or to the market, you know, looking ahead and deciding that it wasn't a great time to continue to own shares. But as I'm just looking at a three-year chart from the US Census Bureau on retail spending, I don't really see any reason to be alarmed. In the event of a slowdown, though, if we do get, you know, we just had our first quarter

• 53:17Speaker 02

  point hike recently in interest rates in a number of years. Perhaps that will weigh on the consumer, perhaps it won't. But in these previous consumer spending slowdowns, assuming that's what we're even going into, how has the company fared in terms of being able to make sure that it isn't over-leveraged?

• 53:36Speaker 01

  Yeah, I think that's a wonderful question. And I had the exact same assumption as you did when I first saw this chart. It really surprised me, just to say the least. But Aritzia's actually been quite resilient during some of the economic shocks that we've had in the year past. So when COVID hit, for instance, they drew down their entire $100 million revolver as insurance and had it fully repaid before the fiscal year was over. And then even during the lockdown, Aritzia did a really good job of keeping its workers employed and moving them into their distribution centers to handle this amazing surge they had in their digital demand. Then in the summer of 2021, when they refinanced, they simply paid off their 75 million term loan in cash. And since then, they haven't carried any debt since.

• 54:16Speaker 02

  So just to hold on a second, you mentioned the summer of 2021 there. And so, money was basically free back then with interest rates being incredibly low and even negative in some countries. So most CFOs would have happily kept some debt on the books, and others probably took out debt just because they could, knowing that they may never be able to borrow again for that cheap of a price, even if they didn't immediately have a need for that cash. The thinking was, you know, hey, we'll find some purpose for it.

• 54:47Speaker 01

  Yeah, you know, Aritzia is like that friend who gets offered an open bar, but then just orders soda water. So, you know, I chalk that up to pretty skilled and cost-conscious management. Management has been very disciplined, as I've seen in how they've handled things like costs, tariffs, logistics, and product mix over the years.

• 55:03Speaker 02

  And the fact that they haven't needed to use debt since that period also, I think, validates that there really wasn't much point in adding more debt to the books, even if it was tempting to do so at low rates. But how about we chat more about management? Because I know Aritzia still has its founder involved, but not quite at the executive level.

• 55:23Speaker 01

  Right. So the founder, as I spoke about earlier, was Brian Hill, but he actually ceded his CEO duties pretty recently, back in May of 2022. And I think he did an exceptional job of building and scaling the brand, and he still remains the company's largest shareholder. So he's also still the executive chairman of the board. Now, his replacement was a woman named Jennifer Wong, another Vancouverite and a true Aritzia lifer. So she started with Aritzia back in 1987 as a style advisor on the boutique floor, you know, helping shoppers find their next wardrobe piece. Over the next few decades, she had a hand in almost every major bet that the company made, from relocating the distribution center, launching e-commerce, rolling out their enterprise resource planning system, and then planning out the US expansion program.

• 56:06Speaker 01

  That track record took her from the sales floor to president and COO in 2015, and then to the CEO position in 2022. So nearly four decades in, she's never worked anywhere else.

• 56:16Speaker 02

  Gosh, good for her. Tenure definitely matters, right? When a longtime insider takes over, I do think there can be real upsides and also maybe downsides to consider. And on the upside side of things, they know the culture better than anyone, so they can carry it forward instead of trying to reinvent the wheel. And someone like Jennifer, who started on the sales floor and had a hand in everything from e-commerce to the US expansion, right? She's going to understand how every part of the business actually works. And because she's seen the company from so many angles, these insiders often have really a clear view of what can be improved. The downside is that great operators are not always great capital allocators. They are different disciplines.

• 56:57Speaker 02

  And so, running stores and supply chains well is a different skill from being able to decide, you know, at 30,000 feet, where the next dollar should go and what the company should, at a really high level, be prioritizing. And someone who has spent their career inside one company might lack the vision or maybe the entrepreneurial instincts to make bold bets or to imagine what else could be possible or just recognize when the playbook needs to change. But if I had to choose, I would still rather see a new CEO come from inside the business generally than from outside. And if you just look at Lululemon, which again, recently handed the keys to an outsider from Nike, the market did not exactly cheer on that news.

• 57:42Speaker 02

  And yeah, that's another Lulu tally for you there, Kyle.

• 57:45Speaker 01

  Yeah. So, you know, I think those are all really, really good points when it comes to culture. And I basically share the exact same beliefs as you. Now, obviously, founder-led businesses would most definitely be at the top of my list. But after that, someone with tenure who has been groomed by the CEO for the position would probably be my next logical choice. So I think Jennifer was the right choice, and I think she's done a ridiculously good job so far as a CEO. Now, during her time as CEO, Aritzia has retained about half a billion dollars in earnings. And during that same time period, the market cap rose by over $10 billion. So she easily passes Buffett's $1 rule of creating at least a dollar of market value for every dollar retained by the company. And the reason that's important is the CEO is, of course, in charge of where capital is deployed.

• 58:27Speaker 01

  So with that said, I do have a few areas of criticism. I think the first is something that you already touched on there a few minutes ago. Jennifer Wong has been with Aritzia for a while, and she has helped with many of the ways that Aritzia has allocated capital. But I wouldn't say capital allocation is her primary strength.

• 58:44Speaker 02

  It's definitely interesting, and I could probably take the exact opposite approach and say, capital allocation has been a very strong characteristic for her in some ways, right? Creating that much value in just four years' time is definitely impressive. And since Aritzia does have to allocate capital into new initiatives, locations, and projects, maybe you're just being a little hard on her. I don't know. How do you think about it?

• 59:05Speaker 01

  Yeah, you know, maybe you're right there. Maybe you're on to something. Maybe I'm just being overly punishing just to make sure that I don't get too bullish on Aritzia, because obviously, I'm still very, very bullish on the company. But you are right, you know, capital efficiency has been increasing. And I think you are right, we do have to give her credit for that. I also think she handled a lot of the supply chain issues, tariffs, for instance, really, really well. So they found out specifically where to cut costs and how to maintain and even raise margins, which has been a treat for me as a shareholder. So the other criticism that I would have here is not only for Jennifer Wong, but for management in general, is just the lack of insider ownership. So yes, Brian Hill, the founder, still has a massive stake in the company, owning somewhere over 15% of the company, and he still retains voting control.

• 59:47Speaker 01

  And obviously, that's great, but Jennifer Wong only owns a fraction of 1% of the shares, and much of the board has no shares at all other than options.

• 59:55Speaker 02

  Yeah, if we were really going to nitpick into this as an issue, I think we could. But given the company's success, I don't know if we need to harp on it too much. And just something important for us to consider with insider ownership, yes, that is a real incentive, right? I mean, it definitely creates alignment and skin in the game that can play a role in how well companies execute. But also as well, the incentives about future compensation matter a whole lot too. So how are Aritzia executives compensated? And do you think it's aligned in a way that creates future shareholder value?

• 1:00:35Speaker 01

  Yeah, I think we're definitely nitpicking here, but you know, I do love me some very high insider ownership. But okay, let's look at the base salaries, first of all, here. They all seem quite decent. You know, Brian Hill, for instance, had a salary of just $1 plus an annual bonus of a dollar since the business had its IPO. So he's obviously not extracting too much money from the company. And this is great to see, as he's been mainly paid through just creating shareholder value. The rest of the executives all have reasonable base salaries with no major increases that are worth noting. Now, as for incentives, management gets its incentives for EBITDA margin, revenue, and adjusted EBIT. So this incentive structure, to me, seems okay. Nothing amazing, but you know, I think it does get the job done. The fact that management speaks so much about margins on earnings call is partially

• 1:01:18Speaker 01

  due to the incentive systems, and they've done a really good job of trying to keep margins up, which, of course, given their incentives, makes a lot more sense now. So it can be very easy to spend as a retailer. So at least having this margin target is very, very helpful, in my opinion. When you add revenue and adjusted operating income, you can see how they are incentivized to create some degree of shareholder value. The last part I'll mention is on share-based compensation. That number has been rising, but it only makes up about 1.6% of revenue, so I'm not overly concerned about dilution here.

• 1:01:47Speaker 02

  I do think the structure gets the job done, right? But I would love to see one more metric in there probably. Got revenue, EBIT to margin, and then adjusted EBIT, you know, another operating profit kind of proxy. They're all coming straight off the income statement. So nothing directly rewards management for how much capital it takes to produce those results. So in theory, you could hit all three just by opening a bunch of expensive stores that grow sales and profits, but generate mediocre returns on that capital over time. And so with new stores paying back in 12 to 18 months, I don't think that is at all what's happening today. But since store rollouts are so central to the story, I'd feel better with something like return on invested capital

• 1:02:32Speaker 02

  or free cash flow per share being in the mix, which would tie pay more directly to the compounding that we talked about earlier. And so Brian Hill taking a $1 salary, I think is a great signal. But with the rest of management owning so little stock, the incentive plan is definitely doing a lot of the heavy lifting on alignment. So that's why it perhaps deserves more scrutiny. And you mentioned a little earlier that COVID and general cyclical are both risks for a business like Aritzia. So how about we expand on that a bit? With Aritzia trading at 33x earnings, there's also some valuation risk here. And if investors get disappointed by results, for example, there could be a lot of room for the multiple to compress.

• 1:03:15Speaker 01

  Yeah, you're absolutely right. But I hesitate to say that the multiple in itself is an actual risk simply because of the growth that I mentioned earlier in this business. If you're a business that can demonstrate steady, consistent market growth over multi-year time periods, of course, you're just going to be assigned a higher multiple than the market average. So let's start out with where I see the largest risk. And for that, we look straight at one of the competitive advantages that I think Aritzia really has, which is the strength of its brand. While the brand is very, very strong, Aritzia, you know, they don't have switching costs, they don't have network effects, no cost advantages and no IP, which another clothing competitor can't just go out and replicate. And there's just an old folks home full of brands that were once powerful that few people still talk about today. You know, Abercrombie, J. Crew, Gap, American Apparel, Club Monaco,

• 1:03:59Speaker 01

  are all examples of businesses that I remember seeing prominently displayed in the biggest malls. And now if I ask, you know, the average 20-year-old, they probably have never heard of them, or they probably look at me like I was growing a third arm.

• 1:04:10Speaker 02

  Yeah, I definitely could see this being one of the bigger risks for them as well. I think if you're in retail, you just want to avoid at all costs, really this Nike or Lululemon moment when it feels like someone has flipped a switch and just suddenly reduced the relevance and impact of your brand. And I doubt Nike or Lululemon will disappear entirely anytime soon. I can see that very confidently, but their brands have certainly weakened over the last few years. And that has been to the chagrin of shareholders. And with Aritzia's brand, I see a business that's still very much on the way up. Last quarter, revenue grew 43%. Comparable sales were up 35%. And then US revenue jumped about 55%. And so for those unfamiliar with that comparable sales figure in particular,

• 1:04:55Speaker 02

  it's really valuable. It represents sales as stores that have been open for at least a year. So it really helps to give us an apples-to-apples comparison where we're not just counting in every new store opening to the top line growth, but really looking at how our existing store is doing. And so the US is now roughly 2/3 of its sales too. And yet there are still big swaths of the country without a single boutique. Like I was saying, I think the closest one to me is a few hours away. And so if I were to play devil's advocate, I would say that this is exactly what a hot brand looks like before things cool down, right? Lululemon had lots and lots of blowout quarters like these, lots of incredible numbers. And so yes, you know, a 35% comparable sales growth number is really impressive.

• 1:05:39Speaker 02

  It also sets a really high bar for next year, where sometimes the market just simply gets ahead of itself and gets too excited. And so it's really unrealistic things about what's possible. And then the moment you have growth normalizing, even if it's still at an impressive rate, a stock, a retail stock in particular, trading at 33x earnings, a premium to some of the best companies in the world, like, you know, Microsoft and Google, then it can be punished really dramatically, even if for the most part, the brand is healthy. So I would say the brand is strengthening, but comparable sales really is the number I'd watch most closely

• 1:06:19Speaker 02

  because it's the truest read on whether existing customers are still excited about the products.

• 1:06:25Speaker 01

  Absolutely. And I think you're completely correct about the comp sales growth. I think once a company has these very, very explosive numbers, the following year becomes very, very difficult because you have to try to maintain or even beat those numbers. And sometimes if they get so high, it's basically inevitable that they're not going to beat them because, you know, trees don't grow to the sky. So yeah. And to be fair, Aritzia definitely does have some very, very high comps that they're starting to lap. So it's going to be very, very hard to beat those. And I think that's probably part of the reason why the share price has dropped so much. But getting back to your point there on the brand strengthening, to your point about it not having a boutique in several areas of the US, I think that's completely correct. So right now, you know, I'm not super concerned about the brand just getting that switch, you know, being hit to the off mode.

• 1:07:09Speaker 01

  But it's definitely something that I know I have to watch into the future and I'm very, very cognizant of because hopefully the wish is that I'll be out of Aritzia by the time it gets to that point. But again, you know, it's hard. So the thing that I'd also look out for is things like gross profit margin compression, things like excessive discounting of their apparel, and then a decrease in the opening of new stores. I feel like all three of those things work in conjunction, probably do a pretty good job of explaining the health of their brand. So the next risk that I look for is in the business model of just being a design house. I think it definitely does synergize with the brand risk, but since they're moving more from being a Canadian market to a US market, they're obviously going to need to stay ahead of the curve on designing clothes that Americans will love as well as Canadians.

• 1:07:53Speaker 01

  So there is some risk here that they will, you know, maybe over manufacture certain items where demand is low. And doing that can be seen in things like rising inventory levels without a corresponding revenue growth. Now, it's worth noting that I know the market definitely pays very, very close attention to inventory levels because I think you have to in retail. So I know in the past with Lululemon, they've had these rising inventory levels that people have pointed out, but you also have to remember their increase in the size of the distribution centers and their demand is going up higher and higher. So yes, while inventory is raising, you would kind of expect that from a brand that's also selling more and more apparel.

• 1:08:27Speaker 02

  I think that's a problem a lot of retailers seem to run into, and that is staying relevant across multiple generations. So you definitely have to tip your hat to Aritzia on that, right? Growing like they have now for almost four decades means marketing to multiple generations, and that's not an easy thing to do. Another risk I see is in the US expansion. Aritzia pretty clearly wants the US expansion to work out, and it is working out well for now. But that does open them up to different risks. And so for instance, if they want to open up fast, that could mean putting their stores into less attractive areas with less foot traffic. It could also mean that they try to incrementally increase their store count

• 1:09:08Speaker 02

  before really setting up the logistics to support a higher number of stores.

• 1:09:13Speaker 01

  Yeah, and that's certainly a risk that I've been monitoring. So over the years, they have gradually shifted up their number of new stores per year. I, of course, have always wanted to see a growing number, but they never increase it by more than say like one to three per year. And I've always really respected them for this as I think it speaks directly to the risks that you just mentioned in expanding too quickly. Because they can expand kind of more at a slower cadence, they really get the time to just find the best possible locations with the demographics that they know they need in order to thrive. The fact that they're maintaining their revenue per square footage seems to suggest that they are opening at very manageable levels. So if the payback period were to lengthen or the sales per square foot start decreasing, well, then that would be an indicator that the brand is weakening or maybe even that their growth plans are too ambitious.

• 1:09:59Speaker 02

  So speaking of growth, I think we're both excited about their growth prospects. So maybe I'll let you explain some of the growth levers here in more detail that get you most fired up.

• 1:10:09Speaker 01

  Yeah, so I think many of the members that I met in New York a few weekends ago during our intrinsic value conference brought up Aritzia and what I exactly feel about it. So they got a sneak peek into why I like this business so much. So I started buying it in 2020 after the lockdown, and I still hold nearly all of my shares today. So one of the biggest reasons that I like this business, you know, going over the next five to 10 years is simply just the lower penetration that it has in the US versus Canada. So as of the latest quarter, they have about 143 boutiques and 67 of those boutiques are in Canada. So the simple way that I think about how big Aritzia could theoretically get in the US is just to compare Canada's population to the US's. So the US has about nine times the population of Canada. And as of the latest quarter, Aritzia derives about 67% of its revenue from the US.

• 1:10:55Speaker 01

  Now, while there is a chance that Aritzia will never be as popular in the US as in Canada, I still think there's a good chance that the US can easily support, let's say, four or five times as many boutiques as we have in Canada. And that would mean the US can probably support somewhere around 300 stores. And just for reference, again, they are currently just at 76.

• 1:11:12Speaker 02

  What is it with these premium apparel brands coming from Canada and then taking over the US? Right? That's the story of Lululemon too, but geographic expansion is definitely a tremendous growth driver and it's something I learned when I looked at Uber. Being able to do that well is rarely as simple as just copying and pacing what has worked at home. And so every new market comes with its own competition, regulations and customer habits and expectations. And so Uber very much learned that the hard way, trying to operate in China and Southeast Asia, where it ended up exiting those markets and selling its local businesses through some of these rivals now,

• 1:11:52Speaker 02

  like DD and Grab, after some very costly battles for market share. And even in the markets where you win, those differences show up in the financial statements because the margins in each geography can be quite different. So how does this all look for Aritzia as it pushes deeper into the US? Is that helping make the company more profitable?

• 1:12:15Speaker 01

  Yeah, those are excellent points, Sean. I'm really glad that you brought those up. So I also have seen this in other businesses as well. You know, generally the best margins tend to be in a geography where you started out from. And then as you expand, you may have to accept these lower margins just to gain market share. And then you can gradually improve margins by doing things such as, you know, cutting rebates or by decreasing your marketing spend. So with Aritzia, you know, unfortunately, they don't make it that easy to find the answer to the question you just had, but we can make a few assumptions to try to create an answer. So they share their revenue by geography and the US has, like you already mentioned, and I have mentioned, is already overtaken Canada as the highest revenue generator. So if Aritzia was running into the issue of declining margin in the US,

• 1:12:59Speaker 01

  well, then the overall margin profile for the entire company would probably decline because the US revenue, like I mentioned, is two thirds of their revenue line. But the numbers actually don't suggest this. If anything, the US is even more profitable than Canada. So margins across the board from gross margins to net margins have all improved. So this suggests that the US is actually even more profitable than Canada, which is obviously another great additional tailwind to have.

• 1:13:22Speaker 02

  And so what do you think is specifically contributing to the US business being at a higher margin?

• 1:13:27Speaker 01

  Yeah, I was wondering about this and my amazing wife filled me in on some really, really interesting things that helped me understand why this might be. So whenever we were in New York or Hawaii and she'd peruse the Aritzia stores, she noticed something really, really interesting. And that was that the prices in Canada were essentially the same as in the US. So for instance, let's say something in Canada was priced at $200. In the US, it would also be priced at $200 only in US currency. So I wanted to just double check that she was correct and she was. So just to give you an example here, I checked an Aritzia jacket in Canada called the Finch trench coat, and it retails in Canada for about $300. So in the US, it does have a little bit of a discount selling for about $265. So while there are some products that have a quote discount, you know,

• 1:14:10Speaker 01

  if you put them both into Canadian dollars, the US is still paying quite a premium over what we pay in Canada. And given that the input costs are essentially the exact same, you can see how the margins have drifted upwards as the US expansion plans have gone along. So the ability to price their products this way helps them get a very nice little tailwind here as the margins in the US are going to be higher on products compared to Canada.

• 1:14:31Speaker 02

  I think that all makes sense, but from what you've told me, the growth engine doesn't just stop at geographic expansion. But management has said that they really see three growth engines. And so the first one is the geographic expansion, but then there's also digital growth and then just increased brand awareness that perhaps increases the volume and loyalty of customer purchase habits. So digital growth is more tangible. It currently makes up about 35% of Aritzia's revenue, but this number has been scaling up very well. And so e-commerce has been around for them since 2013, but it only recently started being recognized as its own segment to reflect its importance.

• 1:15:13Speaker 02

  And then since 2020, digital has grown at nearly 30% a year. So they're just capturing an ever larger market share on that front.

• 1:15:23Speaker 01

  Yeah, and I think the third growth lever that you just mentioned there, increased brand awareness, shows up more in marketing spend than anything else, but I would say it most definitely impacts both geographical expansion and the digital growth. So Aritzia doesn't necessarily care if a customer walks into its boutiques and then walks out with nothing. The mere fact that they walked in and got to experience the brand at least means that their customers now have Aritzia somewhere on their radar. Now, whether they get there by advertising or just by walking into one of their boutiques, it means they are now in Aritzia's ecosystem. And as you can tell by the growing digital revenues, many customers are just simply ordering their Aritzia apparel online rather than in store. But the brand awareness point was brought up to me really well when I got to speak to the wife of one of the community members in New York just last year.

• 1:16:08Speaker 02

  Oh, I remember this. This is one of the more lively conversations we've had about Aritzia.

• 1:16:12Speaker 01

  It was very lively and I think her husband knew just how much of an evangelist she was for Aritzia. So he was very, very happy to introduce the two of us. But she told me a lot of really interesting things because she lives in Canada, but she gets to travel to New York every now and then for work. So she told me while working in New York, wearing some of her Aritzia clothes, that she was super surprised by just how few women were even actually aware of the brand. Yes, there were some women who knew of it. I think if you're from New York, chances are pretty good that you've walked by their flagship store on Fifth Avenue. But her point was that many women from outside of New York had just never heard of the brand. So I got to speak with a few other wives that made it and they also hadn't heard of it either until walking around the city. So what this really tells me is that they have a lot of open space for Aritzia

• 1:16:55Speaker 01

  to continue to gain more and more market share, specifically in the US. Most of the women that I've spoken to who are US-based seem to like the brand who have experienced it. So I got to speak with Sean's wife about Aritzia and she seemed to hold the brand in quite high regard.

• 1:17:09Speaker 02

  She definitely knows the brand. I'm a little worried about her discovering the brand too much because it's a bit expensive, but she seems to be a fan despite the fact that, again, the closest stores are a couple hours away. And so we don't really get a chance to see it until we go up to places like New York. So most of that awareness is, I guess, coming from social media and maybe word of mouth or Aritzia.com rather than from us walking past stores together. And to some extent, that lines up with how we've talked about their digital business growing so quickly. But before we move on, maybe are there any other growth drivers that you want to talk about that we've overlooked so far?

• 1:17:47Speaker 01

  Yeah, so there's one that I tend to just keep in my back pocket that I don't really account for when I think about Aritzia over the next few years. And that's just international expansion. So from memory, I believe Aritzia said they sell online to something like 180 different countries. So gaining a retail presence in cities like London, Tokyo, Shanghai or Beijing all seem like a pretty smart idea just to test out the waters of international expansion. But right now, you know, with just how big the US market is, I don't really see too much of a reason for them to put too big of an emphasis on this. But obviously I'm paying very, very close attention.

• 1:18:18Speaker 02

  I think Lululemon is again, a good case study here. China has been a real bright spot for Lulu with revenue there growing around 30% as recently as the first quarter of this year. But even at that pace, it couldn't make up for North America decelerating because the Americas are still roughly three quarters of Lulu's sales, while China is only about 15%. And so just to offset a 5% decline in America's revenue, China would need to grow something like 25% a year. And last quarter, even China began to slow sharply with comparable sales there falling 8% in constant currency. So international can be really a great second act,

• 1:18:59Speaker 02

  but it's hard for it to rescue a business once its core market begins to stall out. And that's part of why I like that Aritzia still has so much runway in the US before it ever really needs to lean on international. And right, you know, the US and Canada are close enough that you might not say that the US is truly an international expansion in the same way it is for Lululemon to go to China. But I think it sounded talk about what Aritzia is worth. And I know you've hesitated to value it on the show because the multiple always seems a bit high. But with the stock down more than a third now, the price has certainly become more attractive.

• 1:19:38Speaker 01

  Yeah, so I'll start out just giving you my high level view here on Aritzia. So it's my largest position, so it's fair to assume I'm still very, very bullish on it. And after this research that I did to prepare for this call, nothing's really changed down that front. So I think they can continue increasing revenue in the mid to high teens of the next five years or so. And this is an attribute that's just really, really hard to come by. And it's worked really well for me since I initially bought share, simply because I've held through so much growth in the intrinsic value of the company. And even though the business continues to age, you know, it hasn't aged like spoiled milk, more like a fine wine. I think they have a pretty clear growth plan and it doesn't really include doing anything they haven't already done. It just requires that they continue to find new locations. They build their brand awareness to people who have never heard of the brand. And then they just continue selling both in retail and in a digital format.

• 1:20:23Speaker 01

  Now, I'm aware I might be a little bit biased here. You know, I'm from the city where the brand originated. I know people who have worked there personally. And as I was researching this episode, you know, I was just lounging around in my Aritzia sweatpants. And the stock is also a 5X on my average cost basis. But you know, the numbers for the business, when you take all that aside, they just tell a really, really good growth story. And to me, it doesn't really appear like the brand is slowing down at this time.

• 1:20:47Speaker 02

  So with all that said, where do you land on the intrinsic value of Aritzia?

• 1:20:52Speaker 01

  Yeah. So for my base case, I assumed that revenue would continue growing at a rate of about 15%. Now, this should come from a variety of different things, such as new boutiques, bigger boutiques, increase in same-store sales, and then increase in the US sales in particular. So the revenue kegger since going public has been around 20%. And I think with the expediting of new stores mixed with rapidly increasing US growth, a rapidly growing digital business, and increasing brand awareness, it's going to keep the revenue numbers somewhere in the mid-teens for the next five years or so. And then using a reverse discounted cash flow, which essentially just uses the stock price to help reverse engineer what kind of growth rate is embedded in the price, the market is pricing in about 12% revenue growth. Now for margins, I modeled for margins to expand from just 20.6% to just 21%. I think

• 1:21:37Speaker 01

  I was being very conservative with the margins, you know, like I just mentioned there a little earlier, as the US continues to scale, they're going to get a really nice tailwind from their US pricing. With tariffs hopefully over, you know, that should allow for margins to resist going down further in the future. And then Aritzia has also done a really, really good job of reducing their SG&A margins, where I believe they have a little bit more operating leverage. Lastly here, I give them an EV to EBITDA multiple about 15 times. This is pretty much in line with their historical average number. But you know, if they're still growing their revenue in the mid-teens during my terminal year, I think this is a pretty fair multiple to give them. And with that, I get a base case price of about $215, which offers about a 12% return from today's prices.

• 1:22:15Speaker 02

  Of course, it's always important to imagine things going better than what you expect and going worse than what you expect. So how do your bull and bear cases for the company kind of factor in to affect the fair value?

• 1:22:29Speaker 01

  Yeah. So I think the bear thesis is actually a little less likely than the bull thesis. My bull thesis is still quite conservative, using growth rates that are actually still below Aritzia's historical averages. So I give it a slightly higher 25% probability versus 20% for my bear case. Now, when I factor all three of these scenarios and a 20% margin of safety, I get an intrinsic value of about $148. And this means the current share price actually offers a discount of about 23%. Now, we haven't had the greatest luck investing in retailers inside of the intrinsic value portfolio, but individually, I've had a lot of success specifically with this business. Now, I think the big differentiator that you get with a business like Aritzia versus a Lululemon or a Nike is that the business has a lot of revenue growth left in it. And I still think the brand has a

• 1:23:11Speaker 01

  long way to go until it gets that kind of saturated feel that Nike and Lulu are now experiencing. But I know the experience with retail brands, you know, just hasn't been the best. So I'm fine keeping this outside of the portfolio, but this is definitely going to remain the largest position in my personal account.

• 1:23:26Speaker 02

  So I got to say, Cal, I feel like you have made me more appreciative of this business than I would have been after you first pitched it, especially since I was reeling a bit from my Lululemon losses. And so the growth, the margins, I think the balance sheet, the store economics, it is all a pretty impressive picture that you've painted. But I don't think you're going to be too surprised to hear that I'm inclined to pass for now. And I think part of that is my experience with Lululemon. And, you know, you pointed out, brand is really Aritzia's one competitive advantage. And so you don't have a lollapalooza of moats working to your effect here. There are no switching costs, right? It's very easy, probably one of the easiest businesses you could imagine, you know, switching from one product to the

• 1:24:08Speaker 02

  other. There's really no network effects either to fall back on, especially if the brand's popularity ever cools, you could almost get like a reverse network effect. And retail is a place where things can go from great to bad very quickly. And so unlike Lululemon, it really is a brand that I just have no consumer touchpoints either. And that just doesn't help my conviction. And I have to be honest about that. And I said it before, but I think playing with retail brands can be like playing with fire. And there are just very few instances of clothing brands being durable compounders, which means you're playing really a time game where you expect to be able to get out of the stock before it inevitably

• 1:24:49Speaker 02

  turns down and before the market sees that coming. And I just have no reason to think I'd be able to do that. So I'd rather focus on businesses with either wide margins of safety or ones where I have a tremendous amount of confidence in the durability of their earnings power for years, if not decades to come.

• 1:25:07Speaker 01

  Yeah, you know, I respect the pass and I also have to report the final tally here. So I set the over/under for Lululemon mentions at about 10. And the final count, and in fairness, I'm including a few of my own, is over 30, well over 30. But that's all we have for you today. And as usual, I want to leave you with a quote, this one by Aritzia's co-founder, Brian Hill. "It has to be an experience. There's no options now. So you have to give people a reason to come back to your stores." So if you've ever been into an Aritzia store, it's hard to kind of understand the statement, but that's really what it is. It's an experience. And I think the way Aritzia has curated stores and where they want their customers to move around when they're there and see everything, and just how the fitting rooms work, to the service that you get from the stylist, they all support this experience narrative that

• 1:25:51Speaker 01

  Hill has tried to build. And I think it will remain integral to keeping customers coming back for many more years into the future as well. That's all for today, and I'll see you next time.