This Stock’s First Rally Is Over: The Second Could Be Much Bigger

Aritzia’s first rally fixed old problems, but the next move could come from U.S. expansion and rising profitability.

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Key Points
  • Aritzia cleaned up inventory and margins, and the stock doubled because the business truly improved.
  • U.S. revenue is now the main engine, jumping 54.5% last quarter and driving most new store openings.
  • The stock isn’t cheap, so it needs fashion demand and margins to stay strong despite tariff risks.

Some stocks rally because investors suddenly fall in love with the story. Yet the more interesting ones rally because the business underneath them becomes better than the version investors originally bought.

That distinction matters after the easy gains have already happened. A first rally can come from fixing obvious problems. Eventually, the market stops handing out points for recovery. Another move higher needs something stronger, such as expanding into a much larger market while earnings grow faster than sales.

That’s why I wouldn’t automatically dismiss a stock simply because it has already doubled. Aritzia (TSX: ATZ) may be one of the better Canadian examples.

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ATZ

Aritzia stock sells its clothing through boutiques and digital channels under brands including Wilfred, Babaton, and Tna. Its Canadian following was never really the issue. A couple of years ago, investors were much more concerned about swollen inventories and shrinking profitability. Those problems collided with aggressive expansion, sending the shares sharply lower.

Then management fixed them. Inventory normalized. Markdown pressure eased. Margins recovered. Customers kept showing up. Aritzia stock subsequently climbed from a 52-week low around $70.70 to as high as $174.52, a gain of roughly 147%.

That’s quite a comeback. Shares have since retreated to around $133, nearly 24% below that high. Yet the business hasn’t exactly followed them downward. The next rally could be built on something considerably larger than repairing old mistakes.

U.S. expansion

Aritzia stock’s biggest growth opportunity is no longer Canada. First-quarter fiscal 2027 U.S. revenue surged 54.5% to $638.1 million, compared with 25% growth in Canada. The United States now produces about 67% of total company revenue.

Aritzia stock opened 14 new boutiques during the previous 12 months, and management plans another 12 to 13 during fiscal 2027. Eleven or 12 of those are expected to open in the United States. Meanwhile, digital revenue jumped 55.5% last quarter.

For investors looking at Canadian growth stocks, that’s the part I’d focus on. Aritzia stock isn’t merely squeezing more sales out of mature Canadian stores. It’s replicating a proven brand across a much larger American market.

More to come

Opening stores is easy if investors don’t care whether you make money. Aritzia stock’s latest results suggest growth and profitability are arriving together. First-quarter revenue climbed 43.4% to $951 million, while comparable sales increased 35.1%. More importantly, adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin expanded more than four percentage points to roughly 20%.

Adjusted earnings per share nearly doubled. Management responded by raising fiscal 2027 revenue guidance to between $4.55 billion and $4.75 billion, representing 23% to 28% growth. That trajectory explains why I think investors should look beyond the first rally. Aritzia stock could add roughly $2 billion in annual sales in only two years if it reaches the upper end of guidance.

The stock isn’t cheap, though. At roughly 27 times forward earnings, investors are paying for growth to continue. That’s considerably different from buying stocks during a market correction when expectations are sitting on the floor. Aritzia stock’s biggest risk is that today’s popularity doesn’t last forever. Tariffs are another concern. Management has already identified additional tariffs and changes to U.S. rules as pressures it needs to offset.

Bottom line

That said, those risks aren’t hiding. What’s more interesting is what investors are getting despite them. That includes 35% comparable-sales growth, rapidly expanding U.S. revenue, recovering margins, digital growth above 50%, and another wave of American stores still coming.

Aritzia stock’s first rally proved the company could recover. If it proves it can become a truly large North American brand, the second act could make that turnaround look like the smaller story.

Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Aritzia. The Motley Fool has a disclosure policy.

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