Unprecedented Growth Drives Unprecedented Returns: Value Relevance of Accounting
Information
The value relevance of accounting information is critical in decision-making for investors
of Aritzia Inc. (ATZ), who creates, develops, and sells women’s fashion products across Canada
and the United States (Aritzia 2022). The Covid-19 pandemic has created headwinds for the
company as consumer demand decreased as lockdowns were announced and supply constraints
put upward pressure on prices. Given the uncertainty of earnings in the macro-economic
environment, on January 12, 2022, Aritzia Inc. reported its third fiscal quarter of 2021, and the
stock price appreciated by 20.68% the following day as investors had new information to
determine the company's intrinsic value. To the surprise of many shareholders, the company
seemed unaffected by the market environment as the “retail business flourished” and gave the
forward guidance that the “strong performance has continued in the fourth quarter to date,
despite the resurgence of COVID-19, associated supply chain and labor headwinds” (BNN
Bloomberg 2022). This report will discuss the reasons for the drastic change in the market price
for the firms' shares given the new information, and the effects of earnings quality on Aritzia’s
earnings response coefficient.
There are various reasons for the market’s response to ATZ’s earnings. To breakdown the
share price performance, we must consider the investors' pre-earnings beliefs about the firm’s
performance, how investors analyze the financial information, how does the new information
reflects the investors' future beliefs about performance, and observe any abnormal trading
volume around the earnings announcement. Prior to the earnings release, investors had
confidence that the company is expected to grow revenue but thought that it would be unrealistic
to expect further margin expansion as the company will not benefit from economies of scale.
Investors were also aware that Aritzia has a consistent track record of beating revenue estimates
but stated that the firm's market value reflected this information, and its securities were trading at
fair value (SeekingAlpha 2021). Appendix 1 shows the average equity research estimates for
Earnings Per Share (EPS), Revenue, Net Income, and Earnings Before Interests, Tax,
Depreciation and Amortization (EBITDA) prior to the earnings announcement. Aritzia surprised
investors on all four metrics as it saw “sales growth in the United States [that] sustained
unprecedented momentum” and its “eCommerce business continued to surge”(Aritzia Inc. 2022).
The company also provided increased guidance on its fourth quarter and fiscal 2022 outlook with
an increase of 40% to 50%. Investors revised their beliefs that the robust client demand can
continue with strong operational management and the release of its spring collection. To reflect
the change in investors' beliefs, the average 12-month fair value estimates of Aritzia’s shares
increased from ~$53 to ~$65, a 22% increase (Bloomberg L.P. 2022). Lastly, the difference in
volume traded was larger than its average volume. On the day of the earnings announcement,
2,727,000 shares were traded when compared to the daily average of 643,000. This is also
consistent with its previous earnings release when 3,424,000 million shares trades verse the
average volume of 320,000 of the past month. This is consistent with the Journal of Accounting
and Economics findings that “there is significant day 0 impact after the adjustment of after-hours
earnings announcements” (Beaver et al. 2019). After considering these four factors, the stock
price appreciation of 20.68% informs investors that the earnings announcement is seen as a
positive belief change and under efficient market theory, the market value of Aritzia changed to
reflect its new future performance potential.
Given the rapid change in share price, we can determine the earnings response coefficient
to measure the abnormal returns of Aritzia's share price. Earnings quality reflects the investor’s
ability to predict future earnings of the company. The higher the probability that investors are
correct about a company’s financial statements, the higher the earnings coefficient as any
variance from what is expected is rare. To determine the earnings quality of Aritzia, we will look
at earnings persistence and accruals quality. “Earnings Persistence reflects the profit quality of a
firm and shows the firm can retain earnings over time instead of just due to a particular event”
(Fatma et al. 2019). Aritzia’s third fiscal quarter earnings showed persistent growth as its higher
profits were led by favorable contract negotiations for store occupancies and will benefit in the
future when the transitory effects of higher freight costs due to supply chain disruptions ease.
Despite these trends, Appendix 2 shows that investors have a poor track record of predicting
Aritzia’s earnings and the company has beat estimates over the past 5 quarters by an average of
82.99%. Although investors are confident in their ability to predict future performance, earnings
persistence is low for Aritzia. The financial statements show transitory lower inventory
markdowns offset the higher freight costs over the quarter but “temporary [events] or the
application of the concept of accrual accounting write-downs” are seen as irrelevant in the value
of earnings, thus not affecting shareholders' interpretation of Net Income (Fatma, Nurani, and
Hidayat 2019). The discretionary nature of the accruals will not decrease the earnings quality,
leaving this component of the earnings response coefficient unchanged. Earnings quality is the
main driver of Aritzia’s low earnings response coefficient, which concludes that the large beat in
Net Income was a catalyst for the share price movement.
The drastic change in the market price for Aritzia’s shares was driven by the newly
available information that exceeded investors' expectations. Although the company has a low
earnings coefficient due to its low earnings and accrual quality, Aritzia’s reported net income
was 49.09% higher than what investors expected which led to the security’s abnormal return. As
investors are rational, they must update the fair value of the company to reflect the new
information which increased the share prices by 20.98%. This case shows allows us to gain a
better understanding of the usefulness of financial information and can help accountants find
useful information to include to help investors in their decision-making process.
Appendix
Appendix 1: Comparing Aritzia’s Q3 2022 Actual Results to Earnings Estimates
Measure Actual Results Analyst Estimate Surprise
EPS, GAAP $0.56 $0.34 64.46%
Revenue $453.323M $372.429M 21.72%
Net Income, Adj $71.199M $47.757M 49.09%
EBITDA $109.289M $80.533M 35.71%
Source: Bloomberg L.P. (2022) Retrieved March 19, 2022 from SFU Bloomberg terminal.
Appendix 2: Comparing Aritzia’s Actual Quarterly Net Income to Analyst Estimates
Net Income , Adj (Millions) Actual Results Analyst Estimate Surprise
Q3 2021 $32.19 $22.58 42.58%
Q4 2021 $17.68 $5.25 236.98%
Q1 2022 $21.65 $20.32 6.57%
Q2 2022 $44.41 $24.71 79.71%
Q3 2022 $71.20 $47.76 49.09%
Source: Bloomberg L.P. (2022) Retrieved March 19, 2022 from SFU Bloomberg terminal
Bibliography
Artizia Inc. “Aritzia Reports Third Quarter Fiscal 2022 Financial Results.” Aritzia Inc - Investor
Relations, January 12, 2022. https://investors.aritzia.com/investor-news/press-release-
details/2022/Aritzia-Reports-Third-Quarter-Fiscal-2022-Financial-Results-2022/
default.aspx.
Aritzia Inc. “Aritzia Announces Normal Course Issuer Bid.” Aritzia Inc - Investor Relations,
January 12, 2022. https://investors.aritzia.com/investor-news/press-release-details/2022/
ARITZIA-ANNOUNCES-NORMAL-COURSE-ISSUER-BID/default.aspx.
Beaver, William H, Maureen F McNichols, and Zach Z Wang. “Increased Market Response to
Earnings Announcements in the 21st Century: An Empirical Investigation.” Journal of
Accounting and Economics, July 26, 2019.
BNN Bloomberg. “Aritzia Sails Past Q3 Estimates as Profit More than Doubles - BNN
Bloomberg.” BNN, January 12, 2022. https://www.bnnbloomberg.ca/aritzia-sails-past-q3-
estimates-as-profit-more-than-doubles-1.1706825.
Fatma, Nurani, and Widi Hidayat. “Earnings Persistence, Earnings Power, and Equity Valuation
in Consumer Goods Firms,” April 15, 2019.
https://www.emerald.com/insight/content/doi/10.1108/AJAR-05-2019-0041/full/pdf.
SeekingAplha. “Aritzia Stock: Poised for Growth, but It's Not Worth It (OTCMKTS:ATZAF).”
SeekingAlpha. Seeking Alpha, December 7, 2021.
https://seekingalpha.com/article/4473824-aritzia-poised-for-growth-but-its-not-worth-it.
