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Canada Goose Holdings:
Plenty of Life Left in the Brand

Canada Goose Holdings Inc. has been on the SmallCap Informer’s watch list of growing, well-managed companies for quite some time, but the valuation remained outside of editor Doug Gerlach’s buy zone.

Canada Goose management provided some guidance about future results that appeared to have disappointed some investors, but this outlook put the company squarely in our sights, says small-cap expert, Doug Gerlach. “We are thrilled to be able to buy a stock with the potential for revenue and earnings growth of a “mere” 20% a year at such a reasonable price.

“Of course, whether or not Canada Goose is a winner on the SCI roster remains to be seen. But without a watch list in place and a familiarity with the company’s business, the opportunity might have passed us by entirely. At least now we’ll have the chance to see if this new addition to the SmallCap Informer takes flight.

Profile: Canada Goose Holdings Inc.

Founded in a small warehouse in Toronto, Canada in 1957, Canada Goose Holdings Inc. (NYSE: GOOS; TSX: GOOS) has grown into a leading maker of performance luxury apparel. Its ascendancy has come quickly, with total revenues growing from C$218.4 million in 2014 to C$830.5 million in 2018.

In late May, Canada Goose rocked the investment world with its fourth quarter earnings report, which included guidance for reduced growth in the coming year and beyond. Canada Goose’s stock price dropped 30% on the news, and analysts on Wall Street were apparently shocked into downgrading GOOS.

On closer examination, what so terrified the broader market seems like no more than a stunning overreaction. Canada Goose guided investors towards 20% annual revenue growth and 25% annual adjusted EPS growth over the next three years. Yes, this is significantly slower than the 40% annual pace that revenues have been growing at since 2014, or the 48% rate that EPS climbed in 2018. But the drop in stock price puts GOOS’s P/E ratio around 26, its forward P/E below 22, and its PEG ratio at 1.1. This is a very reasonable price to pay for growth.

Canada Goose went public in 2016. The company has a broad international reach, with retail stores and e-commerce websites available around the world. In fiscal 2018 (ended March 31, 2019), sales in Canada accounted for 35.3% of total revenues, the Rest of World for 34.5%, and U.S. sales for 30.2%.

Growth Analysis

Since 2014, revenues have grown at a consistent annual 40.2% rate; EPS have grown at an annualized 90.3% rate since 2015. In the fourth quarter ended March 31, 2019, Canada Goose saw sales grow 25.1% to C$156.2 million while EPS increased 28.6% to C$0.09. Canada Goose’s products are aimed at three seasons of the year—fall, winter, spring, with winter gear being their calling card—so the company experiences a significant degree of seasonality outside of the Northern Hemisphere’s winter months.

Canada Goose has a high level of customer engagement, with 87% of customers saying they “love the brand” and 84% claim a “high repurchase intent.” The company points to its authenticity as a brand developed, tested, and manufactured in Canada as a key differentiator.

The company is aggressively expanding worldwide, with 11 directly-operated stores in attractive retail locations (Regent Street in London, Sendagaya in Tokyo, Soho in New York City) and e-commerce markets in 12 countries. Direct to consumer (DTC) sales made up 51.9% of total fiscal 2018 revenue.

Apparel trends are often unpredictable, so changing tastes could affect Canada Goose’s prospects adversely at any point. It appears that there is still plenty of life in the brand to carry it along for several years at least.

For fiscal 2020 and the next two fiscal years, the company expects annual revenue growth of at least 20%, adjusted EBIT margin expansion of at least 40 basis points, and annual growth in adjusted EPS of at least 25%.

Prior to Canada Goose’s earnings releases, the long-term analyst consensus EPS growth rate was 28.5%, but we expect this to come down once the news is digested. Our rule of thumb is to cap expected sales and EPS growth at 20%, so we use that rate in our study.

Quality Analysis

Pre-tax profit margins have been climbing steadily since 2014, reaching 22% in fiscal 2018. This is double the average of the Apparel industry. On at trailing four quarter basis, Canada Goose’s pre-tax profit margins have been consistently trending upward, as well.

The company’s debt load has been decreasing, reaching 36.4% of equity as of the end of the fiscal year. In the fourth quarter, the company refinanced its debt to support future growth, increasing its revolving facility to C$300 million and C$350 million in peak seasons and extending the maturity of its existing USD $113.8 million term loan facility. As the company continues to expand its presence in its own stores, the availability of capital is key, so we expect that debt levels could increase going forward.

Value Analysis

The current P/E ratio is 26.1, which is about 53% of the average P/E of the last five years. We wouldn’t consider it likely that the stock would return to the highest P/E ratios of the last three years, ranging from 44 to 87, but a stock growing at 20%-25% would well support a P/E of 30.

On the upside, if the company does grow EPS at our projected rate, EPS of C$3.19 could be reached in five years. At a 30 P/E, a forecast high price of USD $95 is indicated.

On the downside, a low P/E of 18 times last year’s EPS of C$1.28 provides a low price of USD $23.

From the current price of USD $33.89, a reward-to-risk ratio of 7.5 is indicated, for a 23.1% annual total return. A maximum buy price is presently indicated at USD $41.

Due to the late breaking news, we expect some volatility in the stock price as the market and investors react to the changing conditions at Canada Goose, and consider it possible that the stock could decline still further below USD $33 or rapidly climb to the top of our buy zone.

Editor’s Note: Each monthly issue of the SmallCap Informer is packed with information aimed at helping you make smarter investing decisions about the small-cap stocks in your portfolio. Two stocks are recommended and analyzed each month using the Stock Study form created in the Toolkit 6 software program (available from ICLUBcentral at http://www.iclub.com). Each stock write-up includes an overview of the company's business, and analyses of the growth prospects, key quality metrics, and valuation assessment.

For a limited time, Bull & Bear readers can receive a subscription (print or online) at 35% off the regular price, visit www.SmallCapInformer.com.

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