Canada Goose Holdings Inc. Reports Fiscal First Quarter Results Wednesday
Canada Goose Holdings Inc.’s unusual – and evolving – business model has ruffled some feathers recently. But for those who do their homework, there’s a chance to reap some luxurious gains.
The Toronto-based outerwear maker, which was founded in 1957 make snowmobile suits and other winter garments, has seen sales more-than double since going public in 2017. The growth has been driven by entry into new markets as Canada Goose introduced its down jackets and other gear to customers who want both luxury and dependable warmth. Operating margins have also exploded, hitting 24.9{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208} last fiscal year from 18.5{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208} in fiscal 2017, driven by a shift to more direct sales from Canada Goose stores and its 12 national websites.
But investors were spooked in late May when the company reported its results for the year through March. The stock tumbled 31{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208} in a single day on multiple concerns, many of which appear unfounded.
First, the March and June quarters are considerably smaller for sales than the peak season quarters, and the company has always made clear that these “shoulder” quarters are a time when orders rather than revenue will be strong. That explains why the company’s inventory jumped to C$267.3 million from C$165.4 million a year earlier at the end of March. For many retailers, that could be a red flag indicating a glut of unsold merchandise that would need to be marked down.
In reality, inventory growth is a positive sign for Canada Goose. The company has enough firm orders from its wholesale business that it can effectively produce based on actual demand.
Even more importantly, Canada Goose has moved production in-house aggressively, with 47{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208} of its down-filled jackets now made in its own facilities. That makes inventory appear much earlier on Canada Goose’s balance sheet than for, say, a retailer that outsources production.
And it is much more sensible to produce ahead of the upcoming season rather than risk paying workers overtime at the last minute. There is also a need to ship products over very long distances to markets it has only recently entered, such as Greater China.
Indeed, there is no sign of the company being forced to sell extra products at a discount. Last year on Black Friday, a day known for deep discounts, the company deliberately introduced its Approach Jacket at full price. The company also allows “demand to build ahead of supply” so there is strong appetite for product by the time it becomes available. Canada Goose never sells in off-price channels.
There are other indications Canada Goose can hold full price with ease. A look through second-hand luxury websites such as The RealReal Inc. shows that many pre-worn jackets are for sale within a whisker of full price. That’s unusual outside of a few ultra-luxury brands like Hermès and Louis Vuitton.
Another possible concern last quarter: The company issued guidance that may have disappointed some investors, including fiscal 2020 revenue growth of at least 20{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208} and adjusted earnings-per-share (EPS) growth of at least 25{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208}. Some analysts had forecasts that were higher for both metrics.
But the company has handily exceeded guidance for revenue and EPS for the last two years. For fiscal 2018, the company guided to mid-to-high teens percentage revenue growth and 20{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208} EPS growth; it delivered 46.4{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208} revenue growth and 95.3{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208} EPS growth. The next year, Canada Goose guided to revenue growth of at least 20{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208} and EPS growth of at least 25{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208}; the actual results came in at 40.5{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208} and 61.9{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208}, respectively.
Investors shouldn’t fret if the company doesn’t raise forecasts Wednesday. Last year, it reiterated initial guidance after the first quarter but began to ratchet it higher after the second quarter. That makes sense, given that it’s hard to get complete visibility during one of the seasonally slower quarters of the year. Website visitor data from Sentieo show a very clear seasonal pattern, with peak visits in December.
That said, there are early signs shoppers may be taking out their credit cards – particularly online. “We are seeing a very recent uptick year-over-year in pageviews and search trends after the quarter end,” said Nick Mazing, Director of Research at Sentieo, referring to visits to canadagoose.com.
Online sales are increasingly important, accounting for approximately 35{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208} of revenue, according to Cowen analyst Oliver Chen. That’s even more than Lululemon, an e-commerce pioneer that generated 26.8{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208} of sales online last quarter and has become a Wall Street darling for its digital prowess.
E-commerce sites offer multiple benefits, the most important of which is lower overheard costs. Canada Goose’s direct-to-consumer segment overall had an operating margin of 54{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208} last fiscal year, and margins for online sales are likely far higher.
The opportunity remains large – both in market size and the chance to reach an elite luxury shopper. Credit Suisse estimates Canada Goose has just a 6{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208} share of the $11 billion premium outerwear market, versus Moncler at 16{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208}. And Canada Goose’s jackets are still hundreds of dollars less than Burberry or Moncler.
It would also be a mistake to think Canada Goose is only a garment for customers in cold climates. Many people with the budget for a $1,000 jacket easily take trips to ski resorts and the company has branched out into lighter items as well.
As for valuation, Canada Goose likely deserves to continue trading at a premium, given its continued pace of growth. The company itself expects this year’s pace of at least 20{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208} revenue growth and 25{efe5d79870c08482e17ab0c97855f89429dac5f22c46026d3ca83573faec2208} EPS growth to continue for the next three years. And again, its forecasts have consistently proved conservative.
Canada trades at 32 times consensus earnings for the year through March 2020, according to Sentieo. While that’s richer than luxury conglomerate LVMH Moët Hennessy or Moncler at about 25 times, Canada Goose is growing about twice as fast as they are – and likely will be for several years. Savvy investors should consider owning Canada Goose before it really takes off.
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