Updated: Aug 4, 2020
Price on date of analysis: $30
Market cap: $1.76B
Overall assessment: BUY
Target price: $65 (1-2 years)
A quick snapshot: While the stock declined from $60 to $30 over the past year, this is caused by short-term slow-down in sales and EPS growth. Analysts are predicting that sales and EPS growth will remain at the current level of 20-25%, but think the stock is underpriced by at least 50%. My analysis below shows they are conservative. The company is preparing for the next round of explosive growth with its expansion to the Asia market.
Why did Canada Goose Inc. (GOOS) pique my interest?
First, I live in Canada, and I see people wearing it every day despite the fact that a jacket costs $1,000 to $1,200
While the stock is declining institutional investors seem to be buying
The stock is getting cheap at $30 with a PE of 32.5
The company is just starting to enter the Asian market, and sales growth there is impressive. As reported by GOOS in November revenue in Asia nearly doubled to $48.9m from $26.6m, and in the United States increased by 38.5%.
Canada Goose Inc. (GOOS) Overview: company, category description
Canada Goose Holdings, Inc. designs, manufactures, distributes, and retails outerwear for men, women and children. It operates through the Wholesale and Direct to Consumer segments. The Wholesale segment comprises sales made to a mix of functional and fashionable retailers, including department stores, outdoor specialty stores, individual shops, and international distributors. The Direct to Consumer segment refers to the online sales through its e-commerce sites to customers in Austria, Belgium, Canada, China, France, Germany, Ireland, Luxembourg, the Netherlands, Sweden, the United Kingdom, and the United States and sales to customers from company-owned retail stores in Boston, Calgary, Chicago, London, New York City, and Toronto. The company was founded in 1957 and is headquartered in Toronto, Canada.
It is interesting to note that back on Dec 11, 2013, it was announced that Bain Capital acquired a majority stake in Canada Goose. We know that Bain Capital invests in companies for a long time and nurtures them, sets guidelines, helps with management to see their investment grow. This was the case with Canada Goose (GOOS).
On June 20, 2018, it was announced that Bain Capital funds, Dani Reiss and John Black (CFO), are selling 8.4 million, 1.5 million and 100,000 shares respectively.
Upon closing of the offering, Bain Capital and Reiss continue to own 39,363,742 and 23,130,334 multiple voting shares, representing voting control of 59.83% and 32.88%, respectively.
Below is the chart for GOOS. It is interesting to note the movement from July 2017 to July 2018 when the stock grew 200%.
On June 15, 2018, Canada Goose had a record quarter as the revenue more than doubled vs. the same quarter last year. The stock closed up $18.02 at $78.01.
Since then, after a bit of volatility, shortly after Bain announced the sale of part of its stake, the price of GOOS stock went into a downward channel with one massive price drop in one day after the release of earnings end of May 2019. The stock stayed in the downward channel for the past year.
Let’s examine the reasons for the decline in the price and whether the company is ready for a comeback.
Sales growth suggests Canada Goose’s attempt to expand its offerings beyond winter gear with products such as US$750 raincoats is paying off. The company also shipped wholesale orders to Asia and Europe earlier after increasing manufacturing capacity.
Expansion in Asia and, in particular, China is working, with revenue from the region tripling. Overall revenue rose 59% to $71.1 million, more than the $53.8 million expected by analysts. Reiss said the Hong Kong store has been performing well despite occasional disturbances due to protests.
Even with the sales surge in the fiscal first quarter, Canada Goose left its annual revenue and net income guidance unchanged. Some analysts find it too conservative as it would mark a steep slowdown from the past. The Toronto-based company is forecasting revenue growth of at least 20%.
Canada Goose Inc. (GOOS) Financial overview
As seen below, Canada Goose (GOOS) business is very seasonal (obviously) with most sales happening in winter when the demand for winter jackets is the highest. The company knows that and is trying to add clothes to its portfolio that could sell in seasons outside of winter, and it was adding sales for quarters outside of winter season quite well as can be seen in the table below. EPS follows sales trend very well with the highest profit in fall/winter but usually going into negative in the summer.
While the business was showing good revenue growth, the most likely reasons for a recent decline in stock price are:
Although sales were growing, EPS (TTM) was flat for the past year.
A bit slower sales growth than in the past (2017-2018) when sales were growing at ~40%, now we see a couple of months with 26%-28%. Slower growth caused a major 22% drop in price end of May 2019 after management forecast revenue growth of 20% for the new fiscal year, which would be a slowdown from the 25% it achieved in the year that just ended.
In August 2019, despite growing revenue, the company kept its guidance for EPS flat. While some analysts think GOOS is conservative, this caused an 8% drop in premarket on that day.
News that Bain sold part of its stake (discussed above) is also having an impact as investors are wondering if Bain will eventually sell all of its stakes. If it is selling the stake, why is that? Do they see slow growth in the future?
One piece of news makes me optimistic about the company and makes me think they are just playing conservative:
In November 2019, GOOS management reported total sales increased by 27.7% to $294.0m. Strong revenue growth in key markets, with standout performances in Asia, which nearly doubled to $48.9m from $26.6m, and the United States, which increased by 38.5% on a constant currency basis.
OK, so, for now, Asia business for GOOS is 16% of sales, but they are growing it very quickly. The USA obviously growing slower for 2 reasons: first, they have probably already the saturated USA; second, who really needs a super warm jacket in the USA? Now, the Asia market is bigger in general. The best thing about Asia as they don’t have as much of that winter-jacket heritage there, they can build the brand from scratch to position it more as an all-season brand.
All GOOS needs to do is build a bit bigger base in Asia. Growing sales at that rate in Asia, they should see sales comparable to the current USA numbers in exactly 3 years. With bigger and bigger sales in Asia that provide stronger growth overall increase in Canada Goose sales will accelerate to 35-40% range in 2022.
Now, why did GOOS have lower EPS growth in recent years (despite sales growth)? The answer is actually quite simple: they increased their marketing and sales expenses because they are building a new market in Asia. Yes, they are using some of the profits to develop a stronger presence in Asia, but that is what businesses usually do: defer current profits to get even more profits in the future. Eventually, once they settle in Asia and will reduce/keep stable, the sales spend there we should get back to profit growth.
Financial health and stability
The company is quite healthy in terms of debt. Some may say that the Current Ratio is too high at 3.02; however, Canada Goose has little long-term debt, so even if it cannot pay its short-term commitments as a profitable company, it can always borrow more money.
Canada Goose Inc. (GOOS) Key financial ratings/Stock Value
Canada Goose (GOOS) forecasts earnings growth of at least 25% and sales growth of at least 20% in fiscal 2020. As discussed above, they might be a bit conservative or they are truly planning to use the profits to build a stronger presence in Asia. We don’t know, but I think it is both. They will surprise a bit but will make sure they have enough marketing/sales spend to build sales in Asia.
With the recent slowdown in sales (as we discussed above, they will go back to 40% sales growth with a stronger presence in Asia), flat EPS (spending more on sales and marketing), and conservative guidance for 2020 the stock price declined. With that, the PE ratio for the company declined from a 160 level in July 2017 to just 32.5.
However, as discussed above, we expect sales growth to go back to 40-45% in 2 years.
Let’s calculate how much impact it can have on EPS. To do that, let’s calculate the operating leverage. We will use the information from the below table.
Leverage is calculated in the following way:
Growth in Profit/Growth in Revenue.
There was an off-year (2017) when sales increased, but profit declined. This was due to the unusual expenses of $24M. Usually, unusual expenses are within $1M per year. Adding back the unusual expenses to profit (taking care of taxes), we get the following. We can see leverage declined in 2019, but again, that is caused by an increase in Selling/Marketing costs. The average Leverage for the past 4 years is 2.3. This means for every 1% increase in sales; the company gets a 2.3% increase in profit. If the company would grow its sales by 40% and have that leverage, it would have a 92% annual growth in profit/EPS. Even if they continue outspending in marketing and have a lower leverage of 1.8 (average for the past 3 years), the annual growth in profit/EPS will be 72%.
With current PE of 32.5 at the price of $30, this will give a PEG ratio (price-to-earnings-to-growth) of between 0.44 and 0.35. Usually, stocks that have PEG of 1 considered to have good value. Anything below 1 means the stock is sold at a discount. In our case, the discount is 65% to 56%, meaning the stock may appreciate 2.5 to 3.5 times in 2-3 years.
As per the below charts and data, analysts predict the growth of EPS to $1.27 for this fiscal and $1.60 for the next (year ending March 30, 2021). Last year's earnings were $0.98. This is a projected growth of 29% for this year and 26% for the following. While less reliable projections for the fiscal year ending March 2022 are $1.93, which is a 21% increase. This seems very low.
EPS estimates on simplywall.st are more or less in line with the estimates above (projecting 26-27% growth).
Canada Goose Inc. (GOOS) Ratings by analysts
While analysts predict 20-25% growth in EPS (as noted above, this seems very conservative), most analysts rank GOOS as Overweight (Buy) with the target price of 44.84. With the current price of $30, this is a potential for a 50% increase.
The analysis on Nasdaq website says the average target price is $52.46
Lastly, simplywall.st ‘snowflake’ analysis also says GOOS is a high growth potential stock.
Who owns it? Changes in ownership
While the rest of the market is pushing the stock price down, institutional investors are buying more of Canada Goose (GOOS) stock. The number of accumulated shares by institutions increased.
Canada Goose Inc. (GOOS) Buzz (StockTwits)
There is a lot of interest from public investors as there are a lot of people talking about the stock. However, recently, as the stock reached $30, the sentiment is quite negative with almost 40% bearish comments.
Canada Goose Inc. (GOOS) Risks
There is little risk for the stock at this price of $30. It may go a bit lower, but there is no way it is going to see a lower $20 range. It is definitely a buy at this price, especially the company is growing, has little debt, and is in a healthy position.
The company is healthy and stable in financial terms, no problems here.
There is a risk that at some point in the future, Bain Capital will decide to sell all its stake to another investment company. However, this may lead to a short-term increase in the share price. In the long-term, the impact is not clear.
Obviously, there is a risk that the company will not succeed in Asia, and sales predictions are not as strong, reducing sales and profit growth.
Canada Goose Inc. (GOOS) Overall assessment and summary
A series of events in 2019 caused the stock to lose much of its value as the stock went from $60-65 range to $30. These events were:
Bain selling part of its stake in June 2018. At that moment, the news was accompanied by strong earnings results and was not noticed as much.
Lower sales in 2019, decreasing from 35-45% a year to about 25% a year.
Less growth in earnings.
Cautions GOOS management guidance for full 2019 (ending March) revenue and earnings: not lifting guidance it gave at the end of its fiscal 2018.
With a bit of a slowdown, analysts are cautious and predict the growth of EPS to $1.27 for this fiscal and $1.60 for the next (year ending March 30, 2021, which is 29% for this year and 26% for the following.
However, if we scrutinize what Canada Goose (GOOS) is doing, we see that there are reasons for lower EPS and actions to combat slowing growth in sales:
Sales are not growing as much as in the past. The reason is the company was selling predominantly in the USA and Canada as Canada Goose already saturated the market. Here sales grow at 20-25%. However, the company management saw this coming; that is why they went to conquer the Asia market. While Asia currently represents only 13% of Canada Goose sales, they are growing at a much faster rate of 80% per year. If sales to continue to grow that fast, Canada Goose’s sales will equal current USA/Canada sales in 3 years (meaning sales will double). Also, the Asian market is huge.
Its EPS growth relative to its sales growth declined only because it is spending more on marketing and sales to conquer the Asia market. It is just spending its profit now to make even more profit in the future.
My sales and leverage analysis for the next few years show that the stock is by far underpriced. With current PE of 32.5 at the price of $30, this will give the PEG ratio (price-to-earnings-to-growth) of between 0.44 and 0.35. Usually, stocks that have PEG of 1 considered to have good value. Anything below 1 means the stock is sold at a discount. In our case, the discount is 65% to 56%, meaning the stock may appreciate 2.5 to 3.5 times in 2-3 years.
I have a strong outlook for this company. In the end, Bain still owns more than half of the company and we know Bain Capital does not own companies unless they have long-term growth plans for it.
My rating: Strong Buy
Have an idea about Canada Goose Inc (GOOS)? You have a different opinion about this stock? I made an error in assumptions? You have additional information to share? Please leave your comments below.