With summer just around the corner, you probably don’t want to worry about having to buy a winter coat. But now could be the perfect time to buy shares of Canada Goose Holdings (GOOS -7.51%).
Valuation and performance
Shares of the once-hot IPO have hit a wall in 2022, falling more than 60% from their 52-week high and nearly 50% year-to-date. This week’s market-wide sell-off sent Canada Goose shares down 10% on Wednesday alone. But the sale seems exaggerated. Don’t look now, but the once expensive, high-flying stock looks downright cheap and seems to be taking a turn after the company expressed confidence in the coming year.
On its May 19 earnings call, Canada Goose reported record sales that topped the $1 billion mark for the first time. The company closes the year “with record sales for the year and confidence in our ability to accelerate earnings growth in fiscal 2023 and beyond.” The company now expects it to make $1.3 billion to $1.4 billion in revenue, which would be a nice boost from record 2022 results.
Although this is a new record, it seems like an achievable goal. Canada Goose has a great growth streak ahead of it. For example, despite having been around since the 1950s, it only opened its first location in New York, one of the world’s top fashion destinations, in 2016. It opened its first location in Toronto, Canada’s largest city, the same year.
As prestigious as the company has become among aficionados in recent years, its physical footprint is still quite small with just five stores in the United States, four in Europe, 10 in China and nine at its headquarters in Canada. The company plans to open 13 new stores in fiscal 2023. Direct-to-consumer (DTC) is the most profitable channel for Canada Goose, where it boasts gross margins of 76%, so that seems like a good strategy.
Avenues to explore for further growth include expanding its presence in China and introducing products into new categories such as lifestyle apparel. In terms of new product offerings, CEO Dani Reiss talked about expanding into new categories to give the brand more “year-round product relevance.” Parkas and heavy coats will always be Canada Goose’s bread and butter, but it can use the reputation it’s built from those categories to build momentum and successfully enter new categories.
Reiss says the company is having “huge success” with its “no-parka offerings.” The data confirms this enthusiasm. Non-parka revenue grew 70% in fiscal 2022, with lightweight down vests being a key contributor.
With 10 physical locations in China, the nation of 1.4 billion people is the country where Canada Goose has its largest physical presence. Shares fell largely in response to lockdowns in China. During the earnings call, Canada Goose said Asia-Pacific is the only region where it saw a drop in sales caused by store closures in mainland China.
But going forward, China may be a tailwind for the company as things normalize. Encouragingly, Reiss says he doesn’t expect the current situation to have a significant effect on Canada Goose’s results in its busy third quarter season. The company is also looking to establish a larger presence in South Korea and Japan in fiscal 2023, as these are important and influential markets.
What supply chain challenges?
Interestingly, at a time when many companies are lamenting supply chain issues in their earnings calls, Reiss doesn’t think the supply chain issues that plague many other companies will have an effect on Canada Goose. . The company says it is well insulated from these challenges thanks to its Canadian manufacturing, which allows it “to always have products available and to navigate effectively in a more inflationary environment”.
Currently, Canada Goose shares are trading at 18 times earnings and just 12 times earnings next year. Additionally, it has a price-to-earnings growth (PEG) ratio of 0.55. Many investors consider a stock to be undervalued relative to its growth prospects if it has a PEG ratio below 1. So the current valuation could be good insulation, indeed, for Canada Goose investors.