At present, as markets brace for a year-end rebound (helped by additional clarity from the Fed’s Jerome Powell that the central bank will be recession-aware as it picks up the pace of rate hikes), the best way to beat the overall market must rely heavily on battered growth stocks trading at truly attractive valuations.
A little-known candidate here is Canada Goose (NYSE: GOOS) – a very recognizable fashion brand in the winter regions of the country, but very rarely seen as an investment opportunity. The premium parkas maker has weathered a tough pandemic successfully and is seeing signs of very strong customer demand.
Since the start of the year, Canada Goose has lost more than 50% of its value, returning its stock to very buyable levels:
While Canada Goose has been a painful investment over the past year, I don’t think there’s a better time than now to step up and take advantage of the rebound here. Canada Goose is looking at a strong 2023 fiscal year (i.e. the year ending March 2023) while trading at a very attractive valuation.
There are a number of reasons, in my opinion, to be bullish on Canada Goose over the long term. The key points to know are:
- Huge untapped global luxury market. Currently, Canada Goose is very popular in its home markets, the United States and Canada. It is expanding aggressively in mainland China, which is the world’s largest consumer of luxury goods; and this is still largely new in Europe. The opportunities for global expansion here are unparalleled.
- Category extension. Evolving from just being a parka brand, Canada Goose has made significant strides in expanding into other categories, notably footwear. The company also offers a range of accessories such as scarves and gloves, as well as a complete children’s selection.
- Incredibly rich gross margin profile. Canada Goose’s high gross margin in its 60s puts the company closer to a tech stock than a consumer goods maker. The incredible fluke of the Canada Goose brand has also allowed the company to raise prices to offset inflationary pressures, which has even led it to expand its gross margin profile.
- The tailwinds of COVID normalization are still ahead of us. At present, Canada Goose’s sales in China (its biggest growth market) are still limited by closed storefronts due to a dynamic COVID situation in the country. As normalization approaches, reopenings in China could trigger a wave of pent-up demand.
We also have a strong outlook for FY23. For 2023, the company achieved revenue of C$1.30-1.40 billion, representing a healthy growth range of 18-28% year-on-year – and with the midpoint of that range, five points ahead of the Wall Street consensus of C$1.30 billion.
Just as importantly, the company also says it will be able to keep “high in the 60s” gross margins consistent this year, with direct channel pricing and mix changes helping to offset inflationary pressures from costs (not all consumer product manufacturers sing the same tune here, by the way).
In terms of valuation, Canada Goose also remains very attractive. At the current share price of nearly $18, Canada Goose trades at a market capitalization of $1.92 billion. After offsetting $287.7 million in cash and $370.0 million in debt on the company’s most recent balance sheet, it results the enterprise value is $1.84 billion.
In the middle of the company’s FY23 Adjusted EBIT range of $250-290 million (representing 55% year-over-year growth from FY22!), Canada Goose is trading at only EV/FY23 adjusted EBIT of 6.8x. On a simple pro forma EPS basis, the $18 stock is trading at a 10.5x FY23 P/E based on the midpoint of pro forma EPS guidance of $1.60 to $1.80.
The bottom line here: Canada Goose continues to grow well, defending its rich margin profile, expanding its products and geographic reach, and earning handsome profits relative to its value. Don’t let irrational fear of this year’s growth keep you from neglecting this stock as we anticipate a year-end rebound.
Now let’s take a closer look at Canada Goose’s latest fourth quarter results, covering the March quarter. The fourth quarter revenue summary is shown below:
Recall Canada Goose’s revenue linearity: for FY23, the company indicated that 5% of annual revenue will occur in the first quarter; 20% in Q2, 50% in Q3 and 25% in Q4. The fourth quarter (January to March) is therefore the heaviest second quarter of the year, which makes sense for a winter company like Canada Goose.
This fourth quarter, the company increased revenue by 7% year-on-year to C$223.1 million. Note that there is an accounting headwind here, as due to the change in Canada Goose’s fiscal weeks, the current quarter started and ended a week later than in FY21. Indeed, the “winter service” of the first week of January was lost during this quarter. The company reports that using the same time frame in both comparison periods, revenue growth would have been 24% year-over-year.
It was also another strong quarter for non-parka revenue, which was up 70% year-over-year. The company noted particular strength for down vests and other garments other than jackets.
Here are some qualitative comments from CEO Dani Reiss’ prepared remarks on the fourth quarter earnings call, detailing sales performance by geography as well as the company’s deft execution to ward off supply chain challenges. :
From a geographic perspective, our retail performance in North America was the main driver of growth. Consumer confidence remains strong and shoppers have returned to pre-pandemic trends. We saw a similar environment in the UK, which led to an immediate increase. In the rest of Europe, we observed weaker local and international traffic trends. APAC was the only region to decline due to ongoing COVID restrictions, including store closures in mainland China. The Chinese government has a reputation for being very proactive in containing COVID outbreaks. We do not expect the current circumstances to have a material impact on the results of our busiest season, which is reflected in our outlook.
Recently, many peers have pointed to ongoing production and supply chain challenges, as well as logistical delays. This was not a factor for us in the quarter nor do we expect it to affect the year ahead. We continue to be uniquely insulated against supply chain issues due to our Canadian manufacturing, which represented 84% of our total units in calendar year 2021. As I mentioned earlier, we achieved a significant revenue milestone in fiscal year 2022. We also laid the foundation to meet our fiscal year 2023 goals en route to the next billion in sales.”
The other highlight is worth highlighting: Canada Goose’s gross margins extended to 69.1%, up 270 basis points from the fourth quarter of the previous year. This is in stark contrast to many other consumer companies who are seeing their margins hit by rising shipping costs and expedited materials. The company attributed the increase primarily to higher prices.
This increase in gross margin also had a knock-on effect on adjusted EBIT margins, which more than doubled to 5.6%. Adjusted EBIT for the quarter increased to C$12.6 million from just C$4.8 million in the fourth quarter of the prior year. The company also achieved a record FY22 EBIT margin of 15.9%, which it will easily exceed with its FY23 margin outlook of 19.2-20.7%.
Key points to remember
Canada Goose’s steep year-to-date declines have sharply overcorrected the stock’s valuation to high value levels. What the market doesn’t seem to see is that Canada Goose is growing admirably in its key markets while maintaining huge margins and delivering strong results. Don’t miss this opportunity to buy this stock at a lower cost.