Canada goose stock: Recent headwinds are temporary (NYSE: GOOS)


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As we prepare for a near-term rebound in the markets, my buying philosophy at this time is to focus on high-quality, long-term stocks that have seen sudden strong pull for potentially transitory factors. Canada Goose (NYSE: GOOS), in my opinion, is one of those names.

Canada Goose, the maker of luxury jackets known for its thick and very expensive parkas worn and loved by both men and women, has suffered a sharp reversal of fortune since the market began to turn south in November. Although Canada Goose has had many fundamental tailwinds behind it – including rapid growth in its direct channels, strong expansion plans in China and the launch of a footwear line in the second half of 2022, it suffered a major setback thanks to Omicron, which imposed new restrictions across its store base. As a result, Canada Goose slashed its forecast for the rest of the fiscal year in early February, sending stocks falling even further. Since the start of the year, the stock has lost nearly 30%; while from the 52-week highs reached in November, the company has lost around half of its value.

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Data by Y-Charts

The guide cut – how bad is it?

Before we overreact, let’s assess the situation. Note that Canada Goose has a May year-end and the company has just completed its third quarter, so the guidance provided by the company only comes out one quarter (up to the fourth quarter, the May quarter ).

Canada Goose Outlook Revision

Canada Goose Outlook Revision (Canada Goose third quarter results release)

The company reduced its annual revenue by C$35 million at the low end of its range and C$70 million at the high end. Now that’s no small number – compared to the C$208.8 million Canada Goose made in FY21, this reduction represents 17 points of growth on the low and 34 points of growth on the top. But we note that even the low end of the Q4 revenue range, at C$214.7 million, still represents 3% year-over-year growth.

I consider this slippage to be more transient in nature or perhaps even a change in channel mix. Here are my anticipated impacts of a lingering COVID situation on the Canada Goose neighborhood:

  • For direct channel customers: Canada Goose’s flagship parkas are expensive and thoughtful buys. If the Canada Goose store is closed due to Omicron, shoppers can wait for the store to reopen or find the product online. Actual demand for perishables is expected to be low. It’s not like the early onset of the pandemic that caused an economic shock and forced people into “savings mode.”
  • For distribution partners: yes, retailers that are due to close will not be ordering as many Canada Goose products in the fourth quarter. But again, as above, if we believe that total final demand is not perishable and that buyers will simply wait to buy their jackets, retailers will simply “push” their orders from Q4 to Q1.

In other words, I think demand is shifting between channels or being pushed back to Q1: but minimal demand is globally lost.

Also note that Canada Goose Chief Financial Officer Jonathan Sinclair also called the forecast cuts temporary in nature during his prepared remarks on the third quarter earnings call:

The temporary cuts we have faced do not change our optimism for fiscal 2023. We will share our views in detail at the end of the year. As we see today, there’s no reason why we can’t have strong growth and margin expansion, even without a full retail recovery globally. Our DTC journey continues. Our brand momentum is strong. The relevance of our lifestyle is expanding. Our one-of-a-kind supply chain and pricing power gives us stability and flexibility in a disrupted retail environment.”

Finally, let’s note that the Canada goose has many interesting growth engines to come. Recall that the company recently launched a new line of shoes and is focusing more on clothing in general. In addition, the company is taking a big step into Japan by concluding a 50/50 joint venture. According to a recent press releasethe company expects to generate between C$50 million and C$65 million in Japanese revenue in FY23, double Japan’s contribution in FY22.

The bottom line here: I don’t see any glaring red flags preventing me from buying Canada Goose on the downside. Omicron’s transitory factors will ease (especially as the US continues to drop restrictions and masking) and lead to a strong FY23.

Third quarter recap

Now let’s take a closer look at Canada Goose’s latest third quarter results. As a reminder, the third quarter is Canada Goose’s largest and most important quarter – in fiscal year 21, it generated about half of the full year’s revenue. The third quarter revenue summary is shown below:

Canada Goose Third Quarter Results

Canada Goose Third Quarter Results (Canada Goose third quarter results release)

Canada Goose’s revenue increased 24% year-on-year to C$586.1 million. We note that there is a bit of a tailwind in the y/y comparison here, as Canada Goose has a 53-week fiscal year in fiscal 22 with the additional 14-week quarter inserted in Q3.

Regardless, the quarter was still strong, especially in Canada Goose’s expanding direct channel. DTC’s revenue increased 49% year-on-year to C$445.4 million, representing 76% of company revenue. As in recent quarters, this direct change in composition has been a significant driver of Canada Goose’s margin growth: and this quarter, gross margin has improved. 380 basis points at 70.6%.

We will note here the richness of this gross margin, especially for a consumer distribution company. A gross margin profile of 70% essentially puts Canada Goose at the level of a technology company.

Other highlights of note: Canada Goose’s non-parka revenue grew 75% year-over-year. While the company hasn’t outright revealed that a lot of revenue is being generated by these new non-essential categories, the strong growth highlights the vast market Canada Goose needs to expand into for general apparel and, over time , should also reduce the seasonal reliance Canada Goose currently has on winter gear.

Here are some additional comments from Canada Goose CEO Dani Reiss on the third quarter earnings call, detailing the company’s successful product roadmap journey:

We are building an enduring global lifestyle brand and expanding roles throughout the year. I’m proud of the dedication our team has shown to achieve this goal, and we’re encouraged by the results we’re seeing across the company. This quarter, revenue excluding parkas increased by 75%. We are seeing tremendous success across our expanded offering. One highlight I’d like to touch on is our pastel collection, our first full expression of the Canada Goose lifestyle, including sweatshirts, outerwear, accessories and footwear. The collection has particularly appealed to women and we plan to expand this offering later this year.

Another milestone of the last quarter was the successful launch of our first-ever footwear collection. The collection has generated enthusiastic demand and strong consumer response. Ahead of our spring collection, we’ll be launching several new styles, furthering our relevance throughout the year. There is so much potential in the shoes, both short and long term, and I look forward to continuing to update you.

Innovative collaborations are the hallmark of our brand and a massive driver of brand heat. In December, we evolved our annual concept collaboration with the addition of popular Japanese fashion brand BAPE. The response was incredible and the collection sold out within days. And tomorrow, we launched our second annual capsule collection with NBA All-Star as part of our multi-year partnership. This year we partnered with Salehe Bembury as guest designer for the collection. Bembury is one of the most innovative designers in the world today and the collection has received exceptional pre-sale interest. I can’t wait to see our brand in Cleveland next weekend.”

An additional note: in Q3, Canada Goose also rolled out a new website design in North America. The company notes that this interface upgrade has resulted in increased online conversion rates.

On the profitability front, Canada Goose increased its adjusted EBIT by 31% year-over-year to C$206.9 million. Margins, meanwhile, rose 200 basis points to 35.3%, driven primarily by gross margin gains.

Canada Goose Adjusted EBIT

Canada Goose Adjusted EBIT (Canada Goose third quarter results release)

Key points to remember

In my opinion, investors now have a great opportunity to buy a well-known brand that is growing in many ways (geographically and through product category growth), which also continues to be margin-rich with many advances for profit expansion. Stay here long and wait for the rebound.


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