Summary
- Canada Goose Holdings is a luxury outerwear clothing brand with stores located in North America, Europe, and Asia.
- Its revenue has been in an upward trend since its IPO in 2017, but took a hit due to the COVID-19 restrictions in Mainland China.
- The firm's plans for global expansion and diversification of its product category indicate a positive long-term growth outlook.
- My intrinsic valuation of the firm indicates that the stock is highly overvalued.
- My skepticism, due to the firm's decline in performance and heavy competition in the industry, makes me rate GOOS a hold.
Canada Goose Holdings (GOOS) has been on a revenue growth trajectory since its IPO. A recent press release revealed its growth and category expansion plans, along with its five-year financial growth targets. I am optimistic that GOOS has the potential to grow in the long term. However, its current setbacks are what concern me.
Goose's earnings have taken a hit due to the COVID-19 restrictions in China . Moreover, the company might be negatively impacted by an economic downturn, such as the current one. While this is the case with any equity stock, GOOS could be even more vulnerable due to its high pricing. That's because consumers tend to spend less on high-end fashion products in such conditions. Its one-year total return has taken a significant hit, falling by 32%. Currently, GOOS's sales depend on just the winter season and a limited product line. Until I see some product category expansion and growth in the near future, I remain skeptical about investing in GOOS. Therefore, I rate it a hold for now.
About Canada Goose Holdings
Canada Goose is a luxury clothing company headquartered in Toronto, Canada. It has stores located in North America, Europe, and Asia. This more than half-decade-old company specializes in luxury outerwear, parkas, and accessories. Its products are designed primarily to withstand extreme winter temperatures while providing style to its customers. The company sells its products through a variety of retail channels, including its own stores, department stores, its online website, and online retailers. Furthermore, the company is soon planning to expand its products in categories such as luggage, eyewear, and home decor.
Recent Corporate Performance and News
GOOS went public on the NYSE in 2017, and since then its revenue has increased significantly. However, due to the market downturn and COVID-19 restrictions in Mainland China, Canada Goose Holdings incurred an estimated revenue loss of CAD60 million (USD45 million). As a result, the revenue for the third quarter ended on Jan. 1, 2023, decreased by 1.6% . GOOS generates 78% of its revenue from direct-to-consumer channels.
The firm has faced serious backlash over the years due to its use of coyote fur and goose down in its outerwear products. Animal rights activists and advocacy groups contend that the fur was obtained using brutal trapping techniques. Despite such criticism Canada Goose persisted in using coyote fur in its products, proclaiming the material's practical advantages, like warmth and durability, as well as the fact that it's a byproduct of the food business. The company was also accused of obtaining feathers from geese that were force-fed and live plucked. Eventually, in 2020, Canada Goose stated that it would no longer buy new fur, but instead use reclaimed fur.
The brand, nevertheless, seems to remain popular due to its luxury appeal. While the pricing of its products ($1,000-plus for parkas and outerwear) remains a topic of debate, a sense of style and indulgence still remains attached to its brand name.
Strengths
Although GOOS's financial estimates in the Q3 2023 earnings report were amiss, I believe its path toward global expansion can be considered positive. Its forward-looking EBITDA growth is expected to be 14%, well above the sector median. Management is aiming at having 100-plus physical stores, nearly doubling its physical presence by the end of 2023. The company aims to achieve $2 billion in revenue in the next five years. This outlook is based on the assumption that there will be improved traffic and fewer operating disruptions globally. Additionally, the firm expects to recover in Mainland China as COVID-19 restrictions have now been lifted.
Moreover, the company plans to diversify its product line across seasons, categories, and geographies. That will allow its consumers to experience the brand in new ways. According to the Consumer Market Outlook , the global apparel market will increase to almost USD2 trillion by 2027. This outlook is likely to be favorable in GOOS's global and category expansion plans. To that end, GOOS has doubled its investment in R&D over the past four years.
Weaknesses
Canada Goose is considered a premium luxury brand; therefore, the pricing is assumed to be high. I have concerns about this - sure, the products are superior, but with a number of well-established competitors GOOS is subject to price sensitivity. Several brands, like Columbia Sportswear ( COLM ) and The North Face ( VFC ), provide high-quality products with significantly lower pricing than GOOS. Although these names don't fall under the premium luxury category, they are highly reputable brands capable of competing with brands like Canada Goose and Moncler ( MONRF ).
While GOOS shows the potential for long-term growth, I am concerned about its current financial health. Its accounts receivables show an increasing trend and have more than doubled since April 2022. There can be two assumptions made here. First, GOOS is allowing its customers to buy its products on credit. Second, the receivables are accumulating as it is unable to collect those payments on time. Both of these scenarios can hurt the financial health of a company if it's in a growth phase, which applies to GOOS. This is reflected in its drop in cash and negative cash flow from investing and financing activities.
Despite its growth expansion plan and its growing international presence, Canada Goose Holdings remains heavily dependent on the North American market. This could limit its growth potential and expose it to regional economic risks. The company has a long way to go before it establishes itself in other foreign markets. China definitely remains a hope, but I'll wait before predicting the outcome.
Valuation
The average price-to-earnings (P/E) ratio of the firms in GOOS's peer group is 12x. In contrast, GOOS has a P/E ratio of 41x, indicating that investors might have high expectations for the company's growth and future earnings. However, a high P/E ratio might also indicate that the stock is overvalued. Its EV/EBITDA is also nearly double when compared to its peers. Again, this might suggest that the firm is overvalued, indicating the possibility of lower profitability relative to its total enterprise value.
I have performed intrinsic valuations by averaging the results of three methods: discounted cash flows ((DCF)), enterprise value to EBITDA (EV/EBITDA), and P/E multiples. The result gives an average stock price of $9, whereas the current stock price of GOOS is $19.5 (as of Feb. 13, 2023). This shows that GOOS is over 100% overvalued.
I have assumed a cyclical pattern in its free cash flows. The enterprise value using the DCF method is evaluated based on this assumption. We should keep in mind that the intrinsic value of a firm is sensitive to assumptions. Nevertheless, we get an overall picture of GOOS that shows it's highly overvalued.
Conclusion
With its brand reputation, innovative product offerings, and commitment to quality, Canada Goose Holdings is well positioned to continue its growth and success in the future. Therefore, I will keep GOOS on my watchlist. However, it faces significant challenges in the highly competitive premium outerwear market. This includes price sensitivity, sustainability concerns, and its dependence on the North American market. Before making an investment in GOOS, I would remain patient and observe its performance in the global market through the end of 2023. I might be bullish on its long-term growth, but I'm concerned about Canada Goose Holdings' financial health currently. Therefore, I rate it a hold.
For further details see:
Canada Goose Holdings: Highly Overvalued Even After A Significant Price Drop