With summer fast approaching, you probably don’t want to have to think about having to buy a winter coat. But it could be the perfect time to buy shares of Canada Goose Holdings (GOOS -2.78%).
Valuation and performance
Shares of the once-hot IPO have hit a wall in 2022, falling over 60% from their 52-week high and nearly 50% year to date. This week’s marketwide sell-off caused Canada Goose stock to fall 10% on Wednesday alone. But the selling appears to be overdone. Don’t look now, but the once-expensive, high-flying stock looks downright cheap and seems to be turning a corner after the company expressed confidence in the year ahead.
On its May 19th earnings call, Canada Goose reported record revenue that surpassed 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 projects it will achieve revenue of $1.3 billion to $1.4 billion, which would be a nice increase from 2022’s record results.
While this would be a new record, it seems like an achievable target. Canada Goose has plenty of growth runway ahead. For example, despite the fact that it has been around since the 1950s, it only opened its first location in New York City, one of the world’s top destinations for fashion, in 2016. It opened its first location in Toronto, Canada’s biggest city, the same year.
As high-profile as the company has become among aficionados in recent years, its physical footprint is still fairly small with just five stores in the United States, four in Europe, 10 in China, and nine in its home base of Canada. The company plans to open 13 new stores in the 2023 fiscal year. Direct-to-consumer (DTC) is the most profitable channel for Canada Goose, where it boasts 76% gross margins, so this seems like a good strategy.
Avenues to explore for further growth include expanding its footprint in China and introducing products into new categories such as lifestyle apparel. In terms of new product offerings, CEO Dani Reiss spoke of 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 has built off of these categories to build momentum and successfully enter new categories.
Reiss says the company is seeing “tremendous success” with its “non-parka offerings.” The data backs up that enthusiasm. Non-parka revenue grew by 70% in fiscal 2022 with lightweight down vests serving as a key contributor.
With 10 physical locations in China, the nation of 1.4 billion is the country where Canada Goose has its largest physical presence. Shares have fallen in large part as a reaction to the lockdowns in China. On the earnings call, Canada Goose reported that Asia Pacific is the only region where it saw a decline in sales caused by store closures in mainland China.
But going forward, China can be a tailwind for the company as things normalize. Encouragingly, Reiss says he does not expect the current situation to have a meaningful effect on Canada Goose’s results during its busy Q3 season. The company is also looking to establish more of a presence in South Korea and Japan in fiscal 2023 as these are large and influential markets.
What supply-chain challenges?
Interestingly, at a time when many companies are bemoaning supply-chain woes on their earnings calls, Reiss does not feel that the supply-chain issues that are affecting 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 effectively navigate a more inflationary environment.”
Currently, Canada Goose stock trades at 18 times earnings and just 12 times next year’s profits. Moreover, it has a price-to-earnings-growth (PEG) ratio of 0.55. Many investors view a stock as undervalued vs. its growth prospects if it has a PEG ratio of under 1. So the current valuation could be good insulation, indeed, for investors in Canada Goose.