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Ryan Vanzo
Ryan Vanzo
Articles (163) 

Canada Goose Is Now Too Cheap to Ignore

A growth stock at a value price

January 05, 2020 | About:

Canada Goose Holdings Inc. (NYSE:GOOS) was once one of the hottest growth stocks on the market. Following its debut in 2017, shares quickly increased from $17 to $36.

By the end of 2018, they surpassed $70. That year, sales grew by 51%, a truly impressive figure for a luxury retailer with a relatively limited range of products. Even more impressive, diluted earnings per share went from 11 cents in 2015 to 67 cents in 2018.

By 2019, diluted earnings hit 96 cents per share, yet the share price languished.

Following years of rapid growth, the market had been pricing in ridiculous growth rates. In 2019, management revised its long-term growth guidance to “above 20%” for sales and “above 25%” for earnings per share. That’s still a healthy rate of growth, but compared to baked-in expectations, the stock took quite a hit.

Bank of America (NYSE:BAC), for example, downgraded shares to neutral, writing in a note: “We believe an outlook for slowing momentum in GOOS’ Direct-to-Consumer channel warrants a lower P/E multiple."

Since November of 2018, shares have shed roughly 50% of their value. While a reset in expectations required a repricing of the stock, it appears as if the valuation has swung too hard the other way. It doesn’t take a math wiz to realize this stock is too cheap to ignore.

Pay attention to what’s growing

Canada Goose has already done what few retail companies ever accomplish: create a world-renowned brand.

In 1957, Sam Tick founded Metro Sportswear, which specialized in wool vests, raincoats and snowmobile suits. The company was later renamed Canada Goose, which adorned its new Expedition Parka, developed for scientists at Antartica’s McMurdo Station. A few years later, Laurie Skreslet became the first Canadian to summit Mt. Everest. He was wearing a Canada Goose parka.

This brand heritage was pivotal in creating one of the most popular and trusted brands in Canadian history. Management estimates that more than 5% of all Canadians own one of its jackets, the vast majority of which plan to buy another Canada Goose jacket. You simply can’t create this level of brand loyalty overnight.

Canada Goose was able to leverage its domestic success to grow rapidly over the years. Around 35% of the company’s sales still come from Canada, with another 30% from the U.S. market. That’s fascinating in and of itself considering the U.S. has nearly 10 times the population.

Only one-third of the company’s sales come from outside North America. This is the figure to pay attention to. While the company still has lucrative runway in the U.S., it’s international growth that will drive the long-term story. Yet for some reason, international opportunities have failed to be priced into the stock.

Last quarter, overall sales grew by 27.7%. If you didn’t break this growth down by geography, however, you’d be missing the entire story. In the U.S., sales increased by 38.5%. But it was Asia that posted truly impressive numbers, with sales nearly doubling to $48.9 million from $26.6 million.

Asian sales still represent a small fraction of revenue, so it’s no wonder few people are paying attention. Even after doubling in size, sales from Asia only went from 11.6% of sales to 16.6%.

But it’s not just Asian sales that are growing at breakneck speed. Rest-of-world sales, which represent 35% of revenue, are growing at more than 50% per year. Again, this segment still represents a minority of overall revenue, so it’s not clearly the main story yet, but over the next several years, it will be the company’s primary driving force.

With rapid international growth, it’s not hard to agree with management’s updated guidance. By 2022, it expects earnings per share to exceed 2.66 Canadian dollars ($2.05). Remember that this is the minimum expectation.



If the company achieves earnings per share of $2.05 in 2022, it would trade at just 17.5 times 2022 earnings. That’s simply too cheap for a company that has a decade of double-digit earnings growth runway to go.

After a big dip in valuation, shares now trade at a depressed multiple of 28.4 times forward earnings. Even assuming no multiple improvement, shares would be worth $58.22 in 2021. That’s 63% above the current trading price.

Armed with a durable competitive advantage via its globally-recognized brand, Canada Goose looks like an incredible bet for the new decade.

Disclosure: The author has no positions in any securities mentioned.

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About the author:

Ryan Vanzo
Ryan has been covering public equities for more than a decade. He has worked on the investment research teams for several multi-billion dollar hedge funds in San Francisco and New York.

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