Jan 27 2020 - Canada Goose: Revenue Growth, Profitability, And Low Valuation, All-In-One.

Summary

Canada Goose is snowballing revenues while boasting a robust bottom line.

The luxury sector is thriving, but the stock is trading at an unjustified lower multiple.

I believe that Canada Goose is a strong buy, considering its future earnings potential relative to its current valuation.

The past decade could easily be characterized by its intense focus on growth. Companies are betting everything towards it. As long as revenues keep hitting all-time highs by the quarter, investors are happy to continue seeing their shares flying higher with every earnings report beat. While I am an advocate of growth investing, I often appreciate more, the companies that are also delivering a solid bottom line. High levels of growth do not deprive firms of showing profitability. A great example of such a case is Facebook, which I analyzed in depth a few weeks ago.

In this article, I want to propose Canada Goose as a strong buy because it satisfies three significant traits:

  • High growth
  • Profitability
  • Decent valuation

Canada Goose

It's getting colder every day here in the U.K., and I can't help myself but be surprised by how many times I get to see the distinctive logo of Canada Goose on people's arms. While the brand seems to be getting much love from customers, the same cannot be said for investors, who have allowed the stock to be trading near its 52-low range. I believe that the stock is massively undervalued and that financials alone will eventually shoot the stock higher.

Growth with consistency

Canada Goose's (GOOS) revenue growth has remained consistent since its IPO, hovering around 30%-50% depending on the season. The company has taken the luxury industry by storm at this point, displaying remarkable growth levels. The most attractive up-and-coming market for the stock seems to be the Asian one, in which revenue growth touched 83.5% YoY on the latest report. However, despite the company's high-growth figures, the stock does not disappoint profit-wise at all. Profitability is one of the primary reasons I believe the stock is a strong buy.

Source: Q2 report

The graph below depicts profitability over the past few quarters, which has also been growing at a rapid pace. I believe that earnings will continue their current upward trajectory and will eventually carry the stock to new highs, considering its current low valuation.

Low multiples vs. high performance

Canada Goose's revenues have been faithfully growing higher every quarter, but the market has a different take on the valuation. The stock is currently changing hands at the lowest levels it has ever traded, just under 5.5x sales.

I believe that a fair stock to compare Canada Goose with is Lululemon (LULU) since they are both involved in the higher-end apparel sector. As you can see, Lulumon boasts a much higher multiple to its sales, even though the stocks have quite similar growth and margins.I believe that the luxury sector is an exciting space right now, and Goose offers optimal exposure towards high-end consumer spending at a very attractive valuation. The luxury sector benefits not only from the high consumer spending at the moment but also from potential consolidations. A few months ago, Louis Vuitton(OTCPK:LVMHF)(OTCPK:LVMUYannounced the acquisition of Tiffany & Co.(TIF) Earlier in December, news came out regarding Kering(OTCPK:PPRUF)(OTCPK:PPRUY), the French fashion behemoth, exploring a potential Moncler~(OTCPK:MONRF)(OTC:MONRY) acquisition. While I consider all these brands attractive investments, I believe than Canada Goose is a unique play that has considerable potential to one day be one of the "big guys" or even potentially being bought out. There are a handful of fresh brands that investors can hop on that provide an attractive growth rate, while also being profitable, trading at a rational valuation.

This is not to say that Goose relies on any future consolidation. The Canadian company is independently killing it. Management predicts CAGR north of 25% and Adjusted EPS north of C.66 over the next two years. The stock is currently trading at C.64 on the Toronto Stock Exchange. Assuming a relatively prudent PE of 30, which I believe is fair for a high growth brand, and the low-end EPS guidance of C.66, the stock should be trading at ~C in 2022. This represents an almost 80% upside over the next two years, which I believe makes for a juicy investment. The upside could even be higher, considering that Goose has been consistently beating its guidance.

Source: Investor Presentation

The risks

When it comes to Canada Goose, there are two risk factors that immediately pop into my head. The first and more major one is the seasonality of the business. Since their products are designed for predominantly cold environments, cash flow is not consistent. Therefore the second quarter always tends to be unprofitable, with limited sales, while the second and third quarters are wildly more profitable. While this is indeed not pleasing, I don't think it poses a significant problem. Even if sales are not consistent throughout the quarter, they are predictable, and that maybe allows Goose to deploy its resources accurately, because of the seasonality of the business model. Moreover, the company is diversifying its product line into different types of apparel. I believe that utilizing its strong brand towards say, summer clothing, is a smart move and should smooth-out the seasonal inconsistencies of the cash flow.

The second factor that could potentially affect the business is consumer spending slowing down. However, data suggests otherwise. Consumer spending is consistently expanding. Even though spending slowdown could affect most sectors, the luxury sector should not take a huge hit. Well-off consumers buy high-end products, and unless we undergo a severe recession phase, spending habits on luxury products should not be affected by a high margin. Below, the graph illustrates the consumer spending growth in the U.S.A.

Conclusion

I believe that Canada Goose is a strong buy. The stock provides excellent exposure to the high-end fashion sector at an attractive valuation. Everyone knows how powerful a well-recognizable brand is, and Goose is marking its presence everywhere in the world, expanding at a swift pace. In my view, the current valuation provides an attractive entry. The stock is, in my opinion, not only cheap in terms of industry multiples, but also relative to itself. Profitability is a huge plus, as the company won't need to look for outside funding or issue more shares, which would dilute existing shareholders. Considering the company's current growth rate accompanied by management's prediction of EPS>C.66 towards 2020, I see a massive upside in Canada Goose's shares at its current valuation. I will certainly be taking advantage of it.

Disclosure: I am/we are long GOOS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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