After taking Canada Goose through the bulk of my vetting process, I’m absolutely convinced that there is a severe disconnect between the ultimate earnings power of this company and its current Enterprise Value – to the tune of 50%. To be clear, this is a very good brand, with an astoundingly relevant core product. But it is being valued like the second coming of Moncler – a luxury lifestyle brand. Correction – it’s trading at a 50% premium to Moncler on virtually every metric. But this is NOT a luxury lifestyle brand – it is, for the most part, a single-product company that I think will fail as it attempts to extend its product lines into anything other than the ‘jacket with a patch’ that gained such massive popularity over the past three years.
Other brands have made the transition to ‘lifestyle’…Lululemon, UnderArmour, and even (to a lesser degree) Deckers/Ugg…but this is none of those. It’s an incredibly seasonal high-priced one-hit wonder that is adding expensive stores while ~80% of sales are coming from a 75% gross margin product. That might be sustainable for short bursts of time for luxury accessories brands – like we saw for three years for both Kors and Coach (until it ended badly and EBIT margins came crashing down from the mid-20s to the mid-teens). But again, those are accessories businesses, and are subject to multiple per-capita purchases every season. The cycles are smooth and at least partially predictable.
In the case of GOOS, it’s apparel – a completely different ballgame – one that is much more fickle and subject to borderline-violent swings in consumer preferences. Better yet, we’re talking winter coats – the same one that PETA is waging a war against. And in the case of the core GOOS product, it’s high quality with a multi-year replacement cycle. In other words, unlike Lululemon a customer isn’t shopping every six weeks, or buying a new Gucci or Kate handbag every season, or a new pair of kicks every four months. By the time a Canada Goose shopper needs a new coat, the competitive landscape will have evolved materially, and the brand’s customer acquisition cost will be higher than it is today while near the top of the peaking process for the brand.
Management has done a fine job through the mother of all up-cycles – and two cold winters relative to recent standards. And while I’m sure the management team are great guys, they severely lack the experience to manage a single product company (or any company, for that matter) through a downcycle. Look no further than seasoned management teams like LB that beat handily when business is on the upswing, but guide down every quarter when business rolls. GOOS’ demand planning and forecast accuracy is average at best, as evidenced by the 75% build in inventories in the latest quarter, due in part to making product that it intends to sell in its peak selling season another three quarters. The consumer doesn’t know what it wants to buy next week – and yet we’re seeing the company build the same product that worked last year to sell to them next winter.
Back to the multiple. GOOS is currently trading at 40x earnings, 25x EBITDA, and a mind-numbing 7.1x EV/Sales. The expectations for future growth here are parabolic. If management wants to grow, it’ll grow, and I have no doubt that it has 2-3 years of 20-30% annualized revenue growth ahead of it. But where the model will fall short is on the Gross Margin line. Management – to its credit – noted on the latest conference call that while there is still room for optimization, the low-hanging GM upside has been captured. Incremental growth is coming from Asia – and while a positive, it is lower margin due to T-Mall’s take rate. Also, last I checked the luxury markets in Asia like Hong Kong and Singapore aren’t too big on wearing winter coats. But the consolidated GM% of 65% between DTC and wholesale seems near impossible to sustain while the top line continues its strong double digit trend as the company grows into new (and lower margin) categories like knitwear.
From a modeling perspective, I have the P&L giving up 250bp per year in Gross Margin, which pegs it at about 55% over a TAIL duration. To be clear, that’s spot-on with Nike, which is perhaps the best and most defendable Gross Margin in all of softlines retail. But where I’m likely to be wrong is that the company won’t give up 250bp per year…but rather 1,000bp in a single year as it needs to clear product in an unsuspecting softening space for which it unknowingly manufactured. The challenge will be in nailing the timing.
This was a great deal by Bain, as it left a lot of money on the table for people smart enough to capture the top line acceleration in the model. But now, after more than doubling since the IPO, the upside is ending. All in, over a TAIL duration, this is a likely a company with ~$1bn in sales, a 55% gross margin, and a low 30s SG&A ratio. That’s about $1.50-$1.75 in earnings power. The P&L and balance sheet characteristics of that business will probably peg a multiple something closer to RL/COLM/DECK -- high-ish end, seasonal and transitioning from hot trend to staple (at best). There’s your 18x p/e, or 12x EBITDA multiple – in another three-four years. Discount that back to today’s dollars, and you’re looking at an $18-$22 stock – less than half of its current $50 price tag.
So all in, over a TAIL duration I would short this name today. But the sole reason it is not on my Best Idea list is because I think its 75% inventory growth just set it up to beat the top line handily in the upcoming quarter. I think I’d be early to make this a Best Idea ahead of the quarter to be reported in June. For now it occupies the top spot on my bench (which is waiting for either a better price or deeper/edgier research call). If I’m wrong in waiting and the stock sells off, I have no problem shorting at a lower price. There’s a lot more downside to go.