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Editor's Note: Our Retail Sector Head Brian McGough added Canada Goose (GOOS) as a Best Idea short on May 22. The stock is down over 21% since. The S&P 500 is flat during that time.

In his original note announcing his new research call he wrote:

"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%."

Below is an excerpt from a recent note. If you would like information on how you can access his institutional research email sales@hedgeye.com.

McGough: Still Short Canada Goose $GOOS - z hedgeye goos

GOOS | Terrible Earnings Quality

Our Best Idea Short thesis on GOOS hinges on our view that that there’s 1,000bp margin risk to this model as it transitions from a consumer durable model into a markdown driven non-durable model with increased fashion risk and chases less profitable distribution.

While I don’t want to make a huge deal out of a seasonally-weak quarter (that accounts for only 6% of annual sales), the reality is that this quarter was a thesis validator. Yes, it beat top line, but that was driven by early shipments to low margin international distributors as it works off its excess inventories --- which had been running 80% above last year on a 20% annual revenue guide.

Moreover, receivables were up 153% on the revenue beat – looks like the orders were pushed hard by the company.

In addition, GM% was down 650bp vs last year – its biggest decline since before it went public – just happens that it coincided with lower margin non-parka revenue hitting 1/3 of the mix – something that should only increase.

All in, the company put up 59% revenue growth (up C$26mm yy) and lost more money on both a GAAP and adjusted basis versus last year. The quality of earnings was terrible, and hardly worth a 5.5x revenue multiple and 30x p/e for a company that’s likely never to see $2 in EPS – over any duration.

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If you're an institutional investor interested in accessing our research email sales@hedgeye.com