While there’s a lot of moving parts in this GOOS quarter – one thing is abundantly clear, and that’s growth is slowing. You could almost hear the bulls cheering at 6:45am when the company printed its C$0.57 vs. the Street’s C$0.43 with outsized wholesale growth. Then the wind was sucked violently from this report’s sail during the conference call when the CFO guided to wholesale growth in 3Q -- the most important quarter of the year – to be down in the mid-teens as GOOS double dipped into the ‘early shipment’ bucket 2 quarters in a row. How’s that for a growth stock – especially one with inventories up 60% yy staring down the barrel of a down wholesale quarter while trading at 5x sales? And on the inventory front, can someone explain how the company shipped early, and yet inventories did not decline sequentially (as we’ve seen in every 2Q to date?). And when you ship early, shouldn’t it be at optimal gross margins? Then why did we see the company discount in each of the past two quarters? I don’t have a problem with the Canada Goose brand or the company that sells it, but I still have a serious problem with the valuation relative to the growth and margin algorithm this brand is capable of churning out and sustaining. This is not #Moncler2.0.
Another issue that is not discussed by anyone is the margin risk as the company goes into what I’ll call ‘SKU Proliferation’ mode, given that its model is built upon a ‘zero markdown’ mantra. That might hold when we’re talking about a single parka, but not when over a third of the mix is now knitwear and lightweight jackets – and that ratio is only growing. I’m not saying that GOOS does not have the right to go there, but simply that it will have to respect the same 13-week seasonal markdown cycle that every single other brand in the performance outerwear space does – which will cost it gross margin. Management has the Street convinced that its margins are locked at current levels, and I simply don’t think that’s the case – something the Street should realize when it clears through its 60% inventory growth at the end of this fiscal year while consumer demand is at best a third of that level. We’re definitely looking at a mismatch between supply and demand.
Ultimately, I’ll front this name the annual top line growth number of 20%+. The fact is that if it wants to grow, it will grow. With vertical integration of its supply chain it’s incentivized to keep production lines full. But I think that there’s another 500bps margin risk to this model as the growth story plays out. That leaves us with an earnings annuity between US$1.25-$1.50, which is likely worth a mid-high-teens multiple. Think something closer to a volatile version of Columbia Sportswear as opposed to a controlled luxury growth algorithm we see at Moncler. That gets me to a $20-$25 stock, compared to $35 today. Still plenty downside to go…
