Editor's Note: Our Retail analyst Brain McGough added Canada Goose (GOOS) as a best short idea on 5/22/19. Shares were trading around $49 at the time. Shares are down significantly trading around $34 today.
Per Brian this morning:
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.
Below is an excerpt of the note Brian wrote on 5/22 outlining his concerns about the company.
In the case of GOOS, it’s apparel – a completely different ballgame from accessories – 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 the transition of a full price single product company through a downcycle (or even a cycle moderation) where a discounting mechanism needs to be part of the equation. 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 in 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.
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