We’re removing Canada Goose from our Best Idea Short list. The reality is that the stock is down by 36% in a +17% market since we went short the stock in May 2019, and at 20x earnings with a third of the float short is actually approaching a point where we’d consider owning the stock ($25 is my price vs $31 today). To be clear, for the most part I didn’t like the quarter...
- Asia accounted for nearly all of the revenue growth in the quarter. North America declined 1.3% due to Canada, the company’s oldest and most mature market, declining 11.6%. This was the first quarter Canada was not the largest market, which was inevitable, but marks a different stage in its growth.
- Wholesale was down 8.5%, but better than -mid-teens% guidance. Wholesale consists of the company’s oldest doors which suggests retail store growth is taking from its partners to some degree.
- Inventory was up 60%. The company didn’t cut price to clear through this winter’s goods. It sounds like that may be pushed through wholesale. We have been saying operating margins are coming down and we are seeing the evidence with bloated inventory levels. Management doesn’t expect inventory growth to be normalized for several quarters. That suggests gross margins are overstated currently.
- Management raised wholesale guidance for the year from HSD% to 9-11%. We believe accelerating wholesale to be a negative indicator of management’s expectations of DTC growth. Wholesale has been on allocation for several years due to a lack of sufficient production capacity. When wholesale accelerated last year it was an indication of weaker late winter sales. In other words wholesale gets the inventory when DTC doesn’t need it.
But the reality is that the magnitude of the guide down for 4Q largely assumes that China all but evaporates for GOOS. That might well be the case, but the company also reset numbers due to weakness in the core – which can partially be attributed to a warmer than expected winter, which is fair. In the end, the ~$1.35 in EPS set by the company seems doable, which is the first time in nine months I can confidently say that about a GOOS quarter. Do I still have concerns that the company will ultimately prove to be unable to navigate the transition to a business where better than 50% of sales come from its non-parka business? Absolutely. Over a TAIL duration, I think there’s risk to management’s margin targets. And it will be all the more reason for me to revisit the name in the future Short Side. But with Hedgeye TREND resistance up at $37.95 and the diminished likelihood of a fundamental miss in 4Q (and higher probability of a beat), we’ll book the gain and move GOOS to our Short Bench.
