FLASHBACK | Best Idea Short → $GOOS

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). 

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.  

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.