The apparel industry is tough. There are no barriers to entry and tens of thousands of brands to choose from, ranging from dirt cheap, to expensively luxurious ones. Being able to convince customers to pay handsomely for products in such a competitive market says a lot about a brand. Such a company/brand has clearly mastered the art of marketing and is perceived as highly favorable by buyers.
Canada Goose Holdings (NYSE:GOOS) is this type of company. Arguably the most popular Canadian-based brand in the world, it has attained a loyal following which continues to grow. A big part of its popularity is that Canada Goose jackets are extremely warm, which is perfect for the harsh winters of Canada and other northern countries.
Canada Goose is well run with a long history meaning it is unlikely to be just a fad. However, the company is trading close to fair value leaving just a small margin of safety.
Canada Goose has quickly been growing internationally. The company had strong results in Europe, particularly in the UK where digital business nearly doubled, according to CEO Dani Reiss in GOOS's most recent conference call.
Reiss went on to explain the company's growth priority. He said:
"Now to our next strategic priority, Mainland China. On our last earnings call, I spoke about the growth plans that we put in place for our business in the region. We have continued to execute on these plans. In the past year, we have more than doubled the number of stores that operate in the market. This quarter we saw that our investment has delivered strong results and our Mainland China DTC revenue has increased by 41.7%. We're still very early in our journey in Mainland China and we see significant opportunity to continue to grow our network in the region."
Mainland DTC revenue increasing by 41.7% is impressive, so it is obvious why Mainland China is a priority for the company.
Besides this, GOOS intends to enhance its offerings and drive higher profit margins (see below). It's important that GOOS starts to diversify its offerings as the company is highly concentrated in its down-filled jackets offerings, as we explain later on.
Source: Fiscal Year 2021 Investor Presentation
We see no reason why GOOS wouldn't be able to keep their growth story going. Here's what analysts think revenue growth will be like:
And here are analyst EPS estimates:
The clothing industry is highly competitive with low barriers to entry. Let's see how Canada Goose compares to other apparel/luxury goods stocks.
We compared GOOS to its peers based on gross profit margins, 5-year average EBIT margins, 5-year average return on invested capital, 5-year revenue CAGR, and days inventory outstanding. We used some 5-year metrics because using only 2020 numbers wouldn't make sense due to the unprecedented lockdowns. The 2020 numbers still drag down the 5-year numbers, but obviously not as much.
The companies we used for the comparisons are Moncler S.p.A. (OTCPK:MONRF), Columbia Sportswear Company (COLM), Capri Holdings Ltd. (CPRI), Nike, Inc. (NKE), V.F. Corporation (VFC), LVMH Moët Hennessy (OTCPK:LVMHF), Ralph Lauren Corporation (RL), L Brands, Inc. (LB), Lululemon Athletica Inc. (LULU), PVH Corp. (PVH), Tapestry, Inc. (TPR), and Kering SA (OTCPK:PPRUF).
Source: Author using data from Finbox
GOOS has average gross margins and slightly above average 5-year EBIT margins when compared to peers.
GOOS's 5-year average return on invested capital (20.34%) is on the higher end of the peer range.
In terms of revenue growth, GOOS is growing much faster than the other companies with a 34.41% 5-year revenue CAGR. This number is a bit overstated compared to its peers, however, because GOOS's fiscal year ended on March 2020 and didn't fully capture the effect of the pandemic. Canada Goose's fiscal 2020 revenue was $684.9M compared to $649.4M for the last twelve months. Therefore, the revenue CAGR number would be smaller, but it would still be well ahead of the other companies mentioned. The closest peers are LULU with 17.23%, and MONRF with 10.35%.
Next, is days inventory outstanding. Days inventory outstanding is an efficiency ratio used to estimate the average number of days a company holds inventory before selling it to customers. The lower, the better, for this metric. GOOS has a DIO of 371.76 days, much higher than its peers. However, this can be attributed to the fact that people only really buy winter clothing in the winter. The rest of the year, GOOS makes fewer sales and sits on more inventory. MONRF is also primarily a jacket company, but its DIO is around 214. Hopefully, GOOS can improve in this metric going forward.
Moving on, we also wanted to analyze the industry based on trends. We have some data from Google Trends comparing Canada Goose, Moncler, Columbia Sportswear, and The North Face. Moncler (in red) is the only search term that reached a 5-year high in 2020, and we are impressed with its strength. The other search terms all lagged their 2019 volume. We assume this has to do with COVID-19.
Source: Google Trends
When comparing Canada Goose to the search term "winter jacket", you can see that GOOS is obviously highly correlated with the search term. However, Canada Goose was outpacing "winter jacket" up until recently. The spread between the 2 has narrowed substantially in the past 2 years, potentially indicating that Canada Goose is less relevant now than it used to be.
GOOS CEO Dani Reiss is the grandson of the original founder, Sam Tick. Knowing that it is a business his family started, this likely gives Dani Reiss incentive to see the company succeed. Needless to say, since he joined the company in 2001, the company has grown into the global brand it is today.
Reiss also owns 18.24% ($1.1B CAD) of the company, further showing that his interests are aligned with shareholders' interests.
For this valuation, we used the Gordon Growth Exit model on finbox.com. As you can see below, the discount rate used was 7.1% (we took this discount rate from Simplywall.st), and the perpetual growth rate used was 2%. The estimates, which we will discuss, calculated a fair value of $43.44 for GOOS.
The model estimates revenue to be $2.17B and EBITDA to be $593M by March 2030. The first 4 years of estimates are based on analyst estimates, the next 6 years' estimates were generated by Finbox.
Note: the estimates are in Canadian Dollars, but the fair price quoted above is in USD.
Capex as a % of revenue is expected to be 2.7% by 2029, according to the model.
Net working capital as a % of revenue will stay steady at 36.4%.
Depreciation & amortization as a % of revenue will stay steady at 2.3%.
Source: Author, using data from Finbox
As you can see, based on these assumptions, GOOS is slightly undervalued, with a fair value of $43.44, and a current price of around $40.81 at the time of writing this.
There are some obvious risks that are associated with investing in GOOS. The first is market risk. GOOS has a beta of 1.62, making it quite a bit more volatile than the overall market. The stock went from over $29 to around $13 during the COVID-19 crash, rallied to $50 recently, and is now sitting near $40. This isn't a stable blue-chip stock by any means.
Besides market risk, there is brand and concentration risk. Canada Goose is just one brand, a highly concentrated one at that. You can see this in the image below. The majority of sales come from down-filled jackets.
Some other luxury brand companies are more diversified because they own multiple brands, such as LVMH Moët Hennessy owning dozens of brands, or by having more diversified offerings.
There are brands that have been able to stay relevant as time goes on (Canada Goose being one of them), but success in the fashion world, especially higher-end fashion, is dependent on what's "in" at the moment. There's always the risk that for some reason it wouldn't be considered "cool" anymore to buy Canada Goose jackets, or their status symbol may wear off, which could negatively impact them. Brand power can act as a moat but it also places extra risk in keeping the brand image intact since that is what allows the company to charge premium prices. These reasons are why it would most likely be safer to buy luxury stocks that are more diversified.
Although it isn't trading much lower than fair value, Canada Goose is a solid company with good margins and ROI, talented management, and promising growth initiatives. The quality of its products has made it one of Canada's most popular apparel brands around the world. This has translated into strong margins and cash flows in one of the world's toughest industries.
This article was written by
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.