Since its IPO in March of this year, Canada Goose Holdings (NYSE:GOOS) stock has soared more than 50% to date. In this first of two segments analyzing the fashionable outerwear company, our Industry Focus team discusses the company's business model to get to the bottom of why the company is wowing consumers and investors alike.
A full transcript follows the video.
This video was recorded on Nov. 14, 2017.
Vincent Shen: Our last topic for today is Canada Goose Holdings. The apparel company priced its IPO over the summer, and in the several months since then, shares have gained over 50%. This is a company that has grown and flourished thanks to the strength of its brand and the reputation it has for offering very high-quality outerwear made in Canada that can survive very harsh environments and conditions, but at the same time is very coveted in fashion circles and urban fashion centers. This allows Canada Goose to occupy the high-end luxury corner of the market. Its famous parkas can easily run over $1,000. The company released its fiscal second-quarter earnings last week. Asit, what has impressed you the most about this company?
Asit Sharma: The thing that's really jumped out to me, Vince, is the strategy that Canada Goose has: That's clicks and bricks. The company reported 34% in fiscal second-quarter 2018 earnings. That came from a combination of physical stores, country-specific online stores, and traditional retail channels, which they call wholesale. They sell wholesale to high-end retailers. This seems to me the path forward. If you are an emerging retailer, and that shadow of Amazon is looming over you as it looms over every single retail business on the planet, this might be a way to succeed and flourish. Have a niche product -- as you mentioned, a parka that sells for $1,000 -- and other more affordable outerwear. They use handcrafted materials. They actually hire sewers. If your read through their annual reports, this is a company that backs up that price tag with that artisan component we've discussed many times, which I think is very attractive to both people who desire quality and the hipster contingent of retail.
Shen: [laughs] Absolutely.
Sharma: Then, have flagship stores. I want to read something from the company's most recent transcript which is interesting to me. This is from the CFO, John Black, and he's talking about the stores they've opened. Bear with me, listeners:
"We do have a few learnings, of course, from the new stores. And there's some minor changes in the economics of the stores, the new ones vs. the old ones, but they're not material. Just as a reminder, a few things to consider when you're looking at the stores. They're generally between 3,000 and 5,000 square feet. Our cost to enter them from a capex" -- that's capital expenditure -- "perspective is between $3 million and $5 million. And they're profitable in the first year, and paid back within two years. So, those are the hurdle rates we've put in place, and all the new stores should achieve this."
Right now, Canada Goose has flagship stores in Toronto, London, Tokyo, New York City, and Chicago, and they plan to have 20 stores in place by 2020. But, while these are modeled after the big innovators, Apple's retail store, of course, which started this trend, they're nothing like a traditional idea of a flagship store. They're actually quite tiny when you think about a high-end brand. Lower footprint, lower capital investment, much higher return on that investment, much quicker return on the investment. I was sort of amazed by this. My wife has family in Canada, so I was familiar with the brand. Actually, somehow, I confused this with a vodka brand out there, but it's not. It's a quite nice hybrid model that maybe companies can follow and be insulated from the trends that we talk about all the time on this show. What leapt out at you, Vince, when you looked over this company? I know you've been interested since their IPO.
Shen: Yeah, I've wanted to cover this company for some time now. Today, you mentioned it as one of our show ideas, and I was very excited to take that on and mention this company, for any Fools who hadn't heard of it or saw the performance and were kind of curious about what makes this company so special.
You mentioned some of the long-term management targets, in terms of their DTC footprint, their direct-to-consumer footprint. They want 15 to 20 e-commerce sites, 15 to 20 company-owned retail stores over the next few years. It's really interesting to see how important that direct-to-consumer component of their business has become in terms of profitability, but also their growth as well. In fiscal 2017, DTC revenue was about 28.5% of the total top line. The prior year, it was just 11.4%, and the year before that, it was just 3.7%. So, the growth they've seen in terms of expansion with these stores, with the sites, the volume that's moving through them is excellent. I remember management, in one of the calls, speaking to about how their Tokyo store, when that opened, there were apparently over 100 people in line waiting for the store to open. So, it's this kind of cachet that the brand has developed for itself.
On that side, in terms of the expansion, the growth they're seeing there, that's great, but it also has a huge impact on their profitability because the profitability of being in the DTC segment is so much higher. For example, gross margin of 73.7% in the most recently reported quarter, versus 47.4% for the wholesale segment, which is bigger in the more traditional route of working with your retail partners -- department stores, for example. And another comment from management that I thought was very powerful, they said a jacket sold via the DTC channel gives the company two to four times greater contribution to operating income than the sale of the same jacket through wholesale partners. So, you can understand why management is so focused on this part of their business.
I think there's also an opportunity for the company to expand into other product categories, too. For example, Canada Goose recently launched a knitwear collection that has been selling very well, meeting or possibly exceeding management expectations. Each new launch like this gives them insight for the next potential category release, and gives them more coverage beyond just the winter cold-weather outerwear to other seasons, so they can branch to other products and even out some of their revenue in terms of the seasonality.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Asit Sharma has no position in any of the stocks mentioned. Vincent Shen has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.