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Goose Down: Canada Goose Shares Plunge on Lowered Growth Prospects

By Asit Sharma - May 30, 2019 at 5:30PM

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The market drastically recalibrated its narrative on Canada Goose in a single trading session.

Canada Goose Holdings (GOOS 8.81%) shares plunged 31% on Wednesday after the company revealed fiscal fourth-quarter 2019 earnings. Investors were unprepared for relatively tepid long-term revenue guidance, and though shares had clawed back roughly five percentage points by midday on Thursday, it's clear that the market has decisively revalued shares for the time being.

Below, we'll walk through highlights of the fourth quarter and fiscal year, and review the financial outlook which stunned shareholders yesterday.

Canada Goose: The raw numbers

Metric Q4 2019 Q4 2018 Growth (YoY)
Revenue CA$156.2 million ($117.1 million) CA$124.8 million ($93.6 million) 25.2%
Net income CA$9.0 million ($6.75 million) CA$8.1 million ($6.1 million) 11.1%
Diluted earnings per share CA$0.08 ($0.06) CA$0.07 ($0.05) 14.3%

Data source: Canada Goose Holdings. YoY = year over year. U.S. dollar figures calculated at quarter-end exchange rate of 1.334 Canadian dollars = 1 U.S. dollar.

Fourth-quarter and full-year highlights

  • The company provided limited information on the fourth quarter, as most of its earnings release focused on full-year results. For the final quarter of the year, while revenue grew appreciably as shown in the table above, operating margin slid by 440 basis points to 11.3%, as higher sales and marketing costs offset a nearly 300 basis point improvement in gross margin, signaling that the company is spending more for its sales growth versus prior periods.
  • For the full year, revenue improved by 40.5% to 830.5 million Canadian dollars.
  • Direct-to-consumer (DTC) revenue soared by 69% to CA$431.3 million in fiscal 2019, as the company opened five new retail stores and one new e-commerce site.
  • Net income in 2019 jumped 53% to CA$143.6 million.
  • Canada Goose achieved growth in each major geographical region in 2019, including revenue expansion of 28.2% in China, 36.3% in the U.S., and 60.5% in the company's "rest of world" region.
  • The company added two in-house manufacturing facilities during the year, bringing its total production locations to eight. Canada Goose manufactured 47% of its total down filling for jackets in-house during 2019.
A woman in a blue parka, in a winter setting

Image source: Getty Images.

The near-term and long-term outlook

Canada Goose issued both a fiscal 2020 outlook and a three-year outlook alongside earnings. As far as revenue and earnings per share are concerned, structurally, the guidance is the same. For both the new fiscal year and the three-year period which ends in 2022, Canada Goose expects revenue to expand at an average annual rate of 20%, and it anticipates that adjusted diluted earnings per share will grow at an average annual rate of 25%.

For most consumer-goods companies, such growth targets would have sent shares rising upon yesterday's earnings release. However, Canada Goose has been priced more like a tech stock since its initial public offering in March 2017; it sported an EV-to-EBITDA ratio of 33.0 as recently as this week. That ratio now sits at a still-high but more reasonable 22.9.

Essentially, Canada Goose has cut its projected forward growth rate in half. And while it still sells a premium product with global cachet, the company has implicitly acknowledged that its path forward will follow a less fiery trajectory. The organization might exceed its financial benchmarks over the next three years if its expansion into China and other Asian markets accelerates beyond current projections. Canada Goose might also dive into related clothing markets, as its November 2018 acquisition of footwear manufacturer Baffin suggests.

In any growth scenario, however, investors are likely to begin to focus on earnings execution as much as top-line momentum. Canada Goose suddenly looks like a much more mature company, and it's difficult to envision that the days of unbridled revenue growth will return anytime soon.

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