Amid global economic shutdowns, Canada Goose (NYSE:GOOS) has struggled to find its footing. Like so many retailers counting on foot traffic and fat pockets to meet sales targets, pain resulting from widespread quarantine is real. Since the coronavirus pandemic began early this year, the stock has seen an abrupt 40% price hit.
Canada Goose's reliance on China and parts of Europe to generate revenue has grown more fragile with the pandemic; future global consumer spending is far from certain. While this should hurt short term sales, other luxury brands like Apple are already seeing a sales rebound in China. Like most luxury brands, the Apple brand enjoys high demand elasticity. While not a directly comparable clothing product, it is still encouraging to see other expensive brands coping with tough times. This offers us some hope other parts of the world can follow a similar trend.
Thus far, the entire retail complex has moved down in unison, dragging Canada Goose's stock with it. This across-the-board selling creates a buying opportunity I am eager to explore.
Compelling Fundamental Backdrop
The global pandemic has distorted Canada Goose's 2020 earnings estimates into a guessing game but the luxury clothing company grew sales in 2019 at a healthy 37% clip, running laps around a sub 3% clip the S&P posted during the same year. I would argue a sales premium so vast deserves a higher valuation premium over the market than Canada Goose currently enjoys. Even if Canada Goose is only able to capture a small fraction of this growth post-pandemic, it still looks cheap. Cash flow will take a hit temporarily, but a healthy cash and equivalents position pushing $100 million plus sales continuing online, equips the company with staying power.
Management Decisions Creating Happier Consumers
Beyond strong financials, savvy managerial decisions augment my confidence in the company story. Recently, Dani Reiss, the CEO, announced a production shift in two factories to personal protective equipment (PPE) for donation to hospitals. This gesture does two things. First, it hints at the financial health of Canada Goose. The company would not be undertaking this money losing task if financial stability was a pressing concern. Beyond serving as a sign of strength, helping health heroes generates good press.
Speaking of good press, an additional decision by Reiss will be well received by most. Historically, Canada Goose's use of virgin fur has been met with harsh criticism from animal rights groups. Reiss recently responded by announcing the company would no longer use virgin fur, even taking it a step further to include a ban on company use of plastic. Just like I believe producing PPE for healthcare workers will bolster public perception, this decision should as well. Conceivably now, the environmentally conscious will feel more inclined to consider a Canada Goose product.
Eliminating certain materials to win over customers alongside the health equipment donations will also raise the company's environment, social, and governance (ESG) score. For other organizations like Microsoft, better ESG ratings have been greeted with higher multiples, as investors begin to consider a company's role in a growingly eco-friendly world. Maybe not their main objective, but a positive one, nonetheless.
Lastly, Canada Goose is actively leveraging brand power by expanding into other clothing categories beyond their iconic parka. By doing so, the company can serve a wider consumer base. Personally, I am not tempted to empty my savings account for one of their premium coats, and I cannot be the only one. Soon Canada Goose will be able to attract additional consumers with a $40 shirt rather than solely a $1000+ parka. Furthermore, making other types of clothing will help make their revenue streams less seasonal. Parkas, obviously, sell best in the winter. Canada Goose's decision will allow them to generate more product interest during warm months when winter coats are not on the minds of most.
The coronavirus pandemic has thrown the entire retail space into disarray. While Dani Reiss's company will certainly feel some of this pain, there is reason to be hopeful. The compelling combination of a reasonable multiple, and managerial decisions to cater to wider consumer bases makes this an interesting idea. As the pandemic sorts itself out, and life begins to normalize, I am inclined to think Canada Goose has room to fly again.