The fiscal 2020 fourth-quarter earnings report Canada Goose Holdings (GOOS 1.14%) delivered on June 3 showed the apparel retailer actually doing well. Its performance was far better than most analysts had feared it would be, and the stock price responded with an immediate 17.7% pop that it held onto thereafter.
But even after that bounce, the company's stock is trading down nearly 47% from its 52-week high set in July 2019. Still, after listening to what CEO Dani Reiss and his team had to say on the conference call that followed the report, I believe the winter apparel specialist's previous 52-week highs are well within reach.
Here are the three reasons why this stock still has a chance to soar.
Image source: Getty Images.
1. Canada Goose's fundamentals are solid
Both the balance sheet and income statement for Canada Goose remain points of strength for the company. With a cash position of roughly CA$120 million and available credit capacity of twice that, liquidity is not a pressing concern. Furthermore, its net income surprisingly remained positive through the peak of the coronavirus pandemic, bolstering an already-solid balance sheet.
The overall numbers for Canada Goose's fiscal 2020, which ended March 29, included three months of impacts from the global coronavirus pandemic, yet it still produced CA$1.36 per share in earnings. That gives it an earnings multiple of roughly 20 -- slightly below the broader market average -- and revenue growth of 15%, nearly four times the market average. Canada Goose posted revenue growth exceeding 30% in the period before the pandemic.
Clearly, there is good value here, which is especially reassuring considering the organization generates a large chunk of sales in Europe and Asia, where the pandemic hit earlier. Reiss on the call confirmed that sales trends are improving and offered his take that the worst hits from the pandemic are over.
2. The transition to a direct-to-consumer model is working
Reiss also pointed out that the company's ongoing shift toward direct-to-consumer (DTC) fulfillment channels -- both brick-and-mortar locations and e-commerce -- has positioned it well for the current situation. Sales in DTC grew 22% year over year for the company despite stores being closed during the quarter. Wholesale revenue grew at a slower pace of 7% as the company increasingly aims its marketing and its products toward its DTC channels.
DTC revenue now makes up just over 50% of total sales, and that's great news for investors. Sales made directly to customers rather than through wholesalers yield triple the profit margin rate and deliver a 13% gain in operating margin to Canada Goose. The incremental profit opportunity is immense if the associated channels can endure COVID-19.
Yes, store closures across the globe hurt last quarter's performance, but help is already on the way. Canada Goose locations across Asia have reopened their doors, and European locations will follow suit in the coming weeks. So far, customer conversion at open stores is even higher than it was prior to the health crisis.
E-commerce sales growth helped partially offset revenue declines from Canada Goose stores and its wholesale partners. Though the company has pulled back on some capital expenditures, Reiss remains fully committed to investing the needed dollars to build its digital presence and marketing. Web traffic reached and maintained historically high levels last quarter, a clear sign of customer loyalty. Reiss is working hard to make sure that loyalty remains steady.
3. It is finding new ways to connect to consumers
Canada Goose's parkas get rave reviews for their quality when used during colder months, but Reiss intends to leverage the brand's popularity to expand into warmer season clothing lines. Early signs of success: Its spring apparel line is exceeding revenue expectations in Asia. The rest of the world could feasibly follow suit. The plan is to turn Canada Goose into a year-round brand associated with premium clothing of all kinds, rather than just luxury jackets.
Furthermore, in a world growing more environmentally conscious by the day, Canada Goose is leading the sustainability charge. In April, the company announced aggressive environmental goals ranging from carbon neutrality by 2025 to eliminating single-use plastics in all of its facilities. Its strong environmentally activist position could give it a leg up in attracting new customers. Perhaps more importantly for investors, it will raise the company's Environmental, Social, and Governance (ESG) score, something many investment funds weigh more heavily now.
Even after the recent share price pop, I think Canada Goose stock has more share price gains ahead of it. Financial strength and savvy leadership are two of the best attributes for a company to possess during any type of crisis, and Canada Goose has both. It will continue to recover from these difficult times and expand its reach globally, and it will continue to be a staple in my portfolio.
