Many retail companies have been struggling this year. They've gone from having too much demand and not enough supply a year ago to now having too much inventory. Inflation and rising labor costs are also putting a damper on margins. Big-name retailers including Walmart (WMT 0.46%) and Target (TGT 1.03%) could be facing a tough year ahead.
One underdog that could be a surprisingly resilient business to invest in is Canada Goose Holdings (GOOS 1.60%). The company's business model is different from many big-box retailers, and that could make its stock an underrated one to invest in this year.
What makes Canada Goose different?
Canada Goose prides itself on making quality winter wear. That means it isn't looking to make the cheapest product possible in order to keep prices low the way a Target or Walmart might. There's no better way to demonstrate that than by looking at their vastly different gross margins:
TGT Gross Profit Margin data by YCharts
Canada Goose's superior gross margins are a great sign of strength and ability to adapt to changing market conditions. The business isn't always profitable, and that's because of seasonality; consumers aren't loading up on high-priced parkas during the summer. But in the last three months of 2021, its busy season, it netted a profit margin of 26%. Walmart's and Target's profit margins typically are usually in the low to mid-single digits.
Another advantage it has over those top retailers: It doesn't have to hold nearly as much inventory.
The business has a steady supply of products
Target has a big problem with inventory right now due to an excess of supply, one that's going to destroy its already low margins this quarter and possibly next. Relying on a complicated supply chain that involves other countries has backfired on companies and has led to too much stock on hand right now. In contrast, here's another chart to show just how much more stable Canada Goose's inventory has been by relying on its local production:
TGT Inventories (Quarterly) data by YCharts
More than 80% of Canada Goose's products are manufactured in Canada, so it doesn't need to worry about the same supply chain problems that Target and Walmart do.
Canada Goose's results and forecast look fantastic
Last month, Canada Goose released its latest earnings numbers. Sales of 1.1 billion Canadian dollars for the year ending April 3 rose 22% year over year. Earnings increased 35% to CA$94.6 million. And what's impressive is that the company has achieved this amid COVID-19 restrictions in China where, at the time of the earnings report, one-quarter of its stores therewere closed while the rest are "facing significant traffic impacts."
Looking ahead, the company is bullish that China will recover and be a strong market. As a result, Canada Goose projects revenue for the new fiscal year to come in between CA$1.3 billion and CA$1.4 billion. And its adjusted per-share profit will come in between CA$1.60 and CA$1.90. Both forecasts on the top and bottom lines are better than what analysts were expecting.
Is Canada Goose a good buy?
Shares of Canada Goose have cratered 48% this year. That's worse than Target's 38% decline, and it's far worse than for Walmart, down 18%, and the S&P 500, which is off 21%. The mistake investors may have been making is in assuming that amid inflation, demand for Canada Goose's expensive, high-priced parkas that often retail for more than CA$1,000 will decline sharply.
However, with a much different customer base than Walmart or Target, that may not be the case. Canada Goose's customers don't flinch at high-priced apparel, certainly not in the same way that discount shoppers who frequent Target and Walmart might. A dollar store may lure away customers from the discount chains, but the same risk likely doesn't extend to Canada Goose customers.
Trading at a forward price-to-earnings multiple of 14, Canada Goose stock is cheaper than that of Target and Walmart. And with the steep decline in price, it could make for an incredibly underrated contrarian investment right now. It may still decline further, but the stock looks like it should be due for a rally over the next 12 months, especially if it can hit its impressive sales and profit targets.
