Consumer goods stock Canada Goose Holdings is a buy for long-term share price gains. But only if you need no dividends and you can accept buying stock in a company that is losing money.
Canada Goose Holdings Inc. (TSX—GOOS; NYSE—GOOS) designs, manufactures, distributes and retails premium outerwear for men, women and children. Its products are sold through select outdoor, luxury and online retailers and distributors. We rate this clothing manufacturing stock a buy for long-term share price gains. But only provided that you need no dividends and that you can accept the risk of buying stock in a company that is currently losing money.
You and Mr. Reiss have similar interests
Canada Goose (CG) got its start in a small Toronto warehouse in 1957. Its president and chief executive officer is Dani Reiss—the founder’s grandson. He owns 24,993,446 shares that carry 10 votes each. Mr. Reiss owns 22.9 per cent of CG’s total share count of 108,987,485. This makes his interests similar to yours.
In the three months to June 30, CG’s net loss was $12.1 million, or 11 cents a share. That beats a net loss of $14 million, or 14 cents a share, a year earlier.
In the first quarter of fiscal 2018, CG’s revenue jumped by 80 per cent, to $28.5 million. In addition, the higher revenue was driven by both new stores and e-commerce (electronic commerce refers to sales directly to consumers over the Internet).
CG’s cost of sales grew by a much lower 36 per cent. As a result, its gross profit jumped by 184 per cent, to more than $13.2 million. The company’s gross profit margin (gross profit as a percentage of sales) improved by 17.2 percentage points, to 46.9 per cent.
SG&A (Selling, General and Administrative) expenses advanced by 43 per cent, to $25.8 million. This was considerably less than the growth in sales. That’s why SG&A, as a percentage of the revenue, fell by 23.7 percentage points, to 91.6 per cent.
CG kept a lid on the costs it controls
Net interest and other finance costs were essentially unchanged. One negative development was that CG’s income tax recovery was lower this year. But the company has limited control over its income tax bills.
Just keep in mind that the first fiscal quarter is not representative of how CG will do for the full year. That’s because the first fiscal quarter is seasonally slow. The company sells much more in its second and third fiscal quarters. Indeed, it generated 83.5 per cent of last year’s revenue in the second and third fiscal quarters.
Mr. Reiss said: “Fiscal 2018 is off to a strong start, as we see the power of the Canada Goose brand continue to resonate around the world. Our team continues to execute our growth strategies in both wholesale and direct-to-consumer channels and we remain confident in our ability to deliver this year.”
CG’s strategies aim to raise sales
One of CG’s strategies is to open more retail stores. It now operates one store in Toronto and one in New York City. This year the company plans to open four retail stores in London, Chicago, Boston and Calgary. Its distribution partner in Japan will open a retail store in Tokyo. CG’s long-term target is 15 to 20 retail stores.
A second of CG’s strategies is to expand its direct-to-consumer channel. It has established e-commerce stores in the United States, the United Kingdom, France, Ireland, Belgium, Luxembourg and the Netherlands. In the rest of this year, the company plans to open three more e-commerce sites. Its long-term target is 15 to 20 e-commerce sites.
A third of CG’s strategies is to introduce new products. The fact is, the market for expensive heavy-duty parkas is only so large. That’s why the company has introduced more products suitable for the spring and fall. Mr. Reiss says: “We continue to see strong consumer demand for our new lighter weight products designed for warmer climates and seasons.” This could reduce the significant seasonality in CG’s revenue and earnings.
Geographic diversification reduces risk
All three strategies will diversify CG’s sales and earnings. Economic difficulties in any one country will have a limited impact on its results. A wider product selection should also stabilize its sales. Particularly in the current age of global warming.
In the first quarter of fiscal 2018, CG generated negative cash flow—albeit better than last year’s cash outflow. This means that we can’t calculate a net debt-to-cash-flow ratio. But we can calculate its net debt-to-equity ratio: subtract cash of $13.1 million from total debt of $233.8 million and you get net debt of $220.7 million. Divide that by the shareholders’ equity of $134.4 million. The result is a high net-debt-to-equity ratio of 1.64 to one. That’s like $1.64 in net debt for every dollar of shareholder’s equity.
On the positive side, CG’s cash flow and balance sheet should improve. That’s because in fiscal 2018, CG is expected to achieve profitability. Specifically, it’s expected to earn 37 cents a share this year. Next year, the company is expected to earn a better 46 cents a share.
Mr. Reiss is optimistic about CG’s outlook. He said, “Overall, we believe we are well positioned for our upcoming peak selling season and beyond.”
The consensus recommendation of four analysts is that CG is a buy. We agree. Canada Goose is a buy for long-term share price gains. But only provided that you need no dividends and that you can accept the risk of buying stock in a company that is currently losing money. The shares trade in both Toronto and New York. But CG’s shares trade much more actively in New York.
This is an edited version of an article that was originally published for subscribers in the August 25, 2017, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
The Investment Reporter, MPL Communications Inc.
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