This stock pitch is intended to be a resource for interview preparation, it should not be interpreted as investment advice.
I recommend a long position on Canada Goose. Currently trading at $74.56, I believe it is undervalued as investors overreacted on Huawei news and the subsequent breakdown of Canada China relations. I also believe that investors are not pricing in the growth potential of Canada Goose, especially internationally. I have a target price of $100, with a minimum upside of 10% on the stock.
Company Background: Functional Luxury
Canada Goose is a luxury outerwear manufacturer and retailer, with a reputation of exceptional warmth and quality. It is founded in 1957, and is headquartered in Toronto. It was traditionally sold in wholesale, to retailers such as Nordstrom and Hudson’s Bay Company. With 12 flagship stores in North America, Europe and Asia, and heavy investment in eCommerce, it is cautiously expanding its Direct To Consumer channel internationally. It is known for its down filled parkas, worn by scientists in Antarctica, and its bombers. Recently, it has introduced new product lines such as knitwear and lightweight jackets and vests. Canada Goose jackets are priced from $800 to $1,500, and its knitwear is priced from $400 to $800.
Manufacturing Facilities
Canada Goose is manufactured in Canada, and currently has 5 facilities in 3 provinces:
- Scarborough, Ontario: 84,800 square feet
- Winnipeg, Manitoba: 82,920 square feet
- Winnipeg, Manitoba: 94,541 square feet
- Winnipeg, Manitoba: 72,619 square feet
- Boisbriand, Québec: 94,547 square feet
Operating Geographies
Canada Goose operates in 3 major geographies, Canada, US, and Rest of World, each makes up roughly one third of its revenues.
Canada
Canada makes up the largest share of Canada Goose’s revenues, in part due to very high brand awareness. With a CAGR of 55.0%, Canada has also experienced the highest rate of growth over the past 3 years. Retail stores were opened in Toronto, Calgary, Vancouver and Montreal in 2016, 2017, 2018 and 2018 respectively. In Canada, the company sold 52 jackets per 1,000 addressable customers in 2018.
United States
US makes up the second largest share of Canada Goose’s revenues. Market entry has been focused on Northeast and Midwest regions, specifically New York, Chicago, Boston and New Jersey, where retails stores were opened in 2016, 2017, 2017 and 2018 respectively. Pacific Northwest, probably Seattle, is being looked at with respect to expansion. In the US, the company sold 1 to 10 jackets per 1,000 addressable customers in 2018.
Rest of World
Rest of World makes up the last share of Canada Goose’s revenues. With a CAGR of 39.0%, it is growing at the second fastest rate. Rest of World can be broken down into Western Europe, Japan/Korea, and China. In Western Europe, Canada Goose is in every major market and has open e-commerce in nine markets, and a retail store in London in 2017. In Tokyo, Canada Goose opened a retail store in 2017. In China, Canada Goose has established a regional head office in Shanghai for marketing and commerce. Canada Goose has also opened retail stores in Hong Kong and Beijing, both in 2018. In Rest of World, the company sold 1 to 10 jackets per 1,000 addressable customers in 2018.
Competitors of Canada Goose
The largest competitor of Canada Goose is Moncler S.p.A, an Italian luxury outerwear company. With jackets starting at $1,000 Canadian, it operates at a slightly more premium price range. Known more for its style and flash, compared to the more functional Canada Goose jackets, Moncler appeals to a different audience.
Internationally, other competitors include Bosideng in China and Woolrich in the US. Domestically, Mackage, Moose Knuckles and Nobis are new entrants to the luxury outerwear space. Offering similar products at similar price ranges, they offer an alternative product to a slightly different demographic. The new entrants are still relatively lesser known, and do not have the brand power of the iconic Canada Goose Antarctica logo. However, functionally, they are at least on par with Canada Goose.
Financials of Canada Goose
Financially, Canada Goose is growing fast. Revenue grew at 39.3% year over year in the last 3 years to $666 million in the last fiscal year. This is 3 times higher than the 13.3% CAGR for Moncler, which made €1.3 billion last year. Their EBITDA margin at 25% is healthy and growing, driven by the shift towards Direct To Consumer sales, through their own stores and eCommerce platforms. Canada Goose does carry some debt on their balance sheet, with a manageable interest coverage ratio of 12.2.
Valuation of Canada Goose
Based on a rough DCF, I believe the market is pricing in a 30% – 40% CAGR in free cash flow over the next 8 – 10 years. This seems reasonable, as there is still a large untapped market for Canada Goose. GOOS is trading at 51.9x EV/EBITDA and 82.1x P/E, compared to industry averages of 17.2x EV/EBITDA and 33.2x P/E. The unusually high multiples reflect the growth potential of the company, as well as its above average CAGR.
Investment Thesis: Why Canada Goose is a Good Buy
Shares in Canada Goose fell significantly after Canada arrested Huawei’s CFO Meng Wanzhou. With talks of a concerted boycott against the Canadian brand by its biggest potential market, the company chose to delay the opening of its new store in Sanlitun, Beijing. However, when the store did open 2 weeks later, fears of a boycott subsided. According to reports, there were huge lineups at the new store, and sales on TMall.com were undiminished. I believe the drop in GOOS prices was unjustified, and its shares will slowly move back up to its price prior to this incident.
On a more macro level, growth in China is slowing, in part due to an ongoing trade war with the US. There is also substantial uncertainty in Europe, with Brexit and increasing nationalism and protectionism in Italy and Hungary. The risk of a global slowdown or recession weighed on the S&P 500 index, down 10% from its high in September 2018. As a luxury brand, Canada Goose is less exposed to that risk. Specifically in China, where appearances are so important, demand for well known brands is highly inelastic with respect to income. I believe the cash flow from Canada Goose will be more robust than expected in a recession scenario.
With regards to estimates of market size, some reports estimate the total addressable market to be 180 million households, defined as wealthy by their income (higher than $100,000). I believe this estimate is too conservative, as Canada Goose is habitually consumed by individuals with much lower income than $100,000, especially by the Chinese. As a status symbol, Chinese people value Canada Goose much more than its price, and therefore will buy it irrespective of income levels. Assuming that the top 5% of China’s population will make enough to save up for a jacket, that would be an additional ~70 million households, or an increase of 39%. I believe the expected upside in China is too conservative.
Investment Risks: What Could Go Wrong?
While I believe that the China Canada tensions will not materially affect Canada Goose sales in China, there is a risk of government intervention. Tariffs would make Canada Goose much more expensive, and reduce demand despite being a relatively expensive good. My view is that the trade conflict will likely not get to that stage, as every government understands the risks of an all out trade war.
However, the risk of a global recession is not immaterial, JP Morgan projects the likelihood to be 60% by 2020. If the global recession hits the middle and upper middle class more than expected, especially in China and other high growth countries, that could be a substantial impact on Canada Goose revenue.
Worst Case Scenario of Canada Goose
The worst case scenario is one where a major global recession coincides with punishing tariffs from China. Assuming the recession hits in 2020, it may result in an implied share price of $15 – $25.
