At 8:16 am this morning (May 29th, 2019) Canada Goose released its fiscal 2019 annual report. Despite beating most estimates and posting an impressive 40.5% and 49.5% growth in revenues and net income respectively, the company’s share price plunged over 31%. We believe this to be an irrational sell-off that offers a prime opportunity to buy one of Canada’s best luxury brands at a significant discount.
The drop in price was due to the following statement concerning 2020 estimates; “Materially larger losses in adjusted EBIT and adjusted net income per diluted share during the fiscal first quarter, due to a larger number of retail stores operating during off-peak periods and higher corporate SG&A investments to support growth, including local market activation ahead of planned retail openings, new product and Greater China operations.” (Source: Canada Goose Press Release). This admittedly worrying guidance given by management would justify the sell-off when taken out of context. Let’s break down just what this statement, in context, and discuss what it really means and implies.
Canada Goose makes luxury winter jackets, it’s their core business and what most people think of when Canada Goose is mentioned. Now, no one really buys winter coats when it’s summer as they aren’t needed when it’s 20+ degrees (Celsius) outside. Given Canada Goose’s Q1 the Spring months April, May, and June it makes sense they would experience lower sales. This is what is meant by “off-peak periods”. The main reason for concern, however, is the larger losses in adjusted EBIT, implying higher operating expenses and investment.
Investing in Growth
Canada Goose has begun investing large amounts into their growth, with opening retail locations and international expansion. As such the company will be spending more, on growth, during a period of lower sales. The key point here is they are spending on growth. They are not anticipating larger operational expenses or adverse effects on the business. This additional spending is going directly to the future growth of the business. This spending is providing greater opportunities in the future, particularly with the investments in China. A country known for its support of luxury designer brands.
Missed but still on track
That said, however, Canada Goose did miss revenue estimates for FY 2019. This may have been a result of a warmer outlook on the 2018-2019 winter season depressing demand for winter coats overall. Despite this Goose still estimates +20% growth in sales for FY 2020 and “average annual revenue growth of at least 20%” over the next 3 years. We feel these estimates, including the lower first quarter, reflect well on management. By investing in the business despite lower sales indicates an intelligent and long term approach to capital allocation. Rather than focusing on making 3 months estimates by any means necessary, Goose wants long term growth.
Given the high growth profile of the business, their profitability and brand have made Goose a company we like, and this press release has only served to strengthen our conviction. We believe this drop has set up an excellent buying opportunity for investors seeking a long term play in the Canadian market.
Their jackets might be a little too expensive on our budget but right now we think their stock is a bargain.
Another high growth Canadian fashion house we like is Aritzia