The Industry Focus: Consumer Goods team is revisiting major consumer and retail initial public offerings from last year.
In this video, they conclude their discussion of high-end outerwear retailer Canada Goose (NYSE: GOOS) with a check-in on its similarly high-end valuation.
A full transcript follows the video.
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This video was recorded on June 5, 2018.
Vincent Shen: The last thing that I think we should cover before we move on, this is something that, last year, when we were talking about the company, I was a little bit more skittish about, and that’s the high valuation. Right now, shares trade, I have at almost 80x forward earnings estimates. That’s not too far off from where we were the last time around. I have to admit that, with this update, I’m still really impressed by this business. I’m a little closer, I think, to coming around for this stock, in terms of the valuation, but part of me still thinks fashion trends, apparel can be a very fickle industry. But when you have a management team that’s very disciplined, that they prioritize the brand positioning first and foremost, because that’s something that’s so difficult to build up, even if you have a ton of money to spend, I think it’s good to see the discipline they’ve maintained there.
Even if growth does level out for this company over time, I think I’m much closer to giving this company a bullish recommendation, for example, for the next five to ten years. Those are pretty solid investing horizons for Fools to consider. I’m curious what you think, given the premium that this stock trades at, if your position has changed.
Asit Sharma: My position hasn’t changed. I’m still optimistic on this stock. But look, let’s be honest, this is a company that’s 60 years old, and it’s built its really high-end product very gradually over decades. It’s a really recent entrant into the public markets, and we all know, investors, you’ve seen a company that just zooms up the chart and has one quarter where it “misses earnings expectations”. This is probably ripe for a pullback at some point in the near future.
However, I don’t think investors should be rattled. One thing I love about Canada Goose is, it’s very methodical in how it expands its business. Another piece of recent news is that the company has filed, I’ll call it a draft prospectus, to raise $1.25 billion in the Canadian markets, its home base. It’s going to use this most likely for expanding production and building out more of these flagship stores. But it doesn’t need this cash right now. In fact, in the announcement of the draft, it’s given a wide array of ways it can actually raise that money, be it debt, new stock issuances, warrants. It’s basically planning for that long term.
Be prepared, listeners, if you own this stock, at some point, it must retrace. Everything that rises has to come down at some point before it rises again. That’s just a principle of the stock market. All in all, I’m with Vince, five to ten years, I think you have a solid investment here.
Shen: I’ll just end on this note in that, some of the, for example, investments that you mentioned in terms of their manufacturing base, things along those lines, I think as they develop some of that infrastructure, the company can increase its scale, have more control and flexibility with each new store it opens, each new market that opens, each e-commerce portal that it launches. And I think that’s going to be very important, having some of that control, being able to fine tune, in terms of what, ultimately, a customer who buys, for example, a $1,000 parka from Canada Goose expects is really consistent, high quality. That’s something that’s part of the brand cachet. So, having the discipline there, the control there, I think, is really important long-term for the company, to make sure it’s able to manage and nurture what I think a lot of people would argue is the most important part of the business, being its brand and the reputation that it’s developed.
Asit Sharma has no position in any of the stocks mentioned. Vincent Shen has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.