Canada Goose’s (NYSE: GOOS) share price has been declining for quite some time now. The trend began in November 2021 when Canada Goose traded at over $51 per share. Today, shares are changing hands at around $16, with the significant plunge that took place after the company’s most recent quarterly report sending shares to multi-year lows.
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In my view, while Canada Goose’s forward-looking outlook fell short of Wall Street’s expectations, the company’s growth prospects appear quite strong. Revenue growth was notable in Fiscal Year 2023, while management expects even stronger growth in Fiscal Year 2024. Considering the fact that Canada Goose’s current valuation has been suppressed due to the stock’s prolonged decline, while its outlook remains robust, I am bullish on the stock.
Re-accelerating Growth despite Weak Investor Sentiment
Canada Goose is currently experiencing a re-acceleration in revenue growth, despite weak investor sentiment. The company posted revenues of C$293.2 million in its most recent quarter, implying a 31.4% increase year-over-year. This is the company’s strongest growth over the past seven quarters and is notably higher than its 5-year compound annual growth rate of 18.6%.
The company’s growth was powered by a higher store count, higher same-store sales, and robust DTC (Direct To Consumer) growth, including higher online sales. Specifically, the company ended Fiscal Year 2023 with 51 permanent stores compared to 41 at the end of Fiscal Year 2022. North America contributed significantly to the top line’s expansion, with revenues growing by 41.2% in Canada, more than offsetting the modest 4.5% revenue decline in the U.S.
However, even more impressive growth was witnessed in Asia Pacific, where revenues rose by 65.4%, primarily driven by the lack of disruptions from COVID-19 restrictions that existed in the comparative quarter, especially in China. In fact, it’s worth noting that China posted a record year-over-year growth rate of roughly 40%.
Based on management’s outlook, the company should sustain its strong revenue growth trajectory moving forward, which is expected to be driven by two main factors. The first is the opening of 16 retail stores that should be fully operational in the second half of the year. The second is higher DTC sales (including higher same-store sales), which are expected to reach the mid-to-high 70s as a percentage of total revenue.
Based on these factors, management expects revenues for Fiscal Year 2024 to land between C$1.4 billion and C$1.5 billion, including total revenues of C$70 million to C$80 million in Q1. At the midpoint, this implies year-over-year growth of 19.1%, which is higher than its past five-year average.
As I mentioned, Canada Goose’s post-earnings plunge was mainly due to the company’s outlook falling short of Wall Street’s estimate, whose consensus projected Q1 revenues of C$77.5M. Clearly, the fact that Wall Street’s estimate was slightly higher than the midpoint of management’s guidance can hardly justify such a steep decline, especially given that management teams generally tend to provide prudent estimates. It’s even more bizarre given that Canada Goose has beaten Wall Street’s estimates in 18 out of the last 20 quarters.
Strong Profitability Prospects Mismatch Current Valuation
Given its strong revenue growth, Canada Goose should have the opportunity to rapidly expand its margins as it scales its operations, leading to strong profitability prospects. The company’s adjusted EBIT margin was 14.4% in Fiscal Year 2023, and management expects to boost this number to 30% by 2028.
Such impressive margin growth over five years, along with strong sales, should lead to significant growth in the bottom line. In fact, based on management’s 2024 guidance, consensus estimates point toward earnings-per-share of $1.04 for the year, already implying a 32% increase compared to last year. At the stock’s current price levels, this estimate, in turn, implies a forward P/E of about 15.8 or an earnings yield of 6.8%.
Few companies are about to grow their sales by nearly 20% and their profits by 32% while trading at a P/E in the mid-teens, which could imply a compelling opportunity for prospective investors.
Is GOOS Stock a Buy, According to Analysts?
Regarding Wall Street’s estimate on the stock, Canada Goose has a Hold consensus rating based on four Holds and one Sell assigned in the past three months. At $18.58, the average Canada Goose stock forecast implies 13.29% upside potential.
Takeaway: GOOS’ Valuation Forms a Tempting Investment Case
In conclusion, despite Canada Goose’s declining share price and weak investor sentiment, several positive factors should be considered. The company has experienced re-accelerating revenue growth, while management’s Fiscal Year 2024 and multi-year margin expansion outlooks appear optimistic. The recent decline in the stock price is likely characterized by an overreaction to a slight miss on guidance, but nothing is really worrisome here. Thus, I believe that with a forward P/E in the mid-teens, Canada Goose’s valuation could form a tempting investment case.
