Canada Goose: Hot Stock With Cold Fundamentals

2018/08/11

Founded in a small warehouse in Toronto almost sixty years ago, Canada Goose has grown into one of the world’s leading makers of luxury apparel. This statement is from the company’s website that illustrates their growth.

The company considers itself a luxury fashion house, their parkas with fur-lined hoods sell for $1,000 to devoted followers. I must admit that Canada Goose jackets provide exceptional warmth in extreme cold weather conditions; however, the stock price gives me the chills when I read their latest quarterly report.

At this writing, the stock price is $57, giving the company a valuation of $6.2 billion. Now, if a company has such a market value, you would expect it to generate at least half a billion dollars in net profits (assuming rational investors, not speculators). Yet, net income is a mere $96 million!

Successful investors are patient, and do not succumb to panic or hasty decisions. Ben Graham said “The intelligent investor is a realist who sells to optimists and buys from pessimists”. In the case of Canada Goose’s stock, it is optimism that is driving the stock price higher not business fundamentals.

You might argue that since the company is growing at a higher rate than the industry, the stock price will appreciate even more and the ROI would be enormous. You might be correct. However, with no margin of safety (GOOS has none) this investment is speculative.

“Investors” have very short memories. Nonetheless when it comes to investing, studying the past can be valuable. As Mark Twain said: “History does not repeat itself, but it rhymes.

This “Growth at any price” approach was the common wisdom of the dot-com era. When investors were injecting their hard-earned money in companies that have no sound fundamentals except a promise of growth. After the crash, $5 trillion in market value was wiped out.

During the 1970s, growth companies were called the Nifty Fifty (companies such as Xerox, IBM, Polaroid, and Coca-Cola) buying shares of these blue-chips was referred to as “one-direction” investing, because their earnings were stable and buying in at any price will yield high returns over the long term.  “While enthusiasm may be necessary for great accomplishments elsewhere, on Wall Street it almost invariably leads to disaster.” (Ben Graham). Investors learned this the hard way, a portfolio containing a basket of these securities in 1973 lost 86% of its value in the first year. Investors had to wait over 25 years to recoup their losses (Achieving 0% return over 25 years!) meanwhile, the S&P 500 generated a compounded annual growth rate of 10.3% with dividends reinvested.

Buying a stock with no consideration to business underlying just because it’s going up is a silly idea. An intelligent investor should always seek a margin of safety (to learn more about this concept please click here). There are many publicly traded luxury fashion houses, the following is a comparison between Canada Goose and Hugo Boss companies: 

GOOS (USD) BOSS (EURO)
Revenue:
$591
2,700€
Operating Cash Flow:
$126
420€
Free Cash Flow:
$92
300€
Net Income:
$96
231€
Market Cap:
$6.2 billion
5.6€ billion
Dividend Yield:
0%
3.8%

Figures in million except Market Cap

For those who get bored with ratios, let me summarize:

Hugo Boss generates enough revenue in 10 weeks as Canada Goose generates in twelve months. Even though Hugo Boss’s bottom line is more than 3 times that of Canada Goose, and pays a generous dividend yield, the two companies are selling for similar valuations. Talk about efficient markets!

On the qualitative side, I do believe that Hugo Boss has a better moat than Canada Goose as their brand is well known and their products are designed for all seasons not only winter.

Ben Graham said: “If you are shopping for common stocks, choose them the way you would buy groceries, not the way you would buy perfume.” I would say “not the way you would buy a winter jacket.

 

Sid-El Mehdi Lembirik
Managing Partner,
Lembirik Group Investments®

 

Disclaimer: Lembirik Group® has no position in GOOS under current valuations nor are we interested in BOSS. These 2 stocks were selected for illustration purposes only.

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