Probably. But that is not free from backlash. As in fact shows the significant slide of nearly 30% recorded by the title since the beginning of December.
Granted, there is a general tidal decline in this correction (the retail sector sub-indices are down 5% in Canada and the US). You also have to recognize that we were starting from a high (the market tends to adjust down a stock at a peak more strongly when the general mood changes, because it fears that it has been over-enthusiastic ).
But above all there is this: Huawei.
The arrest of the financial director of the Asian giant at the beginning of December has greatly chilled relations between Canada and China.
It took only a few days for the media to echo a movement of resentment and a potential boycott of Canadian products in China.
Canada Goose, which is just trying to expand into the Middle Kingdom, has felt the cold snap.
Is the Chinese boycott so tough?
On Canada Goose's short-term profitability, not really. The company actually only has around 30 distribution points (and only two stores of its own) in China. By comparison, it has 250 in North America and 865 in Europe. A boycott of 2.5% of a network is unlikely to jeopardize a company's profits. Especially when other outlets continue to deliver growth.
A boycott of 2.5% of a network where significant hopes of growth are built is however likely to deal a felt blow to the multiples at which a security is traded. Doubt settling in the market on future prospects, multiples deflate. Particularly when the stock is trading at 60 times current year expected earnings.
Hence the slip observed.
Can the stock recover?
Some think so, like Meaghen Annett of TD Securities, who, when the price touched $60, raised his recommendation to “best stocks to buy today”.
The analyst expects that the recent events will work out over time and that the potential of the Chinese market will then return to minds and valuation.
She further notes that while Canadian, American and Chinese diplomacy is at work, the results should continue to progress.
Growth generated by the expansion of the physical distribution network, but above all by the popularity of the brand and online efforts. The strength of online coat shopping is eyebrow-raising. In 2015, direct online sales accounted for approximately 4% of Canada Goose's total sales. They are now at 43%. And Susquehanna Financial Group expects them to reach 70% in 2021. Their progression is all the more interesting as they offer higher profit margins, with no commission having to be paid to physical retailers.
Ms. Annett notably bases her optimism on the fact that the international market is still weakly penetrated by Canada Goose. In Canada, for every 1,000 individuals with a household income of over $100,000, the company currently sells 52.2 coats. Elsewhere, above the 37th parallel, penetration is at 10.2 coats per 1000 individuals in Japan and South Korea, 6 per 1000 in the United States and 5 per 1000 in Europe.
Most analysts are also optimistic, while the consensus predicts that earnings per share should increase by 31% over the year 2020 (March) and 26.9% the following year (2021).
“Yes but, even by adhering to the reasoning, the title remains at more than 51 times the profit expected in March 2019, a very strong multiple”, we will say.
It all depends on the angle from which you choose to look.
Apparel companies like Under Armor and Brunello Cucinelli have averaged trading at a multiple of 42 times earnings for the next 12 months in times when their earnings were growing at a rate of 20% to 30% per year. However, for the following year (2020), Canada Goose's multiple is 39.4 times, and it is only 31 times the 2021 anticipation.
If one believes that relations will have warmed up between China and Canada in 2020-2021 and that penetration rates have the potential to climb significantly, the title is probably indeed an attractive opportunity.
However, we remain personally suspicious of high-multiple designer clothing and accessories companies. With the rapid market declines experienced in the past by iconic names such as Crocs, Tommy Hilfiger and Under Armour, in mind. Too popular often makes people less popular, and reversals in growth can be rapid.
For those who would still want to venture into the fashion market, retailer Aritzia's stock (ATZ, $16.22) seems more appealing. Its clothing designs are gaining popularity as its profit has advanced 23% in the past 12 months; driven by strong growth in same-store sales. The consensus of analysts is for an increase of 15% next year and 22% the following year. Earnings advances are a little more modest than for Canada Goose, but at 17.6 times next year's anticipation, the stock carries much less expectation than the latter's 39 times.