The third quarter is almost in the books which means it’s time for all 10 entrants in InvestorPlace’s 10 Best Stocks of 2019 to account for the good and bad that happened to their stock picks in the penultimate quarter of the year.
Thankfully, my pick, Canada Goose (NYSE:GOOS), has had a much better showing in Q3 than it did in the two previous three-month increments. As I write this, GOOS stock is up 19.0% over the last three months through September 26, with most of those gains coming in the last 30 days.
I needed this boost to my confidence as did, I’m sure, every owner of Canada Goose stock. The first six months of 2019, by any standard, was a complete shambles.
What’s happened between the end of June and the end of September that’s gotten GOOS stock to take flight once more?
Earnings Weren’t Terrible
Canada Goose announced its Q1 2020 results August 14 and they weren’t half bad.
On the plus side, GOOS had quarterly revenue of CAD $71.1 million, 59.1% higher than a year earlier and ahead of the analyst consensus of CAD $53.8 million. On the bottom line, Canada Goose had an adjusted loss of CAD $22.8 million, 37% higher than a year earlier. However, on a per-share basis, it lost CAD $0.21, three cents less than analyst expectations.
Its expansion continues to gain momentum with sales in Asia tripling during the quarter to CAD $18.1 million from CAD $6.6 million a year earlier. Here in Canada, where I live, sales rose by more than 40% while the U.S. growth was somewhat subdued, up 15.8%.
One unexpected positive in the quarter: Canada Goose’s wholesale business, which had been losing ground to its online and retail stores, saw revenues grow by 68.8% in the quarter to retake the lead over Canada Goose’s direct-to-consumer (DTC) business.
The only other negative in the quarter was the 650 basis point drop in its gross profit margin to 57.5% from 64.0% in the same quarter a year earlier. In addition, its gross profit margin was 410 basis points lower than the analyst estimate of 61.6%.
The lower gross margin resulted from higher wholesale revenues combined with the sale of lower-margin, non-parka products. But even here, there’s a silver lining.
If the company wants to become a billion-dollar brand (revenues), it’s got to diversify beyond winter coats. In the first quarter, its non-parka revenue almost doubled, accounting for one-third of its CAD $34.8 million in DTC revenue in the quarter or 16% overall.
Analysts were disappointed by the company sticking to its 2020 guidance that it established at the end of fiscal 2019 in May. It felt this would lead to a slowdown in sales over the remainder of the year based on historical trends.
This guidance calls for 20% sales growth, 25% growth in adjusted net income per diluted share, and an adjusted EBIT margin expansion of at least 40 basis points to 25.3%.
CEO Dani Reiss suggested that raising the guidance after only one quarter, the smallest quarter of the fiscal year, wouldn’t be the responsible thing to do.
I couldn’t agree more. Underpromise and overdeliver is always the preferred route for CEOs I support.
The bigger concern, for me, are the class action lawsuits that seem to be cropping up in the U.S., over some of the statements the company’s made in the past regarding its business. While many of the lawsuits are nothing but ambulance chasers looking for a good score, it’s important investors keep an eye on these things.
One class-action lawsuit filed in early September suggests that Canada Goose management failed to disclose or made misleading statements about its sourcing of down and fur.
While I picked GOOS as my top stock of 2019, I too am concerned about the way it treats the animals used to source its down and fur. As an animal lover, I wouldn’t stand for any ill-treatment of animals. The company denies its suppliers’ abuse the animals that are used in sourcing materials for its parkas, etc. I’ve chosen to take them at their word.
In addition, Canada Goose has had several run-ins with the Federal Trade Commission over potentially misleading statements about its sourcing practices. While the FTC didn’t find the company’s statements were misleading, it also failed to condone the statements. The issue is very fluid and continues to evolve.
The Bottom Line on GOOS Stock
Canada Goose has an excellent business. Its financials are first-rate. Except for the treatment of animal concerns, it’s a great stock to own.
I expect GOOS to finish the final three months of the year strong and rebound nicely in 2020.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.