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Bear of the Day: Canada Goose (GOOS)

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If you live in a cold winter climate – especially in Urban areas, you’ve no doubt noticed the proliferation of bulky down parkas with fur lined hoods and collars and a distinctive embroidered patch signifying that they are from the collection of high-end outdoor garment maker Canada Goose (GOOS - Free Report) .

Around the downtown Chicago offices of Zacks, the Canada Goose parka is the winter wear de rigueur for the millennial crowd. It would be understandable if you thought it was actually a required uniform if you’re going to be standing in line at Starbuck’s (SBUX - Free Report) or the hip place next door that sells take-out salads for 11 bucks.

You may also be aware that those garments are very expensive, with the price of the flagship parka starting at about $800 and going up to $1,400 and beyond. Other garments are priced at similar levels with lighter weight jackets, outerwear pants and premium knit items all selling for over $500.
So how does a company with popular, premium-priced products end up as the Bear of the Day?

Lowered earnings estimates, stagnating long-term forecasts and the wildcard of selling products made from animal feathers and fur that have been the subject of negative press and an FTC investigation into the company’s claims of “ethical sourcing.”

There’s also the issue that while those expensive parkas have become ubiquitous in the big city coffee lines, they were noticeably absent from the slopes of ski resorts in places like Jackson Hole, WY and Vail CO during the holiday season. In fact, an informal survey of outdoor winter sports enthusiasts finds that that group still prefers high-performance, technical outerwear from the likes of the North Face, Patagonia and Columbia Sportswear and considers Canada Goose a fashion "poser" brand.

Having a hot fashion brand can be a double-edged sword. While consumer demand for the newest items can drive sales and help a company hold gross margins, those tastes are notoriously fickle and require a marketing spend that quickly becomes unsustainable if sales dip.

In the case of Canada Goose, the company relies on large, stylish “flagship” stores in prime luxury shopping districts across the US and Canada as well as in London, Paris, Beijing, Shanghai, Hong Kong and Tokyo.

Those stores utilize extremely expensive retail commercial real estate. Floor space is arranged to showcase new inventory and the stores function more as advertisements that draw attention to the brand rather than as a channel for significant retail sales.

Early reports are that Canada Goose outerwear – which was rarely discounted in previous seasons – has been the subject of steep markdowns during the 2019 holiday season. The average discount to MSRP this year was calculated at 13% by one industry analysis firm. Pushback from animal rights groups is affecting consumer demand for the garments at full price.  Activists have been critical of the conditions in which geese for the down stuffing are raised as well as the use of leg traps - necessary to procure coyote fur from wild animals.

Recent downward revisions for Q4 2019 earnings from $0.96/share to $0.87/share earn Canada Goose a Zacks Rank #5 (Strong Sell). Though the company turned in an earnings beat last quarter, management declined to adjust future guidance and the shares have been declining - trading recently at less than ½ the all-time high of $70.05/share reached at the end of 2018.

During the same period, the S&P 500 has increased more than 20%.

In the retail apparel segment, investors would be better of considering “althleisure” pioneer Lululemon Athletica (LULU - Free Report) , a Zacks Rank #2 (Buy) which has been making new highs on the strength of successful efforts to diversify into new segments.

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