Canada Goose Holdings Inc. Plummeted 16% Yesterday: Time to Buy?

Canada Goose Holdings Inc. (TSX:GOOS)(NYSE:GOOS) shares tank, as the company reported strong results that were just not good enough to justify the valuation.

| More on:
time is money compounding

Canada Goose Holdings Inc. (TSX:GOOS)(NYSE:GOOS) was among the biggest losers yesterday, even as its quarterly results that were released were significantly higher than those from the same quarter last year.

Total revenue for the third quarter of fiscal 2018 increased 27%, the gross margin increased to 63.6% from 57.5%, and earnings per share were $0.58 — a 49% increase from last year.

And this follows a very strong second quarter when revenue increased 34.7%, and the gross margin increased to 50.5% from 46.4%, as direct-to-consumer revenue increased fourfold, with the North American e-commerce business showing clear strength.

So, how could the stock get hit so badly after all of this good news?

Well, it’s all about expectations: what investors or the market is pricing in to the shares.

This goes beyond published earnings expectations. When investor psychology becomes so wildly optimistic, and a stock trades at sky-high valuations, the stock is vulnerable.

This is what has happened with Canada Goose.

Canada Goose has been an investor darling from the beginning. The stock was hot right out of the gate and posted a 26% return on the first day of trading. And even with the dramatic fall, the stock is still 136% higher than it was 11 months ago.

The next question to ask is whether we should use this weakness as an opportunity to buy the stock. I think not. While valuations are obviously lower than two days ago, they are still high. The stock trades at 62 times this year’s expected earnings and 50 times next year’s earnings, with an expected growth rate of 51% this year and a 24% growth rate in 2019.

In my mind, I keep coming back to a few key points.

Firstly, the company’s debt-to-total-capitalization ratio is a very high 59%, so the pitfalls of higher interest expense and lower financial flexibility could catch up to the company in more difficult times.

Secondly, while Canada Goose is an iconic brand with a long history of success, and it is clearly doing many things right, it is in the retail industry, which is cyclical and subject to fads that come out of fashion just as quickly as they go in fashion. And with little diversity in its product offering, the risk is magnified. These risks are not reflected in the stock.

Also, consumer debt is at record levels, and interest rates are on the rise, so the fact that consumers will have less disposable income available to them is a risk. In this scenario, premium-priced products are the first to be cut.

In summary, I think the stock does not have an attractive risk/reward profile, and I would remain on the sidelines.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Karen Thomas has no position in any of the stocks mentioned.

More on Investing

Plane on runway, aircraft
Stocks for Beginners

Up 53% From its 52-Week Low, Is Cargojet Stock Still a Buy?

Cargojet (TSX:CJT) stock is up a whopping 53%, nearing closer to 52-week highs from 52-week lows, so what's next for…

Read more »

Question marks in a pile
Bank Stocks

Should You Buy Canadian Western Bank for its 4.8% Dividend Yield?

Down 35% from all-time highs, Canadian Western Bank offers a tasty dividend yield of 4.8%. Is the TSX bank stock…

Read more »

Gold bars
Metals and Mining Stocks

Why Alamos Gold Jumped 7% on Wednesday

Alamos (TSX:AGI) stock and Argonaut Gold (TSX:AR) surged after the companies announced a friendly acquisition for $325 million.

Read more »

tsx today
Stock Market

TSX Today: Why Record-Breaking Rally Could Extend on Thursday, March 28

The main TSX index closed above the 22,000 level for the first time yesterday and remains on track to post…

Read more »

Nuclear power station cooling tower
Metals and Mining Stocks

If You’d Invested $1,000 in Cameco Stock 5 Years Ago, This Is How Much You’d Have Now

Cameco (TSX:CCO) stock still looks undervalued, despite a 258% rally. Can the uranium miner deliver more capital gains to shareholders?

Read more »

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Dividend Stocks

TFSA Magic: Earn Enormous Passive Income That the CRA Can’t Touch

If you're seeking out passive income, with zero taxes involved, then get on board with a TFSA and this portfolio…

Read more »

Man with no money. Businessman holding empty wallet
Dividend Stocks

2 Stocks Under $50 New Investors Can Confidently Buy

There are some great stocks under $50 that every investor needs to know about. Here’s a look at two great…

Read more »

potted green plant grows up in arrow shape
Stocks for Beginners

3 Growth Stocks I’m Buying in April

These three growth stocks are up in the last year, and that is likely to continue on as we keep…

Read more »