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

Money growing in soil , Business success concept.

The $3,000 TSX Investment Strategy for Ultimate Growth

Investors can allocate as little as $3,000 in three TSX growth stocks for massive capital gains.

Read more »

Dollar symbol and Canadian flag on keyboard

2 Dividend Stocks You Won’t Want to Miss

Scotiabank (TSX:BNS) and another top dividend payer have dividend yields north of the 7% mark going into December 2023.

Read more »

growing plant shoots on stacked coins
Tech Stocks

Get Rich Slowly: 1 Smart Stock to Leave in a TFSA for Years and Years

The TFSA isn’t only for short-term goals. With a little time, here’s how you can use stocks to get rich.

Read more »

tsx today
Metals and Mining Stocks

TSX Today: What to Watch for in Stocks on Wednesday, November 29

Mix commodity prices could keep the main TSX index flat at the open today, as investors watch the quarterly U.S.…

Read more »

a person prepares to fight by taping their knuckles
Dividend Stocks

TFSA Investors: 2 High-Yield Heavyweights Worth a Sizeable Investment

SmartCentres REIT (TSX:SRU.UN) and another high-yield heavyweight to buy now while rates and fears remain high.

Read more »

Growing plant shoots on coins
Dividend Stocks

Buy These 3 High-Yield Stocks With Healthy Payout Ratios

The payout ratio is a good way to understand a dividend-paying company’s financial stability, and it’s a good way to…

Read more »

Hour glass and calendar concept for time slipping away for important appointment date, schedule and deadline
Dividend Stocks

Your Guide to the Best Monthly Dividend Stocks in Canada

Three of the best monthly dividend stocks in Canada have market-beating returns despite the elevated volatility in 2023.

Read more »

data analyze research
Dividend Stocks

Passive Income: How to Earn $1,191/ Per Year Tax Free

Make $1,191/year in tax-free passive income with these top TSX dividend stocks.

Read more »