I’ve been a pretty huge bull on Canada Goose Holdings Inc. (TSX: GOOS)(NYSE: GOOS) in the months following its IPO last year, but of late, I’ve become skeptical of the stock’s valuation after its impressive rally and the fact that it’s about to enter a seasonally weak period. Canada Goose refuses to sell swimwear for the summertime after all, even though I’m sure people would still pay hundreds of dollars for swim trunks or bikinis.
In any case, I’ve praised both Canada Goose’s long-term growth plan and CEO Dani Reiss on multiple occasions, but was caught off-guard (like most others) with the blowout quarter that resulted in an upward spike of 43% in just two days!
That’s remarkable and goes to show that with such explosive growth names, valuations sometimes need to take a backseat — assuming you’re a young and aggressive investor who understands the risk/reward trade-off.
If you’re a prudent investor, you always look for better entry points, but with such explosive growth powerhouses, it’s important to remember that such dips may often don’t happen after all. So, it’s usually a good idea to at least get some skin in the game with a stock trading near all-time highs, as long as you’re not freaked out if the stock dips. In that scenario, you should be euphoric about the opportunity to buy more shares of a company that you’re still bullish on over the long haul.
Canada Goose: a low-tech growth juggernaut that’s just scratched the tip of the iceburg
Canada Goose has built a very strong brand for themselves that has enabled them a profound amount of pricing power. And unlike many other firms within a monopolisticly competitive market, Reiss hasn’t loosened up the pursestring when it comes to the ad budget in order to further differentiate its product from its rivals, most notably, Helly Hanson. The man is all about growing in a profitable fashion, so he’s not itching to put every dollar to work in order to build the brand. Quite remarkably, Reiss’ product differentiation strategy has been able to give his firm the absolute best bang for its buck.
Instead of blowing excess cash on ads, Reiss made a wise decision in forming a relationship with film producers such that the famous Canada Goose jacket is now essentially the official winter coat of Hollywood who proudly don the parkas on winter sets (think Daniel Craig and Spectre with the scenes in the Austrian alps).
Sky-high margins to go with astronomical international growth through physical and digital direct-to-consumer (DTC) channels? Sounds like a formula for massive long-term growth. With Canada Goose about to break into the Chinese market, more upward spikes like the one experienced on June 15 may be in the cards for future quarterly releases.
China is a pretty hot market – literally. So, how is an outerwear company going to thrive?
Well, the products go beyond the parkas. With a new line of pringwear and the potential for other seasonal goods (think autumn, maybe summer), affluent Chinese consumers will have more of a reason to scoop up even more of their favourite brand regardless of the season.
The Canada Goose brand is so powerful that many “gooses” that I’ve spotted are sporting the parkas in the warm Vancouver spring months! As you may be aware, Vancouver is essentially the Jamaica of Canada, and the fact that consumers are dying to sport their status symbol parkas in the warmer months speaks volumes about just how much loyalty and power there is behind the Canada Goose brand.
The company could easily release a new line of $1000+ outerwear, and consumers from across the globe will scoop them up without hesitation. Economists often refer to this type of luxury good as a “Veblen good” — a good whose demand increases as its price does.
Bottom line
The blowout quarter served as a huge lesson for many value investors jumping into the high-growth game.
If you’ve got an explosive growth winner, hang onto it and just trim it subtly if you think the valuation has become frothy. Often such explosive growth names possess absurd valuation multiples indefinitely!
Stay hungry. Stay Foolish.
