Canada Goose Holdings Inc (TSX:GOOS)(NYSE:GOOS) announced on Tuesday that it would be opening six stores later this year. Three stores would open in Canada, two in Europe and one in the United States. However, for a company that’s done so well padding its profits thanks to a growing direct-to-consumer (DTC) segment, it’s hard not to question whether this is the right move for the company.
In the release, President and CEO Dani Reiss explains that the expansion is to allow customers to be able to explore all of the company’s offerings: “In addition to growing our footprint in Asia, expanding in Europe and broadening our presence in North America enables our fans to explore all of our collections in a unique and engaging environment and discover the story behind our products, unfiltered.”
Canada Goose has carefully selected its locations to be in prime areas, such as Milan’s fashion district, the Mall of America in Minnesota and the West Edmonton Mall in Canada. Currently, the company has just 11 stores on three different continents.
Will this weigh down the company’s margins?
While I understand that Canada Goose is looking to reach more customers, especially with the novelty around its “cold room,” which will simulate cold weather conditions, the problem is that it’ll come at a significant cost. One of the big reasons retailers have struggled, and some have gone out of business is that the overhead is too high and the margins too low in a retail environment.
Investors have been bearish on retail stocks for some time now, and with many high-profile bankruptcies in recent years, it has many people worried about who might be next. And while that’s not a risk for Canada Goose today, it underscores just how dangerous it is to get into retail.
Although Canada Goose is a high-end retailer, that’s not a guarantee that it’ll be able to avoid those problems. A good example is Hudson’s Bay Co, which struggled to the point that it started selling off one of its prized locations for the sake of generating cash. While Canada Goose might be feeling confident that it has a lot of fanfare around its brand, it can’t underestimate the effect this will have on its margins and overall profitability.
Canada Goose increased its risk and exposure to the retail market today, and for me that makes it a worse buy. I’m sure it’ll generate a lot of traffic, and there will be profits generated from it, but it’s likely going to be at a much lower margin.
What made the stock very appealing to me was that it was growing sales at an incredible rate and because the DTC segment was doing so well, which resulted in a bottom line that was growing at a much better rate.
Canada Goose was an expensive stock before today’s news, and now it appears to have gotten worse. The stock was up more than 3% on the day, and while it’s a good sign for the company that investors were excited about the developments, I wouldn’t consider buying the stock today.
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 David Jagielski has no position in any of the stocks mentioned.