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Could This Spell Trouble for Canada Goose (TSX:GOOS) Stock?

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Canada Goose Holdings (TSX:GOOS)(NYSE:GOOS) has been struggling this year, as a disappointing quarter recently sent the stock over a cliff. And while it has been recovering since then, the stock is now facing a new issue: its marketing claims.

One of the reasons that investors and consumers have fallen in love with the brand is that Canada Goose has been associated with craftsmanship, quality, and being an ethical company. And so it’s a lot easier for consumers to justify paying high prices for the company’s expensive jackets knowing that Canada Goose isn’t just pocketing high margins.

That’s why when it was discovered that the company changed claims on its website relating to the ethical treatment of animals and information on where it gets it coyote fur from, it resulted in a drop in share price. The company has been investigated by the Federal Trade Commission (FTC) for making misleading claims, and while Canada Goose dismisses the notion that it made the changes due to the FTC, the timing of it certainly suggests otherwise.

Should investors be concerned?

The share price has been negatively impacted by these changes, but it’s too early to tell how much of an impact they will have on the company’s valuation. This has not been high-profile news, and for it to really hurt Canada Goose, we would have to see a significant response from consumers, since they are the ones that will determine whether these ethical issues will weigh down sales or not.

It could be that the vast majority of consumers remain unaware of the potentially misleading claims that the company has changed, and if that’s the case,  there may be minimal impact on the share price. However, it’s still a concern for investors because any mark on the company’s advertising could be damaging to not only current sales but also Canada Goose’s long-term growth prospects.

While the company still makes quality products that consumers love, the story of how they’re made and where they come from is a big part of the complete package, and it’s not something that customers take for granted.

It may not be for months until we see if this story gets any bigger and if sales are impacted in any tangible way. Until then, investors may want to keep an eye on the stock closely as if starts to falter and give up the recent gains that it has made, it could be a sign that big investors are wanting to distance themselves from the recent controversy.

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Bottom line

Canada Goose isn’t going to be crippled by these latest developments. But its sales could be significantly impacted, and that’s a concern for a growth stock and a company that’s already coming off a less-than-impressive quarter. In Canada Goose’s next quarterly results, we’ll have a better idea of just how well the company is doing and whether these or other issues have weighed on the company’s results.

Any time a stock is trading at high multiples like Canada Goose, there’s going to be a significant risk for a correction to take place, and that’s not something investors should take for granted.

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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.

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