A year ago, Canada Goose Holdings (TSX: GOOS)(NYSE: GOOS) was one of the hottest stocks on the TSX, and it would end up rising 50% by the end of the year. However, 2019, has been a much different story with the stock losing more than 17% of its value thus far. Things have not been going as planned for the stock, and there are a couple of reasons why it could continue to struggle next year as well.
China-Canada relations will be back in the spotlight
As good a year as 2018 was for Canada Goose, the stock could have generated even stronger returns had it not been for a significant sell-off that began in December. Although it had nothing to do with the company’s performance, when Huawei’s CFO Meng Wanzhou was arrested in Canada, it led to calls for boycotts for Canadian businesses in China, including Canada Goose. While there has been pressure on Canada to drop the issue, it hasn’t done so, and there’s no expectation that it will at this point. In 2020, Wanzhou’s extradition hearing is expected to commence in January, and it’s likely that it will again put the relations between the two nations into the news.
And depending on the result of the hearing, relations could deteriorate even further. China has been a key area that Canada Goose has looked to for growth, and if that’s in jeopardy, it could send the stock down again. A year ago, Canada Goose shares lost around 40% of their value as a result of concerns surrounding China. While there’s no guarantee that a similar decline will happen this time around, there’s certainly the risk that a big decline could happen again.
To make matters even worse is that the protests in Hong Kong are weighing on Canada Goose stock as well. In the company’s most recent earnings, it acknowledged that the protests had impacted the company’s earnings, and that they pose a risk to the company’s sales. If that situation escalates further, then it could have investors very apprehensive about investing in Canada Goose. Throw in the Huawei scandal, and you’ve got the potential for what could be a disastrous year for Canada Goose.
A downturn in the economy could hurt sales in other parts of the world
Last quarter, Canada Goose generated sales growth of 28% from the previous year, and that’s been down from prior quarters when it was averaging around 50%. The problem is that if the economies in North America struggle and possibly head into recessions, the demand for +$1,000 parkas could start to fall sharply. One of the biggest risks as a luxury clothing company is that Canada Goose’s products could be very easy expenditures for consumers to cut out of their budgets as cash gets tighter. That could result in a lower growth rate and send the stock even lower.
Bottom line
At a price-to-earnings multiple of around 40, and the stock trading at more than 13 times its book value, Canada Goose is a very expensive stock to own given the headwinds that it could be facing in 2020. It may be a good move for investors to sell their shares in the stock before things get even worse.
