Early this morning, Canada Goose Holdings (TSX:GOOS)(NYSE:GOOS) reported lower-than-expected results and lowered its full-year outlook. This came as a huge surprise to the market, and investor have sent the shares down more than 15% this morning.
What happened to Canada Goose stock?
The third quarter of 2022 was impacted by new Omicron variant outbreaks and restrictions. This translated into the lower-than-expected revenue in the quarter. It also translated to a 4.6% reduction in the company’s revenue forecast for the full year. Obviously, this has created a domino effect and a deterioration in all metrics as we move down on the income statement.
The bottom line is that Canada Goose’s EPS expectation for the full year is now 15% lower. The company is calling for EPS to be in the range of $1.02 to $1.11 versus the prior expectation that EPS would come in between $1.17 to $1.33. This is clearly a big blow to the company and the stock.
So what?
Upon closer examination, we can see the Canada Goose is, in part, a victim of its lofty valuations. But this is nothing new. This retailer has been very richly valued since the start of its trading. So, while the company has come in below what was built into its stock price, things are not so bad. In fact, Canada Goose posted a healthy 24% rise in revenue. Similarly, the company saw a 40% increase in EPS and for the full year, EPS is expected to grow by 39%.
So, this leads me to my next point. Basically, valuation is so important. As Canada Goose stock has shown, even a great result can lead to a catastrophic fall if the expectations that are priced into the stock are too high. So, as the stock gets hit, let’s keep in mind that this is still a great business. The issue here is that valuation needs to be brought back down closer to reality. The stock price action today is doing just that, so we can now wait patiently for a good entry point into a great business.
Now what?
As investors digest this earnings miss and these lowered expectations, we have to remember the growth that Canada Goose continues to experience. As per the CEO, the company is “on track to exceed $1 billion in revenue for the first time ever”.
The earnings miss is a result of a temporary event, that is, the omicron virus. This type of miss usually results in a good opportunity to buy. Canada Goose stock’s valuation is falling. The company is already recovering from the temporary blip that the virus has created. Keep in mind that while the stock remains expensive on today’s earnings, it only trades at 20 times 2023 expected earnings.
