This fall has been a rough time for stocks, with the S&P/TSX Composite Index down about 7.5% since September 1. But don’t tell that to Canada Goose Holdings (TSX:GOOS)(NYSE:GOOS) shareholders, as they’ve seen their holdings rise 22% in the same period.
Canada Goose’s bullish fall is part of a longer term trend that has seen the trendy coat maker’s shares rise 128% year-to-date. That’s a spicy gain, but with earnings growing at about 34% year-over-year, the top may still be a ways off. To understand why Canada Goose is on an unstoppable upward trajectory, we need to look at its growth.
Solid growth
Canada Goose has excellent growth figures, with revenue up 33% and net income up 36% in Q2. And that growth was achieved in the late-summer season, which is hardly peak selling time for winter coats.
This winter, when well-heeled shoppers go looking for fashionable coats, Canada Goose will be their most obvious choice, so I’m fully expecting the company’s Q3 earnings growth to be even better. Management seems to agree, as they’ve set their adjusted net income per share target at 40%.
Fantastic financials
Beyond its phenomenal growth, Canada Goose also has excellent financial metrics. In the trailing 12-month period, it had a 15% profit margin and a scorching hot 45% return on equity (ROE). For any value investors in the room, ROE is one of Warren Buffett’s favourite metrics, so this might be one to pay attention to.
Unbeatable brand recognition
To move away from numbers for a minute, I’d like to draw your attention to the reason why Canada Goose is doing so well.
Simply put, this is a company with stellar brand recognition driven by its perception as a status symbol. Canada Goose coats are known for their high price tag. They cost about $750 CAD on the extreme low end, and it’s more like $1000 for a coat that actually has the distinctive Canada Goose look (dark and long with a real fur hood).
These qualities have made Canada Goose controversial: the company has attracted criticism from animal rights activists, and the coats have actually been banned in a British school district for perpetuating class divisions.
But those same qualities have also make the brand popular. Because the coat is so often mentioned alongside wealth, it becomes an obvious status symbol (a “Veblen good”) that people will pay for not despite, but because of the high price. That generates excellent word-of-mouth marketing whatever the reason.
Valuation
After an article full of glowing praise for Canada Goose, I should mention one negative point: the stock is pretty expensive at current levels. It has a P/E ratio of about 96, which is fairly high, and a price-to-book ratio of 34, which is stratospheric.
However, these numbers don’t concern me all that much. First, Canada Goose is growing earnings very fast, so the P/E ratio is expected to be high. Second, I don’t think that price-to-book is the most important metric for a stock like this, as it doesn’t rely heavily on tangible assets to generate income.
