Canada Goose (NYSE: GOOS), known for its expensive winter jackets, fell substantially in 2022. Still, the stock’s valuation is more worrying than potential recession headwinds, as its multiple remains relatively high. The overall sell-off in equities explains GOOS’ decline. However, it’s also likely because investors anticipate the company’s financials to lag if a prolonged recession occurs. That said, I don’t believe that a potential recession would act as a catalyst for further share losses.
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If anything, I believe that the company will perform resiliently in such a scenario. If there is a basis that shares could bear further downside potential, in my view, that would have to do with Canada Goose’s valuation. Even as the stock has lost almost one-third of its value over the past year, Canada Goose shares still appear to be trading at a steep premium.
Why Could Canada Goose Perform Well During a Recession?
A recession in 2023 has been anticipated by many, as the macroeconomic landscape has remained highly uncertain. With Canada Goose operating in the consumer discretionaries, a reasonable expectation would be that the company would have a hard time during an economic downturn. Fancy $1,500 jackets are likely not among consumers’ top priorities in such a case.
That said, there is a strong case to be made in favor of Canada Goose during a recessionary environment, despite the cyclical nature of its products.
Firstly, affluent consumers, which embodies Canada Goose’s consumer target group, tend to be less affected by economic downturns and may not cut back on spending as much as poorer consumers. Nike’s (NYSE: NKE) sales, for instance, could decline if consumer spending were to decline in general, as it targets a wide consumer base. However, since Canada Goose targets exclusively affluent consumers, it could, interestingly enough, be less susceptible to this.
Then, don’t forget that luxury goods often serve as status symbols, and consumers may be willing to continue buying them even if their income were to temporarily decline as a way to signal their wealth and success.
Lastly, luxury goods companies such as Canada Goose tend to have a loyal customer base and a strong brand, which can help support sales during a downturn. When somebody buys a Canada Goose parka, they are not only buying it for the functional value it offers but also for the “emotional value” the brand provides.
Direct-to-Consumer (DTC) Roadmap Appears Promising
Whether or not we experience a prolonged recession this year, Canada Goose’s DTC growth roadmap appears quite promising, featuring several catalysts that should help profitability expand.
Since Canada Goose launched its e-commerce site in Canada in 2014, it expanded to an additional 13 national markets within the next five years, which has been a stepping stone for growing its DTC sales.
DTC is the best channel to generate sales from, as this is where the company can achieve the highest margins possible and avoid the middlemen of the wholesale world. DTC, of course, includes the company’s select retail locations as well. Canada Goose has been very selective with its retail footprint, slowly opening locations in key markets that uphold its premium status.
In its most recent Fiscal Q2-2023 results, the company reported that it had 45 permanent stores, up from 38 in the prior-year period. A higher number of locations and strong demand for its products led to DTC growth coming in at 15.6% despite a challenging market environment. As the company pursues further growth in its DTC segment, it should have the opportunity to expand its margins and grow profitability more efficiently.
For context, GOOS had a 67% DTC revenue mix in Fiscal 2022, and DTC gross margins stood at 76% while operating margins stood at 45%. By the end of this fiscal year, DTC, as a percentage of sales, is expected to climb to 70%-73%, which should help the company’s overall margins expand even further.
In that regard, the company expects to generate sales between C$1.2 billion and C$1.3 billion in Fiscal 2023 and adjusted earnings per share between C$1.31 and C$1.62. The midpoint of each outlook implies year-over-year growth of 14.7% and 35%, respectively. This success is despite the ongoing macro hurdles, which supports the case regarding the resiliency of luxury goods and the margin expansion narrative (as net income growth greatly exceeds revenue growth).
What is the Price Target for Canada Goose Stock?
Turning to Wall Street, Canada Goose has a Moderate Buy consensus rating based on five Buys and three Holds assigned in the past three months. At $21.83, the average Canada Goose stock price target suggests that 0.8% downside potential.
Final Thoughts: Valuation Could be a Headwind
As analysts’ price targets suggest, shares of Canada Goose could fall slightly in the near term despite the company’s impressive growth prospects. This likely has to do with the stock’s valuation, which remains elevated even as shares have already declined quite substantially.
At a forward P/E of 24x, Canada Goose is likely trading at a premium, given the rise in interest rates and overall compression in valuations. If there’s a catalyst to drive the stock lower, I suspend it would be a compression in the stock’s multiple and not a potential recession itself.
