Canada Goose (GOOS) (TSE: GOOS) is likely a solid long-term investment for those looking for high-quality exposure to retail. The company has solid operations that create value for shareholders. In addition, analysts see strong upside potential going forward.
Measuring Canada Goose’s Efficiency
Being a retailer, Canada Goose needs to hold onto a lot of inventory in order to keep its business running. Therefore, the speed at which GOOS can move inventory and convert it into cash is very important in predicting its success. To measure its efficiency, I will use the cash conversion cycle, which shows how many days it takes to convert inventory into cash. It is calculated as follows:
CCC = Days Inventory Outstanding + Days Sales Outstanding – Days Payables Outstanding
Canada Goose’s cash conversion cycle is 310 days, meaning it takes the company 310 days for it to convert its inventory into cash. In the past several years, this number has trended upwards, which means the time to convert inventory to cash has been increasing – not an ideal sign. For reference, its cash conversion cycle was just 94 days in Fiscal 2015.
The main driver of the rising metric is days inventory outstanding, which has skyrocketed from 218 days in 2018 to 368 days in 2022. However, this is likely the result of the company choosing to hold onto more inventory due to supply-chain shortages because inventory levels have remained fairly steady since 2020.
In addition to the cash conversion cycle, let’s also take a look at Canada Goose’s gross margin trend. Ideally, I would like to see a company’s gross margin expand each year. This is, of course, unless its gross margin is already very high, in which case it is acceptable for it to remain flat.
In Canada Goose’s case, its gross margin has increased in the past several years, going from just 38.6% in Fiscal 2014 to 66.8% in its Fiscal 2022. This is ideal because it allows the company the opportunity to increase free cash flow or reinvest a larger percentage of its revenue into growth initiatives. Thus, I believe more weight should be placed on the company’s expanding gross margins when measuring efficiency.
Canada Goose Creates Value for Shareholders
Great companies often have great management teams that can effectively allocate capital to profitable projects. Many professional fund managers tout the importance of meeting with a company’s CEO to gauge if that person is suitable for the job.
However, we may be able to get a good picture of management’s effectiveness by simply looking at the numbers. A metric I like to look at is the economic spread, which is defined as follows:
Economic Spread = Return on Invested Capital – Weighted Average Cost of Capital
The idea is very simple; if the return on invested capital is greater than the cost of that same capital, then the company is creating value for its shareholders through well-thought-out projects. Otherwise, the company is destroying value and would be better off simply investing money into risk-free bonds.
For Canada Goose, the economic spread is as follows:
Economic Spread = 12% – 8%
Economic Spread = 4%
As a result, the company is creating value for its shareholders, implying that management is efficiently allocating capital.
What Analysts Expect from Canada Goose
Canada Goose has a Moderate Buy consensus rating based on six Buys, three Holds, and two Sells assigned in the past three months. The average Canada Goose price target of C$37.09 implies 64% upside potential.
Final Thoughts: GOOS Seems Like a Solid Long-Term Play
Canada Goose has built a solid reputation around the world as a luxury brand. Although the time it takes to convert inventory to cash has increased, it doesn’t appear to be a cause for concern since margins and revenue continue to increase.
In addition, the company’s operations create value for investors since it produces a positive economic spread. Although there might be short-term headwinds from macroeconomic uncertainties, analysts still see substantial upside potential.
