Canada Goose Holdings Inc.

Canada Goose Holdings Inc. (TSX: GOOS) is a leading luxury apparel manufacturer company which designs, manufactures, distributes and retails premium outerwear for men, women, and children. The products are sold through select outdoor, luxury and online retailers and distributors across America, Europe, Asia etc. 

Key Updates:

• New product launch: During the third quarter of FY22, the company launched its first-ever Footwear Collection, with two innovative styles for men and women: the Snow Mantra Boots and the Journey Boots. The above marks the company’s presence within the footwear segment and would cater to the segments like adventurers, athletes, researchers, cinematographers etc.
  

• Growth from eCommerce segment: The company is witnessing strong traction from its online segment and reported a whopping 47% y-o-y growth for the first half of FY22. Notably, DTC revenue grew to CAD 112.6 million during the period, as compared to CAD 56 million in pcp. Considering the recent purchase pattern of the consumer, we expect the above momentum to continue in the coming days, which would support the upcoming performance.

• Strong traction from the wholesale segment: The company derives its majority revenue from the wholesale segment, while the company witnessed stupendous growth from the above segment aided by higher sales volume coupled the timing of shipments to the wholesale partners. Notably, the company reported its revenue of CAD 173.7 million in H2FY21, compared to CAD 127.2 million in pcp.

Risks: Extension of government’s restrictions for the closure of stores would be likely to dampen the company’s sales volume and hence the overall performance of the company. 

Q2FY22 Financial Highlights:

• GOOS announced its quarterly result, wherein the company posted its revenue of CAD 232.9 million, higher than CAD 194.8 million in pcp. The growth was driven by higher sales from the existing retail stores coupled with strong performance from e-Commerce segment, followed by positive impact from the retail expansion.
• Gross profit surged to CAD 135 million, higher than CAD 94.2 million in pcp, thanks higher revenue coupled with slightly lower costs of sales.
• The quarter was marked by higher SG&A expense which resulted to a lower operating income of CAD 11.3 million, as compared to CAD 15.1 million in pcp.
• Net income stood at CAD 9 million, slide from CAD 10.4 million in pcp.

Q2FY22 Income Statement Highlights (Source: Company Report)

Valuation Methodology (Illustrative): Price to CF based

Analysis by Kalkine Group 

Stock Recommendation:

During the second quarter of FY22, the company reported increase in retail traffic, normalized store operating hours and increased occupancy limits as compared to the previous quarter. Continuation of the above trend is likely to support the upcoming sales volumes. We have valued the stock using Price/CF-based relative valuation approach and considered peers like Nike Inc, Aritzia Inc, and arrived at a target price offering double-digit upside potential (in % terms).  Hence, we recommend a ‘Buy’ rating on the GOOS stock at the closing price of CAD 47.20 as on January 04, 2022.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Summary Analysis

One-Year Technical Price Chart (as on January 04, 2022). Analysis by Kalkine Group

Martinrea International Inc

Martinrea International Inc (TSX: MRE) is a Canada based manufacturer of metal parts and fluid management systems. Its products are used primarily in the automotive sector by the majority of vehicle manufacturers. 

Key highlights

• Promising long-term outlook: Supply chain difficulties and cost inflation of labor, materials, and energy are currently wreaking havoc on the automotive supply base, making Q3 2021 difficult for the company. However, we estimate that the company's plant launch activities, as well as the expenditures associated with it, will begin to stabilize in 2022 and 2023. Once supply constraints are addressed and production normalizes, these launches are likely to provide future sales growth that outpaces industry production growth over a multi-year timeframe, as well as good profits.
  

• Portrayed objectives of FY23: The company remain confident in meeting its 2023 objectives, which call for total sales, including tooling sales, of CAD 4.6 to CAD 4.8 billion, with an adjusted operating income margin above 8% and Free Cash Flow exceeding CAD 200 million.

• Trading at discounted valuations: The company’s shares are available at an NTM EV/EBITDA multiple of 4.4x compared to the industry (Consumer Cyclicals) median of 7.3x. while on NTM EV/Sales multiple the stock is trading at 0.5x compared to 1.3x. This implies that the shares are trading at deep discount against the industry. The stock is undervalued on multiple valuation parameters. The table below reflects the picture.

Source: REFINITIV, Analysis by Kalkine Group

• New Business awarded: During the quarter, the company received new business worth roughly CAD 40 million in annualized sales at mature quantities, bringing the year-to-date total awards to around CAD 210 million.
  

Risks associated with investment

Many risks are linked with the nature of the company's operation that might obstruct its performance. Some of these risks include a drop in demand from automotive manufacturers, supply chain disruptions, any technological development, increasing pricing of raw materials and commodities, etc. The company also hold a heavy debt in its books. 

Financial overview of Q3 2021 (in thousands of Canadian dollars)

Source: Company Filings

• The company’s reported revenue in Q3FY21 was down by 12.6% on a YoY basis to CAD 848.5 million against CAD 971.0 million in the previous corresponding period. The lower revenue was mainly driven by year-over-year decrease in the North America and Rest of the World operating segments, partially offset by a year-over-year increase in the Europe operating segment.
• On the back of higher cost of sales, gross margin plummeted to 5.9% in Q3FY21 vs. 15.6% in pcp, as a result its gross pross declined drastically to CAD 50.0 million compared to CAD 151.4 million in Q3 2020.
• The company reported operating loss of CAD 16.2 million against a profit of CAD 75.5 million in pcp.
• Net loss in the reported period stood at CAD 17.1 million compared to profit of CAD 45.6 million, partially offset by income tax recovery of CAD 5.5 million.

Valuation Methodology (Illustrative): EV to EBITDA

Analysis by Kalkine Group

Stock recommendation

The third quarter for the company was challenging, as supply chain issues and cost inflation of labour, materials and energy, are currently wreaking havoc on the automotive supply base. On a positive note, vehicle demand remains very strong, and vehicle inventories are at record lows. Furthermore, the company’s current launch activity is expected to generate future sales growth as well as strong margins once supply bottlenecks are removed, and production normalizes. Even it remains confident in meeting its 2023 objectives, which call for total sales in a range of CAD 4.6 to CAD 4.8 billion, with an adjusted operating income margin above 8% and Free Cash Flow exceeding CAD 200 million, which is a significant plus. Therefore, based on the above rationales and valuation, we recommend a “Speculative Buy” rating at the closing price of CAD 11.57 as on January 4, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached. 

Technical Summary Analysis

One-Year Technical Price Chart (as on January 4, 2022). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.