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:

• Restart of Production: The company has restarted the production of outerwear alongside PPE across all its facilities during the second quarter of FY21, which is a key positive. This indicates a gradual revival of the demand scenario. The company paused its production process during March 2020 due to the restriction imposed on account of COVID-19.
• Product Innovation: The company has a solid history of strong product offerings and would continue to invest in innovation and the development of new products as per the changing customer preferences, which is necessary to stay in the competition. Moreover, the company would continue to sell Baffin branded footwear through Baffin’s own distinct sales channels. Furthermore, the company is strategizing to develop a separate Canada Goose footwear leveraging Baffin’s infrastructure, processes, and technology. We believe this would improve the company’s business prospects in the coming days.
• Expansion in direct-to-customer channel: The group has a strong presence across the globe and would continue to expand its retail and e-commerce access globally, which is a key positive. The products offered by the company are well accepted by the customers, and the long-term prospects of the business remain positive. The corporation registered a 10% y-o-y growth in Global eCommerce revenue during Q2FY21, supported by impressive performance in September 2020. We believe the above trend is likely to sustain in the coming days, as most of the customers are opting for home-delivery option.

Q2FY21 Financial Highlights:

• GOOS announced its quarterly results, wherein the company posted revenue of CAD 194.8 million, significantly lower than CAD 294 million in the previous corresponding period (pcp). The decline was primarily attributable to lower DTC revenue (CAD 46.2 million versus CAD 74.2 million in Q2FY20), while wholesale revenue slide to CAD 118.5 million, from CAD 218.1 million in pcp. The performance was hindered due to a reduction in the planned order book and requests from partners and international distributors on account of COVID-19 pandemic.
• Gross profit slumped to CAD 94.2 million, from CAD 160.4 million in Q2FY20. The decline was primarily due to lower revenue, partially offset by a decline in cost of sales (CAD 100.6 million versus CAD 133.6 million in pcp).
• The company’s operating income stood at CAD 15.1 million, as compared to CAD 75.4 million in pcp, due to lower gross profit. Operating margin slumped to 7.8% from 25.6% in Q2FY20, primarily due to a higher SG&A expense in terms of revenue (32% versus 25% in pcp).
• The company posted a net income of CAD 10.4 million, considerably lower than CAD 60.6 million in the previous corresponding period.
• GOOS reported a cash balance of CAD 156.3 million, while total assets were recorded at CAD 1,377.6 million.                     

Q2FY21 Income Statement Highlights (Source: Company Reports)

Risks: 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.

Valuation Methodology: P/CF Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:

The company is focusing on digital channel to improve its topline. Further, the company is witnessing decent traction in China. The group is focusing on product innovation, which is likely to improve the business prospect in the coming days. We have valued the stock using Price/CF based relative valuation approach and considered peers like VF Corp, Under Armour Inc etc., and arrived at a target price offering low double-digit upside potential (in % terms).  Hence, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 36.02 as on January 5, 2021.

GOOS Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Morneau Shepell Inc.

Morneau Shepell Inc. (TSX: MSI) is a human resources company that provides consulting and administrative services in four segments: well-being, administrative outsourcing, consulting, and absence management. 

Key Highlights:

• Higher Operating Cash Flows: The company reported higher cash provided by operating activities of CAD 96.731 million for 9MFY20, as compared to CAD 57.846 million, a year ago. The increase was driven by improved profitability coupled with lower working capital.

• Elevated Recurring Revenues: The company has a solid operational metrics and has shown improvement in repetitive incomes, which indicates higher acceptability of the company’s products. Increase in the recurring revenues ensures revenue growth and stability.

Recurring revenue Trajectory (Source: Company Presentations)

Introduction of Digital Mental Health Solutions: The company would provide access to therapist guided AbilitiCBT ^TM programs through Shoppers Drug Mart stores and the PC Health app in order to support patients with mental health challenges. With the above collaboration, MSI would offer a complete suite of digital cognitive behavioural therapy (CBT) programs that is likely to enhance additional business prospects for the company.

Q3FY20 Income Statement Highlights:

• MSI declared its quarterly results and posted operating revenue of CAD 240.300 million, as compared to CAD 223.980 million in pcp. The increase was driven by strong growth across Well‐Being Solutions and Administrative Solutions, partially offset by lower income from Health and Productivity Solutions.
• Total operating expense stood at CAD 235.931 million, as compared to CAD 213.050 million in the previous corresponding period (pcp). The increment was primarily due to higher salaries, benefits and contractor costs (CAD 167.162 million versus CAD 153.305 million in pcp), increase in depreciation and amortization (CAD 28.931 million versus CAD 24.155 million in pcp) coupled with inclusion of Sublease loss provision amounting CAD 10.300 million, partially offset by a decline in the other operating expenses (CAD 29.538 million versus CAD 35.590 million in Q3FY19).
• The group reported a loss before income taxes at CAD 1.929 million, as compared to a profit of CAD 2.558 million in Q3FY19.
• The company posted a net loss of CAD 2.069 million, against a net profit of CAD 1.332 million in the previous corresponding period.
• MSI posted a cash balance of CAD 5.419 million, while total assets stood at CAD 1,542.080 million.       

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risk: Despite an increase in the revenue, the company incurred higher operating costs and has reported a net loss during Q3FY20. Continuation of the above trend would dampen the company’s profitability and cash flows.

Valuation Methodology (Illustrative): Price to Earnings based

(Note: All forecasted figures and peers have been taken from Thomson Reuters).

Stock Recommendation:

The company’s overall growth has been supported by the acquisition of Mercer during FY19 as it has a strong presence in health and defined benefit pension plan administration business. The company reported a growth in the Adjusted EBITDA and Adjusted EBITDA margin at CAD 49.634 million and 20.7% in Q3FY20, respectively as compared to CAD 43.811 million and 19.6% in pcp. The company has expanded into the rapidly growing telemedicine market to provide the employees of Canadian clients and their families with easier and more convenient access to digital health care services. We have valued the stock using price to earnings based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered peers like TMX Group Ltd, AGF Management Ltd and People Corp. Hence considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 30.84 on January 5, 2021.

MSI Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

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