Canada Goose: A Potential Acquisition Target Now (NYSE:GOOS)

China’s lockup and general macro concerns are to blame for Canada Goose’s dismal stock performance.

We think that Canada Goose (NYSE:GOOS)(TSX:GOOS:CA) suffered from the COVID lockdown in China in addition to the recent downturn for luxury products driven on by macroeconomic worries. The company’s stock performance has also been inconsistent; shares bottomed out at $12.94 in late March 2020, but have since increased by almost 200% before recently falling once more to $19.4.

Consumer opinion on the product’s popularity is inconsistent

The popularity of Canada Goose is a mixed bag, according to customer reviews. Some customers are impressed with the warmth, style, and quality of the jackets, with one customer stating that they “fell more in love with the coat, the style, the fit, the beautiful fur, the warmth.” On the other hand, some customers have had a negative experience with customer service, with one reviewer stating that “the customer service is very rude” and that “most of the agents are Chinese and cannot even speak proper English.”

Performance and functionality of the product create a business moat

Despite these mixed reviews, professional experts consider Canada Goose products to be of high quality. The company is known for producing premium, high-performance outerwear using the best materials and technology. The brand’s popularity can also be attributed to its Hollywood cachet, as it is the unofficial parka for film crews working in colder environments.

Canada Goose is committed to maintaining outstanding craftsmanship and keeping 100% of their production in Canada. This focus on quality and craftsmanship has helped the company establish a strong brand image as a top provider of cold weather outerwear.

Despite some criticism, the performance and functionality of Canada Goose products still play a crucial role in the brand’s success. Its strength in functionality could build a competitive advantage and help it compete with other brands in the market.

A Potential Acquisition Target

With Estée Lauder (EL) recently acquiring Tom Ford for an enterprise value of $2.8 billion, the acquisition wave in the luxury market is expected to continue. In comparison to other luxury brands, Canada Goose’s stock is currently trading at a substantially lower 2.7x EV/Sales ratio and 10.2x EV/EBITDA ratio. The acquisition is likely to be value accretive to the acquiring luxury conglomerate.

This, coupled with its niche market position, makes the brand an attractive acquisition target for private equity firms or luxury conglomerates.

Valuation: Cheap and Getting Cheaper

Bain Capital acquired 70% of Canada Goose in 2013 for $250 million, implying a valuation of $357 million for the company. At that time, Canada Goose had annual sales of roughly $188 million, giving Bain’s purchase price a price-to-sales ratio of 1.9x. As of February 12, 2023, Canada Goose’s stock price has continued to drop and is approaching its initial public offering [IPO] price of $18. It is currently trading at 2.3x price-to-sales ratio, which is close to its 5-year low and not far from 2013 acquisition multiple.

Strong Fundamentals: More Than Just a Local Brand

Canada Goose has taken steps to appeal to consumers by discontinuing the use of wolf fur in its products. Despite a 1.6% decline in revenue in Q3 2022, the brand still generated a gross margin of 72.2%, a 160 basis point expansion.

Its diverse geographic revenue streams confirm that it is no longer just a local Canadian brand, but a globally recognized name. This lowers the risk of integration for luxury companies considering acquiring Canada Goose.

The brand’s direct-to-consumer [DTC] channels account for 78% of its revenue, reflecting its strong organic traffic and loyal customer base. Canada Goose has also positioned itself as an outdoor brand with the acquisition of outdoor footwear company Baffin. This gives luxury companies looking for product category expansion a good entry point and Canada Goose the opportunity to benefit from the luxury conglomerate’s strong distribution channel to improve its wholesale revenue.

We believe, with its cheap valuation and strong fundamentals, Canada Goose is likely to become a target for acquisition in the near future. Its diverse revenue streams, loyal customer base, and recent expansion into the outdoor market make it an attractive opportunity for luxury conglomerates looking to expand their product offerings and reach a wider audience.

Risk

China-US relationship

Canada Goose has stated that it is committed to growing its market share in China. However, the company’s expansion goals can be impacted by the tight relationship that exists right now between the US and China.

But tensions have been rising between the US and China in recent years over a variety of issues, including trade, technology, and human rights. The garment companies wishing to conduct business in China don’t appear to be in immediate danger from this situation.

Nevertheless, Canada Goose might suffer if anti-Western sentiment rises in China.

High interest rate environment

A high borrowing rate environment might potentially hurt Canada Goose’s chances of being acquired. Leveraged buyout (LBO) activity is less appealing to private equity companies when interest rates are high because borrowing money is more expensive. However, Canada Goose’s high EBIT margin of 15.1% may act as a cushion for both lenders who concentrate on credit risk and investors seeking a return.