The Goose Takes Wing

This week we have the IPO of Canada Goose (NYSE:GOOS). If you live in NYC or Boston you can’t help but notice that everyone seems to be wearing these parkas.

How does a company that’s been around since 1957 suddenly make such an impression? Here are a few facts to know about the company and the deal that we pulled out of the GOOS IPO roadshow transcript:

  1. Until recently GOOS was a private-label maker of down-filled outerwear for other brands.
  2. The third generation CEO came in and decided to capitalize on the “authenticity” of the company and create their own consumer brand. They would be the “Land Rover of clothing.”
  3. They have had great success in doing so by leveraging their heritage and “Made in Canada” operating model. Their coats have also been worn by some of the rich and famous and appeared in TV shows and popular films. They took a page out of the early Under Amour (UA) playbook.
  4. Management claims that by building up a massive supply chain it would be “nearly impossible” to replicate their capabilities.
  5. Despite all the “like owning a piece of Canada” rhetoric they decided to make gloves and hats offshore and their new knitwear line will be made in Europe.
  6. The brand has a plenty of international expansion opportunity. They are only partially present in the US and have nearly greenfield opportunities in many other countries around the world.
  7. Margins are expanding thanks to the direct-to-consumer business which has grown from nothing to $100M or about 25% of total sales. This part of the business will dominate growth, further expanding margins.
  8. The company is launching their first casual knitwear collection this fall. For the first time they will be a multiple season clothing maker.
  9. Business is highly seasonal now with 75% of revenues in Q2 and Q3. Wholesale orders are made in advance giving management strong visiblility.
  10. Over time they expect to open more of their own stores (14 to 16 more in the next few years) and continue to build their e-commerce revenue.
  11. A large chunk of the IPO proceeds will be used to pay down debt and give the company the flexibility to grow and make capital investments.

Our Thoughts

It’s worth noting that this is a PE buyout (Bain) trying to get liquid so most fo the deal is secondary. The portion the company is selling will go mostly to debtholders.

Here are the other parts of the story that create a little worry:

  1. As GOOS builds their own brand they will be competing with their private-label customers. As they grow that part of the company it could create conflicts with their other customers.
  2. How many GOOS products will people really buy? A parka makes sense but selling them their “second and third Canada Goose coat” has not really been tried.
  3. Knitwear will be brand new this fall and untested.
  4. Their main shareholder (Bain) will be looking to exit and take gains on GOOS shares going forward, creating some ongoing selling pressure.

They are trying to price Canada Goose a fairly high valuation. With about a 100m shares outstanding post-IPO the market capitalization would be $1.5B at the $15 mid-point. Using a $400M revenue figure as an estimate for the TTM ending in March that puts the stock at 3.75x sales.

So GOOS is expensive for a clothing maker. Compare it to Under Amour  (UA) at 1.7x, Columbia Sportswear (COLM) at 1.62 and the mighty Nike (NKE) at 2.9x.

To be fair GOOS is growing much faster and deserves a premium. But the valuation prices in a fair amount of success already with some expansion ideas that have yet to be executed. Finally clothing is not an easy category to generate consistently high ROIC from.

This will be a key stock to watch when the six-month share lockup expires. It will be coming just as the new fall knitwear line is coming to market.

 

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