Canada Goose Holdings Inc. (GOOS) - Get Report is doing a lot of things well. 

But it's a pricey stock and its valuation must be considered -- perhaps more so than your run-of-the-mill stock pick -- before buying it. 

For starters, here are three strengths of the company:

1. Goose has such a great brand it's able to open direct-to-consumer (DTC) stores, as well as its own website. Operating margins are also very high in the DTC segment.  

2. It's expanding into China where there is a somewhat crazed hunger for certain U.S. luxury goods.

3. In North America, sales and earnings growth rate is expanding. 

Let's look at the most recent set of facts -- the company's earnings report.

What Were Canada Goose's Earnings?

Adjusted earnings per share for the fiscal third quarter came in at 96 cents, beating analysts' estimates of 81 cents. Net income was $79.4 million. Revenue was $300.83 million, beating Wall Street expectations of $270 million.

Canada Goose raised full-year 2019 revenue guidance to a year-over-year percentage increase in the mid-to-high 30% range, up from a prior forecast for the year of a 30% increase in revenue. The company's EBITDA (earnings before interest, taxes, depreciation and amortization) margin is expected to increase by 150 basis points in 2019 from 2018.

EPS year-over-year percentage growth is expected to be in the mid- to high 40% range, up from an initial forecast of 40%. The company also said it plans to open another factory in Quebec. As capacity in the plant grows into 2020, Goose expects to employ a total of 650 people.

How Has the Valuation Of GOOS Changed?

The stock fell as much as 7% to roughly $54 a share after the earnings were released, but that came after a 10% run-up in the five days leading up to what was an exceedingly strong earnings report. It's now valued at 85 times forward 12-months earnings. Peer Columbia Sportswear Co.  (COLM) - Get Report is trading at 25 times forward earnings, but Canada Goose is in expansion mode and improving its distribution strategy. Still, investors need to watch out when everything is priced in. 

Most on Wall Street would say not all the potential growth is priced in. The average sell-side analyst price target on the stock is $64.83, representing roughly 18% upside from here. Several likely scenarios are built into that, but there are always risks. 

Sales and Earnings Growth for Canada Goose

Management is saying it expects sales to grow much more quickly than 30% year-over-year. The expected EBITDA margin expansion will help propel earnings growth to much more than 40% for the full year of 2019. 

These are excellent growth rates, especially compared to other clothing retailers. But high growth rates can't be sustained forever, and it's possible that the run-up in the stock price ahead of the earnings print reflected over-enthusiasm about the stock.

Investors should pay particular attention to sales deceleration at some point, especially as consumer spend has likely hit its cyclical peak for the past 10 years of expansion. High-end brands such as Canada Goose are sensitive to shifts in the economy because their products are marked at high prices.

On the flip side, if many Goose shoppers are middle income to wealthy, it's possible much of Goose's demographic will continue to shop for the jackets. We'll have to watch since Canada Goose has only been publicly traded since 2017, so it's hard to lean on its historical trends. 

How Do DTC Efforts Impact Stock Price?

In theory, its hard for a retail brand to have success with a direct-to-consumer distribution strategy. Success with this strategy usually means that the company has fantastic brand strength. Goose jackets are widely seen to be one for the warmest winter jackets.

D.A. Davidson & Co. senior brand apparel analyst John D. Morris summed up the company's DTC efforts in one sentence in a phone interview with TheStreet. "Because of the rising strength of the brand, it is in a better place to withstand a broad-based downturn in the department stores sector," Morris said. If Goose can build stores in the right locations near the right demographics, DTC could be a big part of its expansion. 

Perhaps just as important is the strong operating margins the DTC efforts carry. Goose's latest earnings report showed that the DTC operating margin was 60% for the quarter, while the company's overall operating margin was 35%. This means that if Goose is able to continue expanding its DTC division faster than the overall company's business, operating profit and earnings should improve as well.

In which case, maybe Canada Goose's valuation isn't so lofty. 

Canada Goose Expanding Into China

Goose's China expansion has just started, so it's hard to know exactly how that segment will perform, how much the company will actually be able to expand and how to apply that geographical segment to the company's valuation.

But if the Chinese consumer takes to Goose jackets the way it's taken to, for example, Starbucks (SBUX) - Get Report coffee, this could also be a huge opportunity for Canada Goose. 


Wall Street says the valuation isn't too high. If a sales growth slowdown occurs in 2019 and 2020, management isn't able to keep expanding the DTC strategy and the China expansion doesn't turn in strong results, the stock may finally deflate a bit (it has run up about 212% since its March 2017 IPO).