The Ratings Game: Canada Goose downgraded over coronavirus, but there are other issues as well

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Canada Goose Holdings Inc. says the coronavirus is hurting performance in the current quarter, but the stock was downgraded to market perform from outperform at Cowen for other reasons.

“A maturing Canadian business (30% of revenue) and tough retail compares are also factors,” wrote analysts led by Oliver Chen.

Slowing tourist traffic could drive a 10% to 20% earnings per share downside, he wrote in a note to clients Monday. “Brand strength remains robust and Canada Goose could be a takeout target,” said the analyst, as he lowered his price target to $29 from $50.

Read: Nike’s coronavirus-related store closures in China could result in an earnings miss, analysts say

Canada Goose GOOS, -3.50%   executives highlighted the pressure that the coronavirus is putting on business during its Friday earnings report. Traffic and sales declines, as well as travel disruptions around the world drove a downbeat forecast.

The company says there have been no supply chain interruptions.

The company now expects fiscal 2020 revenue to reach C$945 million ($709.8 million) to C$955 million, below the C$1.18 billion FactSet forecast. And adjusted EPS is expected to be C$1.33 to C$1.37, also below the C$1.81 FactSet guidance.

“Nothing about this situation impacts our fundamentals and our future growth potential remains intact. …..We believe we have the financial and brand strength to ride it out with confidence,” said Dani Reiss, chief executive of Canada Goose, on the earnings call, according to a FactSet transcript.

Cowen analysts are concerned about the duration of the coronavirus, but the brand’s reliance on its core market is another key factor. Canada growth could slow to the low-to-mid-single digit percentage growth range “as wholesale doors move toward 2,000, broader environment pressures remain, and high-productivity direct-to-consumer markets (Toronto, Vancouver, Calgary) approach comp and new-door maturation points,” analysts said.

Canada Goose is sold at 2,227 wholesale points and has 11 retail stores, according to the company’s website.

A halt to Chinese expansion, and the need to go “beyond the parka” in order to become a lifestyle brand are other worries.

On a brighter note, Baird upgraded Canada Goose and has it on its “Fresh Pick” list for three key reasons: strong e-commerce performance as well as healthy sales at stores that have been around for a while; normalizing of inventory growth; and brand maturity, with analysts at Baird more upbeat about the company’s non-parka business.

“Direct-to-consumer growth should bounce back post-coronavirus, and Canada Goose retains substantial opportunity, providing major ongoing sales/margin tailwinds,” analysts led by Jonathon Komp wrote.

For comparison, Baird notes that Moncler has about 10 times the number of stores.

See: Ralph Lauren has closed about half of its stores in China due to the coronavirus

Susquehanna Financial Group is also positive that the headwinds Canada Goose faces will be “short-lived” and recommends investors “buy the weakness.”

Analysts rate Canada Goose stock as positive with a C$50 price target.

Canada Goose has an average stock rating of overweight and average price target of $52.24, according to 13 analysts surveyed by FactSet.

“[D]emand for the Canada Goose brand remains strong and long-term top- and bottom-line growth prospects are intact,” analysts led by Sam Poser said.

“Canada Goose remains one of the few true growth stores in the consumer discretionary sector.”

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Canada Goose stock is down 3.2% in Monday trading, and has slumped more than 45% over the past year. The Consumer Discretionary Select Sector SPDR Fund XLY, +0.69%   has gained 20.3% over the past year, and the S&P 500 index SPX, +0.37%   has gained 23.1% for the period.

“We are confident that Canada Goose has either found its floor or is very close to doing so,” Susquehanna analysts wrote. “We would be aggressively buying at this level, as valuation is severely depressed offering an attractive risk-reward.”

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