Wells Fargo Downgrades Canada Goose, Risk-Reward Profile Isn't As 'Compelling' As It Is Used To Be

The bullish case for Canada Goose Holdings Inc GOOS, a Canada-based maker of apparel and accessories for cold weather, is "not as compelling as it once was," according to Wells Fargo.

The Analyst

Wells Fargo's Ike Boruchow downgraded Canada Goose from Outperform to Market Perform with a price target lowered from $80 to $68.

The Thesis

Canada Goose's brand and outlook remains compelling, but Boruchow said the bullish case is difficult to make compared to the past when the stock was cheaper and upside to expectations "seemed easier to come by." Specifically, on a price-to-sales basis the stock is trading at 7.4 times, which represents the highest multiple any other brand has ever traded at except for Lululemon Athletica inc. LULU immediately following its initial public offering.

One stock that historically came close to Canada Goose's P/S multiple is Italian apparel maker Moncler SpA at 6.9 times price-to-sales basis. Assuming Canada Goose matches Moncler's revenue and margin structure within six years and then discounting the cash flows to Canada Goose's present value derives a current enterprise value that's 15 percent to 25 percent lower than what it is today.

Social media and search trends shows a recent slowdown in activity over the 2018 holiday quarter with notable weakness in December. The analyst said this should be "somewhat concerning" for a company that's required to demonstrate consistent momentum and robust growth for investors to justify the premium valuation.

Price Action

Shares of Canada Goose were trading lower by 7.4 percent at $45.91 Thursday morning.

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