Baird upgraded Canada Goose to Outperform on Monday as Goldman and Cowen move to the sidelines
Baird analyst Jonathan Komp upgraded Canada Goose to Outperform on Monday as he believes the shares could double if it the company returns to its longer-term algorithm and recaptures the contribution being lost for now in China and Hong Kong. More bearish on the name, both Goldman Sachs and Cowen downgraded Canada Goose to Neutral-equivalent ratings. Shares of Canada Goose were under pressure last week after the winter parka maker reported third quarter results that beat expectations on international sales but cautioned that the coronavirus outbreak will have an impact on future sales and earnings.
BUY CANADA GOOSE: In a research note to investors, Baird's Komp upgraded Canada Goose to Outperform from Neutral with an unchanged price target of C$53. The analyst said he is encouraged that Canada Goose shares fell only modestly after the company cut earnings estimates greater than 20% on the coronavirus impact. Getting past the estimate reset is an important step, the analyst noted, adding that he sees "potential for the intensity surrounding several debates" to lessen during fiscal 2021. Komp also argued that with Canada Goose trading near luxury brand peers on the lowered estimates, its one-year-out downside is limited. He believes the shares "could double" if Canada Goose returns to its longer-term algorithm and recaptures lost China/Hong Kong contribution.
MOVING TO SIDELINES: Meanwhile, Goldman Sachs analyst Alexandra Walvis downgraded Canada Goose to Neutral from Buy and lowered her price target on the shares to $34 from $44. The analyst noted that the company reported third quarter results that were in line with "muted" expectations, but its guidance was cut to account for expected coronavirus disruption to Chinese consumer spending.
While Walvis assumes the potential impact on Canada Goose of coronavirus will be temporary, she sees "incremental causes for concern at the business." She noted slowing sales in the core Canadian market, and highlighted that new store openings have been a progressively smaller contributor to sales. Furthermore, the analyst said she sees growing signs that potential for long-term growth in the Chinese market may be margin dilutive. As such, Walvis is incrementally more cautious on the underlying growth story for the Canada Goose brand.
Voicing a similar opinion, Cowen analyst Oliver Chen also downgraded Canada Goose to Market Perform from Outperform and lowered his price target on the shares to $29 from $50. The analyst cited a lack of evident revenue and gross margin upside amid evolving coronavirus risks. Chen argued that ongoing uncertainty around the coronavirus may force Canada Goose into an increasingly defensive position that puts expansion plans on pause. However, while his analysis suggests tourism-related traffic slowdown, he acknowledged the brand strength remains robust and it could be a takeout target.
TARGET CUTS: In a research noted of his own, DA Davidson analyst John Morris lowered his price target on Canada Goose to $32 from $38, while keeping a Neutral rating on the shares following third quarter results. The analyst pointed out that while earnings topped expectations, gross margins missed by about 100 basis points and confirmed his "datamining reads" that the wholesale channel could present a challenge to the company. The analyst added that Canada Goose's inventory remains elevated with 58% growth relative to the 13% sales growth, though the management expects that growth to normalize in the third quarter of this year.
RBC Capital analyst Kate Fitzsimons also lowered her price target on Canada Goose to C$50 from C$62 after its "in line" holiday quarter, reflecting the company's "rebased" outlook in the fourth quarter due to coronavirus-driven Chinese consumer pullback in Asia and in tourist locations abroad. The analyst kept an Outperform rating on Canada Goose, stating that the outbreak is clouding the company's 20% revenue growth algorithm heading into fiscal year 2021, but its "superior growth" profile around its store, e-commerce, international, and new category attributes remains intact.
RESULTS: On Friday, Canada Goose reported third quarter adjusted earnings per share of C$1.08 and revenue of C$452.1M. The company also lowered its 2020 adjusted earnings per share growth view to (2.2%)-0.7% from at least 25%. Earnings per share growth guidance would result in 2020 adjusted earnings per share of C$1.35-C$1.37. Additionally, Canada Goose lowered its 2020 revenue growth view to 13.8%-15.0%, implying revenue of C$945M to C$955M, from at least 20%.
While the company highlighted its "standout performance" in Asia, it also acknowledged the current "heightened uncertainty" due to the coronavirus outbreak that is "having a material negative impact on performance in the current fiscal quarter ending March 29."
PRICE ACTION: In morning trading, shares of Canada Goose trading in New York have dropped over 3% to $30.82.
"Street Fight" is The Fly's recurring series of exclusive stories that highlight a stock or sector that is in focus amid divergent views from Wall Street analysts.