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Canada Goose shares jump 8% on Cowen upgrade

Canada Goose shares gained 8% on the session following a bullish call from Cowen’s Oliver Chen, who upgraded the stock to ‘outperform’ from ‘market perform’. The bullish call comes as the firm thinks Canada Goose is well-positioned as an outdoor resource amid the pandemic, a leading brand in stores, and as a global luxury beneficiary as China improves faster. Oliver Chen joins The Final Round to discuss.

Video Transcript

MYLES UDLAND: All right, welcome back to "The Final Round" here on Yahoo Finance. Time now for our "Call of the Day." Today we are talking about Cowen's latest note on shares of Canada Goose. The firm upgrading stock to outperform from a market perform rating, raising their price target on shares to $30. That is up from $23 per share.

And we're joined now by Oliver Chen, the analyst behind the call. So Oliver, let's just kind of start with the view on upgrading an outdoor wear company in a time when everyone is expecting, or are many of us are expecting to be indoors for this winter at least, given the unique circumstances we're in, and what you see in the stock here.

OLIVER CHEN: Yeah, Myles, thanks for having me, excited to be here. We upgraded shares of Canada Goose. The big story here, is multifaceted. China is a big part of the business. China can move to 40% of the business from 20% currently. Also, this brand is a big part of the business too. It's a premium lifestyle brand that really stands for warmth and function, and consumers will be spending more time outdoors. We think that's important.

We also believe that consumers will gravitate towards big, well-known brands, which can get bigger. And our survey results point to consumers really liking this brand and it growing in momentum. So China, the brand position, as well as a longer term opportunity outside of outerwear, and valuation, those are all factors that led us to this upgrade.

SEANA SMITH: Hey, there, Oliver. Well, that's the big question here, and I think it's the crux of the issue, is that we're in the midst of a pandemic. We've seen a number of companies over the last 24, 48 hours announce mass layoffs. So when you take that into account, people are strapped for cash at this point, more focused on saving. Do you see that having any potential impact on sales here, at least in the short term?

OLIVER CHEN: That's definitely something we're watching. And what we're seeing in retail though, is really the story of bifurcation, because you really do have a lot of pain in the consumer. But the luxury consumer and luxury spending and spending at the high end is still pretty strong. These cuts are expensive. So a Canada Goose coat is $600 to $700 or more. And it's a highly considered purchase. So at the higher end, there has been some resilience, as that comes down to both saving, as well as a higher end consumer and how that higher end consumer feels.

On the other end of the spectrum, we love ideas like Walmart and Costco and Target, because of the great value, and because of what you're speaking to. So there's bifurcation here. But at the end of the day, the Canada Goose story is also a global story. And there's been more positive momentum in other countries, like China, as well.

DAN ROBERTS: Oliver, Dan Roberts here. Your point is well taken about China, so I don't want to be focusing too much on America. But just stick with American retail and the point that Seana raised about the price here, I would say that before the pandemic, we saw a little bit of squeezing happening already between the bifurcation you talked about.

I mean, there's Walmart and Target on one end. We've talked a lot on this show about the huge e-commerce gains those chains have seen during the pandemic. And then there's luxury premium brands on the other. Canada Goose, Lululemon, which has flown. Would you say that the pandemic is going to hasten the kind of squeezing of the names that fall in the middle?

OLIVER CHEN: Yeah, that's definitely true, Dan. I think it's been a really tough environment. And as retail is consolidating, or that's a nice way of saying plenty of retailers are going bankrupt and there's store closures. Others are surviving and taking share. What's also happening in the land of brands, is that bigger brands are better capitalized and can do more advertising and promotions, and can also withstand this crisis better.

Taking you back to Canada Goose, even though this has been a horrific year that we've had, they're still going to generate positive free cash flow this year. We're modeling about $80 million. They'll generate double digit EBIT margins, just because this is an expensive product and they'll have a better back half, in our view. But that's happening in retail at large.

And what happened in retail also, was that retailers, such as Macy's and Nordstrom's and other department stores, cut inventories very, very quickly and aggressively. So in fact, the inventory positions have been better than feared lately, and promotions have been better than feared. And the retailers are looking at their biggest and best and most prestigious brands in terms of the ones that they're taking bets on and buying into the season, as are consumers. In times of need or safety and tension, consumers do gravitate towards the brands they trust. And Canada Goose does stand for function and warmth.

MELANIE HAHM: Yeah, it's kind of refreshing to hear that a brand stands for two of the things that are quite functional. It's not necessarily lofty ambitions trying to be more than perhaps a coat company. But when you think about the revenue mix that you lay out in your note, according to your analysis, about 55% is direct to consumer, with the rest coming from wholesale channels. How do you expect that sort of breakdown to change and evolve, if at all? Do you expect more DTC over the next year or so? Could that number really rise here?

OLIVER CHEN: Yeah, as we look across luxury in retail, and what Canada Goose will do, yes, expand the direct to consumer percentage over time by opening more stores, as well as growing e-commerce. And that will happen over time. And that's the hallmark of a great luxury slash premium brand, is really having that direct connection to the consumer through stores or online.

So that will happen, especially as Canada Goose grows stores globally over time. The other thing that's happening is this omnichannel, the omnichannel innovation and strategy, which is really linking inventory across regions and stores to an online and offline.

MELANIE HAHM: And Oliver, a quick follow on that. We've seen Amazon dip its toes in a more earnest fashion, I suppose, when it comes to the Oscar de La Renta sort of luxury portal that it's providing to Prime customers. Do you anticipate a Canada Goose entering that sort of space to sort of diversify the ways in which a consumer can access its products?

OLIVER CHEN: Yeah, that's really exciting to watch, what Amazon is doing in luxury, and it's something we're monitoring. I believe that Canada Goose will likely stand alone in terms of controlling distribution, and thinking about it possessing that line directly to the consumer. Never say never, in terms of how this marketplace evolves. But control matters. When you're vertically integrated and you touch the consumer, you own the shopping experience and you train and develop your employees.

That's part of the total experience, because to a certain extent, it's about product innovation, but it's about how you touch the consumer and the customer journey and how the consumer feels. That being said, luxury is an attractive market. And Amazon is highly interested in high margin attractive markets. So we'll see. But it's a broader question too, as we look at platforms at large, like Farfetch and others, and what happens online versus brands going direct to consumer.

MYLES UDLAND: All right, Cowen analyst Oliver Chen, upgrading shares of Canada Goose here. Stock up about 6% during today's trading session. Oliver, always great to get your thoughts. Thank you so much for joining the show today.

OLIVER CHEN: Thank you, guys.