Canada Goose Investors: This Is Your Future

At first glance,Canada Goose's(NYSE: GOOS) IPO this week looks promising. The maker of $1,000 down coats and other such winter apparel has deomstrated strong growth recently.

In its F-1 prospectus, the company revealed that revenue had increased 41.7% to CA$352 million in the three quarters ended December 31, 2016 from the same period in the year before. Operating income grew by a similar percentage, rising 37.1%, to CA$69.1 million, indicating the company is indeed profitable. For its most recent fiscal year, its net income was CA$26.5 million, good for a profit margin of 9%.

Image source: Canada Goose.

Canada Goose is a 60-year-old company that's still family run. In 2001, the apparel-maker had just $3 million in revenue; then CEO Dani Reiss took it over, and has since turned it into a global brand. Expanding to Europe helped give the high-end brand a cachet it previously didn't have, allowing the company to market its coats as luxury products in North America.In 2013, it sold a majority stake to private-equity firm Bain Capital, which helped fuel expansion further as revenue doubled over the following two years.

The fashion conundrum

Canada Goose's IPO, which is expected to value the company around $2 billion, is certainly a win for Bain as the firm gets an opportunity to cash out -- but what about individual investors?

Fashion is already a tough play on the stock market. Once-popular labels likeMichael Kors(NYSE: KORS) andCoach(NYSE: COH) have tumbled recently as their brands seem to have become diluted in a highly competitive handbag market. The problem with investing in stocks like these is that often what's in style one year is on the discount rack just a few years later.

Moncler, an Italian rival of Canada Goose's, has seen its stock nearly double to 19.66 euros from its 10.20 euro IPO price in 2013. Still, plenty of other puffy-coat brands have come and gone on city streets, like Bear, Triple Fat Goose, Fubu, and North Face.

The North Face, in particular, seems like a cautionary tale. The outdoor gear and apparel maker had its IPO in 1996. By 1999 sales were falling and the company put up a $100 million loss. In 2000,VF Corporation(NYSE: VFC) acquired it for just $25.4 million, despite $238 million in sales and a once-popular brand. Today, under the guidance of VF Corp, The North Face now has more than $2 billion in annual sales.

Where Canada Goose could end up

In its F-1 filing, Canada Goose said its competitive strengths are its brand, Canada-made craftsmanship, as well as its control of its supply chain and its multi-channel distribution network, as the company plans to focus on direct-to-consumer sales.

But as companies like The North Face have found, it can be hard to go it alone in the highly competitive wholesale and direct-to-consumer markets. Timberland, another outdoor brand, presented a similar opportunity when its revenue declined and its stock price fell after its 2004 IPO.

VF Corp., which also owns Vans, Wrangler, and Lee, has been able to generate more profits out of those brands because its economies of scale allow it to get lower input costs; the company's expertise with distribution and its marketing have also helped revive sales growth.

Canada Goose won't be able to sustain revenue growth like 41% over the long term. Even once high-flying apparel brands likeLululemon andUnder Armoureventually came back down to Earth. However, with a P/E valuation of about 60 to start, expectations are high for Canada Goose. If growth starts to slow, the most likely outcome seems to be that Canada Goose will end up in the hands of a company like VF Corp or PVH, which owns brands like Calvin Klein, Tommy Hilfiger, and Izod.

While that wouldn't be investors' first choice, it should at least put a floor on the stock price.

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Jeremy Bowman has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Coach, Lululemon Athletica, and Under Armour (A Shares). The Motley Fool owns shares of Michael Kors Holdings. The Motley Fool has a disclosure policy.