Canada Goose Holdings Inc. (NYSE:GOOS) Q3 2023 Earnings Call Transcript

Canada Goose Holdings Inc. (NYSE:GOOS) Q3 2023 Earnings Call Transcript February 2, 2023

Operator: Hello and thank you for standing by. Welcome to the Canada Goose Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. I would now like to hand the conference over to your speaker for today, Amy Schwalm. You may begin.

Amy Schwalm: Thank you, operator, and good morning, everyone. With me are Dani Reiss, Chairman and CEO; Jonathan Sinclair, EVP and CFO; and Carrie Baker, President. Our call today, including the Q&A portion, contains forward-looking statements. Each forward-looking statement, including our financial outlook is subject to risks and uncertainties that could cause actual results to differ materially from those projected. Certain material factors and assumptions were considered and applied in making these forward-looking statements. Additional information regarding these forward-looking statements, factors and assumptions is available in our press release issued this morning, as well as the Risk Factors section of our most recent annual report filed with the securities regulators.

These documents are also available on the Investor Relations section of our website. The forward-looking statements made on this call speak only as of today, and we undertake no obligation to update or revise them. Lastly, our commentary includes certain non-IFRS financial measures, which are reconciled at the end of our press release. With that, I will turn over the call to Dani.

Dani Reiss: Thank you, Amy, and good morning, everyone. This quarter showed us overwhelmingly that our brand strength globally remains strong even in the face of short-term pressures. In Mainland China, consumers returned in full force to shop postponed a period of significant disruption in December. We also saw solid top line growth in the United States, driven by strong performance across our store network. And our gross margin expanded year-on-year for the third quarter in a row, up over 160 basis points, with margin improvement across all product categories. With that said, we did face challenges during a seasonally significant third quarter. The largest being in Mainland China where disruptions were worse than we had anticipated, impacting our performance significantly.

And in North America, we saw a softening of demand towards the end of the quarter. In a few moments, I’ll dive deeper into both of these trends. These short-term pressures will not change how we think about our business. We are and have always been building this brand for the long-term. Now more than ever, we are focused on building deeper relationships with our customers, strengthening our DTC network and continuing to expand categories, all while staying true to our luxury DNA. And we know that our strategy is working. We continue to be recognized for it as well. We are proud that for the fifth year in a row, Deloitte has named us in their Global Power of Luxury Goods Report as one of the world’s fastest-growing luxury brands. Our competitive advantages remain strong.

Our Made in Canada vertical integration has enabled us to so far, offset many of the cost pressures and supply chain delays facing the industry. And we have continued to deliver a steady stream of new and carryover products to our global distribution network. Turning to the quarter. We posted revenue of $577 million, down 1.6% from the prior year period, which included a 53rd week. Using the same trading weeks from the comparative quarter in both periods, revenues grew 2.5%. Before we dive into our results in more detail, I want to spend a moment discussing the pressures that impacted our earnings. It’s really important to note that we firmly believe these trends, disruption in China and softness in North America are temporary, and our brand strength remains incredibly healthy.

Starting with Mainland China, where the region was largely locked down for most of the quarter. We did expect a certain level of disruption. What we did not anticipate was the sudden reopening in early December. This led to a surge in infections, which had a significant impact on our business during what is typically our most productive trading month. Consumer traffic decreased dramatically and staffing levels were impacted due to illness. We are proud of how our local teams are able to navigate difficult circumstances that they faced. On a more positive note, the reopening did give us a clear message from our consumers in Mainland China, Canada Goose’s brand remains strong. Traffic and transaction growth jumps immediately following the disruptions in December.

In January, same-store traffic was up approximately 30% year-over-year. And in Hong Kong, traffic has tripled from the same period last year. And that strong progress has continued. Stores are fully staffed, consumers are back shopping in person, and the familiar lineups have returned to many of our stores. We are confident that our brand has retained its full strength. We also have the added benefit of Lunar New Year in the fourth quarter, which for the first time in three years, was celebrated without restrictions. Traditionally, we see a pickup in store traffic and transactions over three weeks prior to the holiday, and this year was no different. And we hit another milestone in January, surpassing the 1 million follower mark on WeChat, another example of our brand’s strength in the region.

All of this clearly shows that our best days are yet to come. In North America, we are seeing a continuation of mixed results early in the fiscal. Both in Canada and the United States, store traffic is up more than 30% year-over-year as more consumers are choosing to shop our experiential store network. With that being said, conversion in the North American DTC business is lower than we expected early in Q4. As I said, we believe these pressures to be temporary, and we continue to focus on driving brand heat and relevance through our exciting partnerships and collaborations. On that, I’m very excited about our upcoming collection with NBA All-Star as part of our long-term partnership with that organization. The new collection, which will be our third so far, launches next week, and it had always created a lot of buzz and hype per our brand.

And in January, we celebrated our 11th year as an official sponsor of the Sundance Film Festival in Park City, Utah. This year, we returned to Main Street with our exciting Canada use base camp experience and pop-up retail store. Sundance is a perfect backdrop for our brand, truly the intersection of performance and luxury, and an opportunity for our brand to celebrate our authentic decades-long relationship with the film and entertainment industry. Looking ahead, we are also moving forward with our store expansion program much earlier in the calendar year than in past years. We plan to open three new permanent stores early in Q1, one in each Seattle and Los Angeles, as well as a second store in Las Vegas. So let’s turn back to the quarter.

In our DTC channel, our stores had the strongest monthly comps of the quarter in December with total company DTC comps at 9.3%. In fact, every single geography posted positive DTC store comps in the month of December. North America was a notable growth across categories, specifically, apparel grew 61%, compared to last year, reaching 5% of total sales in the quarter. And for the full-year, non-heavyweight down grew considerably, up 20% to nearly 42% of revenues year-to-date, up from 36% in the prior year. As you can see, we continue to make progress against our category expansion strategy. Importantly, our gross margins have remained strong, expanding 160 basis points. We are particularly proud at this point, considering the enhanced promotional activity that dominated much of the consumer retail behavior this holiday season.

We bucked that trend. Our gross margin reflects strength of our non-promotional DTC network, as well as our exclusion from much of the promotional activity in wholesale this quarter. As we look ahead, although we continue to make significant headway on our key growth drivers, we are cautious about the fourth quarter. The softness of demand in North America, along with China’s weaker than anticipated third quarter has led us to lower our fiscal year 2023 expectations. We now feel that these align better with the current environment. Jonathan will give more details on this in just a bit, but I want to emphasize that our long-term expectations for our brand remain unchanged. We are well positioned to see tremendous upside in both the medium and long-term.

Before closing, I want to share some progress that we’ve made on the core pillars of our strategy. First, growing our DTC network. There is a substantial amount of room to grow as we continue our Quest West. In the quarter, we opened two permanent stores, one in Las Vegas and another in Denver, and two pop-up stores, one in Aspen and the second in Detroit. All four locations included the full breadth of our assortment in our Las Vegas location includes our award-winning no room experience, which has been a big hit in the desert. Beyond these four store openings in North America, we also opened new stores in China, Japan and the U.K. this year. At the end of the quarter, we now have 51 permanent stores, roughly a 25% increase from last year.

As well, in partnership with our new South Korean distributor, Lotte, we’ve opened five permanent and 12 temporary pop-up shops in only nine months. Our progress in South Korea has exceeded our expectations and on the beginning of the story there. We still have a long runway ahead of us, and I’m looking forward to sharing more of that with you in the future. And we continue to focus on expanding our product offering, reaching more consumers in more seasons. We see opportunity to expand our offering for women and building on our already strong residents of eager generations. We are innovating in our women’s offering to focus on stylists for futility and it’s working. In the third quarter, we saw a strong reception to our Aurora and Marlow Parkas both achieving approximately 70% sell-through, a fantastic performance for two new styles.

Our pastel collection continues to be hit with women, particularly in APAC, with the region driving around a third of global sales of the collection. And lastly, we launched a beautiful collaboration with reformation in the quarter, which resonated particularly well in the United States. The reaction of the collaboration generated across our social channels, especially with women and Gen Z was overwhelmingly positive. On a final note, and one that I’m particularly proud of, in November we donated over 10,000 parkas, jackets and accessories to UNHCR, United Nations Refugee Agency in support of their humanitarian efforts in the Ukraine. The products went to Ukranians, who have been impacted by the war and needed protection from the onset of winter.

In conclusion, I want to once again thank our teams around the globe, who have continued to put our customers first. Our brand remains as strong as ever, and we are better positioned than ever to execute against our strategy and accelerate our growth. Look forward to sharing more with you at our Investor Day next week. Thank you. And now I’ll turn it over to Jonathan Sinclair.

Jonathan Sinclair: Thank you, Dani, and good morning, everyone. Today, I shall be comparing the third quarter ended January 1, 2023 with the prior year quarter, which ended January 2, 2022, unless I say otherwise. In order to highlight the impact of the incremental week in last year’s results, we have also provided figures that use the same trading weeks in each period. So turning to our results. In the third quarter, total revenue declined 1.6% and 2.2 % on a constant currency basis to $576.7 million. Using the same trading weeks, revenue grew 2.5% and 1.8% on a constant currency basis. The third quarter fiscal 2023 revenue fell below our outlook range of $580 million to $660 million. As you heard Dani discuss, the majority of this can be attributed to Mainland China.

Since we last spoke to you in early November, COVID restrictions in Mainland China worsened that month. Then when the country suddenly reopened in early December, which is our busiest trading month of the year, a wave of infection suppressed traffic and reduced store hours due to staff illness. And in some cases close to the stores altogether. We estimate the impact was about $60 million in lost revenue. In North America, particularly in the U.S., despite store traffic in line with our expectations. We saw lower conversion in our DTC network against a tough macroeconomic backdrop, and we estimate this represented about $25 million in lost revenue. Now turning to our revenue channels. DTC revenue increased 1.5% to $450.2 million. Using the same trading weeks, the increase was 4.6% and 8.2% excluding Mainland China.

DTC comparable sales declined 6% and grew 0.5 excluding Mainland China. Total revenue growth was strong, but was somewhat offset by lower e-commerce revenue. Consumers shopped more in our stores during the quarter and you may recall COVID restrictions in EMEA and in Canada were prevalent in the comparative quarter. Taking this in the round, our strong store performance in our most important quarter reflects brand heat. And importantly, we saw this in Mainland China with the reopening toward the end of the quarter and up until today. Looking forward, we believe we have the opportunity to further enhance store sales productivity and we remain very focused on identifying and executing on the drivers to do so. We also believe e-commerce is a significant area of opportunity.

We are excited to tell you more about our plans for DTC growth at our upcoming Investor Day. In the Wholesale segment, revenue declined 17.3% to $114.4 million in the third quarter. Using the same trading weeks, the decline was 11%. As we explained in our last earnings call, we fulfilled wholesale shipment request from customers in Q2 fiscal 2023, which was earlier than in the comparative quarter. This has returned us to normalized shipping patterns pre-pandemic. Now for the performance by geography, Revenue increased in North America, driven by growth of 11.3% in the U.S. from retail expansion and existing store revenue growth. Using the same trading weeks, U.S. revenue grew 17.4%. Revenue decreased in Canada and in EMEA, largely due to earlier wholesale order book fulfillment and lower e-commerce revenue.

This was partly offset by strong store sales growth. Asia Pacific’s revenue decline on account of Mainland China was partially offset by strong performance from stores in Greater China, as well as the new DTC and wholesale business in our Japan JV. urning to our profit metrics. We grew consolidated gross profit by $2.6 million to $416.4 million, primarily due to gross margin expansion. Q3 gross margins increased 160 basis points to 72.2% with margin improvement in every product category and in both channels. DTC and wholesale gross margins expanded to 78% and 53%, respectively. Gross margins were favorably impacted by pricing and that was partially offset by higher duty costs, product mix and the impact of the fair value inventory acquisition adjustments on sales related to the Japan joint venture.

True to our track record to-date, we expanded gross margins despite the ongoing diversification of our product mix, away from a concentration in heavyweight down. This continues to give us confidence in our model going forward as we accelerate product category expansion. As a region, Asia Pacific skews to more heavyweight down sales as a percentage of total sales. And of course, the region sales were heavily impacted by COVID disruptions. Operating income declined largely due to the unfavorable foreign exchange fluctuations on working capital and on our term loan, as well as investments in technology, higher costs related to retail expansion and running stores at full capacity, as well as costs associated with the Japan joint venture. These were partially offset by higher gross profit and the timing of marketing spend, which occurred earlier in the year, compared to fiscal 2022.

Adjusted EBIT decreased to $197.1 million, primarily due to the higher costs I just described, and came in below our outlook range of $220 million to $250 million for the quarter. This was largely due to lower-than-expected revenue, especially in DTC, the donation to assist refugees from the war in Ukraine, higher-than-anticipated strategic investments, as well as negative FX impacts. In addition, starting in quarter three fiscal €˜23, we have included pre-store opening costs as an operating expense in the calculation of adjusted EBIT. We use non-IFRS measures to help us evaluate the performance of our business. And as we expect to accelerate store openings as part of our growth strategy, we felt it made sense to factor in these costs. As such, comparable periods have been restated to reflect this change and our latest Q4 and annual guidance also reflect this.

I will discuss guidance shortly. Net income and adjusted net income were lower than the comparative quarter, largely as a result of the factors impact operating income and adjusted EBIT, as well as a higher income tax expense. Turning to our balance sheet. Inventory was $482 million, compared to $368 million at the end of the comparative quarter. Japan represented about $25 million of the inventory balance at the quarter end. Higher inventory levels are primarily attributable to lower-than-expected sales in the Asia Pacific region. We monitor the levels of inventory in each of our sales channels and across geographic regions, and we align that with demand that we forecast in each region. Whilst it’s slightly higher than we would like, we are comfortable with the health and makeup of our inventory.

During the third quarter, we renewed our share repurchase program in relation to subordinate voting shares. We purchased about 745,000 shares in the quarter and we will continue to be opportunistic alongside investing in the business, which attracts the highest ROI. We ended Q3 with cash of $344.2 million, compared to $407.6 million at the end of the prior year quarter. Net debt including capitalized leases was $419.2 million, compared to $238.1 million at the end of the prior year quarter. We’re very comfortable with net debt leverage of 1.6 times adjusted to EBITDA at the end of the quarter. The increase in net debt was primarily due to increased lease liabilities on retail expansion. The financing needs of the Japan JV and the impact of FX on our U.S. denominated term loan.

Turning to our outlook. With worse-than-expected COVID disruptions in Mainland China, in our most important trading months and slower momentum in North America towards the end of the quarter and in quarter four to-date, we have revised full-year guidance. We now expect fiscal 2023 revenue to be between $1.175 billion and $1.195 billion, compared to our previous guidance of $1.2 billion to $1.3 billion. For DTC, this assumes a comparable sales decline in the low single-digits, compared to our previous assumption of a decline in low single-digits to growth in the high single-digits at the top end of the range. DTC sales are now expected to comprise the high-60s as a percentage of total revenue, compared to our previous assumption of 70% to 73%.

Wholesale revenue growth is maintained at 6% for the year. We now assume $45 million to $50 million in revenue from the Japanese market, which compares to our previous assumption of $60 million to $65 million as our new stores have had a slower start than we anticipated. Moving to profitability. We expect adjusted EBIT of $167 million to $182 million for a margin of 14.2% to 15.3%, compared to our previous guidance of $215 million to $255 million for a margin of 17.9% to 19.6%. This revised outlook assumes strategic investments will continue into Q4 at a higher rate than previously planned, including key leadership hires, digital investments and strategic initiatives. We continue to expect a lower underlying SG&A growth rate, compared to growth in fiscal €˜22.

We assume consolidated gross margin will be in the high-60s as a percentage of total revenue. Gross margin benefits from our vertically integrated Made in Canada manufacturing model, as well as from the conversion of our Japanese business from a distributor arrangement to a joint venture. Flowing through, we now expect adjusted EPS per diluted share of $0.92 to $1.03, compared to the previous outlook of $1.31 to $1.62. This revised assumption assumes share buyback activity. Lastly, I will cover our outlook for the fourth quarter. We expect total revenue of $251 million to $271 million. Adjusted EBIT of $19 million to $35 million with SG&A used in the calculation of adjusted EBIT assumed to be in the low-50s as a percentage of Q4 revenue. This flows down to adjusted net income per diluted share of breakeven to $0.12.

In summary fiscal €˜23 hasn’t been nothing short of eventful. We’re extremely pleased with the easing of restrictions and the very strong signs of a retail rebound in Mainland China. Including Q4 to-date, undoubtedly reflective of the brand strength. We are well positioned to significantly benefit from our DTC network expansion in the country. We have 6 times as many stores as we did when the pandemic began. We know the macroeconomic environment is challenging, but we’re confident that our luxury brand positioning, our DTC and product expansion plans, as well as our focus on the consumer make for the right strategy. And critically, we are focused on executing our strategy to drive profitable growth. As Dani mentioned, we look forward to taking you through our plans at Investor Day next week.

And with that, I’ll pass it over to the operator to begin Q&A.

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Q&A Session

Operator: Thank you. Our first question comes from the line of Michael Binetti with Credit Suisse. Your line is open.

Michael Binetti: Hi. Thanks, everybody for taking our questions here and for all the detail. I guess just the first one, I’m just looking at the shape of the P&L in the quarter. You — I think revenues came in the quarter, a little down by a few million, but EBIT missed by more than $20 million, maybe walk us through a few of the components that have caused that amount of deleverage, just high-level thinking? And then I am curious what do you think is causing the pressure on the conversion rate in North America direct-to-consumer? I mean, you said traffic was good, so I don’t know if you felt like weather was an issue, but wonder what your early diagnostics are on the conversion issue?

Dani Reiss: Thanks, Michael. So let me take the first part of that. As you said, revenue was lower-than-expected. And that was DTC, which obviously is our highest margin segment and best quality of revenue. And as a percentage of total, that was less than we expected for the reasons I detailed in my prepared remarks. And both in Mainland China and North America, and that’s dilutes gross profit, and that was worth about $5 million just to put an order of magnitude down there. We also made decisions to sustain our marketing investment in support of the brand, as well as investing in strategic growth initiatives. And as I said, we’ll talk a bit more about those next week, but that’s another $3 million. We experienced some negative FX impact, and that was worth a further $3 million within adjusted EBIT.

The move of pre-opening costs into adjusted EBIT, added a further $3 million and of course, we made conscious decision to donate around 10,000 jackets that exist refugees from the war in Ukraine. So that’s really what made up the vast majority.

Jonathan Sinclair: Yes. Just Dani, just to add on us a little bit, I think notwithstanding the challenge we faced specifically in China’s quarter and the pressure we face, we run this business for the long-term and when we feel that we have an opportunity to make an investment for attractive return and to drive growth in the future, that’s what we do. As oftentimes, we look forward to discussing our plans in that regard further in our strategy — at our Investor Day next week. But I think it’s important to remember this — our trajectory is strong and we continue to invest in future growth.

Carrie Baker: And Michael, just on your question around conversion. So I think couple of points here. One, we saw great traffic in stores, so there was a shift from online back to stores, which we have continued to see through the full-year. So traffic was up, I think the convergence specifically was a challenge on e-comm. And so little bit of a problem, we’re happy with what we are seeing, but it’s just in general that shift in the lock and conversion just caused the overall play. The reason for that, I mean, I think you’ll see that across the industry. I think people were a little more nervous in December about spending, I think they saw layoff, I think looming recession, I think all of that contributed to just like lower consumer confidence overall.

Operator: Thank you. Please standby for our next question. Our next question comes from the line of Brooke Roach with Goldman Sachs. Your line is open.