Canada Goose has a China problem.
In a Nutshell: “Despite our strong performance in the quarter, we are not seeing the level of improvement we had assumed in Mainland China. Covid-related disruption, including mall closures, lockdowns and travel restrictions continue to impact traffic,” Canada Goose chairman and CEO Dani Reiss told investors in a conference call on Wednesday. “And as we head into our most meaningful quarter, we are seeing these disruptions affect an increasing number of cities in which we operate.”
Still, Reiss said Canada Goose is “investing in China for the long-term” and will continue opening stores in the region.
The company reported strong North America wholesale sales as it was able to ship orders earlier in the season. Rising order book value was seen, especially in Europe. Reiss said the shift in wholesale timing lets consumers shop earlier and “opens the door to potential reorders.”
Canada Goose aims to grow by strengthening direct-to-consumer, increasing its presence in key markets, re-envisioning product and expanding margins. IT’s still in the “early stages of development” in most of its large international markets, Reiss pointed out.
A Tokyo store will open in December after Canada Goose opened an Osaka store last month. Canada Goose opened 14 shop-in-shops in South Korea with Lotte Group. It wants to build out its presence in the Western U.S., and opened a Manchester store in the U.K. last month. “We’ll continue to look for further strategic opportunities across the U.K. and the Continent for this fiscal year,” Reiss said.
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He said the company plans to grow women’s to 50 percent, while continuing to build men’s. The updated women’s line targeting Gen Z and millennials is speaking to new consumers through influential partners. December will feature a new collaboration offering a more “feminine expression” of the brand. Canada Goose has rolled out non-heavyweight down options, such as fleece. Two new footwear styles arrived in August and three more are on deck before January.
Reiss pointed to the “meaningful” opportunity in footwear, saying expanding in the category “has not come at the expense of gross margin.”
Chief financial officer Jonathan Sinclair said the return of travel and tourism is a welcome development for the company. While sales improved during October’s Golden Week festival in China, business is still below where it should be. “Dynamic Covid restrictions, closures, mandatory quarantines and lockdowns in most of our key markets where we have retail distribution have curbed store traffic and consumer buying,” Sinclair said.
Wells Fargo analyst Ike Boruchow cited China as a “key overhang on the business,” and said Canada Goose expects to face ongoing challenges there over the next six months. He believes wholesale revenue will fall in the third quarter.
Net Sales: Revenues for the second quarter ended Oct. 2 grew 19.0 percent to 277.2 million Canadian dollars ($203.3 million) from 232.9 million Canadian dollars ($170.8 million). Direct-to-consumer revenue grew 16 percent to 94.8 million Canadian dollars ($68.9 million) as it now has 45 permanent stores versus 38 in the year-ago quarter. Wholesale sales jumped 21 percent to 180.7 million Canadian dollars ($131.4 million).
North America was the standout in the quarter, with growth in the U.S. and Canada up 20.3 percent and 25.2 percent, respectively.
Excluding Mainland China, DTC revenue growth was up 28 percent, while DTC comparable sales rose 3.2 percent, also excluding China.
Sinclair said inventory was 511.5 million Canadian dollars ($371.8 million) at the end of the quarter versus 416.4 million Canadian dollars ($302.7 million) a year ago. The company brought orders in earlier and produced more goods offshore to address supply chain risks, he added.
For the six months, revenue rose 20.0 percent to 347.1 million Canadian dollars ($254.5 million) from 289.2 million Canadian dollars ($212.1 million).
Earnings: Net income fell 49.5 percent to 5 million Canadian dollars ($3.7 million), or 3 Canadian cents ($0.02), from 9.9 million Canadian dollars ($7.3 million), or 9 Canadian cents ($0.06).
For the third quarter, the company guided revenue to between 580 million Canadian dollars ($421.6 million) to 660 million Canadian dollars ($479.8 million), on adjust diluted earnings per share of 1.47 Canadian dollars ($1.07) to 1.72 Canadian dollars ($1.25).
Given the Covid uncertainty in China, Sinclair said the company expects total revenue for Fiscal 2023 of 1.2 billion Canadian dollars ($872.3 million) to 1.3 billion Canadian dollars ($945 million), versus prior estimates of 1.3 billion Canadian dollars ($945 million) to 1.4 billion Canadian dollars ($1.02 billion), on adjusted earnings per diluted share between 1.31 Canadian dollars ($0.95) to 1.62 Canadian dollars ($1.18), versus outlook of 1.60 Canadian dollars ($!.16) to 1.90 Canadian dollars ($1.38).
For the six months, the net loss widened to 58.5 million Canadian dollars ($42.9 million), or 56 Canadian cents ($0.41), from 47.6 million Canadian dollars ($34.9 million), or 43 Canadian cents ($0.32).
CEO’s Take: “There is no doubt that the macroeconomic backdrop continues to present challenges, but I’m very confident that the strong underlying fundamentals of our business will help us navigate them well,” Reiss said.