Canada Goose‘s third-quarter net sales and income improvements still disappointed Wall Street, as pandemic-related traffic slowdowns in APAC-store and EMEA-based stores hampered the luxury parka maker’s results. The company lowered its 2022 fiscal guidance for sales and earnings, sending shares down more than 18 percent in early Thursday morning trading.
In a Nutshell: In an earnings call, Canada Goose president and CEO Dani Reiss said the company has been able to take a surgical approach to pricing in the face of recent inflationary pressures, generally executing mid-single-digit increases.
“We tune [the price] up as the year goes along,” Reiss said. “This year has been no different, and we’ve been able to make sure that price isn’t an obstacle to the brand.”
And despite industrywide concerns about supply chain disruption, Reiss noted that the company has not faced any material revenue or margin headwinds relating to supply chain or shipping constraints. The company has attributed its supply chain success to domestic production based in eight owned factories in Canada.
Reiss said he was confident in the company’s inventory position going into fiscal 2023, which came in at $368.1 million CAD ($290.6 million) at quarter end, up 8.6 percent from $339 million CAD ($267.6 million) in the year-ago period.
Gross profit was $413.8 million CAD ($327.1 million), with a gross margin of 70.6 percent, compared to $316.4 million CAD ($250.1 million) and 66.8 percent in the year-ago third period.
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DTC gross margin was 77.1 percent, down from 77.9 percent in last year’s third quarter. The decline was driven by a higher proportion of sales in non-parka categories, higher duty costs, government payroll subsidies in the comparative quarter and an unfavorable shift in geographic mix. The declines were partially offset by pricing.
Wholesale gross margin for Canada Goose came in at 50.2 percent, also a decrease from the 2021 third quarter’s 51.5 percent. Government payroll subsidies in the comparative quarter and unfavorable impacts from product mix due to higher sales in non-parka categories were the main culprits for the decline. This was partially offset by a higher proportion of sales to wholesale partners compared to international distributors and pricing.
Due to lower than expected revenue and retail traffic in APAC and EMEA in the current quarter, alongside new Covid-19 variant outbreaks and restrictions, Canada Goose lowered its full-year outlook for 2022.
“The absence of international traffic has been a headwind for major global shopping destinations, like Paris,” Jonathan Sinclair, Canada Goose’s executive vice president and chief financial officer, told Wall Street analysts. “Restrictions and disruptions have also emerged in markets like Germany.”
Sales for the luxury brand are expected to fall between $1.09 billion CAD ($862 million) and $1.105 billion CAD ($873.5 million), compared with its prior estimate of between $1.125 billion CAD ($889.3 million) and $1.175 billion CAD ($928.8 million).
Canada Goose said it expects adjusted profit for fiscal 2022 to be between $1.02 CAD (81 cents) and $1.11 CAD (88 cents) per share, down from its prior forecast of between $1.17 (92 cents) and $1.33 CAD ($1.05).
However, despite the downgrade, Sinclair remained positive for the future. He cited the international store traffic decline as the major impediment to revenues and margins.
“As we look forward, in terms of fiscal 2023, we see no reason why we can’t expand margins significantly more than the current year, even in this environment,” Sinclair said. “We’ve got pricing power to manage cost inflation, our DTC productivity critically is improving, and the U.S. has already shown us the upside of a more fulsome retail recovery.”
Canada Goose had $407.6 million CAD ($322.2 million) in cash on hand at quarter’s end, compared to $469 million CAD ($370.7 million) in the year-ago period.
Net Sales: Total revenue at Canada Goose jumped 23.6 percent to $586.1 million ($463.6 million) in the third quarter, from $474 million ($374.9 million) last year. As fiscal 2022 is a 53-week year, the additional week included in the third quarter ended January 2, 2022 provided $40.9 million CAD ($32.4 million) of revenue.
When excluding $10.7 million CAD ($8.5 million) of temporary PPE sales in the comparative quarter, total revenue increased by 26.5 percent.
The company also broke out total “non-parka” revenue percentages, saying that they increased by 74.9 percent, reflecting growing year-round lifestyle relevance.
DTC revenue was up 48.8 percent in the quarter, to $445.4 million CAD ($352.1 million) from $299.4 million CAD ($236.7 million). The majority of the increase was driven by higher sales from existing retail stores, complemented by e-commerce growth and retail expansion. Global e-commerce revenue increased by 28.1 percent. DTC revenue in Mainland China increased by 35.1 percent.
Wholesale revenue saw a 15 percent decline to $136.7 million CAD ($108.1 million) from $160.8 million CAD ($127.1 million). The decrease was a result of earlier order shipment timing relative to fiscal 2021, driven by wholesale partner requests.
Other revenue decreased 71 percent to $4 million CAD ($3.2 million) from $13.8 million CAD ($10.9 million). The decline was attributable to temporary PPE sales in the comparative quarter.
Net Earnings: Net income for the quarter ended Jan. 2 was $151.9 million CAD ($120.1 million), or $1.41 CAD ($1.11) per diluted share, compared to $107 million CAD ($84.6 million), or 96 cents (76 cents) per diluted share.
Operating income was $205.9 million CAD ($162.8 million) on an operating margin of 35.1 percent, compared to the 2021 quarter’s $153.3 million CAD ($121.2 million) and 32.3 percent operating margin.
Adjusted EBIT at Canada Goose was $206.9 million CAD ($163.6 million) with an adjusted EBIT margin of 35.3 percent, compared to $157.9 million CAD ($124.8 million) and a 33.3 percent margin a year ago.
Adjusted net income was $152.6 million CAD ($120.6 million), or $1.42 CAD ($1.12) per diluted share, compared to $111.9 million ($88.5 million), or $1.01 CAD (80 cents) per diluted share.
CEO’s Take: “We’re very confident about our business in China. The primary story in China at the moment is is Covid-related and restrictions-related, which would impair traffic to stores,” Reiss said in the call. “I’ll point out that our online business in China was up over 60 percent in the last quarter, which is really important to note, and is a very good sign of consumer demand for our products in China. We’re very optimistic and bullish about our future prospects in China. We have a lot of runway left there and we intend to continue to grow meaningfully for years to come. And hopefully the global climate changes soon and traffic returns to pre-pandemic levels.”