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Canada Goose Returns to Growth, Despite Significant Store Closures

Canada Goose outperformed its own third-quarter expectations with 4.8 percent year-over-year sales growth to $474 million CAD ($369.2 million), returning to sales growth for the first time since the onset of the Covid-19 pandemic.

Seven of Canada Goose’s 28 global retail stores remain closed, while there has been a slowdown in foot traffic in certain markets in response to Covid-related restrictions. Keeping the sales growth afloat was a global e-commerce sales boost of 39.3 percent, while direct-to-consumer sales across all channels in Mainland China jumped 41.7 percent.

In a Nutshell: The store closures had a notable impact in major markets through the peak holiday season, with Canada Goose losing 35 business days in each of its three Toronto locations, with its Ottawa and Montreal stores also shuttering at the end of the quarter. The London store was out of commission for 36 days, while the Paris and Milan locations were closed for 30 as well. Berlin’s store shuttered for 12 days.

While store traffic is roughly split 50-50 between local and international customers, Canada Goose has focused more on serving international consumers at home as tourism dipped, and driving online demand instead, chief financial officer Jonathan Sinclair said in the earnings call.

The strength of e-commerce has helped balance out any issue related to store closures, with Canada Goose seeing strong double-digit online sales growth in all major markets, including North America, Germany, France and Ireland. The biggest increase occurred in the U.K., where e-commerce business doubled.

On the contrary, Mainland China is now home to seven stores (as well as two more in Hong Kong) and is growing significantly, contributing a 41.7 percent sales increase across all direct-to-consumer channels.

Sinclair noted that the luxury outerwear company was pleased by the differentiation in offerings across categories beyond its signature premium parkas, since consumers in warmer regions of the country buy a higher mix of lighter-weight products.

Inventory decreased year over year by 2.6 percent from $348.1 million CAD ($271.4 million) to $339 million CAD ($264.3 million), and 17.8 percent compared to the end of the previous fiscal year, which concluded on March 29, 2020. This is exactly where the company wants to be, according to Sinclair.

“As a vertical manufacturer, with an evergreen offering, the beauty is we can do this without constraining our promotional flexibility,” said Sinclair.

Gross profit for the company reached $316.4 million CAD ($246.5 million), amounting to a gross margin of 66.8 percent, increasing from $298.4 million CAD ($232.5 million) and 66 percent in the third quarter of the prior year. The gross profit jump was attributable to revenue growth and $4.8 million CAD ($3.7 million) in government subsidies. The increase in gross margin was a result of higher DTC and wholesale gross margins, and partially offset by a lower “other” gross margin.

DTC gross margin was 77.9 percent, compared to 75.1 percent from the previous year due to higher pricing, and a favorable geographic mix. Wholesale gross margin was 51.5 percent, up from 48.5 percent last year from higher pricing and volume driven by parkas. This was partially offset by the unfavorable impact of a higher proportion of distributor sales.

In the call, president and CEO Dani Reiss highlighted some of the new developments in the quarter, such as the recent collaboration with its first-ever guest designer, Shenzhen-born Angel Chen, and the introduction of its 100 percent responsibly sourced Standard Expedition Parka. The parka is a blend of recycled polyester and organic cotton, with an outer shell made with 100 percent recycled nylon designed to protect from high winds, rain and snow.

Reiss emphasized Canada Goose’s new purpose-based platform, Humanature, as the backbone behind these decisions. The Humanature platform is designed to unite the company’s sustainability and values-based initiative in an effort to invigorate communities, prioritize philanthropic endeavors and support the arts. Reiss said the brand intends to collaborate with more guest designers in the future.

Although he was vague on details, Reiss also noted that Canada Goose is on track to launch its first footwear collection in the fall, saying he thinks “footwear is going to be a very important category for us in the long term.” Last July, Canada Goose appointed Adam Meek to the new role of general manager of footwear and accessories to lead the ongoing development and execution of the company’s global category strategy,

Cash flow was $469 million CAD ($365.4 million) as at quarter end, compared to $72 million CAD ($56 million) a year ago, alongside $256.2 million CAD ($199.6 million) of available borrowing capacity in an undrawn revolving facility. The increase in cash was driven by positive free operating cash flow and refinancing proceeds.

The company concluded its contractual obligations for personal protective equipment (PPE) manufacturing in the third quarter.

For the fourth quarter, Canada Goose currently expects a low-double-digit year-over-year revenue decline. Given ongoing Covid-19 disruptions and uncertainties, the company is not providing an outlook for fiscal 2021.

Net Sales: Total revenue was $474 million ($369.2 million) in the quarter, increasing 4.8 percent from $452.1 million CAD ($352.2 million). DTC revenue declined slightly to $299.4 million CAD ($233.2 million), from $301.8 million CAD ($235.1 million) in the year-ago quarter due to the Covid-19 driven store closures, but e-commerce growth and continued store expansion in Mainland China kept this category afloat.

Wholesale revenue increased 2.7 percent to $160.8 million CAD ($125.3 million) from $145.3 million CAD ($113.2 million). The increase was a result of the later timing of shipments as requested from partners and international distributors relative to the comparable quarter.

Revenue in the “other” category nearly tripled from $5 million CAD ($3.9 million) to $13.8 million CAD ($10.7 million) in the quarter, with the bump driven by PPE sales in support of Covid-19 response efforts.

Net Income: Third quarter net income was $107 million CAD ($84.4 million), or 96 cents CAD (75 cents) per diluted share, down from the $118 million CAD ($91.9 million), or $1.07 CAD (83 cents) per diluted share, generated in the year-ago quarter.

Adjusted net income, which deducts impacts from its Baffin acquisition, foreign exchange rate gains, temporary store closure costs and pre-store opening costs, was $111.9 million CAD ($87.2 million), or $1.01 CAD (79 cents) per diluted share, compared to $119.7 million CAD ($93.2 million), or $1.08 CAD (84 cents) per diluted share.

CEO’s Take: Reiss felt the diversification of Canada Goose’s product mix was an important factor in the company’s ability to pivot going ahead, especially as it seeks to bounce back in different global markets.

“First of all, our core products and core business models—it’s still very important that we have a strong core, and we’ve seen that this year as well. Consumers have gravitated toward that, but at the same time, there has been a lot of diversification into lightweight and down, our knitwear has been well received, our fleece has been well received. We’ve certainly seen that we have permission from our consumers to get into new categories that makes sense for us…I think that just speaks to the relevance of Canada Goose as a global lifestyle brand,” Reiss said.

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