Canada Goose Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2023

There are 14 speakers on the call.

Operator

Good morning, and welcome to the Canada Goose Q2 twenty twenty four Earnings Call. All participants are in a listen only mode. After the speakers' presentation, we will conduct a question and answer session. As a reminder, this conference call is being recorded. I would now like to turn the call over to Anna Rahman, Head of Investor Relations.

Operator

Please go ahead, Ms. Rahman.

Speaker 1

Thank you, operator, and good morning, everyone. With me are Danny Reese, Chairman and CEO Jonathan Sinclair, EVP and CFO and Keri Baker, President. After Danny's and Jonathan's prepared remarks, We will open it up for your questions. Our call today, including the Q and A portion, includes forward looking statements. Each forward looking statement, including without limitation, discussion of our financial outlook is subject to risks and uncertainties that could cause actual results to differ materially from those projected.

Speaker 1

Certain material factors and assumptions were considered and applied in making these forward looking statements. Additional information regarding these statements, factors and assumptions And regarding material factors that could cause actual results to differ from those projected is available in our earnings press release issued this morning as well as in our filings with U. S. And Canadian Securities Regulators. These documents are also available on the Investor Relations section of our website.

Speaker 1

The forward looking statements made on this call speak only as of today, and we undertake no obligation to update or revise any of these statements. We report in Canadian dollars, so all amounts discussed today are in Canadian dollars unless otherwise indicated. Please note that financial results described on today's call will compare 2nd quarter results ended October 1, 2023 with the same period ended October 2, 2022, unless noted otherwise. Lastly, our commentary today will also include certain non IFRS financial measures, which are reconciled at the end of our earnings press release. With that, I'll turn the call over to Danny.

Speaker 2

Thanks, Anna, and good morning, everyone. We delivered solid second quarter results, reflecting the strength of our iconic brand in key global markets And progress across our strategic initiatives. Our Q2 fiscal 2024 revenue was in line with our expectations At $281,100,000 and we exceeded the top end of our earnings guidance range as we balance investment in our growth initiatives with a focus on operational discipline, delivering $15,600,000 in adjusted EBIT and $0.16 in adjusted earnings per share. For Q3, we are taking a more conservative approach in regards to our expectations given the macro environment we see across many of our markets today. As a result, we are revising our full year outlook, which reflects the moderation in sales growth and continued investments in our priorities, balanced with prudent expense actions.

Speaker 2

Jonathan will expand on both our second quarter results and updated guidance for you. In Q2, more consumers came to shop with Canada Goose In the same period last year, as our brand continues to capture the attention of shoppers around the world. Our innovative high performance product elevated luxury experience are resonating with our loyal consumers, who even with this high inflationary backdrop are returning to enjoy more of our offerings. As we continue to navigate an uncertain global macro landscape, our business is prepared for anticipated demand amidst the reduced visibility. While this macro environment presents a headwind, we remain focused on building for the long term guided by our 3 strategic pillars: Driving consumer focused growth, building our DTC network and expanding our product categories.

Speaker 2

I will take you through the progress we have made on each of these pillars. 1st, driving consumer focused growth. Q2 DTC channel revenue of $109,400,000 was up by 15% compared to the same period last year. Our top priority here is investing in our brand to inspire and engage consumers and drive desirability through customer experiences, targeted marketing campaigns and partnerships. Starting with our distinctive elevated luxury retail experience that we call Canadian Warth, which defines the Canada Goose customer journey.

Speaker 2

In Q2, we began to roll out the Canadian warmth experience across our store network, which during our pilot phase showed a positive uplift in conversion. This is important as we look to capitalize on our strong traffic trends. While the effects on conversion across our networks are not expected to Completely take hold immediately. We are taking a test and learn approach to guide us in moving this metric up into the right. 2nd, our brand marketing campaigns.

Speaker 2

In September, we launched our fallwinter campaign featuring 3 trailblazing women who represent the Canada Goose ethos, Boldly living their authentic lives out in the open. The early weeks of this campaign have been very successful, receiving well over 1,000,000,000 media impressions. In late October, we held our largest event to date in China as we celebrated our 5th anniversary of our 1st brick and mortar store in the region. We welcome nearly 500 guests to our event held in Shanghai, during which they took in our first ever fashion show in the country, which was held outdoors. The event was one of our most successful activations in the market so far, resulting in over 3,000,000,000 media impressions.

Speaker 2

Chinese shoppers continue to be a driver of our growth, both inside and increasingly outside the country. As of Q2, we had 21 stores in China, Position that we have built opportunistically, backed by strong demand for our brand in this market and knowing that this would position us well following the pandemic. I was in China last month for our 5 year anniversary celebration and visited our stores and met with top customers. And I was pleased to see the level of profit in the stores And truly impressed with the guest experience our customers are receiving. Our 3rd approach to brand building is partnerships through which we continue to drive We launched a collaboration with London based fashion house, Brock and artist Matt McCormick that included 8 exclusive pieces for women.

Speaker 2

Products from this collab were featured across select Canada Goose stores in place with strategic and influential fashion retailers like Dover Street Market. In October, we launched another collab with luxury streetwear brand, Pure Moss, featuring a colorful limited edition capsule Inspired by the street culture in Brooklyn, catering to both men and women. Both collabs are seeing solid reception from our customers and more importantly, We're having exciting media coverage globally and building brand awareness around the world. Turning to our 2nd pillar, building our DTC network. In Q2, we opened 6 new permanent stores.

Speaker 2

In addition to the conversion of 2 temporary stores to permanent during the quarter, we had 62 permanent stores at the end of the period. We opened new stores in L. A, Atlanta and Philadelphia in the United States. In Mainland China, we opened a store in Tianjin and a second store in Shanghai. In Japan, we opened a 2nd store in Tokyo.

Speaker 2

With 9 new permanent stores opened so far in fiscal 'twenty four, we are well positioned with consumers Key geographies as we enter the holiday shopping season. We also opened our 1st travel retail store in the Frankfurt International Airport in September. We're just a month into its opening and the store is off to a good start, receiving positive feedback from customers as they connect to this important international hub. Provo Retail is a new part of our wholesale presence and we're eager to test and learn in the selling environment as we refine our growth plan and attract A branded type of clientele traveler. Let's now talk about DTC comp sales, which include both in store and online sales.

Speaker 2

DTC comp sales were down 7% year over year as total store comp sales increased slightly, offset by a decrease in e commerce revenue. While traffic grew significantly both online and offline across all regions, DTC comp growth was down in the U. S, EMEA And Mainland China. Growth in Hong Kong, Taiwan and Macau was robust, fueled by the return of Mainland Chinese tourists. Canada DTC growth also increased, particularly in cities with high levels of tourism, including Vancouver, Banff and Toronto.

Speaker 2

Overall, we saw softer conversion in Q2 year over year, which we believe may be due to the macroeconomic environment in which consumers are spending closer to need, exacerbated by the later onset of cold weather that many regions have been experiencing. Turning to online commerce. Although our stores contributed the majority of our DTC revenue in Q2, e commerce is an important part of our broader strategy to create a seamless omnichannel experience. We are investing in the end to end online shopping journey to drive better conversion and minimize returns. On the front end, we continue to implement new features such as a sign in fit module while enhancing the back end through improvements in merchandising, navigation, inside architecture and performance, just to name a few initiatives.

Speaker 2

In Q2, we made good traction in both top and middle of funnel activities, increasing visits to our product pages and additions to cart. While our overall Q2 DTC comp results were not ideal, our teams are actively working to change its dynamic and trajectory to drive top line growth, such as converting on the strong traffic trends we have had in the quarter across our owned channels. Turning to our 3rd pillar, expanding our product categories. In Q2, demand for non heavyweight dump products grew, Expanding its share of revenue within the overall mix. While total sales for Headway Down were flat year over year, revenue in this category grew within our DTC channel, reflecting continued strength for our core product.

Speaker 2

With a non heavyweight down, rainwear was our fastest growing category in the 2nd quarter, followed by apparel. The Chilliwack Felice bomber Huron pants and hoodie and hybrid knit jacket were the most popular apparel pieces with our customers. When we look at who is purchasing our non heavyweight down products in Q2, we see that more of our repeat customers are coming back to the brand they love to purchase additional items. This is another reason that we are focused on offering customers amazing and authentic experiences that keep them returning for more. And in our footwear category, sales of our recently launched sneaker line in July ramped up and remained at consistent levels through the Q2, I'm happy to see the category performing to our expectations.

Speaker 2

Taking a step back, we are executing on our product roadmap And we're excited with the newness we're injecting into our upcoming product assortments. Product is always top of mind for us, And I and our design teams are actively working with top tier design talent to ensure that execution against our product roadmap continues during this time of transition. In closing, Canada Goose is 1st and foremost about our product. We don't compromise on our vision of being a leading luxury brand, which is defined by our products, High performance, style and craftsmanship. Although we are facing an uncertain and challenging global macroeconomic backdrop at this time, Our fundamentals are strong, and we look forward to seeing many more people enjoy Canadegoo's products in the months and the years ahead.

Speaker 2

Before I hand the call over to Jonathan, I want to congratulate him on his appointment to the role of President of APAC and Neil Bowden on taking on the role of Chief Financial Officer, both of which will be effective on April 1, 2024. Both Jonathan and Neil have deep experience with Canada Goose, allowing for a smooth transition between role and continuity across the business, while supporting our growth and expansion in APAC. Thank you. And with that, I hand it over to Jonathan.

Speaker 3

Thank you, Danny, and good morning, everyone. We're pleased with our solid top and bottom line performance in the quarter, reflecting demand and strong operational discipline. Revenue for the Q2 was $281,100,000 up 1% year over year, driven by growth in our DTC channel. On a constant currency basis, revenue was down 3% year over year as the euros strengthened against the Canadian dollar. DTC sales of $109,400,000 grew 15% Or just under 12% on a constant currency basis over the same period last year as a result of retail store expansion.

Speaker 3

DTC revenue was 39% of total sales in Q2 compared to 34% in the same quarter last year. As our store footprint expanded and consumer demand increased in our more profitable DTC segment, we continue to intentionally shift our proportion of channel revenue to sell directly to our end consumers. Q2 wholesale revenue of $162,000,000 was down 10% year over year Or 15% down on a constant currency basis due to the planned streamlining of our wholesale partners. Similar to Q1, we delivered earlier shipments to our wholesalers who are excited to have the products available ahead of the peak season. We continue to see caution amongst the wholesale community, which is reflected in our order book across all geographies as a challenging macroeconomic backlog continues to present headwinds.

Speaker 3

Moving to performance by geography. Q2 revenue increased in Asia Pacific and in EMEA, whilst it decreased in North America year over year. North America revenue of $124,100,000 was down 0.7% or 8% down on a constant currency basis as lower wholesale revenue was partially offset by growth in our DTC channel. In Q2, our DTC segment in North America grew high single digits year over year due to solid store performance. In the U.

Speaker 3

S, DTC sales grew low double digits due to new store sales. Traffic was substantially higher year over year as we more than doubled our store count to 13 permanent stores. We're taking meaningful steps to grow the female consumer, while continuing to build on the success of the men's business. In the Q2, the share of transactions from women remained stable year over year with pieces from our full winter resonating in the quarter. From a product standpoint, apparel and rain categories led the growth in the non heavyweight down portion of the This demonstrates our ability to provide an all season relevant product offering to our customers.

Speaker 3

Moving to Canada, our home market, we registered modest DTC growth compared to the same period last year Due to growth at our brick and mortar stores, as revenue contributions from tourists continue to grow within the mix, alongside a reduced wholesale penetration. Turning to Asia Pacific. This region had a solid quarter with revenue increasing 13% year over year to $63,800,000 up 11% on a constant currency basis. We had especially strong performance in our stores in Hong Kong, In Taiwan and in Macau, with the continued return of Chinese tourism. Store sales rose in Mainland China, where lifting of COVID restrictions has led to a solid rebound in domestic spending.

Speaker 3

We continue to expand our product mix and grow our non heavyweight down offers with rainwear, apparel and footwear representing a larger portion of total revenues on a year over year basis in the region. Lastly, EMEA revenue was up 6% year over year to $93,200,000 or down 4% on a constant currency basis as wholesale revenue was partially offset by softer DTC channel performance. Wholesale outperformance was led by earlier shipments of orders to our partners. DTC store revenue was offset by lower e commerce revenue as consumers felt the pinch of weakening macroeconomic conditions. We continue to see the share of revenue from international tourism grow as a proportion of total revenues in the region.

Speaker 3

Rainwear is a standout category during the quarter, growing significantly compared to last year, with Europe experiencing more rainfall than average during the summer. Moving to gross profit, Our 2nd quarter gross profit grew 8% year over year to $179,500,000 driven by gross margin expansion. Q2 gross margin expanded 4 10 basis points To 63.9 percent. This was due to pricing, a favorable product mix, even with non heavyweight down, outpacing heavyweight down, I might say, and a higher mix of DTC sets. The increase in the gross margin of our products was seen across nearly all categories with non heavyweight down outpacing The margin expansion of our established heavyweight down segment.

Speaker 3

DTC gross margin was 76% in Q2, down 60 basis points year over year, while wholesale margins increased to 57%, up 620 basis points, again compared to the Q2 of last year. Gross margin in the DTC segment was marginally lower due to inflationary product costs and higher freight charges due to increased volume in the U. S. And in Mainland China, partially offset by favorable pricing. Wholesale margin was higher primarily due to pricing, which included, importantly, foreign exchange tailwinds Due to the strengthening of the euro relative to the Canadian dollar, as well as preference for our higher margin styles Within the heavyweight and lightweight segments by our wholesale partners.

Speaker 3

Adjusted EBIT was 15 point $6,000,000 That was down compared to the $26,300,000 we made in the Q2 of last year, but at the same time was above the top end of our guidance range due to strong operational execution. This was primarily due to lower than planned SG and A spend as we drove efficiencies across the business Through a combination of slowing hiring, process improvements and automation of manual processes. SG and A spend of $177,200,000 was largely associated with the higher costs Coming from the expansion of our retail network, in particular rent and employee costs, as well as the timing of marketing spend, Onetime corporate restructuring expenses and our transformation program, which I'll discuss in a little bit more detail shortly. Adjusted net income attributable to shareholders was $16,200,000 or $0.16 per basic share. Moving to our balance sheet.

Speaker 3

We ended the Q2 of fiscal 'twenty four with inventory of $519,700,000 And that was up 2% from $511,500,000 at the end of the same period last year, As inventory growth decelerated for the 3rd consecutive quarter. In Q2, We bought back approximately 1,360,000 shares to a total cash consideration of $29,900,000 Ending the quarter with $851,900,000 of net debt on our balance sheet, compared to $734,100,000 at the end of the Q2 of fiscal 2023. The year over year increase was due to our investment in the NCIB, our share buyback program, And higher borrowing as we prepare for our peak season. Since the commencement of our NCIB, We have repurchased 3,700,000 shares or 68% of the amount authorized under the program. As you know, this is a strategic pillar in our capital allocation policy and something we keep under constant review.

Speaker 3

We're comfortable with net debt leverage of 3.3 times adjusted EBITDA at the end of the quarter, which you should remember Reflects a seasonal cash flow point for the business. Based on the seasonality of the business, We expect to reduce our net debt leverage ratio by the end of the fiscal year. During the Q2, As part of the transformation program, we took meaningful steps to identify and eliminate inefficiencies from our cost base, while enhancing customer experiences. We streamlined our corporate workforce, reducing non store And non manufacturing headcount by approximately 10%, resulting in a more lean and centralized structure to support the next phase of growth. We also transitioned more production in house with nearly 85% of our domestically produced jackets Manufactured in house in the Q2 of fiscal 2024 compared to 58% as recently as the Q4 of fiscal 2023.

Speaker 3

In house production gives us greater flexibility and quality control over our manufacturing process and consequently control over inventory management. We also rolled out a number of initiatives To enhance store productivity, touching staffing, merchandising and layouts as we seek to improve conversion and customer satisfaction. Together, this has resulted in estimated savings run rate of approximately 15% Of the $150,000,000 we expect as a result of our transformation program by fiscal 'twenty eight and that progress It's ahead of our expectations. Turning to our outlook. We had a solid first half of fiscal twenty twenty four, Delivering on the top line, delivering on the bottom line expectations.

Speaker 3

And we're making good progress across our strategic pillars and our transformation program and seeing some early benefits of our work in the positive adjusted EBIT achieved in the second quarter. We remain confident that our strategy is the right one to achieve long term sustainable growth and improved profitability. All of that said, our outlook for the back half of fiscal 'twenty four Has come under pressure due to an increasingly challenging global macroeconomic environment that has Impact to consumer decision making and prioritization of spend. As a result, we saw early momentum gathered in our 2nd quarter begin to slow noticeably in September. While we began to see some improvement in late October, Visibility remains reduced.

Speaker 3

To reflect the increased uncertainty in the macro environment, We are revising and expanding the potential range of outcomes for revenue, For non IFRS adjusted EBIT and for non IFRS adjusted net income per diluted share for fiscal 2024. As a result, we are updating our full year 2024 guidance as follows. We expect total revenue to be between $1,200,000,000 $1,400,000,000 for the full year. Our revenue guidance assumes DTC revenue to be around 70% of total revenue, Representing a high single digit increase to a low double digit decrease In year over year DTC comparable sales growth and continued store expansion, We now plan to open 15 new permanent stores this year, 9 of which are open as of today. We also expect wholesale revenue to decrease year over year by a lowtomidteens percentage, Reflecting the continued editing of our wholesale door count, which I would remind you is 6% down, We now expect non IFRS adjusted EBIT between $135,000,000 225,000,000 dollars in fiscal 2024, representing an operating margin of between 11% 16%.

Speaker 3

This assumes the gross margin percentage to be in the high 60s on a full year basis with DTC and wholesale gross margin In the mid-70s and low-50s, respectively, we expect SG and A expense To grow at a mid teens percentage rate on a year over year basis due to the larger DTC network And the associated operating cost base moderated by cost saving initiatives, including around $15,000,000 in savings We expect non IFRS Adjusted net income per diluted share to be between $0.60 1 $0.40 This assumes an effective tax rate in the high teens As a percentage of income before taxes and a weighted average of diluted shares outstanding of 103,500,000 units for fiscal 2024. Consistent with this annual guidance, our guidance for the Q3 is as follows. We expect revenue between $575,000,000 $700,000,000 Non IFRS adjusted EBIT between $190,000,000 $265,000,000 And non IFRS adjusted net income per diluted share between $1.22 $1.76 The outlook I've provided represents our most likely range of outcomes based on the trends we've seen so far this quarter. And consequently, where we believe this may take us for the entire Q3 and the full fiscal year. In summary, while the macroeconomic environment presents challenges, we remain very focused on the things we can control, Our products, our brand and our operations.

Speaker 3

In addition to advancing our 3 pillars, We are taking clear steps to improve our operational efficiencies and we're seeing positive results. I'm excited about our prospects as we continue to build on our luxury positioning and execute our strategy to drive profitable growth over the long term and the best possible results in the coming quarter. With that, operator, please open up the lines for questions.

Operator

Thank you. For additional questions, please rejoin the queue. Thank you. Our first question comes from Brooke Roche from Goldman Sachs. Please go ahead.

Operator

Your line is open.

Speaker 4

Good morning and thank you so much for taking our question. I was wondering if we could discuss A little bit more context on the trend that you're seeing throughout the quarter as you move through the fall season, both in stores and online by consumer cohort. What changes are you seeing in consumer behavior? And how are consumers resonating with different aspects of your brand, including the new women's collection? Thank you.

Speaker 2

Hey, Brooke, thanks for the question. We are So far, yes, the trends that we're seeing so far are mixed. We're seeing traffic in our stores is up. We're We're pleased to see that. We have opportunity to continue to drive conversion of that traffic.

Speaker 2

It's Our consumers are gravitating towards their new products and the mix of consumers in our stores remains strong. There's lots of A high percentage of new consumers as well as returning consumers and we're encouraged by that. We do continue to see We have started to see some softening earlier, as Jonathan alluded to, earlier in October and recently we've started to see that getting a little bit better and it's hard at this point How much of that is a new trend and is going to continue, which is why we've taken a cautious approach. We're certainly encouraged from a brand perspective to

Speaker 3

see the traffic in our stores is up.

Speaker 5

I can just jump in too. Brooke, just on the But of men to women, so you've heard Jonathan talk about what we talked about before about how we're really trying to dial in and increase that share of women customers. And so We saw that happen significantly in the U. S. In Canada and EMEA that remained pretty stable.

Speaker 5

Where we saw a bit more changes, Gen X customers that Decreased within the mix this quarter, which again it lines up with what we're thinking and what we're hearing and seeing in the industry in terms of the aspirational Customer being a little bit more challenged right now.

Speaker 4

Great. Thank you. And if I could just follow-up with one additional question on China. Can you elaborate on what is now embedded in your updated full year guidance for Chinese consumer growth both in Mainland China but also globally?

Speaker 3

Yes. So I think when it comes to China, we're seeing an environment which It's still somewhat challenged in terms of the economic impact on the Chinese consumer. That said, we are coming up against very much softer comps as we go through November and into December, as you recall last year, there was very little business being done at that critical time. So we We expect to see some growth coming out of Mainland China for that reason. When we look more broadly, what we're seeing is that the Chinese consumer is Starting to travel, but really that travel is an Asian phenomenon rather than a global phenomenon.

Speaker 3

So we are definitely seeing More Chinese consumers across Southeast Asia, and we're seeing that manifest itself particularly in our stores in Hong Kong and Macau.

Speaker 4

Thank you very much. I will pass it on.

Operator

Our next question comes from Ike Boruchow from Wells Fargo, please go ahead. Your line is open.

Speaker 6

Hey, thanks guys. Two questions from me. Number 1, just at a high level, curious, how is the business preparing for the banning of PFAs in key markets like New York, for example? I'm just kind of curious, how do you are you adjusting manufacturing? What's the conversation internally?

Speaker 6

And then looking at the P and L this quarter specifically, The other revenue line was up to $8,000,000 or $9,000,000 from like less than $2,000,000 last year again. Just can you comment on what exactly is driving that? What's And then, what is that other line kind of forecasted to be the rest of the year as well? How should

Speaker 3

we think about that? Thank you.

Speaker 5

Thanks, Mike. On the first question, so PSAs, so this is a topic we've been Talking about for many, many years, we obviously have a robust program in our sustainability and you've seen, our goals and objectives on that trajectory. So we're well underway. I would say we're feeling strong ahead of schedule, so it's something that we look at region by region. I would not say that's the only A factor that we look at, our sustainability under our Human Nature platform is quite robust.

Speaker 5

And so that's one of our key factors and focuses as we

Speaker 2

Yes. I'll just add to that. I think that our vertically integrated supply chain manufacturing infrastructure is one of our strengths And one of our core competencies is an area that we excel and we feel that we're very much ahead of the curve when it comes to these sorts of matters.

Speaker 3

When it comes to the growth in the performance in the second quarter, obviously, it was In fact, year over year. I think you have to remember is that quarter 2 is all about our wholesale business Really, and the DTC only starts to get going in earnest toward the end of the quarter as you go through September. So as a result, any growth you see there doesn't really show up in the waiting and it's therefore something that's very much more about The wholesale business, which as we've said all along, is going to be down year over year. And even though we were able to meet consumer request to ship Somewhat sooner. The reality is that we still end up down year over year in wholesale and that produces an overall flat picture.

Speaker 3

The key numbers in that though is our DTC business is growing in double digits. Despite the drop in comps, We're still making headwind the growth in that business.

Speaker 6

Right. But I'm asking about the other line. I'm just Because of the friends and family event that happened a couple of quarters ago, I was curious as like what is going on that's driving the higher revenue and other? And then what should we expect the rest of the year?

Speaker 3

I mean, again, as I've said before, friends and family for us is A relatively insignificant part of the total business, it was up €8,000,000 over year as in terms of sales to employees and friends and family, generally speaking. It's a level of business that is likely to, in our view mirror last year as we go through the rest of the year. And we see it as a normal business activity.

Speaker 7

Okay. Thank you.

Operator

Our next question comes from Oliver Chen from TD Cowen. Please go ahead. Your line is open.

Speaker 8

Hi, thank you. On the call up on uncertain macros and buying closer to needs in cold weather, just In your guidance range, it would be helpful to understand what's assumed on the higher end of guidance as well as the lower end. And As you thought about this consumer that's prioritizing certain things, which parts of your assortment were most impacted? And second, you Have made a lot of progress in innovation and a lot of great callouts about what's happening forward with innovation and cultural relevance as well as product. What percentage mix is non heavyweight down?

Speaker 8

And how should we forecast that going forward, given all your initiatives?

Speaker 3

So if I can comment on the obviously, we expect A continuation of the macro. We're not expecting that suddenly to pivot. I think what we would say is that particularly in the U. S, Remember that really we saw that quite suddenly and quite sharply as the holiday season began last year. So we sort of become a bit more comparable with that at the back part of Q3.

Speaker 3

I think when it comes to weather, obviously, we're coming out of a very Unseasonably warm September, which by popular record is by popular account is record breaking across most geographies. We have not assumed an especially mild winter or an especially cold winter in the range of times we've assumed normal weather conditions. Weather impacts this business in the sense that it's

Speaker 5

it prompts

Speaker 3

the first cold snap Prompts business. It sort of reminds the consumer that this is the time that they should go and By cold weather gear. And so the longer you wait for that, the later it starts. And I think that is what we've experienced this year. I think when it comes to the consumer set, As Carrie was describing before, I think that Gen X and that's really where the aspirational consumer Is most concentrated is probably the area we're seeing most affected by all.

Speaker 3

When it comes to non heavyweight down, our business is obviously, it's Fairly seasonal and therefore not heavily weighted down. It's more concentrated, in particularly Q1 and Q2 as we saw this year. But as we think about it for the full year, it's still going to be over half of the business by value. Last year, it was, I think 63%. We should think about it to be in and around the high 50s, low 60s as a sort of Normal place for the time being as we grow and establish the non heavyweight bound categories.

Speaker 3

What I would also add is in Q2, We saw about 5, 6 times the growth rate in non heavyweight down compared to the growth that we saw in heavyweight down, Understanding both of them, we're

Speaker 5

Sorry, Oliver. The thing that excites me about that is where we're seeing that. So, high sales growth in terms of Brainware. So we're seeing that in APAC, followed by North America and then EMEA. I think Denny referred to this before, but our fleece category.

Speaker 5

So we're seeing massive uptick in that, whether it's outerwear, whether it's a layering piece, there's Customers are gravitating towards the Chillic and the CIMCO. What I really love about all of this is that none of the category expansion isn't coming at the expense of Gross margin. So as we get into new categories at different price points, we're still able to hold margins.

Speaker 2

Yes. Oliver, if I can just sorry, just jump in and add to it. I just want to go back to the point I made earlier about traffic and how strong we're feeling about our brand Thank you, and the traffic trends in our stores. And This company has changed a lot over the years, from one that was really very wholesale focused, one to where now we're more DTC than ever before, which is a really, Really good thing for us in so many ways, but also what it does is it pushes our revenue further to the right and We've just got back to your guidance question about the response with widened the range of outcomes. It's really early to tell.

Speaker 2

Zani is asking how the macro environment is going to play out in these uncertain times and we felt that's responsible to do. But In regards to how we're feeling about our brand and overall, we're feeling really good about it.

Speaker 8

Thank you very much. A quick follow-up. You made progress on your e commerce and you have Really great leadership there. But what's happening in that business in terms of what we should know, the consumer interface Looks much better and the content looks really integrated. But overall, across the industry, we've been seeing traffic and conversion issues.

Speaker 8

Thanks. Best regards.

Speaker 2

Yes. Thanks, Oliver. I appreciate the comments on our website ecommerce platform. We are really focused on it. Also seeing traffic being very strong there as we are in stores, which is great.

Speaker 2

And we've got multiple projects going on, many AB tests that we're working on at this Now concurrently to optimize conversion and that's what we're focusing on. And many of those tests are working and I expect to continue to see those show progress in the quarter and years

Speaker 3

Thank you.

Operator

Our next question comes from Rick Patel from Raymond James. Please go ahead. Your line is open.

Speaker 9

Thank you. Good morning, everyone. I appreciate you taking the question. You talked about seeing more gross margin expansion in the non heavyweight Down category, I was hoping you can expand on the drivers of that and how we should think about the sustainability of these margins as we think about the puts and takes going forward.

Speaker 3

Yes. Hi, Rick. It's Jonathan. Our gross margin story has been Very much consistent over the years. We've been very clear that over the longer run, We're talking about mid-70s and DTC mid high-40s in wholesale.

Speaker 3

At the moment, we've got a tailwind of FX. So hence, this year is somewhat stronger than that in wholesale. But the reality is that the way we manage this We mature the margins as the category grows. And so back in the Investor Day that we did in February this year, we deliberately printed the consolidated gross margin for Lightweight down to illustrate the fact that it's very close to the corporate margin. And that's important because as the category has built out to a meaningful 2nd pillar in this business.

Speaker 3

What we've been able to do is to grow the gross margins back to the level that we'd expect them to be as a mature category. So you'd correctly assume that, for example, footwear margins are not that strong right now. But that's okay because we're on a trajectory. And if I stand back from all of this, and I go back to, call it, 2018 when we were, Let's say 85% heavyweight down and just heard that we've that mix has come down to sort of low 60s. Our margins have stayed the same.

Speaker 3

So what we've been able to do through that journey is actually manage the overall algorithm to accommodate those the maturing and improving gross margins outside of heavyweight town and balance the tailwinds that we create with the investment in product development and investment in scales until that point happens. So I hope that gives you a sense of it. We're certainly not changing our perspective on the sustainability of those gross margins, Nor are we expecting to raise them overall because one of the key components is that we continue to invest new product development in new categories We need the space to do it within the overall gross margin.

Speaker 9

And you also touched on an improvement in late October. Can you just Expand on that. Does that reflect marketing or product activation? Or is it a function of just week to week volatility?

Speaker 3

I think you're right. We do touch on the fact that we're seeing sequential improvement. And I think that's Obviously, Keith, inevitably, there are activities that we do as we get into peak season, that's true every year. I think around us, you're also getting the advent of fall, which you're probably seeing a feeling firsthand. And As that happens as well, it's you've got the coalescence, if you like, of the activity that we're undertaking and The climate becoming a little bit more seasonal.

Speaker 3

And so the 2 come together and the business starts to build.

Speaker 2

Absolutely. It's the time when we expect to see this happen. This is where our business is the flow of our business every year. And Starting in September, every week is bigger than the previous week. And so The acceleration we started to see towards the end of October is promising and It's not enough yet to indicate a complete shift in trends, but it's certainly a bright spot and we're optimistic about it.

Speaker 7

Thank you very much.

Operator

Our next question comes from Robbie Ohmes from Bank of America. Please go ahead. Your line is open.

Speaker 10

Good morning. Thanks for taking my question. I was curious if given the sort of change in the global operating environment, If you're thinking about changes in the promotional strategy for Canada Goose to drive better response from customers. And also just with the weakness in the wholesale channel, are there any thoughts of any adjustments Strategy in wholesale, like maybe more of a relationship with Amazon or other distribution channels to sort of Support revenue growth in this tougher environment.

Speaker 2

Hey, Robbie, thanks for your question. Yes, so from our point, There is absolutely no change with regards to our strategy. When our promotional brand, our product sells through very well at full price and The value that is inherent in the products that we build here in Canada is something that our consumers recognize and know the demand that we build for our products It's something that we've always taken great pride in. And so yes, we have no plans to change our strategy with that regard.

Speaker 10

And any thoughts on changes in distribution strategy, maybe opening up more with Amazon as an example?

Speaker 2

No, in fact, we don't some. There was a time when we sold through Amazon many years ago, we decided not to stop doing that and That decision turned out to be the right one for us and helped accelerate our own online business at the time. We feel that we have the right, the right alchemy Of partners and we're going to stick with them.

Speaker 5

Yes, I think just to jump in on the just to add some color on, the whole Stay with the same strategy. We may add some doors. We're not looking to add volume of doors, but strategic accounts, influencer accounts, of course, those change year after year, Season after season, who are they meeting a different customer that we want to reach? So those are where we think about adding. Generally, as you've heard us talk about, It's streamlining wholesale to make sure that we're doing better business, bigger business with the right partners that treat the brand right, understand that it's a full price brand, Full price proposition, so nothing on that front has changed, but I just want to clarify who we would add with if we did.

Speaker 3

Otherwise, it has to be brand accretive. And that is our guiding light. And ultimately, that's why we lean further into DTC in this journey.

Speaker 10

Terrific. Thanks so much.

Operator

Our next question comes from Jonathan Komp from Baird. Please go ahead. Your line is open.

Speaker 11

Yes, good morning. Thank you. And Jonathan, congrats on the new role. I want to ask just about that transition and I know it will Yes. It takes some time to occur, but could you just maybe elaborate more on the reasons for the leadership change In the Asia Pacific region and then maybe more near term, if you could just talk a little bit more about separate of the easy comparisons in China the next few months, What's your sense of the recovery for the Chinese consumer and how that's faring versus your expectations?

Speaker 2

Thanks, John, for question. It's Daniel. I'll start

Speaker 3

to give some

Speaker 2

high level commentary on the management changes and leadership changes, I'm very excited about, to start with Jonathan moving to APAC. Obviously, Jonathan has got Tremendous knowledge of our business over the years and, Bhagwala, that goes as I was saying. And he's also got tremendous Knowledge of the Asian market from this business and past businesses that he's been involved with In that region, great knowledge of the retail landscape and storage adjacencies and This is Keith, also in negotiating our JV agreement with Japan. So Jonathan has perfectly suited that role and gives me someone, Another person that I trust deeply in that region and that's very important. And with regards to Neil, Neil has been working at Canopy's for a long time now, knows our business and our brand intimately, is a protector of it and We've been molding him and building him up for this role and he's ready to take it on.

Speaker 2

It's very exciting for Ross and Brandon, we've reached this moment. So it's It's a exciting future. And I don't know if Jonathan talked about that.

Speaker 3

So to answer that and Thank you for your comments. But to answer your question about Men in China, I think that You'll recall what was happening a year ago. I think Golden Week has been an interesting time this year. It's not been the sort of Peak that we've experienced starting pre COVID and in years prior. But as we look forward, we're going to be open in November, we're going to be open in December, and these are As important as October is, November is way more important, December way more important again.

Speaker 3

And we're looking forward to full trading in all of our stores. We've got all of the right inventories well staged around the region. And we believe we're well positioned to take advantage of the consumer demand. And particularly as the cooler temperatures settle in, which is probably it's only just beginning to happen, North and China and Shanghai is still very warm.

Speaker 11

That's really helpful. And then if I could just ask one follow-up On the margin outlook, I know the lower half of the guidance this year embeds lower EBIT margin year over year for the full year. Is there any way as we look forward you can give a better sense of what SG and A growth might look like and just any more context Around the multiyear margin recovery potential.

Speaker 3

Thanks again. Yes. I mean, we yes, I mean, We remain very clear that there are 3 things that will drive our overall margin recovery. One is comp growth and clearly that's a pressure point right now. The second is Successful opening of stores doing the expected levels of productivity.

Speaker 3

And the third is the transformation program, Well, we're already making headway. And you're hearing today that not only are we can we have run rate savings, we've got in year savings. And the best way I can manifest that operational execution to you is if you look at the upper end of the guidance Now and look at the level of profitability that's been built into it, it's the same level of profitability So we were expecting when we got to a higher level of revenue previously. So we've been able to bring into the mix A significant first step. That's important because that gives us some of the momentum we need To start building that third leg of our growth, while we focus on building comp growth and continuing the retail network development alongside.

Operator

Our next question comes from Mark Petrie from CIBC. Please go ahead. Your line is open.

Speaker 12

Yes, good morning. Thanks for the question. I just wanted to follow-up on the U. S. Specifically and you could give any more color with regards to sort of the detail on sales patterns, particularly by regions and then also with Stokes store cohorts And appreciate any comments about the ramp up of stores opened in the last year or so.

Speaker 12

Thanks.

Speaker 5

Thanks, Mark. So the U. S, yes, we talked about it under some pressure. Obviously, revenue is down year over year, 11%. But the good news as we've talked about a lot and this is what our opportunity to win is traffic substantially higher.

Speaker 5

So obviously, we doubled our store count. We opened 3 new stores in Bev Center, in FIPS Plaza and then King of Prussia. So traffic is there. They're coming. They're engaging with the brand.

Speaker 5

As we said, I think there's a bit of a hit to that And we're generally people are just maybe waiting to see the urgency isn't the same as we've seen in years previous. In terms of Regional news, I mean, we continue to succeed similar to Canada where tourism is happening. So you see that in the West Coast, You see that in New York area. That's not a new phenomenon for us, but continue to see that. New stores are opening well.

Speaker 5

I would say because we're opening it in this environment where it's a little bit more challenged, we're not seeing the same types of Instant lineups that we would before, again, still very happy with the traffic and the engagement and the brand buzz around that, but a little bit more tempered, I would say, than maybe Definitely pre pandemic, but maybe in the last 3 years. So it hasn't changed our strategy. Again, we build stores for the long term success. We know that those are the right locations. We know that that's where the traffic will eventually and that they will convert.

Speaker 5

So we're just even for those days to start happening.

Speaker 3

We're seeing a good contribution from the store expansion to the overall business in the U. S. To the point where As you'd expect and hope, but nevertheless, it's important we reaffirm. We're actually seeing significant top line growth In our total stores cohort in the U. S, even if we're negative on the comps.

Speaker 12

Yes, understood. Okay. All the best in holiday. Take care.

Speaker 3

Thank you.

Operator

Our next question comes from Michael Wu from Barclays.

Speaker 7

Good morning. Yes, as Aubrey said, this is Michael Vu and I'm on for Adrian Yee, and thank you for taking our question. So your inventory position has vastly improved, but we were wondering how does the big sales guidance impact fiscal year and inventory expectations?

Speaker 3

Yes. It's obviously, it's a fairly broad range. The range is clearly Driven by DTC volatility. And If you go with that, then you're going to assume that, that range has a maximum impact of 25% of that revenue number on the inventory at the end of the year. Therefore, it is possible that we end the instead of being flat, being slightly up.

Speaker 3

But We're working very hard to make sure that our production plans and our purchasing are as tailored as they can be to what we're seeing Because we are still driving for improvements in inventory turns both this year and over time. What you've also seen this quarter is, as you know, is our 3rd successive quarter of inventory deceleration. And I think that's important. We've said it all along. We continue to expect that to be the case.

Speaker 3

And obviously, we're working to make sure we don't end up at the bottom of the revenue range in any event.

Speaker 7

Great. Thank you. And then can I ask one follow-up question since we're discussing inventory? So how much more do you plan to manufacture in house this year versus last year? And would you please repeat what you said about the improved merch margin drivers from in house manufacturing?

Speaker 3

Yes. I mean, so we're running at 85% now. I think we were Remember, it's 75 or 78 in the previous quarter, but with this quarter, we were 85. That's sort of where it belongs. We like having complementary CMT manufacture, it allows us to put the right manufacturing in the right locations, gives us flexibility, gives us resilience.

Speaker 3

But it's sort of that helps us in terms of how we operate. When it comes to the tailwind that comes through it, there is a Tailwind. But you got to rethink about where it comes from because the materials come from us. So if you think about product makeup being, call it, 40% material, 40% labor, 20% overheads. To the extent there's a profit element, the profit elements on the labor and the OPEs are not in the materials because it's CMT They're getting the packages of materials from us in the first place.

Speaker 3

So it's one of the components of Tailwind But we create alongside pricing alongside sourcing efficiencies. But it sits within our overall margin algorithm, Which I was talking about before is normally being mid-70s, mid- to high-40s between the 2 key channels and this year's low-50s because of the FX Tailwind and wholesale.

Speaker 7

Great. Thank you very much.

Operator

Our last question will come from Jay Sole from UBS. Please go ahead. Your line is open.

Speaker 13

Great. Thank you so much for taking the question. My question is, you said you're opening 15 stores this year. How many leases have you committed to for next year store openings? Thank you.

Speaker 3

Yes. We're relatively early in that journey at the moment, as you'd expect. So we probably got somewhere in the single digits and a handful of stores at this point as you would expect. But obviously, we have our plans and we've got our target locations and we're well on with the negotiations. So it's just sort of where you'd expect to find us at this point in time.

Speaker 13

And Jonathan, can you tell us how many stores you expect to open next year?

Speaker 3

It's a little early for that at the moment Because we haven't talked specifically about our plans for next year. But what I would remind you From the Investor Day is that we've set our stall out for, call it, 130 to 150 stores over a 5 year time horizon, including conversion of Stores that might be under different arrangements today into our own network. So that's the best guidance Point I can give you, little g, in that sense, that gives you a sense of pacing.

Speaker 13

Got it. Okay. That's helpful. Thank you so much.

Speaker 11

Very welcome.

Operator

We have no further questions. I would like to turn the call back over to Anna Raman for closing remarks.

Speaker 1

Thanks everyone for joining us today. If you have any

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
Canada Goose Q2 2024
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