Earnings Call Transcript - GOOS Q3 2020

Operator, Conference Operator

Good morning. My name is Kenzie and I will be your conference operator today. At this time, I would like to welcome everyone to Canada Goose's Third Quarter 2020 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. I would now like to turn the call over to Patrick Bourke, Senior Director, Investor Relations. You may begin your conference.

Patrick Bourke, Senior Director, Investor Relations

Thank you and good morning, everyone. With me are Dani Reiss, President and CEO; and Jonathan Sinclair, EVP and CFO. After prepared remarks from Dani and Jonathan, we will take your questions. This call, including the Q&A portion, includes forward-looking statements. Each forward-looking statement, including discussion of our fiscal 2020 outlook, is subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statements. 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 the earnings press release issued this morning, as well as the Risk Factors section of the most recent annual report filed with the SEC and Canadian Securities Regulatory. These documents are also available on the Investor Relations section of our website. 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. Our commentary today will include certain non-IFRS financial measures that are reconciled in the table at the end of the earnings press release issued this morning and available on the Investor Relations website. With that, I will turn the call over to Dani.

Dani Reiss, President and CEO

Thank you, Patrick. And good morning, everyone. There are two things that I want to accomplish with this call today. Number one, I'd like to share our third-quarter results to continue to reinforce our brand health and long-term growth trajectory. And secondly, I'd like to address the coronavirus health crisis and its material impact on our fourth-quarter performance. So let me start with the good news. Our brand is strong, and our third-quarter performance results are a testament to that. I'm really encouraged about the health of our brand and as energized as ever about our long-term potential. To me, what matters the most is that Canada Goose is driving traffic and sales at full price. We are delivering best-in-class product and experience, and we are building deeper relationships with our consumers. We're not only succeeding at all of this, but excelling. This was recently reflected in the List Index where Canada Goose was included as one of the top 20 hottest brands in the world in the last quarter of 2019. To compile this list, they analyzed the shopping behavior of more than 9 million shoppers across 12,000 designers and stores online, considering search data and online sales, as well as social media and engagement statistics. It is a great external validation of what we already know to be true, that brand strength led to strong performance. Our third-quarter revenue increased by 13.2% to $452.1 million, and adjusted EPS per diluted share grew by 12.5% to $1.08. This was achieved with wholesale revenue decreasing by 8.4% due to a planned and communicated timely shift. As you'll recall last quarter, we had a shift in the order book to the left, and we forecasted a mid-teen decrease in Q3. Nonetheless, we outperformed our expectation because of strong demand for reorders, further demonstrating the strength of our brand. We also grew our direct-to-consumer business by 28.3%, even though our stores in Hong Kong, which prior to the protest were amongst our best in the world, were severely impacted by disruption. In what has been called a challenging retail environment in the winter shopping season, the commercial energy in our stores was incredible. We continue to have frequent lineups across our store network including our order locations such as Yorkdale and SoHo, and our new experiential store at Sherway. That ability to drive profits and full-price sales also applies to wholesale. I carefully curated best-in-class partners regularly called us out as bright spots. Timely shifts aside, the fact that we have grown wholesale revenue by 11.2% year-to-date while editing down points of distribution is a testament to how strong our brand is and to the quality of the partners that we have chosen. While most other outdoor brands were discounting frequently throughout the season to drive business, we were not. We had a great Black Friday, one of our biggest sales days of the year without any promotions in our entire DTC channel, and we saw the same strength for Cyber Monday and for Boxing Day. That tells me that we continue to offer consumers something unique, which they truly value and are willing to invest in. We are not prepared to participate in a race to the bottom with which other brands are. Many of you have done your own channel checks, and you know what I'm talking about. This continued brand momentum all started with great products. We've been methodically adding depth and diversity to our offerings for years. The results this season tell us that we're on the right path. Our top five new styles across both genders were lightweight down, which is incredibly versatile product for a wide range of conditions and requirements. We also saw the large hoodie, a core lightweight jacket that we've had in our collection for years, become one of our top sellers in DTC. There is no doubt that our strategy to move beyond just the parka is working. In Knitwear, we also continue to see encouraging results. It is growing well above the business as a whole, with significant volume increases complemented by an additional uplift from pricing. For the first time, the category approached double digits in a percentage of sales and in the number of retail stores, not surprisingly, I’ve seen in Hong Kong and Milan given the climates, as well as Mall of America. As we all know, retail is undergoing transformation, and success requires new thinking and bold moves. As I mentioned in our last call, we opened the journey, an innovative new retail concept that we launched in Toronto in December, which is a great example of that breakthrough innovation. We've seen an incredibly strong reception from consumers already. During a three-week period in the heart of the holiday shopping in December, over 8000 guests completed the journey. It takes about 15 minutes; it is a guided and intimate tour to explore the brands with digital content, interactive displays, and the next generation of our award-winning Cold Room. As they finish their journey, guests have the ability to browse and purchase the full assortment of Canada Goose online with local same-day home delivery and they do. As an experimental omnichannel concept, there are a lot of valuable early learnings from the journey that we're reflecting on, and it has proven that an inventory-free store environment can be commercially viable for us. With this format, we enable our brand ambassadors to focus exclusively on guest experience, education, and service. And customers get access to the full depth of our online inventory at a snap of their fingers with same-day delivery. We consider this experiment to be a big success, and this concept is something that we are very excited to explore further. I also want to provide an update on our supply chain, which we discussed last quarter. Now that we have sufficiently built our own manufacturing infrastructure, we're in the process of rationalizing our third-party manufacturing capacity by approximately two-thirds. We expect that this will bring in-house production as a percentage of total output from the low 50s at present to approximately 70% in the next year. As we have said before, in the short term, we plan to continue to ramp up our own facilities, building inventory ahead of near-term growth for next year to maximize efficiency and continuity. Moving into fiscal 2021, our plan is to have inventory levels be much more in line with sales as total output comes down in a planned way, and we expect to see inventory normalized relative to growth by the third quarter. Now, let me address the dynamics around the coronavirus outbreak which has hit our biggest current growth market. First and foremost, our hearts go out to everyone who has been affected, and we stand together with everyone in China and the rest of the world in addressing this health crisis. To that end, we have made a RMB1 million contribution to the Wuhan Charity Federation, and we hope that our humble contribution can be of help in swiftly winning this battle. The health and safety of our team in Greater China is our top priority, and we are closely watching the situation and adjusting our operations as needed in cooperation with the local authorities. I'm proud of how our team has responded to the situation. They have demonstrated incredible calm and professionalism. On their behalf, and on behalf of all of our 5300 employees around the world, I want to express our gratitude to all of the healthcare workers who are working tirelessly on the front lines. China is incredibly resilient, and we hope for a swift resolution to the situation. As is the case for everyone in the luxury industry, this is obviously a major near-term headwind. Understandably, people are staying home and avoiding shopping for their own health and safety in China and abroad. So we're seeing impact in our stores and on TMall in China, and also in stores located in major international shopping destinations in Europe and North America due to extensive flight cancellations and travel restrictions. While we expect this to have a material near-term impact, this is a temporary disruption. Nothing about the situation impacts our fundamentals, and our future growth potential remains intact. We know it will pass with time, and we believe we have the financial and brand strength to ride it out with confidence. From a supply chain perspective, we expect that any impact that may occur in the long term will be offset by the buffer inventory that we have built over the last year. Unlike many other manufacturers, our current finished goods inventory gives us high confidence in our ability to fully satisfy demand for next year. We've built an incredible business in Greater China in a short time, and we are ready to continue our rapid expansion there as soon as this is over. In closing, I deeply believe in our long-term potential and our strategy to get there. We continue to work diligently on our product extension plans, our brand is strong, and we have a solid position in all of our key markets. We already command the things that we can control, and we have the strength to navigate the things that we can't.

Jonathan Sinclair, EVP and CFO

Good morning, everyone. And thank you for joining us. We delivered robust growth in revenue and earnings in the third quarter in line with our expectations across key metrics. As we contended with the external disruptions and the planned timing shift in our wholesale business. As Dani mentioned, the continued strength of global affinity for our brand, the growing international diversity of our business, was pivotal for our performance. With that said, the immediate and material negative impact the coronavirus outbreak is having on the fourth quarter with just six weeks of the year left. We have adjusted our annual outlook, and I'll return to this later. I’ll now walk through the numbers in detail. Please note that all the figures are quoted in Canadian dollars. For Q3 compared to the same quarter last year, revenue increased by 13.2% to $452.1 million or 13.7% on a constant currency basis. Starting with wholesale, revenue decreased by 8.4% to $150.3 million or 8.1% on a constant currency basis. As we discussed in our last call, this is mainly a function of when we shipped. This year, we were able to deliver a higher proportion of total order shipments sooner than last year in response to customer requests and enabled by manufacturing flexibility. As a result of strong in-season reorders late in the period, we outperformed our communicated expectation of negative mid-teens growth. DTC revenue increased by 28.3% to $301.8 million or 28.9% on a constant currency basis. Hong Kong was a very severe headwind in the third quarter. With the anniversary of IFC’s exceptional opening and despite the opening of an additional store this year in Ocean Center. Beyond the declines in tourism and traffic, we also had to contend with frequent reductions to regular operating hours. Otter at IFC had 21 days of early closures, and three days of full closures, while Ocean Center had 27 days of early closures, and two full closures. Elsewhere, while we were pleased with this year's new store openings, they generally had lower revenue contributions in the quarter relative to last year. This is due to differences in market characteristics and business patterns with doors. With the exception of Short Hills, which is a great local store, the other four openings last year in Vancouver, Montreal, Beijing, and until the disruptions in Hong Kong, are all among the most significant top-line contributors in our retail network. Looking at our fiscal 2020 openings, Sherway is experimental and experiential. Banff is our first-ever store in a resort town. Edmonton is a strong, but smaller market in relative terms. With Milan and Paris as well as Banff, we also expect a proportion of sales to occur outside of our typical big season in Q3. Intuitively, this is due to high levels of international retail traffic in the markets in the summer months. With a network of only 20 stores globally, we are still incredibly underrepresented in some of the world's most important luxury retail markets. A great example of this is our new store opening in Shanghai. This was the standout performer in Q3 from our openings this year. Shanghai is China's wealthiest and largest city, with over 20 million people. It's also the nation's fashion capital with highly sophisticated global shopping. We knew going in that local demand was exceptional, thanks to the TMall survey. At our location at the food on IFC Mall, it is world-class. More broadly, the pulse of our DTC business was great during the holiday shopping season. We believe our brand continues to define the performance luxury space, driving exceptional traffic and consumer engagement with our stores and e-commerce sites as the destination for those who want the best product and experience. It's great to see our oldest stores and our most developed markets, Yorkdale, and SoHo perform so strongly. It's well documented that as our first two locations globally, they opened to great fanfare. Three years later, and during the peak season, they are going from strength to strength, with frequent lines and exceptional results throughout the quarter. Online, both Mainland China through TMall and the U.S. led the way, growing significantly relative to last year. That momentum speaks to the incredible digital runway we have in those two major markets. Moving on to revenue by geography, we're making great progress in our evolution as a global luxury brand. While Canada is our most developed market in terms of distribution relative to size, it is and will continue to be important with further growth potential. Informed by how the sector looks globally, we believe that we have larger longer-term growth opportunities in other parts of the world. And we're moving the needle on them, starting with Asia. Here, our top line doubled to $94.7 million and $46.4 million was driven by incremental revenue from expanding DTC operations in Greater China compared to last year. As a wholesale distributor market, you will also recall from previous quarters that Japan had a particularly large timing shift. Japan was not a positive contributor in this quarter, though its trajectory in the year-to-date remains very strong. Europe and the rest of the world revenue increased by 11.9% on a constant currency basis. DTC performed well across the region and drove growth. In the United States, revenue increased by 10% on a constant currency basis. Strength online and in store offset the impact of negative growth in wholesale. Through a year-to-date lens and adjusting for timing shifts, our U.S. wholesale business has outperformed the wholesale channel as a whole significantly. We continue to be an incredible driver of full-price business for our carefully curated network of best-in-class U.S. partners. Lastly, at home in Canada, revenue decreased by 11.6%. Also, revenue declined more than other regions due to both timing and a more challenged retail landscape relative to other markets. We have reached a stage where our wholesale presence is at maturity. And so, we are looking to adjust the balance of that going forward. Both stores continued to produce at an exceptional length, but we also had tough comparisons from very strong opening periods in both Montreal and Vancouver, as I mentioned before. Moving on from revenue, consolidated gross margin was 66% compared to 64.4% last year, and that increase was driven by the change in channel mix. As expected, wholesale gross margin was flat year-over-year at 47.7%. This is a 20-basis point improvement from Q2. As our comparisons have normalized versus the first half, this level is right in the mid-to-high 40s area that we want it to be in. Increases to realized prices were a meaningful and positive tailwind. We used the benefits of that to fund cost inflation and the strategic investments in product mix, with lighter weight jacket styles riding significantly, even in our most significant heavyweight parka quarter. From an elevated comparison at 76.1%, DTC gross margin came in at 75.1%. Pricing was a tailwind. In this case, the combined impact of higher input costs, as well as higher freight costs and duties from international sales, more than offset the benefit. While this quarterly result came in under our expectations, it is right on the mid-70s levels that we think are appropriate over the long term. The sustained growth in direct gross margins at these levels, while growing significantly in newer categories, speaks to the power of our pricing. Wholesale operating income was $56.5 million and operating margin of 37.6% compared to 40% last year. This climb was driven by the operating deleverage on SG&A given the timing shift in channel revenue to the first half of the fiscal year. Excluding pre-store opening costs in both periods, DTC operating margin was 56.6% compared to 58.8% in the third quarter last year. This reflects the decline in channel gross margin already described as well as lower contribution margins from current year store openings. Unallocated corporate expenses were $61.4 million compared to $61.3 million last year, while unallocated depreciation also raised from $2.5 million to $2.6 million. While we concentrated more of a marketing investment in this quarter and grew ahead of revenues, this was offset by cost efficiencies as well as higher non-recurring costs in the comparative period relating to the backend acquisition and the secondary offering last year. Combined, this resulted in a total operating income of $161.4 million compared to $139.9 million. On a non-IFRS basis, adjusted EBIT was $163.8 million, compared to $144.7 million, with a flat adjusted margin of 36.2%. Lastly, net income was $118 million or $1.07 per diluted share, compared to $103.4 million or $0.93 per diluted share last year. Adjusted net income was $119.7 million or $1.08 per diluted share, compared to $107.2 million or $0.96 per diluted share last year. Turning to the balance sheet, we ended the quarter with net debt of $296.5 million. This now includes $219.7 million in lease liabilities under IFRS-16. On a spot basis at the quarter-end, net debt-to-EBITDA on a trailing 12-month period remains very strong at 1.1 times. This reflects the seasonal peaking cash generation and full repayment of our short-term facilities. Net working capital was $284.7 million compared to $170.7 million in the same quarter last year. This reflects the continued build of inventory as we move more production in-house, partially offset by increases in accounts payable and accrued liabilities. Looking at the composition of our $348.1 million inventory position in detail, the vast majority is being staged for the next financial year. That captures essentially all of the more materials and work in progress in manufacturing, as well as over 80% of our finished goods, given our current year guidance. I also want to provide an update on the third-party manufacturing rationalization we discussed last quarter. We are in the process of reducing Canadian third-party capacity by over two-thirds. In the near term, our intention is to constantly build and stage inventory ahead of near-term growth, as we further accelerate in-house output for efficiency and continuity. Moving into fiscal 2021, as the rationalization takes effect, there will be an offset to the growth you're seeing now. By Q3 of next year, we expect to reach an inflection point with investment levels in inventory normalizing relative to growth. Now turning to our revised guidance for fiscal 2020. As I mentioned at the start of my remarks, our fourth-quarter performance today is being materially impacted by disruptions from the outbreak of the coronavirus in Greater China. The period going into the Lunar New Year is one of the peak shopping times for our brand. Inevitably, it performed well under our expectations and based on our experience last year. Those are the last major windows of opportunity in the fall-winter selling season. As you're well aware, throughout Mainland China, retail traffic has fallen sharply with consumers staying home and avoiding all non-essential shopping as a health precaution. This includes our most significant TMall markets such as Beijing and Shanghai. In Hong Kong, this is another blow to a market which was already heavily interrupted. Travel restrictions have essentially cut off all traffic from Mainland China, and local activity is almost at a standstill. Unfortunately, SARS is still fresh in many minds. Irrespective of closures and reduced operating hours, revenue is now at negligible levels across the entire store network and TMall in Greater China. Abroad, the impact is spreading globally to major shopping destinations in North America and Europe. For us, as with others in the sector, traveling shoppers from the region account for a significant share of global luxury demand, that is being largely and suddenly cut off with flight cancellations and travel restrictions contributing. While our brand continues to be in great health globally, and is a standout performer in each of our markets, this development has caused us to revise our guidance as follows; annual revenue growth at 13.8% to 15%, implying revenue of $945 million to $955 million. This assumes wholesale growth between 9% and 11%. Adjusted EBIT margin contraction of between 280 basis points to 330 basis points, implying an adjusted EBIT margin of 21.6% to 22.1%. Annual growth in adjusted net income per diluted share of negative 2.2% to positive 0.7%, implying EPS per diluted share between $1.33 and $1.37. There are a couple of factors to consider in assessing this short-term revision. It starts with the success we have had in rapidly scaling our business in Greater China, with a revenue base that is almost entirely DTC. This makes the impact more immediate and more material. We believe that the sudden change in consumer behavior is temporary and unrelated to underlying demand for our brand. We believe that we are poised to resume our strong growth trajectory in Greater China when this is over. With regard to margin and earnings, the timing is also relevant. You'll recall that we concentrated our SG&A growth investments early in the year to secure strong momentum throughout the peak season. We had expected Q4 to drive our annual operating margin inflection, as there was an offset from that spending table. With this sudden development, we lose that leverage, and we don't have enough time left in the year to make significant adjustments beyond those reflected in this guidance. In summary, our brand and underlying business model are as strong as ever. We continue to have deep conviction in our strategy, and we're really encouraged by the progress we've made this year. While we will make surgical adjustments to our forward plans as you'd expect, we won't lose sight of the long game. The phenomenal long-term potential of this brand will always be at the forefront of every decision we make.

Dani Reiss, President and CEO

Thanks, Jonathan. I would be remiss if I didn't take this opportunity to encourage you all to check out our new Project Atigi Collection. This year's expanded collection features 90 bespoke pieces created by 18 innovative designers from 12 communities in Canada's North, who retain all the rights to their designs. All proceeds from the sale will benefit the Inuit communities across Canada through ITK, which is a national organization that supports self-directed Inuit education, employment, and cultural preservation programs. Arctic stewardship has always been a part of our business, and it is something that I'm very passionate about. We're leveraging our global platform to share craftsmanship with the world and create significant economic development in the areas that need it most. Watch this space closely as we have a big long-term vision for Project Atigi, and we are just getting started. While we activate this important initiative, we also just launched our global spring campaign with our newest Goose Person, Kate Upton, a renowned supermodel, entrepreneur, and actress. Kate is a passionate advocate for polar bears and protecting their habitat. This year’s collection includes five new spring styles for our Polar Bears International capsule, including rainwear, windwear, and lightweight down options. $50 from each jacket goes to funding for critical research and advocacy. I have always believed that what is good for business must also be good for the world. So I'm really excited about how closely our commercial efforts are married to our long-standing corporate citizenship initiatives. We're doing it in our own authentic way, true to where we come from, and we're doing it at a greater scale than we have ever before. We look forward to releasing our first sustainability report in the near future. And with that, I will now turn over to the operator to begin Q&A.

Operator, Conference Operator

Thank you. Our first question comes from Erwan Rambourg at HSBC. Please go ahead, your line is open.

Erwan Rambourg, Analyst

Yes. Thank you. Good morning, gentlemen. I'm quite surprised by the magnitude of the revision of the guidance given that North America is still 60% plus of your sales. So I was just wondering if you could give us details in terms of how much Chinese consumers account for in terms of your sales? I mean, we can have a look at Asia and take a view of what Greater China accounts for. But I guess more importantly, it would be interesting to understand how much Chinese travelers account for in terms of sales in Canada and the U.S. So, I don't know if you can give us an assessment of sales by nationality, which would be quite useful in understanding this revision? Thank you.

Jonathan Sinclair, EVP and CFO

Hi. I think our guidance revision is important to understand as it is driven by the impact of the outbreak on our overall business in the fourth quarter, following a third quarter that met expectations across our key metrics. In China, we are experiencing negligible revenue across our entire store network, including TMall. Although local demand in North America and China remains strong, international traffic from Chinese consumers is virtually non-existent due to travel cancellations and restrictions. They have traditionally been the largest purchasers of luxury goods. While the effect is less severe on a unit-by-unit basis, the size of our business outside of Greater China is considerably larger in terms of distribution revenues. For these reasons, which are reflected in our guidance, we expect significant revenue declines in North America and Europe. Historically, we've noted that our clientele mix varies by store, but overall, it is a 50-50 mix between domestic and international demand. I believe that is what you are observing here.

Erwan Rambourg, Analyst

Thank you. And just maybe a follow-up on wholesale; I think you mentioned that Canada was close to maturity. I'm just wondering if you could give us an update in terms of where you stand in terms of the number of doors? I think you went gradually down from 2,500 to close to 2,000 or maybe a bit below. Where do you stand today in terms of doors at wholesale?

Jonathan Sinclair, EVP and CFO

So, in fiscal 2018, we were at 2200. In fiscal 2019, sorry, we were at 2200. And we were on a gradual journey of editing towards about the 2000 mark.

Omar Saad, Analyst

Good morning. Thank you for the information and the update. I wanted to ask a few follow-up questions regarding the impact of the coronavirus in China. Did you notice a significant decline in both Mainland China and the tourist business from outside of Mainland Greater China? Did this drop become more pronounced after January 23, which seems to be a critical date? Additionally, based on your updated guidance, it appears that the anticipated growth for the fourth quarter has shifted from around plus 20 to now between minus 10 and minus 20. Does this suggest that the Chinese consumer accounts for about 30% to 40% of your overall customer base, including those who travel from China? Lastly, how is your e-commerce business in China performing? We have heard from other companies that e-commerce is performing better since people can shop online without leaving their homes. Thank you.

Dani Reiss, President and CEO

Yes. I mean, in terms of the big picture, I think that the fourth quarter impact on the guidance was directly related to China and also to Chinese tourists traveling, and the overall travel ban that have taken effect, airline cancellations and that has caused a decline in traffic overall. Understandably, people are staying home and not shopping, taking care of their health both not shopping in stores or online as much as they were before. And that's the macro reason why our guidance changed this quarter.

Jonathan Sinclair, EVP and CFO

I think it's fair to say that the decline in traffic at malls and shopping destinations in China was sudden, dramatic, and affected the entire sector around the time we indicated. This impacts Tmall just as much as it does the physical stores.

Kate Fitzsimons, Analyst

Yes. Hi, guys. Thanks for taking my questions. I know it's too early obviously to give guidance for fiscal 2021. Just given the business is facing some headwinds right now between Hong Kong and China. Dani, you've been pretty clear that Asia is a big part of the growth story going forward. You have seen tremendous growth in recent quarters despite what you're seeing right now. I guess, when we're thinking about fiscal 2021 growth plans, how is what you're seeing in the business right now adjusting how you were thinking about the growth levers into fiscal 2021? And then longer, can you just speak to your confidence that this headwind doesn’t impair growth below that 20%-plus three-year topline outlook you guys put out about a year ago? Thank you.

Dani Reiss, President and CEO

Thank you for the question. We are very confident in the long-term prospects of the business. There's a near-term impact as well as a long-term impact, and we recognize it as a significant challenge in both timeframes. Nevertheless, we have strong financial stability and are ready to continue our expansion. We believe we can maintain the same growth trajectory, especially in China, where we began building that business unit just over a year ago, and it is growing quickly with ample room for further growth. We look forward to continuing that expansion once this crisis is resolved globally. For instance, being named one of the 20 hottest brands on the List Index in the last quarter of 2019 serves as essential external validation of our brand and capabilities. Additionally, we are seeing robust growth in U.S. DTC. There are many encouraging signs. We are actively redefining our concept store and focusing on creating a new generation of experiential retail, which is crucial for us to remain proactive. Once we overcome this temporary challenge, I am confident in our ongoing ability to grow.

Jonathan Komp, Analyst

We see a lot of positive signs in the growth of our U.S. direct-to-consumer segment. Our concept store is playing a crucial role in redefining and discovering what the new generation of experiential retail looks like. It's important for us to avoid complacency and keep exploring what this entails. Once we navigate through this specific temporary issue, I remain very confident in our ongoing growth potential.

Dani Reiss, President and CEO

We can't hear the speaker.

Michael Binetti, Analyst

Thank you for taking the questions. I want to follow up on the impact of the coronavirus. It appears that you're indicating margins in that business, and the lost sales seem to be similar to what we've seen from other global businesses recently. I'm trying to figure out whether the reduction of $50 million to $55 million is concentrated in Global DTC, or if you lowered your wholesale plan for the fourth quarter as well. It seems like you're assuming most of that impact will occur in direct-to-consumer. It would be helpful to understand what you're observing, or if any wholesale partners are cutting orders in the near term given that the news about the coronavirus broke only three weeks ago.

Jonathan Sinclair, EVP and CFO

Mike, this is Jonathan here. You're absolutely right. This is a DTC story. Wholesale is relatively low in this quarter anyway; it's all in support of our spring business. It's proceeding as planned. This is all about DTC.

Michael Binetti, Analyst

I would appreciate some assistance in understanding the metrics within direct-to-consumer, as the business has become more complex with its growth. We are trying to make sense of the 29% DTC growth this quarter alongside a store count increase of 70, which may actually be 50 based on the footage. Both figures are significantly higher than the 28% total DTC growth. I understand there may be differences in productivity as you move away from the key areas like Soho. However, it's challenging for us to grasp the year-over-year growth of legacy stores as e-commerce expands within the DTC figures due to the numerous factors involved. Can you provide clarity on the economics of the new stores being opened, particularly as you transition out of shopping centers, given that there won't be many centers outside of Soho with comparable economics in the future? This understanding is becoming crucial as your store count increases.

Jonathan Sinclair, EVP and CFO

We currently have 20 locations, which is just a fraction of the many prime, highly productive retail luxury spots available. Our approach is not simply about selecting the best stores right at the beginning; we recognize that different groups of stores will exhibit varying characteristics. This year’s stores have unique traits that affect their sales densities for various reasons. For instance, we have stores located in tourist areas and resort spaces, making it overly simplistic to assume that the sales density from our existing locations will directly apply to these new ones. However, looking ahead, there's significant opportunity for us to expand both the brand and our sales. In terms of online performance, we've experienced strong results globally, with notable gains in the U.S. and China, two major e-commerce markets. As we enhance our omnichannel approach, I believe it will provide leverage for our entire direct-to-consumer operation.

Michael Binetti, Analyst

Can I just. If corona comes and goes within the March quarter, I don't know about the timing. Is this a 20% multi-year revenue growth algorithm business as we get into 2021?

Jonathan Sinclair, EVP and CFO

For a variety of reasons, we've made the case as to why this business is a fraction of its eventual size. The impact of this terrible and sudden health crisis is temporary in our view, and it doesn't affect our view of our strategy and of the potential of this brand and our ability to continue to grow.

Jonathan Komp, Analyst

If the coronavirus situation improves during the March quarter, I'm uncertain about the timing. Will this business achieve a 20% multi-year revenue growth rate as we enter 2021? For several reasons, we believe this business is only a small part of its ultimate potential. We see the effects of this serious and sudden health crisis as temporary, and it does not change our perspective on our strategy, the potential of this brand, or our capacity to keep growing.

Dani Reiss, President and CEO

I'll just add to that, maybe exactly what Jonathan said. I think that's for long-term and in the near term we're being cautious. In the long-term, I'm an optimistic person. I have a tremendous amount of optimism about the future of this business.

Erwan Rambourg, Analyst

Okay. Great. And then just one follow-up, both related to some of the comments around Canada and the tough retail environment and then the obviously the dynamics in China. Just when you think of the inventory you have today, is like how different is it on hand versus what you would have expected your 90 days ago? And just any thoughts about the risk of the balance of current goods that you have on hand?

Dani Reiss, President and CEO

Yes. We're really happy with where we stand with regards to our inventory. I mean, as we've explained and as we've planned, we've really been building out our in-house capacity, which is a core strategy of ours from the beginning, and we've successfully reached a point where we're very happy with our in-house facilities to a point where we're now rationalizing third-party Canadian contractors. As a result of this build, we've built a lot of inventory, and through this rationalization, we're going to see the ratio of that inventory to sales come down, and that will become noticeable in the third quarter of next year. Also as a result, we have a good amount of inventory; all of this inventory is staged for next year. Jonathan has mentioned in his prepared remarks that over 80% of it is made for next year and it's all good inventory. We feel like we're in a really good position especially given the unfortunate events that the coronavirus presented to be able to deliver all the orders for next year as well with this inventory.

Oliver Chen, Analyst

Hi. Thank you. As we model the gross margin on a longer-term basis, should we expect continued pressure from freight costs inflation? And as you enter newer categories, the negative mix impact. We'd love your thoughts.

Jonathan Sinclair, EVP and CFO

Thanks, Oliver. I think from our point of view, nothing's changed. In the sense that we talked about tailwinds and we talked about headwinds, and our algorithm doesn't change. In other words, we don't see margin over time going massively up or down. What we still see is ourselves managing a balance in channel between the tailwinds of bringing more production in-house, pricing efficiency, and reinvesting that in addressing the cost inflation of the inputs that we have, as well as in the development of our product. So, we don't see anything that's really changed.

Dani Reiss, President and CEO

We're really excited about the reception to our new products. I believe the reason we've been able to deliver great new products to the market is due to our strategy of taking our time with new products and understanding the dynamics of the marketplace. We are very conservative in how we build inventory for our new offerings, which is why they are introduced gradually. Over time, we believe this is the right approach, and we have a long runway ahead of us.

Oliver Chen, Analyst

Thank you. And lastly, are you thinking about M&A in terms of your strategy and what you're considering for growth opportunities and synergizing your talents?

Jonathan Sinclair, EVP and CFO

We're not.

Sam Poser, Analyst

Good morning. Thank you for taking my questions. A couple of things. Prior to the slowdown of the traffic due to the coronavirus, was there a change in the manner of filling orders that were planned from retailers that was planned for the fourth quarter? I mean, was there any impact on anything in the fourth quarter maybe due to weather and so on that impacted your fourth quarter reduction and guidance as well?

Jonathan Sinclair, EVP and CFO

No. I mean, if anything, what we saw was that we took more in-season orders than we thought because we guided, as you'll recall, to mid-teen declines in wholesale, and we actually came in at around an 8% decline, and the delta there was the in-season reorders. So no, absolutely not.

Dani Reiss, President and CEO

But on the contrary, our wholesale orders in Q3 were higher than expected. We shifted a lot in Q2, and we expected a year-over-year decline, but it was far less than we thought it would be.

Mark Petrie, Analyst

Hey, good morning. I just wanted to ask you about the relative sort of pricing levels and price increases that you've taken across the portfolio. This season, not sure if you can quantify what the overall sort of price increase would have been for this year. And sort of interested, I guess, specifically with regards to parkas, but also then in lightweight down and you call that a success there. And then, you have been introducing many new products at the higher end of the range. I'm not talking about BRANTA, but just in terms of the core portfolio. I wonder if you could talk about the performance of those newer products at the higher end and your perspectives on pushing prices further in fiscal 2021? Thanks.

Jonathan Sinclair, EVP and CFO

I will answer your question in two parts. I'll talk a bit about pricing, and we've always talked about taking price in the mid-single digits, and that's something that we continue to do. That applies surgically across the product collections, and then we deploy that around the world, in line with global pricing indexes followed by other brands. So nothing has changed. We continue to do that.

Dani Reiss, President and CEO

To follow on to Jonathan's comments regarding us putting new products into the marketplace at higher price points, that has definitely been a strategy of ours, and I'm happy that this is working extremely well for us. We intend to continue to do so. Yes, we have strong and strategic relationships with all of our wholesale partners. We align ourselves with partners who share our values, making conversations easy. We are a brand that drives traffic to stores, as many of our wholesale partners have noted. Our approach to competition is straightforward; we do not rely on promotions, and our partners are in agreement with that vision.

Ike Boruchow, Analyst

Thank you for the question. Good morning, everyone. Jonathan, I have two questions for you. First, I’d like some clarification. Prior to the coronavirus outbreak, based on your expectations for Q3, would you have planned to either reaffirm or raise your fiscal year outlook, or is there another factor to consider? Secondly, as I look into Q4 and beyond, could you discuss the implications for gross margins? It seems like the revenue challenges in DTC might put pressure on gross margins due to the shift towards wholesale. Additionally, I assume there could be even more of a decline in gross margins because of the disappearance of higher margin DTC revenue from your stores in China. I would appreciate any insights on Q4 gross margins and what to expect moving forward. Thank you.

Jonathan Sinclair, EVP and CFO

Okay. So I think two things. First of all, we've been very clear that we were on track in Q3, and what's changed? The fundamental change is the serious situation with the coronavirus, which is the only factor affecting the business. This impacts consumer shopping trends globally. That's the first question you asked. Regarding gross margins, we have stated that we expect high single-digit percentages, high 40s for wholesale gross margins, and mid-70s for our direct-to-consumer gross margins, which are appropriate for this business. That's what you are seeing. I anticipate this will play out over time, and I do not foresee any change to that. You will notice some seasonality; when spring is stronger, margins may be slightly lower, and when spring is weaker, margins tend to be stronger due to seasonal effects. Overall, wholesale gross margins should remain relatively stable, and direct-to-consumer margins will also stay similar moving forward. The overall dynamics of the business will change as wholesale becomes a smaller part of our operations, but nothing else will change.

Alex Walvis, Analyst

Good morning. Thanks so much for taking the question here. My first question is on the Canadian market. You made some comments about challenges there. I wonder if you could elaborate and did that region fall short of your expectations coming into the quarter? Or is that embedded in expectations before? And then my second question is on the European market; a couple of openings there this quarter. Any color on performance there, and how that's changing your thinking on the opportunity in the European market? Thanks so much.

Dani Reiss, President and CEO

Yes, thank you, Alex. Our wholesale business in Canada is progressing towards maturity. The retail landscape is softer here compared to other markets, including the U.S., and some of our partners did not have a successful fall-winter season. We are currently working on adjusting our presence and streamlining it, which is a natural process and not a concern for us. Canada is our largest market in terms of distribution relative to its size. In the short term, we also need to deal with the effects of the current virus outbreak, industry travel disruptions, and how they impact travel and tourist traffic, which will present challenges. However, I am not worried about our brand health or our growth potential in Canada. The enthusiasm in our stores and consumer sentiment remains very strong. The European market remains very strong. We opened two new stores there this year, and we're very excited about that. The first store is in Honore in Paris. We see Europe as, in relation to all of our markets, having the lowest percentage of DTC. So, we see a large amount of runway there.

Operator, Conference Operator

This concludes our Q&A session for today. I will now turn the call back to Dani Reiss for closing remarks.

Dani Reiss, President and CEO

Well, thank you all very much for taking the time to be here with us today. We appreciate your interest in and your support of Canada Goose, and I very much look forward to speaking to you again at the end of the year.

Operator, Conference Operator

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