Earnings Call Transcript - GOOS Q3 2021

Operator, Operator

Good morning. My name is Andrea and I'll be your conference operator today. At this time, I would like to welcome everyone to the Canada Goose Third Quarter Fiscal 2021 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. Please 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 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 our earnings press release issued this morning as well as in the Risk Factors section of our most recent annual report. These documents are also available on the Investor Relations section of our website. 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. Our commentary today will include certain non-IFRS financial measures, which are reconciled in the table at the end of our press release issued this morning and available on our 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. I am pleased to speak with you today about our performance in our third quarter, which has exceeded our expectations. We began this fiscal year with many unknowns. So we believed in what we knew to be true. We advanced our long-term plans to best capture and serve demand while at the same time placing our business in the best position for continued growth. This approach has delivered strong results when it matters the most. Today I will provide an overview of our third quarter results and share an update on three areas; one our strategic areas of focus, two, our purpose-based commitments and three, our outlook for the rest of the fiscal year. In the third quarter of the fiscal year, our business showed remarkable resilience and we outperformed our own expectations. Total revenue increased by 4.8% to $474 million despite extensive closures and operating restrictions. This marks a return to growth for Canada Goose and our biggest quarter and we did it with strong profitability and cash flow. Adjusted EBIT margin in the quarter was 33.3% and free operating cash flow increased by $75.1 million to $309.6 million. Our third quarter results reflect the impact of our strategic long-term initiatives, our flexibility in key investments. To give you further context, here are a few highlights. First, I'd like to give an update on our digital business, which we believe to be a foundational component of the future of retail. We have invested heavily in our e-commerce business for years with a long-term view. This year we successfully executed against that long-term strategy and at the same time, strategically deployed additional resources to better capture and serve demand around the world in our peak season. As a result, our global e-commerce revenue increased by 39.3% and we're encouraged by the strong momentum and acceleration that we continue to see across our e-commerce business in the fourth quarter. This quarter, I feel it's important to give a deeper geographical insight into our e-commerce business. Across each of our major markets, we saw strong double-digit growth. Europe was particularly strong, which includes France, Germany, and Ireland and a nearly doubling of our digital business in the UK. In Mainland China, our operations continue to be a bright spot and a powerful channel for our brand and in well-established sites in Canada and the United States, we saw a strong increase in revenue from a contribution perspective. Now to our next strategic priority, Mainland China. On our last earnings call, I spoke about the growth plans that we put in place for our business in the region. We have continued to execute on these plans. In the past year, we have more than doubled the number of stores that operate in the market. This quarter we saw that our investment has delivered strong results and Mainland China DTC revenue has increased by 41.7%. We're still very early in our journey in Mainland China and we see significant opportunity to continue to grow our network in the region. In the year that began with so much uncertainty for us all, we learned with trips and our customers' pages which has shaped our strategic approach moving forward. On our last call, I discussed in-store omnichannel shopping, which has surpassed our expectations. We believe that it would be a game changer for customer experience and conversion and I'm pleased to say that it has been and the cost of purchase continues to evolve. In this quarter, we truly saw the power and results. We consider this as validation of our approach to enable Canada Goose fans to shop with us wherever they are, whenever they want, with access to our complete assortment. Today I'll also highlight the continued importance of sustainability across our business. We are steadfast in our commitment to strengthening our communities, protecting our planet, and working towards a better future for generations to come. In this quarter, we launched HUMANATURE, a purpose-based platform that unites our sustainability and values-based initiatives. It is the driving force of our enduring commitment embedded across every aspect of our operations. The role of business has evolved in today's world and driving meaningful change has become fundamental to today's consumer. We are focused on keeping the planet cool and people on it warm through our sustainable impact strategy, continued product innovation, and invigorating global communities and building culture through the arts. We've committed to protect people from the elements and now through HUMANATURE, we're taking that commitment to an even deeper level. Building on that, this past January we launched our most sustainable product to date, the standard expedition parka. This brand-new style inspired by the iconic expedition parka encapsulates our heritage, renowned functionality, and optimizes sustainable integration. This product is significant for our brand, helping to set the standard for the future of Canada Goose. We've kept sustainability at the forefront throughout the past six decades driven by constant innovation for the betterment of both our consumers and the planet, and I am proud to say that this is only the beginning of our sustainable journey, and that the consumer response has matched our own excitement as the style has nearly sold out. Further to the topic of brand momentum and consumer relevance, last month we partnered with Shanghai-based Angel Chen, our first-ever guest designer. We challenged her to reinterpret our particular heritage pieces; we co-created a capsule collection based on her innovative design direction. The collection offers a refreshing perspective and is another important highlight for the brand. Lastly, I'd like to take this opportunity to welcome Michael Armstrong, who joined our Board of Directors in January. A 22-year industry veteran, he is currently EVP Worldwide Television Licensing and Operations for ViacomCBS Global Distribution Group. I am confident that his vast experience in popular culture, entertainment, and media will provide a valuable perspective as we continue to execute on our long-term growth strategy. And with that, I'll turn it over to Jonathan to go over the details of our financial results and outlook.

Jonathan Sinclair, EVP and CFO

Good morning, everyone. Thanks Dani and thank you all for joining us. Looking at Q3 performance and our current trends, there are three key things that stand out. Canada Goose has returned to growth. The resilience of our earnings and cash flow has been strong, and we're entering the final quarter of the fiscal year with strong momentum. Starting with the topline, total revenue increased by $4.87 million to $474 million with significant sequential improvement across our business. This reflects global demand strength as well as our focus on pivotal distribution to where the consumer is shopping. Coming out of the first COVID wave in the summer, we were in the midst of a massive digital shift in consumer behavior. We knew that e-commerce was as close as we could get to an always-open channel and we were proactive in our investments compared to the fall selling season, from logistics to inventory mapping and experience. The result is a strong acceleration in performance compared to the previous quarter. E-commerce grew by 39.3% driven by meaningful investments to both traffic and conversion. Operationally, we're pleased with how smoothly our network handled record online volumes during the peak. The transition we completed in the summer to enhance capability and service levels was central to achieving this. Geographically, we saw well-balanced double-digit growth in all of our major e-commerce markets. In North America, we saw strong contributions from our well-established sites in Canada and the US. In Mainland China, our growth continued to be a powerful engine for growth and last but not least, our momentum in Europe was exceptional. This includes very strong results in Germany, France, and the UK, where we nearly doubled our digital business. Alongside e-commerce, another big strategic bet this year was store expansion in Asia. We prioritized serving the world's largest luxury consumer base at home. DTC revenue in Mainland China increased by 41.7%, with existing stores near pre-pandemic levels and the completion of our two remaining openings in Changchun, China, and Shanghai. This strengthens our conviction as we further expand into tier one and tier two cities complemented by the reach of Tmall. In our stores in North America and Europe, we faced outsized headwinds from capacity restrictions and managed closures compounded by a lack of international traffic. In Q3, we lost 35 trading days for each of our three locations in Toronto, with Ottawa and Montreal also shutting at the end of the quarter. In London, we lost 36 trading days, with Paris and Milan each closed for 13 days, as well as Berlin for 12 days. These closures included some of our most productive stores globally during the biggest and busiest days of the year. Despite this, achieving total DTC revenue of $299.4 million, only $2.4 million less than last year, is a great result. Relative to Q2, we offset a much greater proportion of retail deployments with e-commerce, and the stores that were open delivered strong productivity. Wholesale increased by 2.7% to $160.8 million, driven by later shipment timing, and we’re pleased with the performance of our partners this fall winter. We're taking a controlled, brand-first approach to managing this channel. Moving to earnings and cash flow, the adjusted EBIT margin was 33.3% in the quarter. This is a level of profitability most brands never approach, let alone in times like these. Our resilience is grounded in full-price economics and highly productive distribution. Consolidated gross margin was 66.8%, with DTC at 77.9% and wholesale at 51.5%. Both channels were above typical levels due to temporary tailwinds. Gross margins in the mid-70s for DTC and mid-to-high 40s for wholesale remain the right level for wholesale over the long term. These increases also reflect the durability of our gross margin fundamentals. Looking at the P&L, the DTC operating margin was 55%. Retail profitability was impacted by operating disruptions, but was still very strong, and the uplift from e-commerce growth partially offset this. Wholesale operating margin came in at 42.9%. While aggressively managing costs and cutting discretionary spending, we are better equipped to be proactive when we see the opportunity. We accelerated SG&A investments in brand and demand building while still delivering a strong profit this quarter. Diluted EPS per share was $1.01 compared to $1.08 last year. Our free operating cash flow was $309.6 million, an increase of $75.1 million driven by reduced working capital. As a vertical manufacturer with an evergreen offering, we are executing against a planned drawdown of staged goods. Inventory decreased by 2.6% relative to Q3 last year and 17.8% relative to the end of fiscal 2020. We remain on track to deliver a significant year-over-year decline as we close out fiscal 2021. In terms of liquidity, we are in a strong position with no leverage and a high degree of flexibility. Cash was up to $469 million at the quarter end alongside an additional $256 million of available borrowing capacity in our undrawn revolver. Finishing with current trends, we are encouraged by the continued acceleration that we have seen in e-commerce growth since December. On the retail side, however, store closures and movement restrictions have intensified. Currently, 45% of our retail stores globally are closed. Globally, we've also seen a slowdown in foot traffic in certain markets in response to new movement restrictions. Recognizing this is a dynamic situation, we believe we are well-positioned to continue managing these headwinds through our digital business. In wholesale, the vast majority of our shipments have been completed to date. Q4 is seasonally a very small quarter for the channel and we currently expect a low double-digit year-over-year revenue decline. We concluded our contractual obligations for PPE manufacturing in Q3, and as a result, we do not expect further revenue from these activities in other segments in Q4. In terms of gross margin, we do not expect the DTC and wholesale gross margins in Q4 to repeat the larger year-over-year increase we had in Q3. This is due to seasonal spring products and a reduction in the PPE business manufacturing. Lastly, we expect overall SG&A in Q4 to grow at a similar rate year-over-year to the rate we saw in Q3, driven by our continued investments in brand demand building. At the start of this year, we moved aggressively to offset downside while investing with conviction when we saw opportunities. Our success this quarter shows that strategy is working. We can grow and be highly profitable in a challenged operating environment. We believe that this underscores the potential for growth once the world emerges from this pandemic. We know that the path there won't be straight, but we're on the right track. I look forward to updating you on our progress on our next call. And with that, I will pass it over to our operator to begin Q&A.

Operator, Operator

Your first question comes from the line of Omar Saad of Evercore. Omar, your line is open.

Omar Saad, Analyst

Thank you for taking my question. So I'm wondering about, you know, I appreciate the information around the tourist impact; it sounds like it was a pretty big drag. But maybe you could dive in a little bit deeper, especially in North America and Europe, whether it has historically been a strong tourist customer? And maybe you could also shed some light on the mix of your business between locals and tourists in your key market. And then also, the Chinese tourist is an important tourist. Do you have the footprint and presence you need in China to recapture some of those lost tourists there yet? Thanks, guys.

Dani Reiss, President and CEO

Hey Omar, thanks for your question. Good question we’re certainly in an environment with essentially no international traffic in North America and Europe - in fact the tourist market has been closed since last spring. So I'm really pleased with the strength of demand from local consumers in these markets. For example, our revenue in Europe and the rest of the world increased by 30%, which is reasonable but has been particularly hard hit by tourism. So, I'm very encouraged by what we've been seeing in our local markets from our local consumers.

Jonathan Sinclair, EVP and CFO

If I can add a couple of points to that, I mean, I think in a pre-COVID world, you'll have heard us say many times that our retail traffic had roughly split to 50/50 between local and international consumers. And strategically, our focus this year has been on serving those traveling international consumers at home and driving demand in the local markets. The fact that we were able to grow our business in Q3 with all of these headwinds is really encouraging. When it comes to China, we've had a great couple of quarters formally in Mainland China this year, with this most recent one up 41.7%. We are seeing great progress both in our existing stores and in the new stores. We've got a very clearly established strategy of Tier 1 and Tier 2 complemented by Tmall, and we're able to take great advantage of that market by executing on that strategy. We're very pleased with how it’s going.

Operator, Operator

Your next question comes from the line of Jay Sole with UBS.

Unidentified Analyst, Analyst

Hi, good morning. This is on behalf of Jay. I have a couple of questions. I know you mentioned the fourth quarter isn't very relevant to the wholesale channel, but what are you seeing regarding wholesale book orders? It might be early to ask, but I'm curious about the fall season. Additionally, could you share some information about the growth of the e-commerce channel in the last quarter? Lastly, as you mentioned your focus on China and Tier 1 and Tier 2 cities, how does that impact potential store openings in the coming years? Thank you.

Dani Reiss, President and CEO

So I think our wholesale order book is something we typically talk about in the next fall, but we run a process, which we're running this year. And we're very pleased with the outstanding results. Regarding the e-commerce performance geographically, we talked in our last call about how we've seen acceleration toward the end of the second quarter in our e-commerce performance year-over-year. That's an acceleration that continued to build through the third quarter, just as the numbers got bigger and just when it really mattered. That acceleration has continued beyond the third quarter and into the fourth quarter. When we think about the future, where we're going with stores, we are continuing to execute on our strategy. There is no change to that. DTC remains a key avenue for growth in this business, both online and physically.

Jonathan Sinclair, EVP and CFO

I agree with all of that. I'm particularly proud of this quarter and the team's ability to achieve our biggest quarter ever under the circumstances of a global pandemic. We've seen strong demand from consumers all over the world, driving growth and acceleration, and Canada Goose is a lifestyle brand that consumers are gravitating toward, which makes me very optimistic and hopeful for the future.

Operator, Operator

Your next question comes from the line of Kate Fitzsimons of RBC Capital Markets.

Kate Fitzsimons, Analyst

Yes. Hi. Good morning. Congratulations on the return to growth. I guess I wanted to ask two quick ones. You guys have mentioned a couple of times the acceleration in the e-commerce business here in Q4. It is interesting because it seems at least demand for your brand tends to maybe happen earlier in the winter season. So, curious what you think is driving the acceleration there, any comments on regional performance or response to early spring selling that would be helpful. And then secondly, Jonathan, you noted some brand-building investments on the SG&A in Q3. What was the nature of some of these investments? As we look out to Q4, what are some of the strategic expense priorities for Q4 and beyond in terms of channels, wholesale, DTC, and also unallocated expense buckets? That would be helpful? Thank you.

Jonathan Sinclair, EVP and CFO

Thank you for your question. I'll start off by providing some supplementary information. As we've seen in previous quarters and throughout this year, consumer mentality is much more of a buy-now, wear-now mentality. I think that's important given the shift in consumer behavior. Also, our brand is very relevant at a time like this, where we make products that last and are functional, which resonates with consumers today. As for the acceleration, people are gravitating toward real things that have authentic attributes, and I think that's part of the explanation for the acceleration we’re seeing.

Dani Reiss, President and CEO

On the question of cost, the key investments we've been making, as I mentioned in my prepared remarks, are around brand and demand building. We were deliberately more cautious with investments in the past but as the market enters the season, we ramped up investments in markets both new and existing, also in support of markets where we're opening stores. We've been investing to raise brand awareness and capitalize on demand and convert it into the business that we're reporting today. This trend is expected to continue into Q4, and that's why we’re projecting continued investment in that area.

Operator, Operator

Your next question comes from the line of Ike Boruchow with Wells Fargo.

Ike Boruchow, Analyst

Hi, good morning, everyone. Just two quick ones for me. Jonathan, you guys had significant cash flow, a lot of cash in your balance sheet relative to years past? Any thoughts on usage of cash or your capital allocation? And then we appreciate the wholesale commentary for Q4; is there any color, despite the noise with store closures and whatnot, about the DTC revenues that are embedded in your plan for Q4 as well?

Jonathan Sinclair, EVP and CFO

Our top priority in capital allocation is investing in the growth of this business. There is huge untapped potential, and investing in the future remains our top priority. We stated we’re expected to invest $45 million this year in capital expenditures, which is very much on track. We’re not looking at other uses for this cash. When it comes to Q4, we’ve experienced good momentum, and while DTC has been impacted by some store closures, last year was also heavily impaired. We have a strong case for DTC performance this quarter.

Operator, Operator

Your next question comes from the line of Megan Annette with TD Securities.

Megan Annette, Analyst

Thanks. Good morning. Dani, you touched on this in your remarks, but I was wondering if you could talk a bit more about the success of the various collaborations that were launched in the quarter and also early into Q4. So, what kind of response are you seeing from consumers? And is there any color you can provide on the pipeline of collaborations that you're working on in the upcoming year? Lastly, any update on the plans for the footwear launch that you can discuss? Thank you.

Dani Reiss, President and CEO

Thank you for your question. Yes, collaborations are a very important part of our business, and they have been successful for us this year. We had our first-ever guest designer this year, Shanghai-based Angel Chen, who designed a capsule collection for us that has been well received by our consumers. These opportunities provide high moments for our brand, allowing reinterpretation by different designers for different markets. We do intend to have more guest collaborations in the future. Regarding footwear, we are still on track to launch that next fall. I'm excited about it as footwear will be a very important category for us long-term. Our execution strategy has been carefully thought through, and I believe we are well-positioned to introduce footwear to the market.

Operator, Operator

Your next question comes from the line of Oliver Chen of Cohen.

Oliver Chen, Analyst

Hi, regarding innovation and product, Dani, how are you thinking about focusing on lighter weight products and non-evergreen? You have a really strong core. As we look ahead, inventory relative to sales growth, I would love your thoughts on planning there, given the performance here and how your production availability or utilization looks? Thank you.

Dani Reiss, President and CEO

With regard to our innovation and product strategy, our core business model is still vital, and we've seen that this year. Consumers have gravitated toward our traditional offerings. However, there has been significant product diversification into lightweight down and other categories such as knitwear and fleece, which have been well received. Consumers have given us the permission to expand into new categories that align with our brand values and market expectations. It's ultimately crucial for us to ensure that we maintain the best-in-class quality of products, regardless of the category. Our global diversification is highly encouraging.

Jonathan Sinclair, EVP and CFO

Regarding inventory, we're reporting a modest decline this quarter, which aligns with our expectations. We're executing a planned drawdown on inventory levels this year, which generated substantial cash flow in Q3 as a vertical manufacturer with an evergreen offering. This enables us to adjust our inventory without compromising commercial flexibility. We remain on track to deliver significant year-over-year decline while maintaining the commercial potential of the business.

Operator, Operator

Your next question comes from the line of Mark Petrie with CIBC.

Mark Petrie, Analyst

Good morning, you touched on this earlier, but I want to follow up specifically with regards to China and the evolution in shopping behavior there. Recognizing that parkas drive the business, I'm interested in hearing about the adoption beyond parkas and how the sales mix in China compares to regions where you’ve had a direct consumer presence longer, specifically parka versus accessories or knitwear. What does that say about the brand being built in that market?

Dani Reiss, President and CEO

We are seeing great progress in China, where parkas have always driven the business. However, we have also seen strong performance with our other categories. This is encouraging as it indicates we're achieving a more rounded presence with consumers in that market. China is geographically diverse, and the southern part is less frigid in winter, leading to more interest in lighter-weight products. In northern regions, heavier products like parkas have greater penetration.

Jonathan Sinclair, EVP and CFO

This just speaks to the growth of Canada Goose as a lifestyle brand and that our products are being accepted across multiple categories, which is very encouraging. I see a lot more potential in the future, and there's plenty of opportunity ahead of us.

Operator, Operator

Your next question comes from the line of Adrienne Yih with Barclays.

Adrienne Yih, Analyst

Hello, good morning. My question is actually regarding the reinstallation or reengagement of the manufacturing process starting this year for winter 2021. What level of innovation are you planning for winter 2021? Secondarily, on the wholesale guidance for the fourth quarter, is that largely due to current bookings and what’s the opportunity for upside to that number? Upon full recovery, do you think you’ll re-engage with the same number and sort of inventory depths with these channel partners? Thank you very much.

Dani Reiss, President and CEO

Thanks for your question. With regards to factory innovation, we're constantly innovating and finding more efficient production methods. We are proud of our eight facilities in Canada and are regularly working to enhance their efficiency. We have the largest manufacturing infrastructure of its kind in this country, employing a significant number of workers. On our wholesale business, we are pleased with our performance. The primary source of revenue in this quarter came from fulfilling our order book. Customers requesting more products are considered in our allocation model, and we were able to meet requests, leading to positive growth.

Jonathan Sinclair, EVP and CFO

The fourth quarter is typically a small quarter for wholesale. It’s a highly seasonal business, and most wholesale activities happen before we get into this quarter. The intent for being down year-over-year is due to a small number. Notwithstanding the closures and restrictions, we’re positive about the wholesale channel. We remain disciplined and selective in managing it as a strong complement to our brand.

Operator, Operator

Your next question comes from the line of Brian McNamara with Berenberg Capital.

Brian McNamara, Analyst

Hi, good morning, thanks for taking the question. Just a follow-up on wholesale. The results came in much better than your guidance of a low double-digit decline. Could you provide more color on what drove that large delta? Also, is it reasonable to assume you've culled a significant amount of wholesale partners, just given the aftereffects of COVID? If so, have wholesale partners been receiving better allocations and results? Thank you.

Dani Reiss, President and CEO

Our wholesale performance in the quarter was something we were very pleased with. The primary revenue source in the quarter was fulfilling our order book, and we were able to meet customer requests for more product in our allocation model, which contributed to positive growth. Additionally, we have continuously edited our wholesale distribution over the past several years, and we don’t see that changing anytime soon. Quality of distribution is more important than quantity for us, and we plan to continue focusing on that as we move forward.

Operator, Operator

Your next question comes from the line of Robby Ohmes with Bank of America Securities.

Robert Ohmes, Analyst

Hey guys, thanks for taking my question. I wanted to ask about the U.S. market in particular. U.S. revenues were down a little bit for the quarter, but your digital performance pointed out strong double-digit growth. Was the wholesale business weaker in the U.S. than in other regions, or were the stores much weaker versus what you're seeing in China? Could you provide a bit more color on how the U.S. market played out this quarter?

Dani Reiss, President and CEO

Overall, our online performance was strong, and we are proud of that, considering it's a major business segment for us. However, our stores experienced some interruptions. There was noise around the election affecting traffic and contributing to challenges at our wholesale business.

Jonathan Sinclair, EVP and CFO

As we know, there was no tourism this year, and major disruptions impacted many stores, both wholesale and retail, throughout the year. However, the strength that we observed from wholesale and retail during periods when they were open for local consumers was strong and strongly demonstrated the underlying demand for our products, which was very encouraging.

Operator, Operator

I would now like to hand the call back to Mr. Dani Reiss for any closing remarks.

Dani Reiss, President and CEO

Thank you very much. Thanks to everybody for joining the call. Before we leave, I would like to close by acknowledging how challenging a year it has been and continues to be for so many people. COVID-19 has impacted the lives of millions, and our hearts go out to all those that have been affected. I’d also like to sincerely thank our team members around the world for their continued efforts, resilience, and strength, and for showing such strong embodiment of our values throughout this very difficult year. Thank you again for joining us, and I look forward to talking to you again soon.

Operator, Operator

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