Earnings Call Transcript - GOOS Q3 2023

Operator, Operator

Hello and thank you for standing by. Welcome to the Canada Goose Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. I would now like to hand the conference over to your speaker for today, Amy Schwalm. You may begin.

Amy Schwalm, Speaker

Thank you, operator, and good morning, everyone. With me are Dani Reiss, Chairman and CEO; Jonathan Sinclair, EVP and CFO; and Carrie Baker, President. Our call today, including the Q&A portion, contains forward-looking statements. Each forward-looking statement, including our financial outlook is subject to risks and uncertainties that could cause actual results to differ materially from those projected. 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 press release issued this morning, as well as the Risk Factors section of our most recent annual report filed with the securities regulators. 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 them. Lastly, our commentary includes certain non-IFRS financial measures, which are reconciled at the end of our press release. With that, I will turn over the call to Dani.

Dani Reiss, CEO

Thank you, Amy, and good morning, everyone. This quarter showed us overwhelmingly that our brand strength globally remains strong even in the face of short-term pressures. In Mainland China, consumers returned in full force to shop with those following a period of significant disruption in December. We also saw solid top-line growth in the United States, driven by strong performance across our store network. And our gross margin expanded year-on-year for the third quarter in a row, up over 160 basis points, with margin improvement across all product categories. That said, we did face challenges during a seasonally significant third quarter. The largest being in Mainland China, where disruptions were worse than we had anticipated, impacting our performance significantly. In North America, we saw a softening of demand towards the end of the quarter. In a few moments, I'll dive deeper into both of these trends. These short-term pressures will not change how we think about our business. We are and have always been building this brand for the long-term. Now more than ever, we are focused on building deeper relationships with our customers, strengthening our DTC network, and continuing to expand categories, all while staying true to our luxury DNA. And we know that our strategy is working. We continue to be recognized for it as well. We are proud that for the fifth year in a row, Deloitte has named us in their Global Power of Luxury Goods Report as one of the world's fastest-growing luxury brands. Our competitive advantages remain strong. Our Made in Canada vertical integration has enabled us to offset many of the cost pressures and supply chain delays facing the industry. We have continued to deliver a steady stream of new and carryover products to our global distribution network. Turning to the quarter, we posted revenue of $577 million, down 1.6% from the prior year period, which included a 53rd week. Using the same trading weeks from the comparative quarter in both periods, revenues grew 2.5%. Before we dive into our results in more detail, I want to spend a moment discussing the pressures that impacted our earnings. It's important to note that we firmly believe these trends, disruption in China and softness in North America are temporary, and our brand strength remains incredibly healthy. Starting with Mainland China, the region was largely locked down for most of the quarter. We did expect a certain level of disruption. What we did not anticipate was the sudden reopening in early December. This led to a surge in infections, which had a significant impact on our business during what is typically our most productive trading month. Consumer traffic decreased dramatically and staffing levels were impacted due to illness. We are proud of how our local teams navigated the difficult circumstances they faced. On a more positive note, the reopening did give us a clear message from our consumers in Mainland China; Canada Goose's brand remains strong. Traffic and transaction growth jumped immediately following the disruptions in December. In January, same-store traffic was up approximately 30% year-over-year. In Hong Kong, traffic tripled from the same period last year, and that strong progress has continued. Stores are fully staffed, consumers are back shopping in person, and the familiar lineups have returned to many of our stores. We are confident that our brand has retained its full strength. We also have the added benefit of Lunar New Year in the fourth quarter, which for the first time in three years was celebrated without restrictions. Traditionally, we see a pickup in store traffic and transactions over three weeks prior to the holiday, and this year was no different. We hit another milestone in January, surpassing the one million follower mark on WeChat, another example of our brand's strength in the region. All of this clearly shows that our best days are yet to come. In North America, we are seeing a continuation of mixed results early in the fiscal year. Both in Canada and the United States, store traffic is up more than 30% year-over-year as more consumers are choosing to shop our experiential store network. That being said, conversion in the North American DTC business is lower than we expected early in Q4. As mentioned, we believe these pressures to be temporary, and we continue to focus on driving brand heat and relevance through our exciting partnerships and collaborations. On that, I'm very excited about our upcoming collection with an NBA All-Star as part of our long-term partnership with that organization. The new collection, which will be our third so far, launches next week and has always created a lot of buzz and hype for our brand. In January, we celebrated our 11th year as an official sponsor of the Sundance Film Festival in Park City, Utah. This year, we returned to Main Street with our exciting Canada Goose base camp experience and pop-up retail store. Sundance is a perfect backdrop for our brand—truly the intersection of performance and luxury—and an opportunity for our brand to celebrate our authentic decades-long relationship with the film and entertainment industry. Looking ahead, we are also moving forward with our store expansion program much earlier in the calendar year than in past years. We plan to open three new permanent stores early in Q1, one in Seattle, Los Angeles, and a second store in Las Vegas. So let's turn back to the quarter. In our DTC channel, our stores had the strongest monthly comps of the quarter in December, with total company DTC comps at 9.3%. In fact, every single geography posted positive DTC store comps in the month of December. North America saw notable growth across categories, specifically, apparel grew 61% compared to last year, reaching 5% of total sales in the quarter. For the full year, non-heavyweight down grew considerably, up 20% to nearly 42% of revenues year-to-date, up from 36% in the prior year. As you can see, we continue to make progress against our category expansion strategy. Importantly, our gross margins remained strong, expanding 160 basis points. We are particularly proud at this point, considering the enhanced promotional activity that dominated much of the consumer retail behavior this holiday season. We bucked that trend. Our gross margin reflects the strength of our non-promotional DTC network, as well as our exclusion from much of the promotional activity in wholesale this quarter. Looking ahead, although we continue to make significant headway on our key growth drivers, we are cautious about the fourth quarter. The softness of demand in North America, along with China's weaker than anticipated third quarter, has led us to lower our fiscal year 2023 expectations. We now feel that these align better with the current environment. Jonathan will give more details on this in just a bit, but I want to emphasize that our long-term expectations for our brand remain unchanged. We are well positioned to see tremendous upside in both the medium and long term. Before closing, I want to share some progress that we've made on the core pillars of our strategy. First, growing our DTC network. There is a substantial amount of room to grow as we continue our Quest West. In the quarter, we opened two permanent stores, one in Las Vegas and another in Denver; and two pop-up stores, one in Aspen and the second in Detroit. All four locations included the full breadth of our assortment, and our Las Vegas location includes our award-winning no room experience, which has been a big hit in the desert. Beyond these four store openings in North America, we also opened new stores in China, Japan, and the U.K. this year. At the end of the quarter, we now have 51 permanent stores, roughly a 25% increase from last year. Additionally, in partnership with our new South Korean distributor, Lotte, we've opened five permanent and 12 temporary pop-up shops in only nine months. Our progress in South Korea has exceeded our expectations, and this is just the beginning of the story there. We still have a long runway ahead of us, and I'm looking forward to sharing more of that with you in the future. We continue to focus on expanding our product offering, reaching more consumers in more seasons. We see an opportunity to expand our offering for women and build on our already strong resonance with eager generations. We are innovating in our women's offering to focus on style and utility, and it's working. In the third quarter, we saw a strong reception to our Aurora and Marlow Parkas, both achieving approximately 70% sell-through, a fantastic performance for two new styles. Our pastel collection continues to be a hit with women, particularly in APAC, with the region driving around a third of global sales of the collection. Lastly, we launched a beautiful collaboration with Reformation in the quarter, which resonated particularly well in the United States. The reaction to the collaboration generated across our social channels, especially with women and Gen Z, was overwhelmingly positive. On a final note, and one that I'm particularly proud of, we donated over 10,000 parkas, jackets, and accessories to UNHCR, the United Nations Refugee Agency in support of their humanitarian efforts in Ukraine. The products went to Ukrainians who have been impacted by the war and needed protection from the onset of winter. In conclusion, I want to once again thank our teams around the globe, who have continued to put our customers first. Our brand remains as strong as ever, and we are better positioned than ever to execute against our strategy and accelerate our growth. I look forward to sharing more with you at our Investor Day next week. Thank you. And now I'll turn it over to Jonathan Sinclair.

Jonathan Sinclair, CFO

Thank you, Dani, and good morning, everyone. Today, I shall be comparing the third quarter ended January 1, 2023 with the prior year quarter, which ended January 2, 2022, unless I say otherwise. In order to highlight the impact of the incremental week in last year's results, we have also provided figures that use the same trading weeks in each period. So turning to our results. In the third quarter, total revenue declined 1.6% and 2.2% on a constant currency basis to $576.7 million. Using the same trading weeks, revenue grew 2.5% and 1.8% on a constant currency basis. The third quarter fiscal 2023 revenue fell below our outlook range of $580 million to $660 million. As you heard Dani discuss, the majority of this can be attributed to Mainland China. Since we last spoke to you in early November, COVID restrictions in Mainland China worsened that month. When the country suddenly reopened in early December, which is our busiest trading month of the year, a wave of infections suppressed traffic and reduced store hours due to staff illness. In some cases, stores were closed altogether. We estimate the impact was about $60 million in lost revenue. In North America, particularly in the U.S., despite store traffic in line with our expectations, we saw lower conversion in our DTC network against a tough macroeconomic backdrop, and we estimate this represented about $25 million in lost revenue. Now turning to our revenue channels. DTC revenue increased 1.5% to $450.2 million. Using the same trading weeks, the increase was 4.6% and 8.2% excluding Mainland China. DTC comparable sales declined 6% and grew 0.5% excluding Mainland China. Total revenue growth was strong but was somewhat offset by lower e-commerce revenue. Consumers shopped more in our stores during the quarter, and you may recall COVID restrictions in EMEA and Canada were prevalent in the comparative quarter. Taking this in the round, our strong store performance in our most important quarter reflects brand heat. Importantly, we saw this in Mainland China with the reopening toward the end of the quarter and up until today. Looking forward, we believe we have the opportunity to further enhance store sales productivity, and we remain very focused on identifying and executing the drivers to do so. We also believe e-commerce is a significant area of opportunity. We are excited to tell you more about our plans for DTC growth at our upcoming Investor Day. In the Wholesale segment, revenue declined 17.3% to $114.4 million in the third quarter. Using the same trading weeks, the decline was 11%. As we explained in our last earnings call, we fulfilled wholesale shipment requests from customers in Q2 fiscal 2023, which was earlier than in the comparative quarter. This has returned us to normalized shipping patterns pre-pandemic. For performance by geography, revenue increased in North America, driven by growth of 11.3% in the U.S. from retail expansion and existing store revenue growth. Using the same trading weeks, U.S. revenue grew 17.4%. Revenue decreased in Canada and EMEA, largely due to earlier wholesale order fulfillment and lower e-commerce revenue. This was partly offset by strong store sales growth. Asia Pacific's revenue decline, on account of Mainland China, was partially offset by strong performance from stores in Greater China, as well as the new DTC and wholesale business in our Japan joint venture. Turning to our profit metrics, we grew consolidated gross profit by $2.6 million to $416.4 million, primarily due to gross margin expansion. Q3 gross margins increased 160 basis points to 72.2% with margin improvement in every product category and in both channels. DTC and wholesale gross margins expanded to 78% and 53%, respectively. Gross margins were favorably impacted by pricing and that was partially offset by higher duty costs, product mix, and the impact of the fair value inventory acquisition adjustments on sales related to the Japan joint venture. True to our track record to date, we expanded gross margins despite the ongoing diversification of our product mix away from a concentration in heavyweight down. This continues to give us confidence in our model going forward as we accelerate product category expansion. As a region, Asia Pacific skews toward more heavyweight down sales as a percentage of total sales. Of course, the region's sales were heavily impacted by COVID disruptions. Operating income declined largely due to unfavorable foreign exchange fluctuations on working capital and our term loan, as well as investments in technology, higher costs related to retail expansion, and running stores at full capacity, along with costs associated with the Japan joint venture. These were partially offset by higher gross profit and the timing of marketing spend, which occurred earlier in the year compared to fiscal 2022. Adjusted EBIT decreased to $197.1 million, primarily due to the higher costs I just described, and came in below our outlook range of $220 million to $250 million for the quarter. This was largely due to lower-than-expected revenue, especially in DTC, the donation to assist refugees from the war in Ukraine, higher-than-anticipated strategic investments, as well as negative FX impacts. Starting in quarter three fiscal 2023, we have included pre-store opening costs as operating expenses in the calculation of adjusted EBIT. We use non-IFRS measures to help us evaluate the performance of our business. As we expect to accelerate store openings as part of our growth strategy, we felt it made sense to factor in these costs. As such, comparable periods have been restated to reflect this change, and our latest Q4 and annual guidance also reflect this. Net income and adjusted net income were lower than the comparative quarter, largely as a result of the factors impacting operating income and adjusted EBIT, as well as higher income tax expense. Turning to our balance sheet, inventory was $482 million, compared to $368 million at the end of the comparative quarter. Japan represented about $25 million of the inventory balance at the quarter end. Higher inventory levels are primarily attributable to lower-than-expected sales in the Asia Pacific region. We monitor the levels of inventory in each of our sales channels and across geographic regions, and we align that with the demand we forecast in each region. While it's slightly higher than we would like, we are comfortable with the health and makeup of our inventory. During the third quarter, we renewed our share repurchase program concerning subordinate voting shares. We purchased about 745,000 shares in the quarter, and we will continue to be opportunistic alongside investing in the business, which attracts the highest ROI. We ended Q3 with cash of $344.2 million, compared to $407.6 million at the end of the prior year quarter. Net debt including capitalized leases was $419.2 million, compared to $238.1 million at the end of the prior year quarter. We're very comfortable with net debt leverage of 1.6 times adjusted EBITDA at the end of the quarter. The increase in net debt was primarily due to increased lease liabilities on retail expansion, the financing needs of the Japan joint venture, and the impact of FX on our U.S. denominated term loan. Turning to our outlook. With worse-than-expected COVID disruptions in Mainland China in our most important trading months and slower momentum in North America towards the end of the quarter and in quarter four to-date, we have revised full-year guidance. We now expect fiscal 2023 revenue to be between $1.175 billion and $1.195 billion, compared to our previous guidance of $1.2 billion to $1.3 billion. For DTC, this assumes a comparable sales decline in the low single digits, compared to our previous assumption of a decline in low single digits to growth in the high single digits at the top end of the range. DTC sales are now expected to comprise the high-60s as a percentage of total revenue, compared to our previous assumption of 70% to 73%. Wholesale revenue growth is maintained at 6% for the year. We now assume $45 million to $50 million in revenue from the Japanese market, which compares to our previous assumption of $60 million to $65 million as our new stores have had a slower start than we anticipated. Moving to profitability, we expect adjusted EBIT of $167 million to $182 million for a margin of 14.2% to 15.3%, compared to our previous guidance of $215 million to $255 million for a margin of 17.9% to 19.6%. This revised outlook assumes strategic investments will continue into Q4 at a higher rate than previously planned, including key leadership hires, digital investments and strategic initiatives. We continue to expect a lower underlying SG&A growth rate compared to growth in fiscal 2022. We assume consolidated gross margin will be in the high-60s as a percentage of total revenue. Gross margin benefits from our vertically integrated Made in Canada manufacturing model, as well as the conversion of our Japanese business from a distributor arrangement to a joint venture. Flowing through, we now expect adjusted EPS per diluted share of $0.92 to $1.03, compared to the previous outlook of $1.31 to $1.62. This revised assumption assumes share buyback activity. Lastly, I will cover our outlook for the fourth quarter. We expect total revenue of $251 million to $271 million, adjusted EBIT of $19 million to $35 million with SG&A used in the calculation of adjusted EBIT assumed to be in the low-50s as a percentage of Q4 revenue. This flows down to adjusted net income per diluted share of breakeven to $0.12. In summary, fiscal 2023 has been nothing short of eventful. We're extremely pleased with the easing of restrictions and the very strong signs of a retail rebound in Mainland China, including Q4 to-date, undoubtedly reflective of the brand strength. We are well positioned to significantly benefit from our DTC network expansion in the country. We have six times as many stores as we did when the pandemic began. We know the macroeconomic environment is challenging, but we're confident that our luxury brand positioning, our DTC and product expansion plans, as well as our focus on the consumer make for the right strategy. We are focused on executing our strategy to drive profitable growth. As Dani mentioned, we look forward to taking you through our plans at Investor Day next week. And with that, I'll pass it over to the operator to begin Q&A.

Operator, Operator

Thank you. Our first question comes from the line of Michael Binetti with Credit Suisse. Your line is open.

Michael Binetti, Analyst

Hi. Thanks everyone for taking our questions and providing all the details. To start, I'm looking at the shape of the P&L for the quarter. Revenues declined slightly, but EBIT fell by over $20 million. Can you walk us through some of the key components that contributed to this level of deleverage? Additionally, I’m interested in your thoughts on the pressure affecting the conversion rate in North America direct-to-consumer. You mentioned traffic was good, so I'm unsure if weather was a factor, but I'm curious about your initial insights on the conversion challenge.

Dani Reiss, CEO

Thanks, Michael. So let me take the first part of that. As you said, revenue was lower-than-expected. And that was DTC, which obviously is our highest margin segment and best quality of revenue. As a percentage of total, that was less than we expected for the reasons I detailed in my prepared remarks. Both in Mainland China and North America, and that's dilutes gross profit, and that was worth about $5 million just to put an order of magnitude down there. We also made decisions to sustain our marketing investment in support of the brand, as well as investing in strategic growth initiatives. And as I said, we'll talk a bit more about those next week, but that's another $3 million. We experienced some negative FX impact, and that was worth a further $3 million within adjusted EBIT. The move of pre-opening costs into adjusted EBIT added a further $3 million, and of course, we made a conscious decision to donate around 10,000 jackets to assist refugees from the war in Ukraine. So that's really what made up the vast majority.

Jonathan Sinclair, CFO

Yes. Just to add a bit, I think despite the challenges we faced in China's quarter and the pressures we're experiencing, we operate this business with a long-term perspective. When we see an opportunity for a worthwhile investment that can drive future growth, we pursue it. We look forward to discussing our plans further at our Investor Day next week. It's important to remember that our trajectory is strong, and we continue to invest in future growth.

Carrie Baker, President

And Michael, regarding your question about conversion, I want to highlight a few points. We experienced excellent traffic in stores, indicating a move from online shopping back to physical locations, a trend that has persisted throughout the year. While traffic increased, we faced specific challenges with e-commerce conversion. Although we are pleased with our performance, the overall shift in purchasing behavior impacted our results. This trend is not unique to us; many in the industry observed similar patterns. In December, consumer spending appeared to be cautious due to layoffs and fears of a potential recession, which collectively lowered consumer confidence.

Operator, Operator

Thank you. Please standby for our next question. Our next question comes from the line of Brooke Roach with Goldman Sachs. Your line is open.

Brooke Roach, Analyst

Good morning and thank you so much for taking our question. I was wondering if you could speak to the reacceleration that you're seeing quarter-to-date in China? I know you spoke to traffic levels rebounding. But can you help quantify the rebound that you're seeing in dollar sales and store productivity levels? Based on what you're seeing today, how does that form the range of outcomes for your China business contribution for the fiscal fourth quarter and into calendar 2023? And some of the medium-term opportunities that you see in terms of brand health and momentum? Thank you.

Dani Reiss, CEO

I want to thank you for the question. The recent reacceleration in China is a strong indicator of our overall brand health. In December, we experienced some short-term challenges due to the lifting of restrictions, which negatively affected what is typically our strongest month. However, following that period, as more people recovered from COVID in China, our sales have significantly improved. Currently, sales are very robust, with long lines outside our stores, and we are confident about our brand health both in China and globally.

Jonathan Sinclair, CFO

Yes. And if I can just add to that, we're really seeing very strong growth in virtually every store quite in Mainland China and I'll count that is up. None of those increases are measured in single digits; some of those increases are measured in triple digits, and equally outside of Mainland China; in Greater China, we're seeing very strong growth. In Hong Kong, we're seeing great growth in Macau, and we're seeing very strong growth in Taiwan.

Operator, Operator

Thank you. Please standby for our next question. Our next question comes from the line of Adrienne Yih with Barclays. Your line is open.

Adrienne Yih, Analyst

Good morning. Thank you for taking my questions. Regarding China, Jonathan, could you help us understand the situation with the stores that opened during the last three years, particularly the Hong Kong stores amidst protests and COVID? Can you discuss the planned sales and EBIT for those stores as a group now and the potential for recapturing sales and EBIT margin over the next 12 to 18 months for that segment? Additionally, could you provide insights on the recent comps reported in North America and what the quarter-to-date performance looks like in that market? Thank you very much.

Jonathan Sinclair, CFO

Thank you, Adrienne. Let's begin with China. The stores have clearly not been performing as expected during normal conditions, especially throughout most of 2022, which we have observed. However, there has been a strong rebound this quarter, with numbers coming back significantly. Despite this, we still have a considerable way to go before reaching normal operating levels for the year. This year has seen nine months where the stores were either closed or experiencing severely limited traffic. We believe there is a significant improvement opportunity, evident from the reduction attributed to China's performance in the last quarter and what we've reported this quarter. As for our current performance in North America, the stores are indeed experiencing a macro impact, but they are performing better than they were a year ago. We have more stores open compared to last year, but we are noticing a decline in website conversion rates. There seems to be a natural hesitance among consumers at this time, which appears to be affecting the entire sector.

Operator, Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Ike Boruchow with Wells Fargo. Your line is open.

Ike Boruchow, Analyst

Hey, good morning. Jonathan, I was wondering, kind of, piggybacking on Brooke’s question, just more specifically in terms of the dollars and productivity in China. I think you said that there was a $60 million shortfall in China this quarter specifically. I guess, if we could just zoom out high level? If you look at the store base you built out in China, what you normally would have planned, I know it's hard to think this way whether “normalized revenue stream out of the region”. Can you talk about the revenue dollars that are not currently in the P&L that if things are to revert back to normal could come back? I mean, clearly like you said, it's $60 million just this quarter, but I'm kind of curious on an annualized basis how maybe you guys are thinking about that?

Jonathan Sinclair, CFO

So if I take it at its most, I'm going to reiterate a little bit the point I just made, but remind you of the numbers. We are talking about a $100 million reduction previous cycle and a further $60 million this cycle. So absolute minimum, we're looking at $160 million that's attributed to weakness and performance in China. And that assumes that we were actually assuming a normal year this year and which we were not. So in broad terms, we would say that there's upside greater than those two reductions.

Operator, Operator

Thank you. Please standby for our next question. Our next question comes from the line of Oliver Chen with Cowen. Your line is open.

Oliver Chen, Analyst

Hi, thank you. Regarding the U.S., what are the opportunities that you have within your control to improve conversion, and what might you see happening ahead with that customer? And then as we think about Asia and China, the inventories and the traffic build, I would love your highlights on how you'll manage inventory in a pretty dynamic reopening period? A third and final is investors often ask about brand heat. You have a lot of momentum and a lot of the metrics look really strong. Would love your thoughts on the key things that prove your brand heat is really robust as we go forward? Thank you.

Carrie Baker, President

Thank you, Oliver. In the U.S., conversion is something we constantly focus on. We're making significant investments in creating a warm Canadian experience for our customers. It’s important that anyone who visits our website or store feels welcomed, understands our offerings, and sees the full range of products we provide. Specifically in the U.S., customers view us as a lifestyle brand, not just a parka brand. Our brand ambassadors in stores provide guided expertise, and I believe this combination has contributed to our success and increased conversion rates, which remains a priority for us. Online, we are continually evolving as we gain a better understanding of our consumers in each market and region. We aim to personalize their journey, offer the right products at the right time, and ensure a seamless checkout experience. While I can't mention any specific new programs now, this remains a key focus for us. We'll provide more details in our five-year strategy discussion next week at Investor Day.

Jonathan Sinclair, CFO

When it comes to inventory, and particularly when it comes to Mainland China, it takes us a reasonable while to get products into the country and ready for sale. So as a result, a lot of the products that we were expecting to sell in Q3 were already staged in China in that quarter. Therefore, as we've come into Q4, the inventory is all there; we can respond to demand pretty immediately. We're not concerned about our ability to meet demand in short order. Our numbers are proving that.

Dani Reiss, CEO

Yes. To address the brand health question, outside of China, our store sales have significantly accelerated in Q4, with lines forming outside our stores again, which is a positive sign. We're making substantial headway with our strategy and observing strong demand for our new products, which are being adopted at a quicker pace than our existing offerings. Overall, despite the macroeconomic context, we continue to see a robust demand for the products we manufacture.

Operator, Operator

Thank you. Please standby for our next question. Our next question comes from the line of Jonathan Komp with Baird. Your line is open.

Jonathan Komp, Analyst

Yes, hi, good morning. Thank you. I want to just follow up on inventory, if I could. Could you maybe just share a little more detail on the state and positioning of the current base, if you have any plans to reduce inventory, and how you plan to do that? And then just a broader question. When you presumably reduce the utilization at your factory, does that have a material impact on the COGS of any new production? Just maybe if you could walk through the dynamics there?

Jonathan Sinclair, CFO

Sure, let's begin with the macro perspective. First, I'd like to point out that Japan's inventory is not comparable since it wasn't part of the joint venture a year ago, representing about $25 million of the total. We currently have more inventory than anticipated at this time of year, slightly exceeding our preference. However, we are confident in the health of our inventory. Our brand has a strong record of selling through products, with most items being continuous core products that we can carry over seasons. Therefore, as you correctly surmise, we might adjust our future production volumes to align with our gross margin strategy, but we do not foresee this impacting our forward margins significantly.

Operator, Operator

Thank you. Please standby for our next question. Our next question comes from the line of Mark Petrie with CIBC. Your line is open.

Mark Petrie, Analyst

Hey, good morning. Thanks, a question around the strength in the non-parka categories. Just wondering if you could talk a bit more about that. Was that consistent by region? Consistent through the period? And is that sort of continuing into Q4? And then I also just wanted to ask about the performance in Japan and if there are any specific circumstances that drove the reduction in the expected contribution of some increase?

Carrie Baker, President

Certainly. Let me discuss the expanded offering. We observed growth across different regions. In North America, sales increased by 51% compared to last year, now representing about 5% of total sales for the quarter. The heavyweight and non-heavyweight categories both increased by 20%, bringing their contribution to 42% of revenue year-to-date, up from 36% the previous year. We see similar trends in EMEA. The APAC region is somewhat unique due to various factors we've mentioned, but we are pleased to see that new categories are growing at a faster rate than anticipated, outpacing traditional core parka sales. This indicates that customers are embracing our brand as a lifestyle choice, rather than just as a cold weather or parka brand. We have focused on this strategy, and it is clearly having a positive impact.

Jonathan Sinclair, CFO

I think when it comes to Japan, what I'd say is that as a reminder, the strategy there obviously is a switch from wholesale into retail. As you know, we've opened a couple of stores there, one in Osaka in Shinsaibashi and one in Ginza in Tokyo. While we're very happy with the locations, the initial take-up of business was a bit slower than we might have expected. Hence, we've seen that business be a bit softer, and we've revised the ranges accordingly.

Operator, Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Jay Sole with UBS. Your line is open.

Jay Sole, Analyst

Great, thank you so much. I just wondered if you could elaborate a little bit more. I think you touched on this in other parts of the call, but if you elaborate a little bit more on the footwear business and sort of how that played out this season, what you're expecting for next season to beyond, that would be helpful. Thank you.

Dani Reiss, CEO

Thanks, Jay. Absolutely. Footwear has been doing quite well. Obviously, it is a nascent category for us. It's grown almost 175% overall since this quarter, and we have big plans for it, as you know. We're very pleased with the way our consumers have taken to our new products. Some of our first two products launched were very strong, and the follow-up products to that were even stronger. We continue to build momentum and strength behind that category and are super excited about future growth.

Carrie Baker, President

And just one thing to add on that is the one thing I've particularly been watching is just the uptake with women. We have a really standard size with our pull-down topper boots. Women have been taking those up; they are very excited about those categories, and we're selling out often and having to replenish quickly. So that's great in terms of both category growth but also in terms of how we're reaching women, which is obviously a key focus for us.

Operator, Operator

Thank you. Please standby for our next question. Our final question comes from the line of Omar Saad with Evercore. Your line is open.

Omar Saad, Analyst

Thanks for squeezing me in. Most of my questions have been asked. I just have a couple of cleanup questions. I want to confirm, it sounds like you don't think weather, the warm weather was an impact in North America slowdown, number one. Maybe dive in a little bit. Do you think in Japan, do you think there's just a brand awareness and recognition issue? Do you have that kind of presence with the consumer mind where it needs to be for the store footprint? And then lastly, in China, what gives you confidence that the strong recent trends are not just the Lunar New Year? Thanks.

Dani Reiss, CEO

Thank you for your question. I don't think weather has ever significantly affected our performance. We've managed to perform well regardless of weather conditions. While extreme weather events can be more common and localized, when there is a snowstorm, people tend to want more products. However, I don't believe there is a considerable macro impact throughout the year. Regarding Japan, I believe our brand is strong there. I've been excited about our joint venture and now having an operating entity in Japan. Our stores have just opened, and since they are new to the market without an established customer base, it will take some time to gain traction. Nevertheless, I am confident in our brand's potential in Japan. While I know its current market size, the future possibilities seem promising and could improve significantly over time, with our stores being a key factor in that growth.

Jonathan Sinclair, CFO

I think when it comes to the Chinese business, I mean, there's clearly the Lunar New Year, but the real driver is pent-up demand from consumers. That's what we've been seeing. That's what drives the lineup. You're not just seeing business at the weekend; you're seeing it every single day of the week. It's been very marked and very strong.

Dani Reiss, CEO

Yes. I'll just close with agreeing on all that. I think if the reopening happened one month sooner, we would have seen the same behavior in December. Had we seen the same behavior in December, I think the conversation of the quarter would be a lot different. But it was an unfortunate matter of timing for us, and we are fortunate that during Chinese Lunar New Year, our Chinese consumers were able to shop in our stores and online, and the performance speaks for itself.

Operator, Operator

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.