Canada Goose Holdings Inc. (NYSE:GOOS) Q1 2024 Earnings Call Transcript August 3, 2023
Canada Goose Holdings Inc. misses on earnings expectations. Reported EPS is $-0.7 EPS, expectations were $0.64.
Operator: Thank you for standing by. Welcome to Canada Goose First Quarter 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers’ presentation, there will be a question-and-answer session [Operator Instructions]. As a reminder, today’s program is being recorded. And now I would now like to introduce your host for today’s program, Ana Raman, Vice President, Investor Relations. Please go ahead.
Ana Raman: Thank you, operator, and good morning, everyone. With me are Dani Reiss, Chairman and CEO; Jonathan Sinclair, EVP and CFO; and Carrie Baker, President. After Dani’s and Jonathan’s prepared remarks, we will open it up for your questions. Our call today, including the Q&A portion, includes forward-looking statements. Each forward-looking statement, including without limitation, discussion of our financial outlook, is subject to risks and uncertainties that could cause actual results to differ materially from those projected. Certain material factors and assumptions were considered and applied in making these forward-looking statements. Additional information regarding these statements, factors and assumptions is available in our earnings press release issued this morning as well as in our filings with US and Canadian securities regulators.
These documents are also available on the Investor Relations section of our Web site. The forward-looking statements made on this call speak only as of today and we undertake no obligation to update or revise any of these statements. We report in Canadian dollars so all amount discuss today are in Canadian dollars unless otherwise indicated. Please note that financial results described on today’s call will compare first quarter results ended July 2, 2023 with the same period ended July 3, 2022, unless noted otherwise. Lastly, our commentary today will also include certain non-IFRS financial measures, which are reconciled at the end of our earnings press release. With that, I’ll turn the call over to Dani.
Dani Reiss: Thanks, Ana, and good morning, everyone. We kicked off the year with another strong quarter marked by healthy consumer demand for our products. Q1 revenue grew 21% over the same period last year to $84.8 million as more consumers around the world sought out our products for their style, performance and unmatched craftsmanship. Later, Jonathan will discuss our first quarter financial performance and our expectations for the second quarter. Today I’m going to focus on the progress we’ve made in Q1 across our three strategic pillars, driving consumer focused growth, building our DTC network and expanding our product categories. First, driving consumer focused growth. Revenue growth in our DTC channel was strong in Q1, up 60% year-on-year.
During the quarter, we grew the number of customer shopping in our stores across our major markets led by Asia Pacific, which doubled from the same period last year as traffic returned following the removal of COVID restrictions. We are focused on creating great customer experiences, attracting customers to our well-known brand and keep loyal fans coming back for more. In Q1, we launched AI driven support on our e-commerce sites to offer real time self-serve to our customers. We’re already seeing benefits from this initiative with over 25% of incoming customer conversations received in the quarter positively resolved through this tool. Initiatives like this with the unlocking of data through our CRM program will help us better engage with customers and provide elevated experiences.
Growing our women and Gen Z customer segments is a part of our consumer focused growth plans. In Q1, the number of women shopping with us grew in the high teens over the same period last year. Our revenue share from Gen Z increased slightly from an already strong base within our overall mix. We continue to apply our longstanding playbook to remain top of mind and culturally relevant to our women in Gen Z customer segments to help build momentum for our bigger selling season. In Q1, we sponsored Canada’s first ever WNBA event, which was broadcast across North America. Our pieces also appeared in front of the camera in some of the biggest film and TV programs this year through our established partnerships in the entertainment industry. These included Ted Lasso, Fast X, the latest in the Fast and the Furious franchise and two different episodes of our popular Netflix series, Never Have I Ever, which had 11.5 million views in its first week.
Moving to our next strategic pillar, building our DTC network. Q1 DTC comp sales growth was up 28% year-over-year and strong across all of our key markets with especially robust performance in Macau and Hong Kong, fueled by the return of Chinese tourists. DTC growth of this order across all of our markets reinforces our confidence in our global retail network. Since our last earnings call, we opened four new permanent stores bringing our permanent store count to 55 stores. These stores were in Dublin, Las Vegas, Bellevue near Seattle and LA at the Beverly Center, which opened in July. We also reimagined and relocated our Beijing Sanlitun store to find a new level of customer experience. This flagship store is our largest store in the world and includes a VIP lounge featuring original Canadian art, a roof terrace garden, archived product displays in our [snow room], which features video and sound to provide a full Arctic experience.
Traffic and sales have exceeded our expectations in its first few weeks of opening. We also opened two pop-up stores in the US, in Miami and Anchorage. These cities are both big tourist hubs, growing local and international demand. We especially have a strong local following in Alaska, a state where our brand has a long history. Turning to digital commerce. Our retail store strategy is part of a broader plan to create a seamless omnichannel experience, one that brings the customer journey from discovery of our brand to conversion of a sale to the post sale experience, whether that happens on or offline. Digital commerce is an important part of this. We continue to invest in both our front and backend e-commerce capabilities. On the front end, in Q1, we tested optimizations across mobile and desktop devices to reduce friction by helping customers more easily find the products they love and make their purchase.
We’re seeing some early positive conversion results, which we’ll continue to learn from and build on. For the backend, we’re advancing initiatives to improve digital merchandising and optimization of returns process to enhance operational efficiency and the overall customer experience ahead of the main selling season in the second half of the year and beyond. Turning to our third strategic pillar, expanding product categories. In Q1, apparel accessories were among our highest growth categories, increasing their share of revenue within the overall mix by a healthy margin. Within apparel, the HyBridge Knit Jacket and Hoody and Chilliwack Fleece Bomber were the most popular with our consumers, while our Waist Pack and Arctic Disc 2 were our top sellers within accessories.
It is worth noting that our HyBridge and Chilliwack styles are iterations of our core pieces that are clearly continuing to resonate with customers. As a result of this demand, Q1 year-over-year revenue growth of our non-heavyweight down product outpaced that of heavyweight down through our DTC channel. Just a couple of weeks ago, we introduced our new sneaker line marking the next step in our footwear journey. The Glacier Trail Sneaker is a versatile piece that offers the highest levels of function, performance and comfort that our brand is known for. With the year round appeal, the sneaker has offered in a variety of colors for women and men. Although, orally, we have seen very good sales velocity out of the gate and are excited for the opportunity ahead in this category.
We also launched Generations Canada in July, expanding our e-commerce platform to more customers since our US launch in January. This nascent platform reflects the core of our DNA as a sustainable brand that stands the test of time and the elements. We are compiling learning that we can apply across the US and Canada as we continue to expand our presence and capture a big opportunity in the [circular] economy. Finally, we recently released our fiscal 2023 sustainability report, which demonstrates our continued commitment to keeping the planet cold and the people on it warm. I’m pleased with the progress that we made last year across our operations, materials and community goals. In closing, our Q1 performance and the progress we made across our strategic pillars during the quarter continues to demonstrate that we are moving very well in the right direction.
We have an internationally recognized brand. We’re excited about the opportunities to bring Canada Goose into the lives of many more people around the world, all the while continuing to focus on making the highest quality products and creating memorable experiences for our customers, so that anyone that our brand touches is inspired to live their authentic lives in the open. And now I’ll pass over to Jonathan to discuss our financial results.
Jonathan Sinclair: Thank you, Dani, and good morning, everyone. We are pleased with our first quarter performance, characterized by strong top line growth. Revenue for the first quarter was $84.8 million, up 21% year-over-year or 18% on a constant currency basis, above the high end of our guidance range. Growth was driven by healthy demand for our products across our priority markets. DTC sales of $55.8 million grew 60% or 54% on a constant currency basis from the same period last year and that arose from continued retail store expansion and an increase in existing store sales. DTC revenue was 66% of total sales in Q1 compared to 50% in the same period last year as we optimized the greater DTC share within our channel mix. Consistent with our strategy over many years, we are intentionally shifting our proportion of channel revenue to sell directly to our end consumers.
The right mix between DTC and wholesale channels positions us to capture new customers and retain existing ones with optimal unit economics. Q1 wholesale revenue of $27.1 million was down 18% year-over-year or 19% on a constant currency basis, that primarily arises from the streamlining of our wholesale partners. Even so this was above our plan due to earlier shipments to customers. We’re concentrating our efforts on serving our top accounts that are brand accretive and positioning us within our target segments. Similar to others in the sector, we noted caution amongst the wholesale community, which is reflected in our order book. Q1 revenue increased across our key regions year-over-year as more customers shopped at our stores in North America, APAC and EMEA.
North America revenue was up 24% to $41.6 million, up 20% on a constant currency basis, driven by continued retail expansion and an increase in existing store sales. Canada DTC comparable growth was faster than the US, up by double digits in most stores. This indicates continued brand momentum in our most established markets, which benefited from a return to tourism. The US experienced 15% year-over-year growth from existing and new store sales. We saw a higher proportion of new and existing consumers entering our non-heavyweight down categories and demonstrating significantly higher interest in apparel. We also gained traction with women in the US, which is one of our top markets for this segment. Share of revenue increased within the country’s mix compared to the same period last year with our rain, everyday and lightweight down pieces resonating with women.
Our progress in Q1 further strengthens our belief in our long term US retail expansion strategy, while also continuing to grow DTC comps as we continue to navigate the uncertain economic environment. Turning to Asia-Pacific. This region had a stellar quarter with revenue increasing 52% year-over-year to $24.5 million, up 43% on a constant currency basis. We saw broad based growth across each buck key markets, including Mainland China where lifting of COVID restrictions has led to a strong rebound in domestic spending in stores, as well as in e-commerce. As Dani mentioned, we had especially strong performance in our stores in our ex-Mainland China Asia-Pacific markets with the return of Chinese tourism. Our stores in Japan also saw strong growth this quarter led by domestic and tourist demand.
It’s worth reminding you that there maybe significant upside to our top and bottom line should Chinese tourism return to a more normalized level in the West this year as we’ve not considered this in our guidance. Asia-Pacific consumers continued to purchase our non-heavyweight down offerings, such as apparel and accessories, which grew triple digits this quarter over the same period last year in the region. Finally, EMEA revenue was down 7% year-over-year to $18.7 million or 6% down on a constant currency basis as lower wholesale revenue was partially offset by growth in our DTC channel. Our stores have continued to benefit from more tourism from the US, from the Middle East and more recently from China. Most of our European stores registered double digit comparable sales growth year-over-year in Q1 as they benefited from a more normalized operating environment.
Despite the hot weather, our heavyweight down collections saw notable growth in EMEA in the quarter, almost doubling as compared to the same quarter last year, as more wholesalers gravitate to our iconic offerings. Given the outsized impact of wholesale in the region, it was most impacted by the dynamic in our wholesale order book. Moving to gross profit. First quarter gross profit grew 29% year-over-year to $55.2 million, primarily driven by higher revenue and gross margin expansion. Q1 gross margin increased 400 basis points to 65.1% compared to last year due to a higher mix of DTC sales as well as favorable product mix and pricing. The increase in the gross margin of our products was seen across all categories with non-heavyweight down outpacing margin expansion of our established heavyweight down segment.
DTC gross margin expanded to 73% in Q1 while wholesale gross margins increased to 51%, up 40 and 30 basis points respectively compared to the first quarter of last year. Gross margins were favorably impacted by pricing product mix due to the higher proportion of heavyweight down sales and lower freight costs. These margins are entirely consistent with our long term expectations of mid-70s DTC and mid to high-40s wholesale gross margins on an annual basis. The adjusted EBIT loss increase to $91.1 million compared to Q1 of last year. That primarily arises from increased SG&A expenses. Our adjusted EBIT loss in the quarter was favorable compared to our first quarter guidance range, mainly as a result of strong revenue growth. SG&A increased 24% year-over-year to $154.9 million, largely associated with higher costs associated with the expansion of our retail network and strategic investments in technology and across our transformation program, which we expect will enable operational efficiencies across the organization to support sustainable growth and profitability.
Adjusted net loss attributable shareholders was $73.1 million and an adjusted loss of $0.70 per basic share. Moving to our balance sheet. We ended Q1 of fiscal ’24 with inventory of $522.1 million, up 3% from $504.7 million at the end of the same period last year. As expected, year-over-year growth in inventory decelerated for the second consecutive quarter as we more closely aligned the supply of products with anticipated demand and utilized the evergreen product we have on hand. During our first quarter, we stopped production at one of our two Montreal facilities, consolidating production into our other facilities. We also brought more production in-house to introduce greater flexibility and improve overhead leverage. In Q1, approximately 75% of our domestically produced jackets were manufactured in-house compared to 58% in the fourth quarter of fiscal ’23.
We expect the planned deceleration of inventory growth and a shift to in-house production to continue to support further gross margin expansion. During the first quarter, we bought back approximately 1.16 million shares for a total cash consideration of $26.3 million ending the quarter with $48 million of cash on our balance sheet compared to $81.8 million at the end of quarter one fiscal ’23. Since the commencement of our buyback program, the NCIB, we have repurchased 2.7 million shares or approximately 50% of the amount authorized under this program. We’re very comfortable with net debt average of 2.7 times adjusted EBITDA at the end of the quarter. In Q1, we extended our revolving facility through 2028, solidifying the balance sheet. Canada Goose is investing across multiple fronts to position ourselves for long term growth, represented by our three strategic pillars and our transformation program, the latter of which we expect will strengthen our foundation and add greater efficiencies into our operating model to support long term growth and the associated margin expansion.
In Q1, we laid the groundwork for our transformation program and are now focused on beginning implementation across a number of initiatives, including enhancing store productivity and optimizing production and procurement. Stay tuned for further updates on this front as we advance these initiatives into implementation. Turning to our outlook. We had a strong first quarter and are pleased with the progress we have made to achieve our full year plans. Our outlook contemplates an uncertain macroeconomic environment together with foreign currency volatility. We continue to plan against a range of scenarios and our guidance represents our assessment of market conditions and the most likely consumer impacts. Our fiscal ’24 outlook assumes continued momentum in Asia Pacific balanced with a more challenged consumer backdrop in the US as noted by others in the sector.
Our priorities for fiscal ’24 remain unchanged. We intend to continue investing in our strategic pillars and of course in our transformation program to build for the long run. We remain confident that this is the right path to achieve sustainable growth and improved profitability. As such, we are reiterating our full year fiscal 24 guidance. We expect total revenue to be in the range of $1.4 billion to $1.5 billion for the full year. Our revenue guidance assumes DTC revenue in the mid to high-70s as a percentage of total revenue, driven by mid single digits to mid-teens comp sales growth and continued store expansion as we continue to plan to open at least [16] new permanent stores in the year of which four are already open. We also continue to expect wholesale revenue to decrease by 6% year-over-year as we maintain our visibility over our order book and our delivery comprising the vast majority of the year’s wholesale business.
We expect non-IFRS adjusted EBIT to be in the range of $210 million to $240 million in fiscal ’24, representing an operating margin in the range of 15% to 16%. This assumes gross margin percentage to be in the high-60s on a full year basis with DTC and wholesale gross margins in the mid-70s and mid to high-40s respectively. We are not including any benefits from the transformation program in the fiscal ’24 guidance. We expect non-IFRS adjusted net income per diluted share in the range of $1.20 to $1.48. This assumes an effective tax rate in the low-20s as a percentage of income before taxes and weighted average diluted shares outstanding of 106.3 million for fiscal ’24. Consistent with this annual guidance, our guidance for Q2 is as follows.
We expect revenue to be in the range of $270 million to $290 million. Our revenue range reflects the earlier shipments of wholesale orders that took place in Q1 that will no longer be included in Q2. We expect non-IFRS adjusted EBIT to be in the range of $20 million to $30 million loss, reflecting the impact of us expanded store network in the summer quarter in terms both of the number of new stores we are operating and the number of stores we’re planning to open in our second quarter, as well as the planned timing of marketing spend, which is later this year than last. We expect non-IFRS adjusted net loss per basic share to be in the range of $0.17 to $0.24. In conclusion, we had a strong start to the year. More new and existing customers are returning to our stores.
We’re showing up in more places and people love our products. Customers are shopping with Canada Goose seeking the very best in craftsmanship, style and performance. We’re pleased with the progress we’ve made across all fronts in our first quarter to position us well for long term growth and improving profitability as we continue to execute against our strategic pillars and our reiterated annual guidance. With that operator, please open up the lines for questions.
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Q&A Session
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Operator: [Operator Instructions] And our first question comes in line of Brooke Roach from Goldman Sachs.
Brooke Roach: Dani, I was hoping you could talk a little bit more about your updated thoughts on how the Canada Goose brand is resonating with the Chinese consumer now that you’re a few months further into the reopening? And then perhaps for Jonathan, can you elaborate on the outlook that you now see for China following a strong fiscal first quarter? How does the trend that you’re seeing this quarter impact your view on the recapture ability of the $160 million of lost China revenue from the prior year?
Jonathan Sinclair: As Dani is not on the call, Carrie is going to take the question on China, and I’ll reverse on the second question on the outlook.
Carrie Baker: So yes, we had stellar results in APAC. In mainland China, we saw a strong rebound spending across our DTC channels, mostly that’s because we’re seeing people come back into stores. We saw especially robust performance in Macau and Hong Kong and that’s really because of the return of tourism to Chinese Mainland. And then Japan also saw strong growth both from locals and from tourists. So we’re really energized by what we’re seeing and we expect that to continue.
Jonathan Sinclair: And I think as we think about the outlook for China, the key thing to think about is when it was most impaired last year. So we’ve already said at the beginning of this year that we are expecting progressive improvement. We’ve obviously had a very good start to that. China was at its most disrupted in Q1 and Q3 last year. And so that’s when I’d expect to see the growth that it’s strongest. And if you recall, what we said was we have not included in our guidance an assumption that we recover the whole of the hit that we took last year, but we’re seeing progressive improvement towards it as you can see here.
Operator: [Operator Instructions] And our next question comes from the line of Robert Ohmes from Bank of America.
Robert Ohmes: Jonathan, I think, maybe my first question is just the — can you give us any help on the pricing tailwind to 1Q sales, how significant was the pricing increase benefit?
Jonathan Sinclair: I think from my point of view, we’ve always said we are sort of around the same mid single digits or so in pricing. This year’s not been any different than that. You’ll have heard me talk a number of times about the relatively scientific way in which we go about this, both in terms of in architecture in any one market and the application of it across multiple markets. And that this year has been no different than that. We’ve maintained the model from what we can see, the international pricing metrics is alive and well and operating across the sector. And therefore we’ve obviously had pricing benefit in our numbers as we would expect and in line with the sort of rate we’ve experienced in previous years.
Robert Ohmes: And just a quick follow-up. On inventory, it’s great that you’re — the growth of it is slowing. Is there ever — will you ever go through a period where inventory levels that you carry could be worked down a little? Because obviously they’ve gotten a little bloated during COVID and I thought maybe they would work down somewhat.
