Canada Goose Inc. reported sales collapsed 63.3 percent in its seasonally-slow first quarter ended June 28 due to the impact of store closings from the outbreak of COVID-19 and slow reopening phases. The loss widened in the period.
“Adversity demands change, drives innovation and reveals winners. For Canada Goose, that has never been more true than today, as we begin to see signs of recovery around the world heading into our most important season,” said Dani Reiss, president & CEO. “Where we face uncertainty, we have practiced discipline and flexibility, and where we see an opportunity, we have accelerated our strategic plans.”
COVID-19 Business Update
Today’s reality has reinforced long-standing pillars of Canada Goose’s DTC strategy: globally scalable in-house eCommerce and omnichannel innovation. With digital adoption rising rapidly, the company has increased and accelerated investments in these areas going into the Fall/Winter season. This includes the launch of mobile omnichannel capabilities in U.S. stores, following a successful pilot in Canada, and a cross-border solution to expand international access.
Retail investments have also been reduced and refocused. New openings this year will be concentrated in Mainland China where the recovery of traffic remains ahead of other markets. With international tourism now heavily constrained, serving the world’s largest luxury consumer base at home is increasingly crucial. The first of four committed new stores opened in Chengdu in June and it has consistently performed ahead of expectations.
Twenty-one of 22 retail stores in the DTC channel globally are in operation. Employee and customer safety measures have been introduced in all locations. This includes enhanced cleaning and sanitization, reduced occupancy levels to support physical distancing and reduced operating hours.
Alongside the continued production of PPE to support front line workers fighting against COVID-19, down-filled jacket manufacturing has restarted on a limited basis. With a strong finished goods position, the company is focused on adding depth for key on-trend styles in the upcoming Fall/Winter season. Canada Goose currently plans to produce roughly one-third of the fiscal 2020 output with the intention of significantly reducing inventory by the end of fiscal 2021.
Canada Goose’s liquidity and cash flow profile continue to provide extensive coverage against ongoing external uncertainties. Measures taken to reduce anticipated cash expenses and investments by $90.0m in the first quarter of fiscal 2021 were fully met. Despite the significant topline impact of temporary retail closures, net cash used in operating activities was $110.5m lower than the comparative quarter last year.
First Quarter Fiscal 2021 Results (in Canadian ollars, compared to First Quarter Fiscal 2020):
- Total revenue was $26.1m from $71.1m.
- DTC revenue was $10.4m from $34.8m. The decrease was driven by temporary store closures and reduced store hours due to COVID-19 global disruption. In line with seasonality, revenue generated through e-commerce was consistent with the comparative quarter.
- Wholesale revenue was $8.7m from $35.6m. The decrease was a result of a significant reduction in shipments due to COVID-19 disruptions to partner operations. Revenue generated in the quarter comprised international distributor shipments to Asia.
- Other revenue was $7.0m from $0.7m. The increase was attributable to PPE sales in support of COVID-19 response efforts.
- Gross profit was $4.8m, a gross margin of 18.4 percent, compared to $40.9m and 57.5 percent. The decrease in gross margin was a result of lower gross margins in the Wholesale and Other segments and a lower proportion of DTC revenue, offset by an increase in DTC gross margin. Excluding the sale of PPE at cost and $4.3m of net overhead costs resulting from the temporary closure of its manufacturing facilities, gross margin was 47.6 percent.
- DTC gross profit was $8.6m, a gross margin of 82.7 percent, compared to $26.0m and 74.7 percent. The increase in gross margin was driven by a $1.7m (+1,620 bps) duty recovery related to 2019 shipments to Asia partially offset by $0.7m (-680 bps) of favorable inventory recoveries in the comparative quarter. These factors had a disproportionate impact on DTC gross margin given the low level of revenue in the quarter.
- Wholesale gross profit was $1.5m, a gross margin of 17.2 percent, compared to $14.9m and 41.9 percent. The decrease in gross margin was attributable to an $11.7m (-990 bps) decline resulting from a higher proportion of distributor sales relative to the comparative quarter. In addition, there was a $1.7m (-1,730 bps) impact due to favorable inventory recoveries in the comparative quarter. These factors had a disproportionate impact on wholesale gross margin given the low level of revenue in the quarter.
- Other segments gross loss was $(5.3)m, compared to $nil. PPE gross profit and gross margins were $nil and 0 percent as PPE was sold at cost.
- Gross loss and gross margin were further affected by $4.3m (-6,190 bps) of net overhead costs resulting from the temporary closure of its manufacturing facilities.
- Operating loss was $(59.3)m, an operating margin of (227.2) percent, compared to $(27.5)m and (38.7) percent. The decrease in operating loss and operating margin was a result of reduced revenue due to COVID-19.
- DTC operating loss was $(12.2)m, an operating margin of (117.3) percent, compared to operating income of $6.5m and 18.7 percent. The operating loss was driven by COVID-19 temporary store closures resulting in lower revenue offset by $1.2m of government payroll subsidies, savings from variable rent and other cost-saving initiatives. COVID-19-related temporary store closure costs of $5.5m were recognized. The decline in DTC operating margin reflects fixed cost deleverage resulting from lower revenue.
- Wholesale operating loss was $7.2m, an operating margin of (82.8) percent, compared to operating income of $5.0m and 14.0 percent. The decrease in operating loss was attributable to the decline in revenue offset by cost reduction efforts across the business supplemented by $0.8m of government payroll subsidies. The decline in operating margin reflects fixed cost deleverage as a result of lower revenue.
- Other operating loss was $39.9m compared to $(39.0)m. The decrease in operating loss was attributable to $4.3m of net overhead costs resulting from the temporary closure of its manufacturing facilities offset by $5.1m of government payroll subsidies recognized in SG&A.
- Net loss was $50.1m, or 46 cents per diluted share, compared to $29.4m, or 27 cents per diluted share.
- Adjusted EBIT was a loss of $46.5m, compared to a loss of $25.9m.
- Adjusted net loss was $38.4m, or 35 cents per diluted share, compared to a loss of $22.8m, or 21 cents per diluted share.
- Inventories at the period’s end were $428.6 million against $366.1 million at the same time a year ago.
While there has been a gradual sequential improvement in performance, the negative financial impacts of COVID-19 have continued in the second quarter of fiscal 2021 with a significant revenue decline expected.
In the wholesale channel, which represented 74.2 percent of sales in the second quarter of fiscal 2020, shipments to partners continue to be materially lower as they restart their retail operations. A controlled and selective approach is being used in the early stages of re-opening. On an annual basis, the company expects lower wholesale revenue and later shipment timing relative to fiscal 2020.
In the DTC channel, consistent with earlier experiences in Greater China, reopened retail stores globally have had slow starts with traffic considerably lower than in the comparative quarter. The current period is a low point for online purchasing due to the limited in-season relevance of the offering. Preparations for the peak online selling season continues to remain on-track.
Given prevailing global uncertainties, including the potential for a second wave of outbreaks, the pace of retail traffic recovery, and the impact of economic developments and travel restrictions on consumer discretionary spending, all of which are unknown, the company continues to not provide an outlook for fiscal 2021.
Photo courtesy Canada Goose