Canada Goose Holdings, Inc. reported results for the second quarter ended October 2 that easily topped analyst estimates, but the company reduced its outlook for the year due to weakness in China and the uncertain global macroeconomic climate.

All amounts are in Canadian dollars unless indicated.

Earnings in the second quarter were 22 cents a share, topping the consensus analyst estimate of 4 cents. Revenue for the quarter came in at $277.2 million versus the consensus estimate of $203.59 million.

“We are encouraged by our performance in the second quarter of fiscal 2023, driven by topline growth of 19 percent,” said Dani Reiss, chairman and CEO. “Given the extent of COVID disruptions in Mainland China as well as an uncertain global macroeconomic backdrop, we have revised our fiscal 2023 outlook. We will continue to leverage our competitive strengths and remain focused on the things we can control, including disciplined investment spend. We remain confident in our brand strength and see a long runway ahead to drive profitable growth by increasing our direct-to-consumer mix, expanding our penetration in key markets, and expanding our product offerings.”

Revenue
Q2 2023 revenue grew 19.0 percent on a reported basis to $277.2m and 22.3 percent on a constant currency revenue basis. The strength of the US dollar compared to the Canadian dollar was outweighed by the depreciation of the pound sterling and euro relative to the Canadian dollar.

Revenue By Segment
DTC revenue grew 15.6 percent largely due to continued retail expansion, with 45 permanent stores in Q2 2023 compared to 38 permanent stores in the comparative quarter. Revenue from existing stores grew in all geographies except Asia Pacific. DTC revenue in Asia Pacific was negatively impacted by COVID-19-related restrictions, which resulted in store closures, reduced hours, and significantly lower retail traffic, which were not prevalent in the comparative quarter. DTC comparable sales growth was 4.0 percent, which included positive comparable sales growth in all geographies except the Asia Pacific. Wholesale revenue grew 21.2 percent due to earlier order book fulfillment as well as an increase in order book value.

Revenue By Geography
Q2 2023 revenue grew in all geographies except the Asia Pacific. Canada, the U.S. and the EMEA continued to see increased sales within existing stores and also benefited from wholesale growth. The EMEA experienced a larger increase in wholesale order book value relative to the other geographies.

Gross Profit and Gross Margin
Gross profit increased 22.8 percent due to higher revenue as noted above and gross margin increased by 180 basis points. Q2 2023 gross margin increased in both DTC and Wholesale segments. The total gross margin was favorably impacted by pricing, lower product costs largely driven by increased production efficiencies and less distributor sales, which are lower margins. These benefits were partially offset by the product mix and the unfavorable impact of the fair value inventory acquisition adjustment on sales related to the Japan joint venture.

Operating Income and Adjusted EBIT
Operating income fell 62.7 percent to $4.7m from $12.6 million. Adjusted EBIT rose 70.1 percent to $29.6m from $17.4m. Operating income declined largely due to unfavorable foreign exchange fluctuations related to the company’s senior secured term loan facility and working capital, net of hedge impacts, incremental personnel costs, and higher costs related to retail expansion and investments in strategic initiatives, partially offset by higher gross profit as described above and the timing of marketing spend. Adjusted EBIT increased primarily due to higher gross profit and the timing of marketing spend, partially offset by incremental personnel costs, higher costs related to retail expansion and investments in strategic initiatives.

Net Income and Adjusted Net Income
Net income attributable to shareholders of the company declined 66.7 percent to $3.3m from $9.9m a year ago.

Balance Sheet Highlights
Cash was $97.1 million as at Q2 ended October 2, 2022, compared to $98.9 million as at Q2 ended September 26, 2021 largely due to greater investment in working capital.

Inventory was $511.5 million as at Q2 ended October 2, 2022, compared to $416.4 million as at Q2 ended September 26, 2021. Of the increase, $27.4 million is related to the Japan joint venture. Inventory levels increased ahead of its peak selling season to keep pace with growth and were further supported by domestic production levels gradually returning to pre-pandemic manufacturing levels. Additionally, the company aims to mitigate supply chain risks through earlier acquisitions and higher volumes of offshore production in support of growth relative to the comparative quarter. Canada Goose is monitoring inventory levels in each of its sales channels and across geographic regions to align with the demand it forecasted in each region.

Third Quarter and Full Year Fiscal 2023 Outlook
For fiscal 2023, the company lowered its overall guidance ranges from its original outlook. The revised guidance assumes that COVID-19 restrictions in Mainland China will continue to negatively impact performance consistent with the extent of the impact experienced in the third quarter fiscal 2023 sales trend to date. The revised ranges also reflect the uncertainty from the broader macroeconomic and political environment. The company remains focused on capitalizing on its growth opportunities and driving further brand heat while also tightly controlling all non-strategic spending to maximize profitable growth.

The company currently expects:

  • Total revenue $1.200Bn to $1.300Bn compared to original guidance of $1.300Bn to $1.400Bn;
  • Non-IFRS adjusted EBIT $215m to $255m, representing a margin of 17.9 percent to 19.6 percent compared to original guidance of non-IFRS adjusted EBIT $250m to $290m, representing a margin of 19.2 percent to 20.7 percent; and
  • Non-IFRS adjusted net income per diluted share is $1.31 to $1.62 compared to the original guidance of non-IFRS adjusted net income per diluted share of $1.60 to $1.90.

For the third quarter of fiscal 2023, the company currently expects:

  • Total revenue $580m to $660m;
  • Non-IFRS adjusted EBIT $220m to $255m; and
  • Non-IFRS adjusted net income per diluted share of $1.47 to $1.72.

This outlook is based on a number of assumptions, including the following:

  • Improved traffic and lower levels of operating disruptions globally, including mandatory closures, in both company and partner-operated retail stores, relative to fiscal 2022;
  • With respect to Mainland China’s contribution, the impact of COVID-19 restrictions does not materially worsen from the extent experienced to date in the third quarter fiscal 2023;
  • The company expects $60m to $65m in total revenue in fiscal 2023 from the Japan joint venture, which is roughly double the contribution from the Japanese market in fiscal 2022. Much of the revenue from the Japanese market is expected to shift to the second half of the fiscal year as revenue is being earned in DTC and Wholesale channels with the creation of the Canada Goose Japan joint venture in Q1 2023 as compared to only Wholesale revenue in fiscal 2022;
  • Approximate percent of fiscal 2023 total revenue by quarter—Q3 50 percent, Q4 22 percent;
  • DTC percent of total revenue 70 percent to 73 percent impacted by DTC comparable sales decline in the low-single-digits at the lower end of the range to the growth of high-single-digits at the top end of the range, compared to the original assumption of low- to high-teens DTC comparable sales growth, and continued channel expansion;
  • Wholesale revenue growth of 6 percent;
  • Gross margin in the high 60s, as a percent of total revenue, with expansion driven by DTC mix shift;
  • Q3 fiscal 2023 SG&A expenses used in the computation of Adjusted EBIT in the low- to mid-30s as a percent of revenue;
  • The effective tax rate in the low 20s, as a percent of income, before taxes for fiscal 2023; and
  • Weighted average diluted shares outstanding of 105.8m for fiscal 2023. This does not assume any incremental share buyback activity.

Photo courtesy Canada Goose