Canada Goose Holdings Inc. reported a wider loss in its seasonably-small first-quarter ended June 30 in part due to costs to expand its direct-to-consumer (DTC) operations. But the loss was smaller than expected with the help of a hike in sales and margins.
“Notably in the smaller quarter, we increased revenue across all geographies and sales channels,” said Dani Reiss, president and CEO, on a conference call with analysts. “We made headway in our direct-to-consumer global expansion plans and we continue to expand our in-house manufacturing capabilities and achieve gross margin expansion. Together these factors allowed us to grow year-over-year sales.”
Sales jumped 79.6 percent in the period to Canadian $28.2 million.
Wholesale revenues jumped 38.2 percent to C$19.9 million. This increase was primarily driven by earlier timing of C$5.1 million in shipments that were expected to be delivered later in the year.
DTC revenue catapulted to C$8.3 million from C$1.3 million, driven by strong growth in ITS North American e-commerce sites, and incremental revenue from new stores in Toronto and New York City and new e-commerce sites in France and the U.K., which were not operating in the same period last year.
Gross margins improved to 46.9 percent compared to 29.7 percent in the same period a year ago.
Wholesale gross margin jumped to 35.1 percent from 27 percent., Consistent with the year-ago first quarter, sales to distributors comprised a higher proportion of the latest period’s revenue and carried a lower margin than comparable units sold to retailers. In addition, an inventory provision of C$1 million was included in the year-ago first quarter that negatively impacted the gross margin.
DTC gross margins were 75.3 percent versus 60.2 percent a year ago.
SG&A expenses jumped 45.1 percent to C$25.8 million, reflecting a higher cost base associated with the company’s DTC expansion. As a percent of sales, SGA&A was reduced to 91.6 percent from 115.3 percent a year ago.
Canada Goose said SG&A grew more slowly than planned as the timing of spending shifted between quarters. SG&A also benefited in the latest quarter from an unrealized foreign exchange gain and was reduced in the year-ago period due to foreign exchange gains.
The net loss for the quarter was C$12.1 million, or 11 cents per share, compared to a net loss of C$14 million, or 14 cents, in the first quarter of 2017. The adjusted net loss for the quarter was 13 cents versus a loss of 9 cents a year ago. Wall Street’s consensus estimate had called for a loss of 19 cents.
The adjusted loss excludes any costs related to its IPO in March 2017 and secondary offering in June 2017 as well as expenses tied to establishing its international headquarters in Switzerland and terminating of third party sales agents. Adjustments also exclude gains on foreign exchange forward contracts and a gain an unrealized foreign exchange gain on term loan.
Adjusted EBITDA showed a loss of C$13.6 million in the latest quarter against a loss of C$7.5 million in the prior year as SG&A investments in the period were magnified in the seasonally-small quarter. Adjusted EBITDA benefited from stronger than anticipated growth in the DTC channel, favorable timing of wholesale shipments and lower SG&A spending that is expected to be incurred later in the year.
On the call, Reiss said the company was “particularly pleased” with the continued strength of its spring assortments around the world. He added, “Our line performed very well this year which validates, the consumers are looking to Canada Goose for new function first product to protect them of any climate or season.”
Regarding DTC, its first two stores in Yorkdale Shopping Centre in Toronto and Soho in New York City delivered “solid performance” in the quarter and the company remains on track to open locations in Chicago and London ahead of holiday 2017. The company also announced that locations in Boston and Calgary will open later this fall. The company had expected to open only three locations this year. A store will also open in Tokyo this fall through a distribution partner.
Said Reiss, “Having our own stores allowed us to showcase full array of our product in our store, it tells the story of Canada Goose unfiltered while also better capturing market share and adding to our bottom line.”
He also says he hears “positive consumer feedback” about the high level of service from store associates and called them “a significant part of what sets Canada Goose apart at retail.”
On e-commerce, both its Canadian and U.S. sites “continue to perform well and we’re happy with customer traffic and orders from the France and UK market, which are in their first year of operation.” Ireland’s website was activated at the end of Q1 and Belgium, Luxemburg and the Netherlands early in Q2. Canada Goose remains on track to open three additional sites for a total of seven sites this fiscal year.
At wholesale, a “strong performance’ was seen across all geographic regions.
“The growth was primarily driven by the earlier timing of shipments reflecting only our increased efficiency in manufacturing and sales planning, but also the high demand and sell through of our products,” said Reiss. “In fact, many retailers are specifically asking us to accelerate shipments so they can get our product on the floor earlier. We see this as a testament to our belief that Canada Goose is a bright spot for our retail partners.”
He also noted that the strength in spring demand is encouraging more retailers to open year-round Canada Goose in–store shops North America and Europe.
Looking ahead, Reiss said the company is “very pleased” with its spring 2019 order book and the company is “especially excited” about the launch of its first ever knitwear collection to hit its owned channel and select retailers next week. Said Reiss, “Knitwear is a natural step for our brand and for our business and by all accounts we expect this to be successful.”
Operationally, Canada Goose expanded its manufacturing capacity at its Quebec facility to 95,000 square feet as part of its push to increase in-house production while driving margin expansion. As of July, the facility employed 125 and another 325 are expected to be hired by the end of 2018.
To also drive margin improvement and operational efficiency, Canada Goose centralized raw materials processing and quality assurance at its six sites located in Toronto in July 2017. Said Reis, “We remain committed to keeping production of our core products made in Canada and we believe that we are well positioned from a supply chain perspective to continue to meet the demands of our growing business.”
Canada Goose also reached a significant milestone in the quarter by surpassing 2,000 employees. Added Reis, “I’m very proud of everyone on our team and believe we have the strongest team we’ve ever had in place to keep building on our momentum and on the growth opportunities that we see ahead.”
Photo courtesy Canada Goose