Canada Goose again raised its guidance for the year after banging out significant gains in earnings and sales in the third quarter ended December 31. Results benefited from strong demand for expanded lightweight offerings, retailer requests for earlier shipments of merchandise, and a strong reception to new stores.
In the quarter, revenue vaulted 50.2 percent to Canadian $399.3 million and grew 49.0 percent on a currency-neutral basis.
Adjusted net income catapulted 66.2 percent to C$107.2 million, or C96 cents a share, from C$64.5 million, or C58 cents, a year ago. Wall Street’s EPS target was C81 cents.
The adjustments primarily exclude charges related to the acquisition of Baffin and a secondary offering as well as unrealized foreign exchange gains on its term loan facility. Net income surged 64.1 percent to C$103.4 million, or C93 cents, from C$63.0 million, or C$56 cents, in the same period a year ago.
The higher net earnings were helped by increased operating earnings and a lower effective tax rate.
“Adjusted EPS in the quarter was larger than our annual figure for all of 2018,” said Dani Reiss, president and CEO, on a conference call with analysts. “On a global stage, our brand voice and consumer connection have never been stronger. Awareness and affinity are growing in the markets that we are prioritizing. And we have a lot of remaining runway.”
Operating income rose 55.6 percent to $139.9 million, driven by revenue growth and gross margin expansion, partially offset by SG&A growth investments. Adjusted EBITDA rose 59.6 percent to C$151.1 million.
Gross margins improved to 64.4 percent from 63.6 percent due to greater DTC (direct-to-consumer) revenue.
SG&A expenses expanded 46.0 percent due to due to investments to support growth in marketing, corporate headcount and IT, including Greater China operations. Professional fees and other costs relating to public company compliance also increased. As a percent of sales, SG&A expenses were reduced to 28.1 percent from 28.9 percent on a larger quarterly revenue base.
DTC revenue jumped 78.7 percent to C$235.3 million. The increase was driven by incremental revenue from five stores and one new e-commerce site, as well as the strong performance of existing retail stores and e-commerce sites.
DTC gross margin eased slightly to 76.1 percent from 76.5 percent due to sold inventory manufactured at higher labor costs due to the onset of Ontario’s minimum wage increase at the start of the 2018 calendar year.
DTC operating income improved 78.8 percent to C$141.4 million as the benefit of strong sales productivity across the channel was partially offset by incremental SG&A fees to operating partners in Greater China.
Wholesale revenue grew 22.2 percent to C$164.0 million. The increase was primarily attributable to higher order values from existing partners, coupled with earlier shipment timing relative to last year. Favorable foreign exchange fluctuations and incremental revenue from the acquisition of the business of Baffin also contributed positively.
Wholesale gross margin eased to 47.7 percent from 51.0 percent due to changes in product mix, as well as profit which would otherwise have been recognized on sold Baffin inventory due to a fair value markup at acquisition. Manufacturing labor cost increases also had a more significant impact in the wholesale channel due to the difference between wholesale and retail selling prices.
Wholesale operating income rose 13.8 percent to C$65.1 million as the sales growth and SG&A leverage offset the gross margin erosion.
On the call, Dani Reiss, president and CEO, said the strong results reflect healthy demand for its products and the benefits of bringing newness through color into its fall winter collections. Heritage styles “continue to grow at very healthy rates” and the brand “successfully introduced an expanded palette of seasonal colors and prints with white and silver verse styles being particularly sought after.”
The new Approach jacket “made a big splash” with its release on Black Friday, Reiss added. Beyond its core offerings, the lightweight down Hybrid Base jacket, designed for a wider range of cold temperatures than the classic hybrid light, has been a “standout performer” in its first year. More broadly, lightweight down “continues to grow significantly” and Reiss sees “an incredible opportunity to continue to lead this category going forward.”
Both DTC and wholesale channels outperformed in the quarter and continue to complement each other, according to Reiss.
Canada Goose has opened 11 stores since opening its first three years ago, including five over the last year. All the “openings performed well and existing stores are also continuing to deliver strong results,” according to Reiss.
Added Reiss, “I am very encouraged but not surprised by guest feedback showing that we are moving the needle on our high touch experiences. Getting this right is critical. And doing it in peak season with high traffic is the ultimate test and we passed that with flying colors.”
He believes Canada’s stores are benefiting from a focus on investing in prime real estate and a focus on a localized approach. Experiential approaches, including its Warm Holiday photo booths and the introduction of cold rooms, also helped drive traffic and more such efforts are being planned.
E-commerce delivered “another strong performance,” including newer markets. In China, Canada Goose was one of the top 10 brands in its space on Singles Day. Online operational and customer service metrics were also reached.
Wholesales likewise saw “another outstanding quarter” as efforts to work with retailers to elevate storytelling and presentation paid off. Said Reiss, “On the back of high sell-through levels early in the season, retailers continue to request earlier shipments of remaining order book commitments and to reorder allocations. And because of our success expanding in-house manufacturing we were able to respond to this faster, putting our partners in stronger merchandising positions to meet peak consumer demand.”
Canada Goose also announced the opening of its second Québec production facility in Montréal closely following the opening of its third Winnipeg facility.
The facility will have 100 employees by the end of March, create 300 jobs in its first year of operation and employ 650 at full capacity. Canada Goose now has a total of eight in-house manufacturing facilities in Canada and Reiss counts it as a core competency. Said Reiss, “Some brands only have their headquarters in the city. They’re missing the great history and potential that this area has.”
Despite the strong results, shares of Canada Goose fell U.S.$7.66, or 12.9 percent, to U.S.$51.53 on Thursday after posting the results. One investor concern was a shortfall in gross margin due to higher labor costs. But the stock has been due for a breather as shares began the year at U.S.$43.72 and has quadrupled its IPO offering price (U.S $12.78) from March 2017.
For 2019, Canada Goose’s updated outlook calls for:
- Annual revenue growth in the mid-to-high thirties on a percentage basis, compared to at least 30 percent previously. The growth assumes wholesale revenue growth in the mid-to-high teens versus high-single digits previously.
- Adjusted EBITDA margin expansion of at least 150 basis points compared to fiscal 2018, unchanged
- Annual growth in adjusted EPS in the mid-to-high forties on a percentage basis, compared to at least 40 percent previously.
Image courtesy Canada Goose