Canada Goose Holdings, Inc. reported earnings and sales came in below guidance in the fiscal third quarter ended January 1 and lowered its outlook for the year due to worse-than-expected COVID-19-related disruptions in Mainland China and slowing momentum in North America.
Total revenue of $576.7 in the quarter was below company guidance in the range of $580 million to $660 million. Adjusted EBIT of $197.1 million was below guidance in the range of $220 million to $255 million. Adjusted net income per diluted share of $1.27 came in below guidance in the range of $1.47 to $1.72.
All amounts are in Canadian dollars.
“We were pleased with accelerating growth in Mainland China toward the end of the quarter and continue to see promising signs of a strong local rebound to date,” said Dani Reiss, Chairman and CEO. “However, for most of the third quarter which includes December, our busiest month of the year, our performance was impacted by worse-than-expected COVID-19-related disruptions in Mainland China. This, combined with recent slowing momentum in North America set against a tough macroeconomic backdrop, has led us to revise annual guidance. We believe these challenges are temporary and our brand strength and strategy position us well to drive profitable growth – which we look forward to discussing at our upcoming Investor Day.”
Q3 2023 revenue declined 1.6 percent to $576.7 million on a reported basis and 2.2 percent on a constant currency revenue basis3.
DTC revenue grew 1.5 percent largely due to continued retail store expansion, with 51 permanent stores at the end of Q3 2023 compared to 41 permanent stores at the end of the comparative quarter. DTC comparable sales5 declined 6.0 percent, which included positive comparable sales growth in all geographies excluding Mainland China. We were negatively impacted by COVID-19-related restrictions in the Asia Pacific region, particularly in Mainland China, which resulted in temporary store closures, reduced hours, and significantly lower retail traffic.
Wholesale revenue declined 17.3 percent. The decline was attributable to earlier shipments in Q2 2023.
Revenue By Geography
On a constant-currency basis, revenue was up 6.3 percent in the U.S. while declining 6.8 percent in Canada, 3.4 percent in Asia Pacific, and 7.3 percent in EMEA. Revenue in the United States grew primarily driven by higher revenues from existing stores as well as continued retail expansion. Revenue decreased in Canada and EMEA due to earlier timing for Wholesale shipments and lower e-Commerce performance, partially offset by increased sales within existing stores. APAC declined due to Mainland China COVID-19-related disruptions, partly offset by increased revenue as a result of the Japan Joint Venture.
Gross Profit and Gross Margin
Gross profit increased $2.6 million primarily due to gross margin expansion to 72.2 percent from 70.6 percent. Gross margin was favorably impacted by pricing, partially offset by higher duty costs, product mix from a lower proportion of parka sales 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 declined 5.2 percent to $194.3 million from $205.0 million largely due to unfavorable foreign exchange fluctuations related to the company’s senior secured term loan facility and working capital, net of hedge impacts, investment in information technology for business growth, higher costs related to opening new stores and running stores at full capacity except for Mainland China, and higher fees in support of strategic activities and costs associated with the Japan Joint Venture. The decrease was partially offset by the higher gross profit and the timing of investment in marketing to assist with brand awareness and support our growth, which occurred earlier in the year compared to fiscal 2022. Adjusted EBIT decreased primarily due to higher costs related to investment in technology, opening new stores and running stores at full capacity except in Mainland China, foreign exchange fluctuations net of hedge impacts related to working capital partially offset by higher gross profit and the timing of marketing spend which occurred earlier in the year compared to fiscal 2022.
Net Income and Adjusted Net Income
Net income declined 10.8 percent to $134.9 million, or $1.28 a share. Net income on an adjusted basis slid 11.0 percent to $134.5 million, or $1.28. Net income and adjusted net income were lower as compared to Q3 2022 primarily as a result of the factors described above impacting operating income and adjusted EBIT as well as higher income tax expense.
Balance Sheet Highlights
Cash was $344.2 million as at Q3 ended January 1, 2023, compared to $407.6 million as at Q3 ended January 2, 2022, largely due to greater investment in working capital. During the third quarter of fiscal 2023, the company repurchased 745,381 subordinate voting shares for a total cash consideration of $17.9 million.
Inventory was $482.0 million as at Q3 ended January 1, 2023, compared to $368.1 million as at Q3 ended January 2, 2022. Higher inventory levels are attributable to lower-than-expected sales in the Asia Pacific region due to ongoing COVID-19 disruptions for most of fiscal 2023 year-to-date and inventory planning. Inventory of $27.3 million was acquired through the Japan Joint Venture, and the inventory level is $25.2 million as at January 1, 2023. We monitor the levels of inventory in each of our sales channels and across geographic regions and aim to align with the demand that the company forecasted in each region.
Full Year Fiscal 2023 Outlook
For fiscal 2023, the company has lowered its overall guidance ranges from the previous outlook due to worse-than-expected COVID-19-related disruptions for most of Q3 2023 in Mainland China and slowing momentum in North America against a challenging macroeconomic environment. The company remains relentlessly focused on capitalizing on its growth opportunities and driving further brand heat while also tightly controlling all non-strategic spend in an effort to maximize profitable growth.
The company currently expects:
- Total revenue $1.175Bn to $1.195Bn compared to previous guidance of $1.200Bn to $1.300Bn provided in Q2 2023 earnings release;
- Non-IFRS adjusted EBIT $167m to $182m, representing a margin of 14.2 percent to 15.3 percent compared to previous guidance of non-IFRS adjusted EBIT $215m to $255m, representing a margin of 17.9 percent to 19.6 percent; and
- Non-IFRS adjusted net income per diluted share $0.92 to $1.03 compared to the previous guidance of non-IFRS adjusted net income per diluted share $1.31 to $1.62.
For the fourth quarter of fiscal 2023, the company currently expects:
- Total revenue $251m to $271m;
- Non-IFRS adjusted EBIT $19m to $35m; and
- Non-IFRS adjusted net income per diluted share $0.00 to $0.12.
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;
- There will be improved strength in Mainland China across the company’s DTC channels and the macro-economic environment will not materially worsen in any of the company’s geographies;
- The company expects approximately $45m to $50m in total revenue in fiscal 2023 from the Japan Joint Venture compared to the previous assumption of $60m to $65m in light of a slower-than-expected revenue build in new stores;
- DTC revenue is expected to be in the high 60s as a percentage of total revenue, compared to the previous assumption of 70 percent to 73 percent of total revenue with a DTC comparable sales decline in the low single digits compared to the previous assumption of a 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;
- Wholesale revenue growth of 6 percent;
- Gross margin in the high 60s as a percentage of total revenue;
- Q4 fiscal 2023 SG&A expenses used in the calculation of adjusted EBIT in the low 50s as a percentage of revenue;
- Effective tax rate in the mid-20s as a percentage of income before taxes for fiscal 2023 compared to the previous assumption in the low-20s; and
- Weighted average diluted shares outstanding of 104.8m for fiscal 2023 compared to the previous assumption of 105.8m as the new assumption incorporates share buyback activity.