Canada Goose Holdings Inc

Good morning. My name is Mariama and I will be your conference operator today. At this time, I would like to welcome everyone to the Canada Goose second quarter 2020 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, please press star then one on your telephone keypad. If you would like to withdraw your question, please press the pound key. Thank you. I would now like to turn the call over to Patrick Burke, Senior Director, Investor Relations. You may begin your conference.

Thank you, and good morning, everyone. With me are Danny Reese, President and CEO, and Jonathan Sinclair, EVP and CFO. After prepared remarks from Danny and Jonathan, we will take your questions. This call, including the Q&A portion, includes forward-looking statements. Each forward-looking statement, including discussion of our Fiscal 20 outlook, is subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statements. Certain material factors and assumptions were considered and applied in making these forward-looking statements. Additional information regarding these forward-looking statements, factors, and assumptions is available in our earnings press release issued this morning, as well as the risk factors section of our most recent annual report filed with the SEC and Canadian securities regulators. These documents are also available on the Investor Relations section of our website. Forward-looking statements made on this call speak only as of today, and we undertake no obligation to update or revise any of these statements. Our commentary today will include certain non-IFRS financial measures, which are reconciled in the table at the end of our earnings press release issued this morning and available on the Investor Relations section of our website at CanadaGoose.com. With that, I will turn the call over to Danny.

Thanks, Patrick, and good morning, everyone. I am really pleased to tell you that the power of our brand and our business model pulled through despite a challenging external environment, and we delivered another strong set of results to finish the first half. And here are the highlights. In the second quarter relative to last year, revenue grew by 27.7%, and adjusted EPS per diluted share increased 23.9%. Even with the unrest in Hong Kong, revenue in Asia nearly doubled to $48.9 million. Revenue in the U.S. increased by 38.5% on a constant currency basis. Revenue in Canada grew by 29.9%. Against tough comparisons in our most developed market, this is a strong result. From a brand perspective, it is great to see consumers at home embracing our lightweight down jackets and knitwear. From a channel perspective, wholesale led the way with its largest quarter, with revenue increasing by 22.9%. This was complemented by direct-to-consumer growth of 47.2%. Like in the first quarter, we continued to fulfill partner requests for earlier shipments on the back of increased operational flexibility. With that as a starting point, there are a couple of specific topics that I would like to address. Let me start with Hong Kong. As I'm sure you're aware, the situation has intensified since our last call. With the impact on tourism and retail traffic, the performance of our store at IFC has impacted it significantly. The same goes for our recently opened location at Ocean Centre, which is the fifth of our nine openings this year. With this addition, we are established in the two most important luxury retail districts in the city, complementing the mix of guests we already reached through IFC. Although we wish that the situation was different today, we are developing markets and building stores for decades, not just for the next quarter. Fortunately, during our second quarter, strong top-line performances in other markets offset the impact on Hong Kong. We are watching the situation closely and evaluating actions to streamline our cost base on the ground, including negotiating accommodations from landlords. Moving on, wholesale timing is another important topic for understanding our business. The channel operates largely as a planned economy. Our fall, winter, and spring order books are set down to the color, style, and or well in advance, and this gives us great visibility through the year. The timing of when we shift these orders can and does shift from month to month in any given year. It comes down to a balance of when our partners want delivery and when we can manufacture their orders most efficiently. This year, we've been well-positioned to fulfill customer needs earlier. The shape of every year has always been different, and so movements of orders between quarters or months is not a reliable indicator of annual performance. I am really pleased that we've shipped so much of our fall-winter order book earlier, which naturally means less shipments in the next quarter. It does not mean the underlying demand in the channel is changing. We continue to expect wholesale revenue to grow in the high single digits in fiscal 2020. This shift has already impacted our numbers for Europe and the rest of the world, where revenue decreased by 3.4% in constant currency. For the same reason, this is not something that I am at all concerned about. As it is our most wholesale-centric region, and it grew by 79.7% in the first quarter. So fewer orders shipped this quarter is a logical follow-on effect. As you have seen before, growth rates in any given geography can vary from quarter to quarter exactly for this reason. Lastly, I want to provide an update on inventory, which we discussed last quarter. We have continued to build an inventory buffer ahead of growth to maximize production efficiency and long-term commercial flexibility. Going back to our IPO, a key growth strategy has been increasing in-house production to control our own destiny, provide greater flexibility, and to increase margin. Initially, this meant expanding in-house capacity alongside expanding existing contractor production. In building four factories over the last two and a half years, over half of our downfield production is now in-house, and we're at a stage where we can actively reduce our CMTs in the coming year. I continue to feel very good about the size and the current composition of our inventory position. We continue to operate commercially with a disciplined and selective allocation model, both at wholesale and in our own DTC channels, and always at full price. Going into next year, once the rationalization and transition are complete, we intend to improve inventory efficiency relative to sales and expect that our inventory levels relative to revenue will trend lower over time. I'm also excited to share with you a few things that we are doing with innovation and experimentation in retail this season. I believe that our customers own our brand, and the value of our brand is defined by the sum of their experiences. Innovation and experimentation is an important part of that puzzle for us. With consumers looking To use outerwear to express our own personality more and more, our recent relaunch of Branta is a great example. A focused collection of six never-to-be-repeated styles, it is an elevated interpretation of Canada Goose's heritage designed to inspire loyal brand fans and reach new audiences with pinnacle product. Through versatile 4-in-1 and 3-in-1 and reversible styles that feature an artistic print, and luxury fabrics such as Loro Piano wool. Branta has been a high-impact centerpiece on our floors, and the commercial response so far has been incredible. We have also introduced pilot programs to encourage self-expression, including the ability to add personal details on their jackets and to customize for consumers to customize their jacket with new hood brim options, offering new reflective, comfort, and insulated brim choices, Consumers can tailor their jacket to where and how they use it and their own personal style preferences. The customer response from these programs has been extremely positive, and we are learning a lot to inform future direction of both product and retail engagement. Similar to our innovation with cold rooms and customization and personalization pilot programs, we continue to experiment and evolve with retail formats. In a fast-changing digital-first world, you cannot succeed by repeating the same store concept again and again. One box does not fit all. There are so many interesting opportunities out there to micro-target to specific locations, customers, influences, and experiences. This year, we've activated a number of new direct-to-consumer formats to test and learn what works where, what customers want, and how we can deliver exceptional experiences in new ways. As we have done in the past, we are also utilizing pop-ups to activate markets and test locations for permanent openings. Later this week, we'll be opening at Tyson's Galleria in Washington, D.C. area, and we're excited to be bringing our amazing Canada News experience to life there. Going back to my initial remarks, having global brand strength, multiple avenues of growth, and the discipline and focus to execute well are so important in times like these. Winter has just kicked into high gear, and I am really encouraged by how we are performing despite the continued external headwinds and ongoing uncertainties. Despite that, we continue to see long lineups in our stores across geographies, which shows the power of great products and exceptional experiences. And with that, I'll turn it over to Jonathan to go into the specifics of our financial results.

Good morning to me. Good morning everyone. Thank you for joining us. We delivered strong second quarter results in line with our expectations. Brand power, geographic diversity and high quality distribution continue to be a winning combination. We were able to offset the impact of disruptions in Hong Kong with strong performances in other markets. Against external uncertainties, we're executing with discipline and we're pleased to be in a position to reaffirm guidance for the year. Now, with that backdrop, I'll walk you through the numbers in detail. Please note that all figures are quoted in Canadian dollars. For the second quarter, compared to the same quarter last year, revenue grew 27.7%, $294 million. or 28.3% on a constant currency basis. Wholesale was a standout performer in the largest quarter, with revenue growing 22.2% or 22.9% on a constant currency basis. This was primarily driven by growth from existing partners, complemented by earlier shipment timing relative to last year. Incremental revenue from Baffin in its peak sales quarter also had an impact. We continue to assume high single-digit wholesale growth for the year. This reflects our performance through the first half, with a materially higher proportion of all winter orders fulfilled relative to last year. We also anniversary the acquisition of Baffin at the start of November. For these reasons, we expect wholesale revenues in Q3 to decrease in the mid-teens on a percentage basis year over year. This is purely a function of timing. We have fewer remaining fall winter orders to work through, and that's what drives the quarter. Moving on to Q4, we transition to the spring order book and late-season fall winter replenishment. We're pleased to satisfy our obligations to our partners earlier, putting our 2,000-plus points of distribution in a better position for the peak season. However, this does not change the commercial discipline with which we supply and operate this channel. DTC revenue increased by 47.2% or 47.4% on a constant currency basis. Now, due to the transition to a 4-4-5 fiscal calendar this year, we lost one day in the quarter relative to last year. Excluding the extra day in the prior period, growth would have been 49.3%. Our established stores and e-commerce markets performed well, and our new store openings had good starts, with Shenyang and Edmonton being particularly noteworthy. Moving on to geography, we made great strides in key markets alongside continued growth at home. Starting with Asia, our top line nearly doubled to $48.9 million. Now, while Japan growth was much lower than Q1, due to shipment time, it still continued to be a positive contributor, as, of course, did incremental revenue from DTC operations in Greater China. And Hong Kong specifically, our store was inevitably impacted by external disruption. That said, given the effects on tourism and traffic, we're pleased with how I've seen it performed. We're fortunate to have a global business with the resilience to offset this with strong performances, in other geographies. Now, unfortunately, and as we're all aware, the situation in Hong Kong has intensified. As we enter the second half of the year, we also have an additional location at Ocean Centre, and we anniversary IFC's opening, making the headwind on DTC revenue growth more significant. As you'd expect, we're also being very prudent with our local cost base and resource allocation, and that includes pursuing accommodations with our landlords and service providers alike. Moving on to the United States, revenue increased by 38.5% in constant currency. This was driven by a significant contribution from wholesale in its largest quarter, complemented by a strong DCC performance both online and in-store. At home in Canada, revenue increased by 29.9%, Against a tough comparison in a seasonally smaller quarter, we were pleased with the performance of our highly productive DTC channel. Incremental Bafin revenue in its peak quarter was also particularly relevant to Canada. In Europe and the rest of the world, revenue decreased by 3.4% in constant currency. You'll recall that the growth in Q1 was very elevated, 79.7%. We called that out as being driven by earlier timing shipment relative to last year. As an output, there were fewer remaining fall-winter orders to ship in Q2, and in our most wholesale-centric geography, this was the fundamental driver of the decrease. Moving on from revenue, consolidated gross margin was 54.6%. At a channel level, wholesale gross margin came in at 47.5%, as expected. This represents normalisation relative to the first half of last year, which was elevated through a number of temporary timing factors. As I've said before, the mid to high 40s is right where we want to be over annual periods, and our comparison normalised in the second half of this year. BTC gross margin came in at a strong 75.6%. This was driven by the net positive impact of pricing relative to costs. We saw the benefits of tailwinds from our core, which are more significant at this time of year relative to Q1, when the mix from non-Parker growth margin. Wholesale operating income was $90.9 million with an operating margin of 41.4%. This reflects the gross margin shift versus last year, as I've just described, and relatively flat SG&A as a percentage of revenues. Turning to DTC and excluding pre-opening costs in both periods, our operating margin increased to 45.3% from 43.7%, with strong sales productivity and profitability across all components of the channel. We incurred $3.6 million in pre-opening costs for the locations not yet open, and this compared to $1 million in the same period last year. Including these costs, DTC operating income was $30 million, representing an operating margin of 40.4%. Unallocated corporate expenses were $43.2 million compared to $34.2 million last year, while unallocated depreciation was $2.3 million compared to $1.8 million this year. Increase in corporate SG&A was primarily driven by increased growth investments in marketing, corporate headcount, and infrastructure, including Greater China. Combined, this resulted in total operating income of $75.4 million. That compares to $65 million last year. On a non-IFRS basis, adjusted EBIT was $79.2 million compared to $66.5 million last year. Net income was $60.6 million, or $0.55 per diluted chair, compared to $49.9 million, or $0.45 per diluted chair last year. Adjusted net income, which excludes a $4 million impact from pre-opening costs, was $63.6 million, or $0.57 per diluted chair, compared to $51.1 million, or $0.46 per diluted chair last year. It's also worth noting that earnings in the quarter benefited from a change in the effective tax rate to 12.8% for 18.1% last year. Now, this is largely a temporary timing impact. It relates the differences in the transfer of inventory to specific geographies and the applicable tax rates. We continue to assume an effective tax rate for the full year in the area of 21.3%, which is what we achieved in fiscal 2013. Turning quickly to the balance sheet, we ended the quarter with net debt $537.9 million. That includes $224.2 million in lease liability, as presented under IFRS 16. On a spot basis at the quarter end, net debt to EBITDAR on a trailing 12-month period was 2.0 times. This reflects a seasonal peak in the financing of our working capital cycle, achieved through our short-term facilities. Networking capital was $383 million compared to $270 million in the same quarter last year. This reflects a continuation of our planned inventory build and was partially offset by increases in accounts payable and accrued liabilities. To support the staging needs of our international DTC expansion, and maximize the efficiency of our new in-house capacity coming online, we have built up buffer inventory in continuative core styles for longer-term commercial flexibility. This buffer gives us continuity as we rationalize third-party CMTs. Moving beyond this fiscal year, once this transition is complete, we expect our inventory levels to begin to normalize. In summary, we're really pleased with our performance through the first half of the fiscal year and we're well positioned as we enter our busiest commercial period. While external uncertainties are a reality, we remain confident in the power of the brand and indeed in our business model. Against this backdrop, we've continued to deliver strong growth in revenue and earnings and we're pleased to reiterate our outlook for the year. Now I'll turn back to Danny for some closing remarks.

Thanks, Jonathan. The first half of the year has truly been great, and with the peak season now in full swing, there are a number of exciting things on the horizon. We'll be opening our first store in Paris on Rue Saint-Honoré shortly. This is a dream come true for me personally, and I can't wait to see it up and running. We're also launching our first concept store at Sherway Gardens in Toronto, an experimental and experiential way to engage with our local fans. And last but not least, we'll be introducing our first small format resort town location in Banff, which is one of Canada's most beautiful and popular international destinations. And with that, I'll now turn it over to the operator to begin the Q&A.

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone keypad. To withdraw your question, press the pound or hash key. Please remember to limit yourselves to one question and one follow-up question. If you have any further questions, you may re-enter the queue. Please stand by while we compile the Q&A roster. Your first question comes from the line of Kate Fitzsimons with RBC Capital Markets. Your line is open.

Yes, hi. Good morning, guys. Congratulations on the momentum. I guess my first question is, you know, the growth rates in your more established markets, Canada and the U.S., were very impressive in the quarter. How do you think about what's driving the demand in the home market, particularly at the wholesale channel, as well as growth opportunities go forward in North America? And then secondly, on Asia, you know, obviously very impressive growth there despite that disruption in Hong Kong. Can you just dig into what you're seeing in other markets as an offset? And, you know, Danny, it's been about a year since you've been in China. You know, what would you say have been the more interesting or surprising learnings there more recently, you know, just despite the fact that what's going on in Hong Kong? Thanks so much.

Thank you for your questions. I think that our brand heat has never been stronger, and it continues to grow. Global awareness and affinity of our brand are in a great place, and you can see that in our results. We have significantly grown our business in all geographies, and we continue to achieve a very significant pace of growth off of a much larger base today. I think that some anecdotes... As it's gotten colder, there are lineups at our stores. We get, again, there are people camping out overnight to get at some of our collaborations and to make sure they get one of them. So, you know, the demand for our products has truly never been stronger across all geographies. And, you know, to speak to China, and, yeah, we've been offering there for a year, and as you can see, the results have been great this quarter. We've got... almost doubled our business in China. I think that we took the right approach there by running China from China and investing in infrastructure and offices in-country. I think the results are showing dividends, notwithstanding, obviously, what's going on in Hong Kong. We're hoping for that to resolve itself in a positive way for everybody. In the meantime, China is great. Demand is strong. Chinese consumers Our brand is really resonating with them.

Great, guys. Best of luck for holiday.

Thank you.

Your next question comes from the line of Omar Saad with Evercore ISI. Your line is open.

Thanks. Good morning. Nice quarter. I wanted to ask about follow-up on a lot of your comments around the supply chain production, the inventory build. Looks like you're continuing to kind of build that quarterly production, how much you guys are producing. obviously also doing more in-house. I think you said 50% or over 50%. Maybe you could talk about do you expect production to still ramp, whether it's internal production or with your external suppliers over the next year or two from these levels, or do you expect the production to level off at some point? And also on the own manufacturing, do you think you get to a level much above 50% over time? Are you kind of happy where it is? And then help us think about, I think there was a comment around building some of the core items longer term and inventory. Help us understand that dynamic. And maybe you could frame it inventories per store or another metric that helps us understand and get comfortable with how the inventory flows through the seasons and throughout the year. Thanks, guys.

Thanks for the question. I'll talk a little bit about our manufacturing strategy. It does go all the way back to, as we pointed out, as we were going public as one of our key growth strategies, that we were going to bring a lot of our manufacturing in-house by either building and or acquiring new facilities. And we've built over, I think, four-plus facilities now since then, and we've been able to bring a lot more of our capacity in-house to the point where I think last year it was close to 50% of our manufacturing. And I think that, you know, to your point of how high can that go, I think there's still room to go a bit higher than that. We don't have an absolute target, but I think that there's still room to grow. And that is important for a number of reasons. It's important to be able to control our own destiny and to have control over our own supply chain. And also, obviously, we get to bring – as we bring it in-house, we increase our opportunity for additional margin. And so we're really excited to be able to do that. And some of that has resulted in having a little bit more inventory because we obviously – In our view, it's better to have more good inventory than not enough good inventory. And the thing about inventory that's important for you to know about our company is that we're different than many in that approximately two-thirds, 75% of inventory is carryover inventory, and that's the stuff that we're making. So there's no excess inventory risk here. It's not risky inventory. It's inventory that will be sold at full price, and it's inventory that will be available and has been available for many years. So I think that You know, I'm not worried at all about the inventory and inventory risk. And this sort of inventory position is something that we're used to at Canada Gears. Even going back 10, 20 years when we were a smaller company, we'd have more inventory relative to sales. It wouldn't bother us at all because that's the way our company works. John's going to add anything.

Yeah, I mean, just building on that, you know, it's clear that we build inventory in manufacturing ahead of the curve in core products in the way Dennis just described. That means it doesn't line up with quarterly sales trends, and that's not what we're trying to do. And particularly here, we're addressing a transition through CMT and that puts us in a great position for continued growth in fiscal 21 as well. So, on the one hand, that's not dynamics we necessarily expect to change in the near term, but we do expect the position to improve relative to revenues once the effect of the rationalisation takes effect. And I think I'd take you back to something I said last quarter, We look at inventory in terms of turns in this business. Once you strip out manufacturing, raw materials, and work in process, and that level of turns on an average basis puts us pretty much in line with where others are in fast-moving, highly seasonal businesses like this.

Got it. Thank you.

Your next question comes from the line of Michael Benetti with Credit Suisse. Your line is open.

Hey, guys. Good morning. Thanks for taking our questions here. So I guess you reiterated the guidance for wholesale will be up high single digits for the year, but then you gave us some color that we think they'll be down mid-teens and third quarter. I think that leaves us with a pretty wide range of outcomes in wholesale for fourth quarter, where from positive double digits to even slightly negative. But I think, Dan, you described that as a period when you'll start shipping for spring and also replenishing for winter. Can you just help us understand the upside versus the downside in that guidance? You know, speak to the scenario that could result in something near the low end there or even negative in fourth quarter. And then I also want to say within that guidance, for wholesale revenues to be down in the third quarter. What region do you think we'll see most impacted? Is that largely U.S. given the second quarter growth rates that we just saw? Thank you.

Yeah, I mean, so the way the wholesale business works, we come into the year knowing the wholesale order before all the seasons. And therefore, to some extent, Danny describes it as a managed economy. To some extent, therefore, we know what the outcome is, and that's why we assume high single digits within our guidance. And therefore, there's an inevitability that if we supply it sooner, then the reality is the order book is fulfilled. Now, none of that stops our wholesale partners coming back and asking for more, but you'll also recall that we operate an allocation model here. And the allocation model privileges our own stores first and then our e-commerce. And then we consider replenishment of wholesale orders where it makes sense to do so. And that's consistent with what we've done in the past. So clearly, as and when those requests come through, we look at them in that context and against that model. And I think the reality is that as you look forward, obviously, then we've got a new season being supplied in the fourth quarter, which is spring-summer, and that's got its own dynamics in any event. But from our point of view, we look at the wholesale channel as both important in the sense of being a very strong channel and also important in terms of its role it plays in the brand.

I agree with that. Our wholesale business for the year is looking like it's going to end up exactly where we thought it would, and we're really happy about that. Michael, you asked about the range between downsides and upsides. Given that we feel very confident that it's going to end up where we thought it would, there's no downside there at all. It's just exactly what we thought it would be. And, you know, we have inventory available for reorder should that come into play.

Great. Thanks.

Your next question comes from the line of Ike Buracho with Wells Fargo. Your line is open.

Hey, Danny, Jonathan, Patrick. Good morning. Let me add my congrats. I guess, Jonathan or Danny, just a question, two questions on the wholesale market. You guys have talked about, you know, the pull forward effect many times. And again, like the brand is so strong that you're clearly getting orders earlier. Just kind of curious, is there any way to quantify the pull forward just so we can kind of think about the dollars that may be shifted into Q2 from Q3? And then Jonathan, there's been some normalization on the wholesale gross margin and you've been very helpful to kind of talk us through what's going on there. Any color on how to think about the wholesale gross margins in the back half and specifically Q3? Just Basically trying to figure out if there's any more normalization or dynamics we should keep in mind as we model that out. Thanks a lot.

That's okay. So I think if we, let's start with the timing of when our customers want us to ship product. I mean, we're very much in their hands in that sense. And when they ask for it, we do our level best to ship it. Best way to look at this, is to remember what our full year assumption is that underpins our guidance, which is high single digits. And if you look at it in that context, the extent that it's way above that, then that's where we've got customers seeking to get the product sooner. And I think that's the best way to answer that. I think when it comes to the wholesale gross margin, No, we're right where we want to be. You know, 47.5% in Q2. That's really the right sort of zone for this business. Comparisons inevitably with last year have distorted the read, and they get easier through the remainder of the year. For different reasons, both Q1 and Q2 last year had margins in the 50 area, and we've been calling that out as atypical. And you saw last year that we landed at 48.1%. We continue to believe that the right way to look at this is mid to high 40s in the wholesale business in this sector.

Great. Thank you.

Your next question comes from Alex Walvis with Goldman Sachs. Your line is open.

Good morning. Thanks so much for taking the questions here. Some first questions on the operating margin guidance. You've reiterated the guidance for the full year and applying some expansion in the back half. I wonder if you could talk us through the drivers of this between mix and then some operating leverage in each of the divisions and what the key components of that are. My second question is on the Branta product. I think you you mentioned that this is intended to reach some new consumers. I wonder if you could elaborate a little bit on that point. Are you planning to distribute it all through new channels going forward, and how could that expand the relevance of the brand? Thank you.

So let me answer the guidance piece. I think, you know, The reality is we're guiding to 20% revenue growth, 25% earnings, at least 20% revenue growth, at least 25% earnings growth this year. Now, as we move into the second semester, clearly DTC moves to the fore, and that's going to be the principal characteristic in the second half. We will continue to invest heavily in marketing, as we move through particularly the third quarter, which is very important. And that will allow us to really leverage that channel, which, as we know, is our most profitable channel. I think that's the fundamental dynamic that's going to shift as we move into the second half of the year. But the weight of the marketing in the third quarter is likely to mean that that will push margin expansion towards the end of that quarter into the fourth quarter.

I'll just talk about Branta. Branta is something we're relaunching. We had Branta products on the line a number of years ago, and I think we were a bit early with them. At this point, today, we're seeing tremendous demand for them, which is great. They continue to be, obviously, function-first products. They're also pinnacle products, and they're intended to define performance luxury everywhere and to redefine performance luxury everywhere, and not just to follow what's already been done, but to do it in a completely different way. I think that it's a pinnacle product that's... that's aimed at the top of the pyramid and, you know, consumers who've been Canada Goose fans for a long time who want something new and different and it's really working, you know, and enable us to set our fans in new ways and to reach new audiences with this kind of product. So that's the thinking behind Renta and why we relaunched it now and I'm really happy that we did.

Your next question comes from Mark Petrie with CIBC. Your line is open.

Yeah, I wanted to follow up actually on that line of questioning around Branta. And I guess more broadly, you know, you've been pushing prices up and also introducing, you know, new parkas at higher price points and sort of push through some of the barriers that I think you had talked about previously. So I guess, you know, what have you seen in terms of response? You know, you already addressed Branta, but I guess in terms of the core park of business, and how does that impact how you think about positioning the portfolio going forward?

I think that the category of luxury outerwear is something that didn't exist 10 or 15 years ago and that we helped create, and I think that it continues to grow. I know it's a growing category, and certainly we're introducing new products at higher prices, and that's working well for us. The products that we're bringing to the market that are – that are priced higher and have performed extremely well. So I think that bodes really well for the future and we're very excited about it.

And I guess just to follow up on the wholesale gross margin topic, it is also down slightly from the level two years ago. Presumably there is some leverage from the greater in-house manufacturing. So what are the most material sort of headwinds on that number versus two years ago?

So I think it's worth reminding ourselves of the gross margin algorithm that we work with here of the tailwinds and headwinds because we do create tailwinds and we do that because we want to address the headwinds. Tailwinds that we deal with obviously are pricing and scale and insourcing of manufacturing. Those are the things that help us the most in terms of moving our margin forward. We have cost inflation in labour, which was probably more significant in the second half last year and the earlier part of this year. Then we also have cost price inflation in materials and of course we have reinvestment in new product as we continue to develop the product offer in both our existing and new categories.

And so how would you talk about sort of the product-level margins in wholesale?

But our product-level margins in wholesale are fine. I mean, they're absolutely where they belong. There's sort of an industry pricing structure, and we're very much in line with that. And therefore, that determines where your wholesale margins turn out, which is why we continue to say mid to high forces is exactly where they belong.

Your last question comes from the line of Oliver Chen with Cohen. Your line is open.

Hey, good morning. This is Ross Collins on for Oliver. I just wanted to follow up on the retail formats, the pop-ups that you mentioned, and just understand kind of the timing of them. Will they just be for the holiday period or kind of a longer-term basis? And then also the kind of inventory and assortment implications of those pop-ups. And lastly, just geography. Will they just be within... Or I guess will they be within all of your geographies or just within one or two? Thanks.

Thanks for your question. Yeah, pop-ups, these are important things. I think I wouldn't characterize them as a new strategy for us. We've done pop-ups for a number of years, both with wholesale partners and on our own. It's kind of a bit of a catch-all phrase. And they're used for moment-in-time brand experiences and for events. And they're also really useful tools in figuring out future permanent store locations. If you could show up somewhere for a brief period of time and see how well that works. So for example, Tyson's Galleria specifically, which we're opening shortly, it's about exploring and testing that DC market area and seeing how well a full permanent store would perform in that marketplace. And I think in today's retail environment, the pop-up strategy, well-executed, is really important. And I think that the retail environment is changing, and it's important to be nimble and react with it.

I think because they're experimental and because they represent learning experiences for us, the financial contributions they make are, of course, much less significant than the permanent retail stores. And I think it's important to keep that in mind. There's a wide range of sizes and durations that they represent. And of course, all of that is factored into our guidance.

Thank you.

There are no further questions at this time. I will now turn the call back over to Danny Reese for closing remarks.

Thank you. And thank you all for taking the time to be here with us today. We appreciate your interest and your support of Canada Goose. This is our last earnings call for the year, and in fact for the decade. We'd like to wish you a great holiday season and an early happy new year, and I very much look forward to updating you on our progress when we report our third quarter results next year. Thank you very much.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.