Canada Goose Holdings Inc

Good morning. My name is Kenzie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Canada Goose third 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. To ask a question during the session, you will need to press star 1 on your telephone. 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 2020 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 in 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. The 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 our investor relations website. With that, I will turn the call over to Danny.

Thank you, Patrick, and good morning, everyone. There are two things that I want to accomplish with this call today. Number one, I'd like to share our third quarter results continue to reinforce our brand health and long-term growth trajectory. And secondly, I'd like to address the coronavirus health crisis and its material impact on our fourth quarter performance. So let me start with the good news. Our brand is strong and our third quarter performance results are a testament to that. I'm really encouraged about the health of our brand and as energized as ever about our long-term potential. To me, what matters most is that Canada Goose is driving traffic and sales at full price. We are delivering best-in-class product and experience, and we are building deeper relationships with our consumers. We are not only succeeding at all of this, but excelling. This was recently reflected in the list index, where Canada Goose was included as one of the top 20 hottest brands in the world in the last quarter of 2019. To compile this list, they analyzed the shopping behavior of more than 9 million shoppers across 12,000 designers and stores online. Considering search data and online sales as well as social media and engagement statistics, it is a great external validation of what we already know to be true. That brand strength led to strong performance. Our third quarter revenue increased by 13.2% to $452.1 million and adjusted EPS per diluted share grew by 12.5% to $1.08. This was achieved with wholesale revenue decreasing by 8.4% due to a planned and communicated timing shift. As you'll recall, last quarter we had a shift in the order book to the left, and we forecasted a mid-teen decrease in Q3. Nonetheless, we outperformed our expectation because of strong demand for reorders, further demonstrating the strength of our brand. We also grew our direct-to-consumer business by 28.3%, even though our stores in Hong Kong, which prior to the protests were amongst our best in the world, were severely impacted by disruptions. In what has been called a challenged retail environment in winter shopping season, the commercial energy in our stores was incredible. We continue to have frequent lineups across our store network, including our older locations such as Yorkdale and Soho and our new experiential store at Sherway. That ability to drive profit and full-price sales also applies to wholesales. Our carefully curated best-in-class partners regularly call us out as a bright spot. Timing shifts aside, the fact that we have grown wholesale revenue by 11.2% year-to-date while editing down our points of distribution is a testament to how strong our brand is and to the quality of the partners that we have chosen. While most other outerwear brands were discounting frequently throughout the season to drive business, we were not. We had a great Black Friday, one of our biggest sales days of the year, without any promotions in our entire DTC channel, and we saw the same strength for Cyber Monday and for Boxing Day. That tells me that we continue to offer consumers something unique, which they truly value and are willing to invest in. We are not prepared to participate in a race to the bottom with which other brands are. Many of you have done your own channel checks, and you know what I'm talking about. This continued brand momentum all started with great products. We've been methodically adding depth and diversity to our offering for years. The results this season tell us that we are on the right path. Three of the top five new styles across both genders were lightweight down, which is an incredibly versatile product for a wide range of conditions and for climates. We also saw the Lodge hoodie, a core lightweight jacket that we've had in our collection for years, become one of our top sellers in DTC. There is no doubt that our strategy to move beyond just the parka is working. In knitwear, we also continue to see encouraging results. It is growing well above the business as a whole, with significant volume increases complemented by an additional uplift from pricing. For the first time, the category approached double digits in percentage of sales in a number of retail stores, not surprisingly, I have seen it in Hong Kong and Milan, given the climates, as well as Mall of America. As we all know, retail is undergoing transformation and success requires new thinking and bold moves. As I mentioned in our last call, we opened The Journey, an innovative new retail concept that we launched in Toronto in December, which is a great example of that breakthrough innovation. We've seen an incredibly strong reception from consumers already. During a three-week period in the heart of the holiday shopping in December, over 8,000 guests completed The Journey. Designed to take 15 minutes, it is a guided and intimate tour to explore the brand through digital content, interactive displays, and the next generation of our award-winning cold room. As they finish their journey, guests have the ability to browse and purchase the full assortment of Canada goose online with local same-day home delivery, and they do. As an experimental omnichannel concept, there are a lot of valuable early learnings from the journey that we're reflecting on, It has proven that an inventory-free store environment can be commercially viable for us. With this format, it enables our brand ambassadors to focus exclusively on guest experience, education, and service, and customers get access to the full depth of our online inventory at the snap of their fingers with same-day delivery. We consider this experiment to be a big success in this concept of something that we are very excited to explore further. I also want to provide an update on our supply chain. which we discussed last quarter. Now that we have sufficiently built out our own manufacturing infrastructure, we are in the process of rationalizing our third-party manufacturing capacity by approximately two-thirds. We expect that this will bring in-house production as a percentage of total output from the low 50s at present to approximately 70% in the next year. As we have said before, in the short term, we plan to continue to ramp up our own facilities, building inventory ahead of near-term growth for next year, to maximize efficiency and continuity. Moving into fiscal 2021, our plan is to have inventory levels be much more in line with sales as total output comes down in a planned way, and we expect to see inventory normalized relative to growth by the third quarter. Now, let me address the dynamics around the coronavirus outbreak, which has hit our biggest current growth market. First and foremost, our hearts go out to everyone who has been affected. and we stand together with everyone in China and the rest of the world in addressing this health crisis. To that end, we have made a 1 million RMB contribution to the Wuhan Charity Federation, and we hope that our humble contribution can be of help to swiftly win this battle. The health and safety of our team in Greater China is our top priority, and we are closely watching the situation and adjusting our operations as needed in cooperation with the local authorities. I'm proud of how our team has responded to this situation. They have demonstrated incredible calm and professionalism. On their behalf and on behalf of all of our 5,300 employees around the world, I want to express our gratitude to all of the healthcare workers who are working tirelessly on the front lines. Greater China is incredibly resilient, and we hope for a swift resolution to the situation. As it is to everyone in the luxury industry, this is obviously a major near-term headwind. Understandably, people are staying home and avoiding shopping for their own health and safety in China and abroad. So we're seeing impact in our stores and on Tmall in China. And also in stores located in major international shopping destinations in Europe and North America due to extensive flight cancellations and travel restrictions. While we expect this to have a material near-term impact, this is a temporary disruption. Nothing about the situation impacts our fundamentals. and our future growth potential remains intact. We know it will pass with time, and we believe we have the financial and brand strength to ride it out with confidence. From a supply chain perspective, we expect that any impact that may occur in the long term will be offset by the buffer inventory that we have built over the last year. Unlike many other manufacturers, our current finished goods inventory gives us high confidence in our ability to fully satisfy demand for next year. We've built an incredible business in greater China in a short time, and we are ready to continue our rapid expansion there as soon as this is over. In closing, I deeply believe in our long-term potential and our strategy to get there. We continue to work diligently on our product extension plans. Our brand is strong, and we have a solid position in all of our key markets. We are in command of the things that we can control, and we have the strength to navigate the things that we can't. And with that, I'll turn it over to Jonathan to go over the details of our financial results and revise our plan.

Good morning, everyone, and thank you for joining us. We delivered robust growth in revenue and earnings in the third quarter in line with our expectations across key metrics as we contended with external disruptions and a planned timing shift in our wholesale business. As Danny mentioned, the continued strength of global affinity for our brand, the growing international diversity of our business were pivotal for our performance. With that said, given the immediate and material negative impact that the coronavirus outbreak is having in the fourth quarter, just six weeks of the year left, we have adjusted our annual outlook, and I'll return to this later. I'll now walk through the numbers in detail. Please note that all the figures are, as usual, quoted in Canadian dollars. For Q3 compared to the same quarter last year, revenue increased by 13.2% to $452.1 million, or 13.7% on a constant currency basis. Starting with wholesale, revenue decreased by 8.4% to $150.3 million, or 8.1% on a constant currency basis. As we discussed on our last call, this is mainly a function of when we shipped. This year, we were able to deliver a higher proportion of total order shipments sooner than last year in response to customer requests and enabled by manufacturing flexibility. As a result of strong in-season reorders late in the period, we outperformed our communicated expectation of negative mid-teens growth. BTC revenue increased by 28.3% to $301.8 million, or 28.9% on a constant currency basis. Hong Kong was a very severe headwind in the third quarter, with the anniversary of IFC's exceptional opening, and despite the opening of an additional store this year in Ocean Centre. Beyond the declines in tourism and traffic, We also had to contend with frequent reductions to regular operating hours. In the quarter, IFC had 21 days of early closures and three days of full-day closures, while Ocean Centre had 27 days of early closures and two days of full-day closures. Elsewhere, while we were pleased with this year's new store openings, they generally had lower revenue contributions in the quarter relative to last year. This is due to differences in the market characteristics and business patterns for the stores. With the exception of Short Hills, which is a great local store, the other four openings last year, Vancouver, Montreal, Beijing, and until the disruptions, Hong Kong, are all among the most significant top-line contributors in our retail network. Looking at our fiscal 20 openings, Shoei is experimental and experiential. Banff is our first ever store in a resort town. Edmonton is a strong but smaller market in relative terms. With Milan and Paris, as well as Banff, we also expect a proportion of sales to occur outside of our typical peak season in Q3. Intuitively, this is due to high levels of international retail traffic in these markets in the summer months. With a network of only 20 stores globally, we are still incredibly underrepresented in some of the world's most important luxury retail markets. A great example of this is our new store opening in Shanghai. This was the standout performer in Q3 from our openings this year. Shanghai is China's wealthiest and largest city by urban core, with over 20 million people. It's also the nation's fashion capital, with a highly sophisticated global shop. We knew going in that local demand was exceptional, fair thanks to the T-Mall information. And our location at the Pudong IFC Mall is world-class. More broadly, the pulse of our DTC business was great during the holiday shopping season. We believe our brand continues to define the performance luxury space, driving exceptional traffic and consumer engagement. with our stores and e-commerce sites as the destination for those who want the best product and experience. It's great to see our oldest stores in our most developed markets, Yorkdale and Soho, perform so strongly. It's well documented that, as our first two locations globally, they opened to a great fanfare. Three years later and during the peak season, they're going from strength to strength, with frequent lines and exceptional results throughout the quarter. Online, both mainland China through Tmall and the US led the way, growing significantly relative to last year. That momentum speaks to the incredible digital runway we have in those two major markets. Moving on to revenue by geography, we're making great progress in our evolution as a global luxury brand. While Canada is our most developed market in terms of distribution relative to size, It is and will continue to be important, with further growth potential. Informed by how the sector looks globally, we believe that we have larger longer-term growth opportunities in other parts of the world, and we're moving the needle on them, starting with Asia. Here, our top line doubled to $94.7 million from $46.4 million. was driven by incremental revenue from expanding DTC operations in Greater China compared to last year. As a wholesale distributor market, you will also recall from previous quarters that Japan had a particularly large timing shift. Japan was not a positive contributor in this quarter, though its trajectory in the year to date remains very strong. In Europe and the rest of the world, revenue increased by 11.9% on a constant currency basis. BTC performed well across the region and drove growth. In the United States, revenue increased by 10% on a constant currency basis. Strength online and in-store offset the impact of negative growth in wholesale. Through a year-to-date lens and adjusting for timing shifts, Our U.S. wholesale business has outperformed the wholesale channel as a whole significantly. We continue to be an incredible driver of full-price business for our carefully curated network of best-in-class U.S. partners. Lastly, at home in Canada, revenue decreased by 11.6%. Wholesale revenue declined more than other regions. due to both timing and a more challenged retail landscape relative to other markets. We have reached a stage where our wholesale presence is at maturity, and so we are looking to adjust the balance of that going forward. And although both stores continue to produce an exceptional number, we also had tough comparisons from very strong opening periods, both Montreal and Vancouver, as I mentioned before. Moving on from revenue, consolidated gross margin was 66% compared to 64.4% last year, and that increase was driven by the change in channel mix. As expected, wholesale gross margin was flat year over year at 47.7%. This is a 20-bit improvement from Q2. As our comparisons have normalized versus the first half, This level is right in the mid to high 40s area that we want it to be in. Increases to realised prices were a meaningful and positive tailwind. We used the benefit of that to fund cost inflation and the strategic investments in product mix, with lighter weight jacket styles growing significantly, even in our most significant heavyweight parker quarter. From an elevated comparison at 76.1%, DTC gross margin came in at 75.1%. Again, pricing was a tailwind. In this case, the combined impact of higher input costs, as well as higher freight costs and duties from international sets, more than offset the benefit. While this quarterly result came in under our expectations, as it is right off the bat, on the mid-70s levels that we think is appropriate over the long term. The sustained direct gross margins at these levels, while growing significantly in newer categories, speaks to the power of our pricing. Wholesale operating income was $56.5 million, an operating margin of 37.6% compared to 40% last year. Decline was driven by the operating deleverage on SG&A, given the timing shift in channel revenue to the first half of the fiscal year. Excluding pre-store opening costs in both periods, BTC operating margin was 56.6% compared to 58.8% in the third quarter last year. This reflects the decline in channel gross margin already described, as well as lower contribution margins from current year store openings. Unallocated corporate expenses were $61.4 million compared to $61.3 million last year, while unallocated depreciation also rose $0.1 million from $2.5 million to $2.6 million. While we concentrated more of our marketing investment in this quarter and grew it ahead of revenues, This was offset by cost efficiencies as well as higher non-recurring costs in the comparative period relating to the Baffin acquisition and the secondary offering last year. Combined, this resulted in a total operating income of $161.4 million compared to $139.9 million. On a non-IFRS basis, adjusted EBIT was $163.8 million compared to $144.7 million, with a flat adjusted margin of 36.2% and last. Net income was $118 million, or $1.07 per diluted share, compared to $103.4 million, or $0.93 per diluted share last year. Adjusted net income was $119.7 million, or $1.08 per diluted share, compared to $107.2 million, or $0.96 per diluted share last year. Turning to the balance sheet, we ended the quarter with net debt of $296.5 million. This now includes $219.7 million in lease liabilities under IFRS 16. On a spot basis at the quarter end, net debt to EBITDA on a trailing 12-month period remains very strong at 1.1 times. This reflects a seasonal peak in cash generation and full repayment of our short-term facilities. Net working capital was $284.7 million compared to $170.7 million in the same quarter last year. This reflects the continued build of inventory as we move more production in-house, partially offset by increases in accounts payable and accrued liabilities. Looking at the composition of our £348.1 million inventory position in detail, the vast majority is being staged for the next financial year. That captures essentially all of the raw materials and work in progress in manufacturing, as well as over 80% of our finished goods, given our current year guidance. I also want to provide an update on the third-party manufacturing rationalisation we discussed last quarter. We are in the process of reducing Canadian third-party capacity by over two-thirds. In the near term, our intention is to confidently build and stage inventory ahead of near-term growth as we further accelerate in-house output for efficiency and continuity. Moving into fiscal 21, as the rationalisation takes effect, there will be an offset to the growth you're seeing now. By Q3 of next year, we expect to reach an inflection point with investment levels in inventory normalising relative to growth. Now, turning to our revised guidance for fiscal 20. As I mentioned at the start of my remarks, our fourth quarter performance today is being materially impacted by disruptions from the outbreak of the coronavirus in Greater China. The period going into the Lunar New Year is one of the peak shopping times for our brand. Inevitably, it performed well under our expectations and our experience last year. It's also the last major window of opportunity in the fall-winter selling season. As you're well aware, throughout mainland China, retail traffic has fallen sharply, with consumers staying home and avoiding all non-essential shopping as a health precaution. This includes our most significant Timbuan markets, such as Beijing and Shanghai. In Hong Kong, this is another blow to a market which was already heavily interrupted. Travel restrictions have essentially cut off all traffic from mainland China, and local activity is almost at a standstill. SARS, unfortunately, is still fresh in many memories. Irrespective of closures and reduced operating hours, Revenue is now at negligible levels across the entire store network and Tmall in Greater China. Abroad, the impact is spreading globally to major shopping destinations in North America and Europe. For us, as with others in the sector, travelling shoppers from the region account for a significant share of global luxury demand. That is being largely and suddenly cut off. with flight cancellations and travel restrictions both contributing. While our brand continues to be in great health globally and is a standout performer in each of our markets, this development has caused us to revise our guidance as follows. Annual revenue growth of 13.8% to 15%, complying with revenue of $945 to $955 million. This assumes wholesale growth between 9% and 11%. Adjusted EBIT margin contraction of between 280 to 330 basis points, implying an adjusted EBIT margin of 21.6% to 22.1%. Annual growth in adjusted net income per diluted share of negative 2.2% to positive 0.7%, implying EPS per diluted share between $1.33 and $1.37. There are a couple of factors to consider in assessing this short-term revision. It starts with the success we have had in rapidly scaling our business in Greater China. with a revenue base that is almost entirely DTC. This makes the impact more immediate and more material. We believe that this sudden change in consumer behaviour is temporary and unrelated to underlying demand for our brand. We believe that we're poised to resume our strong growth trajectory in Greater China when this is over. With regard to margin and earnings, the timing is also relevant. You'll recall that we concentrated our SG&A growth investments early in the year to secure strong momentum throughout the peak season. We had expected Q4 to drive our annual operating margin inflection as there was an offset from that spend tapering. With this sudden development, we lose that leverage and we don't have enough time left in the year to make significant adjustments beyond those reflected in this guidance. In summary, our brand and our underlying business model are as strong as ever. We continue to have deep conviction in our strategy and we're really encouraged by the progress we've made this year. Whilst we will make surgical adjustments to our forward plans, as you'd expect, we won't lose sight of the long game. The phenomenal long-term potential of this brand will always be at the forefront of every decision we make. And with that, I will hand back to Danny for his final remarks.

Thanks, Jonathan. I would be remiss if I didn't take this opportunity to encourage you all to check out our new Project Antigui collection. This year's expanded collection features 90 bespoke pieces created by 18 Inuit designers from 12 communities in Canada's north who retain all the rights to their designs. All proceeds from the sales will benefit the Inuit communities across Canada through ITK, which is a national Inuit organization which supports self-directed Inuit education employment, and cultural preservation programs. Arctic stewardship has always been a part of our business and is something that I'm very passionate about. We're leveraging our global platform to share Inuit craftsmanship with the world and to create significant economic development in the areas that need it most. Watch this space closely as we have a big long-term vision for Project Antigui and we are just getting started. While we activated this important initiative, we also just launched our global spring campaign with new goose person, Kate Upton. A renowned supermodel, entrepreneur, and actress, Kate is a passionate advocate for polar bears and protecting their habitat. This year's collection includes five new spring styles for our Polar Bears International capsule, including rainwear, windwear, and lightweight down options. $50 from each jacket goes to funding for critical research and advocacy. I have always believed that what is good for business must also be good for the world. So I'm really excited about how closely our commercial efforts are married to our long-standing corporate citizenship initiatives. We are doing it in our own authentic way, true to where we come from, and we are doing it at a greater scale than we have ever before. We look forward to releasing our first sustainability report in the near future. With that, I will now turn it over to the operator to begin Q&A.

Thank you. At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad. We ask that you limit yourself to one question and one follow-up, and if you wish to ask more questions, you may queue up again. Our first question comes from the line of Erwin Ramborg from HSBC. Please go ahead. Your line is open.

Yes, thank you. Good morning, gentlemen. I'm quite surprised by the magnitude of the revision of the guidance, given that North America is still 60% plus of your sales. So I was just wondering if you could give us details in terms of how much Chinese consumers account for in terms of your sales. I mean, we can have a look at Asia and take a view of what greater China accounts for. But I guess more importantly, it would be interesting to understand how much Chinese travelers accounts for in terms of sales in Canada and the U.S. So I don't know if you can give us an assessment of sales by nationality, which would be quite useful in understanding this revision. Thank you.

Hi. So I think a guidance revision has been important to understand. It's driven by the impact of the outbreak on our overall business in the fourth quarter, having had a third quarter in line with expectations across our key metrics. In China, what we're talking about here is that we have negligible revenue across our entire store network, including Tmall. And while local demand in North America and China continues to be strong, international traffic from Chinese consumers is essentially shut off due to travel cancellations and restrictions. And for us and for the sector generally, they are the largest buyers of luxury goods. Now, while the impact is, of course, less severe on a unit-by-unit basis, the size of our business outside of Greater China is much larger in terms of distribution and revenue, as you say. And for those reasons, and this is reflected in our guidance, we also expect material revenue declines in North America and Europe. Historically, we've always said that we have a mix of clientele, which always varies by store. But in aggregate, it's a 50-50 mix between domestic demand and international demand. And I think that's what you're seeing play out here.

Thank you. And just maybe a follow-up on wholesale. I think you mentioned that Canada was close to maturity. I'm just wondering if you could give us an update in terms of where you stand in terms of the number of doors. I think you went gradually down from 2,500 to close to 2,000 or maybe a bit below. Where do you stand today in terms of the doors at wholesale?

So in fiscal 19, we were at 2,200 doors. And we're on a gradual journey of editing towards about the 2,000 mark.

Okay. Thank you.

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

Good morning. Thanks for all the information. I appreciate the update. I just kind of wanted to follow up on the commentary around China and the coronavirus impact. Just a couple of questions embedded within that. Did you see a sharp drop-off both in mainland China and with the tourist business outside of mainland, greater China? Could you see that really stark drop-off post that kind of January 23rd timeline that everyone's pointing to? And then I guess if I look at your revised guidance, it seems like the implied fourth quarter growth that was implied in the guidance previously, you know, is probably around plus 20. And now it looks like you're talking about minus 10 to minus 20 for the fourth quarter. Does that mean that the Chinese consumer, does that imply that the Chinese consumer is roughly 30, 40% of your overall base? Is that the right way to think about it, including the traveling Chinese consumer? And then are you, last piece on, last question on the China piece, are you seeing any You know, what's happening with your e-commerce business in China? We've heard from a couple other players that the e-commerce business is holding up better because people don't have to leave their homes and they can still shop online and have stuff delivered. Thank you.

Yeah, I mean, in terms of the big picture, like, I think that, you know, the fourth quarter was – the impact on the guidance of the fourth quarter were directly related to China. Yeah. and also to Chinese tourists traveling and the overall travel bans that have taken effect and airline cancellations and that has caused decline in traffic overall and also understandably people staying home and not shopping, taking care of their health, both not shopping in stores or online as much as before. And that's the macro reason why are going to change this quarter.

And I think it's fair to say that the drop-off in traffic in malls and in shopping destinations in China was sudden, dramatic, and happened and affected the entire sector around the time you suggest. And that applies to Tmall just as much as it does physically to the stores.

Oh, interesting. Okay. Thank you. Thanks for the caller. Great job.

Our next question comes from the line of Kate Fitzsimmons with RBC Capital Markets. Please go ahead. Your line is open.

Yes. Hi, guys. Thanks for taking my questions. You know, I know it's too early, obviously, to give guidance for fiscal 21, just given the businesses facing some headwinds right now between Hong Kong and China. You know, Danny, you've been pretty clear that Asia is a big part of the growth story. Go forward. and you have seen tremendous growth in recent quarters despite what you're seeing right now. I guess when we're thinking about fiscal 21 growth plans, how is what you're seeing in the business right now adjusting how you were thinking about the growth levers into fiscal 21? And then longer term, can you just speak to your confidence that this headwind doesn't impair growth below that 20% plus three-year top line outlook you guys put out about a year ago? Thank you.

Yeah, thanks for your question. I mean, we're very confident in our long-term prospects for the business. I think there's a near-term business impact and there's a long-term business impact, and obviously it's a major headwind near-term and long-term. You know, we're very confident in the financial strength of our business, and we're poised to continue our expansion, and we're very comfortable that we're going to continue to do so. You know, on the same trajectory and similar trajectory as we have been growing our business, especially in China where we just started just over a year ago building that business unit, and it's grown very rapidly and it continues to grow rapidly. There's so much runway there. We're excited to continue that growth once this crisis passes and once we as a world get through it. And I think we can point to things like the – the fact that we were included as one of the 20 hottest brands on the list index in the last quarter of 2019. I think that's a very important external validation of our brand and of what we know to be true. On top of Asia growth, we see great strength in the U.S. DTC as that continues to grow. So we see a lot of really positive signs. We see a I think our concept store and the fact that we're taking a leadership position and redefining and finding out the new generation of experiential retail, that's really important to us to not be complacent and to continue to figure out what that is. I think that that's all really important. So once we get past this temporary and specific situation, I think I'm very confident in our continued ability to grow.

Great. Thanks so much.

Your next question comes from the line of Jonathan Komp from Baird. Please go ahead. Your line is open.

We can't hear the speaker.

We can't hear the speaker.

Jonathan Kompf, we are unable to hear you. If you could remove yourself from speakerphone.

I'm going to move on to the next one and we can take Jonathan after he recues.

Certainly. Our next question comes from the line of Michael Benetti from Credit Suisse. Please go ahead. Your line is open.

Hey, guys. Thanks for taking our questions here. So I want to follow up on the coronavirus impact. It looks like you're implying margins in that business. I know it's fairly similar to what we've seen from some of the other global businesses recently. But I'm trying to figure out, is that Is the, you know, $50 million, $55 million reduction, is that concentrated in global DTC, or was there any, did you lower the plan at all for wholesale that you had in the fourth quarter? It would seem like most of that would be, it seems like you're assuming most of that impact will happen in direct-to-consumer. It would be helpful to understand kind of what you're seeing. I don't know if you're seeing any wholesale partners cut orders in the near term this quickly, considering corona really just hits you know, the news wires three weeks ago.

Yeah, Mike, this is Jonathan here. You're absolutely right. This is a DTC story. Wholesale is relatively low in this quarter anyway. It's all in support of our spring business. Proceeding as planned. This is all about DTC.

Okay. I guess I would love a little bit of help understanding some of the metrics within D2C because as the business has grown, it's become a lot more complex and a lot harder for us to understand. We're trying to reconcile between dynamics like 29% D2C growth in the quarter. The store count was up 70. Depending on the footage, if we have it right, it looks like it might be 50. Both numbers are significantly higher than the 28% total D2C growth. I know you'll reference a difference in productivity as you move out of the real power centers in Soho and things like that, but it's hard for us to understand the componentry of how the legacy stores are growing on a year-over-year basis. Is e-commerce growing globally within that D2C number just because of the number of lines that are feeding in there? Is there anything you can help us understand so we get a better understanding of the economics of the new stores as they're coming in and you really move out of, you know, these shopping centers that are, there's not going to be many shopping centers, right, like outside of Soho with the kind of economics like that as you go forward, and I think it's becoming more important for us to understand as the store count grows bigger for you.

Okay, so two or three things. Number one, we've got 20 locations in a world where there are way more than that in terms of prime, highly productive, retail luxury locations so it's not a question that we're sort of going down the list as it were and sort of only having the best stores in the first year and everything else is worse than that so second point inevitably therefore different cohorts of stores have different characteristics and this year's cohort of stores happens to have a set of characteristics which is somewhat different when it comes to the sales densities that we experience for a variety of reasons and I enumerated those on the call in my prepared remarks in the sense that you know we've got stores which are in tourist locations or we've got stores that are in resort locations or experiential stores and therefore extrapolating The sales density of the existing fleet into those and expecting that to be how the numbers manifest themselves is probably oversimplifying it as a result. But that said, when we look at the future runway and the ability to grow the stores and the sales from those stores into the future, we have huge amounts of white space to grow the brand. When it comes to online, we've seen strong performance in our online pretty much around the world. I think, you know, we've certainly seen, we've called out the strength of performance in America. We've called out the strength of performance in China, both of which are huge e-commerce markets and both of which saw significant growth. As we get further into Omnichannel, I see that as a point of leverage across the entire DTC operation.

If Corona comes and goes within the March quarter, I don't know about the timing, is this a 20% multi-year revenue growth algorithm business as we get into 2021?

For a variety of reasons, we've made the case as to why this business is a fraction of its eventual size. The impact of this terrible and sudden health crisis is temporary in our view, and it doesn't affect our view of our strategy and of the potential of this brand and of our ability to continue to grow it.

Okay, thank you.

Our next question comes from the line of Jonathan Komp from Baird. Please go ahead. Your line is open.

Yeah, apologies for the last time. Maybe just to re-ask my question, I really want to understand, as you're planning the business, how you're thinking about the ongoing impact from the coronavirus crisis. And as you think to the months and quarters ahead, just any more color on how to think about the seasonality as it changes, you know, and the relative mix of the business being impacted, and then also your ability to react more from a cost or margin perspective?

I think we're being responsible in the way that we plan the business, obviously. None of us know exactly how this plays out and over what period of time. But what we are doing is, if you like, looking at the business through two lenses. One is our long-term growth, our long-term potential and ensuring that we are taking the right decisions to continue to grow this brand. And on the other hand, we're being responsible in the short term so that we are good financial stewards of the business.

Yeah, I agree.

Okay, understood. And then as you – Go ahead. No, I'm sorry. Go ahead, Danny.

No, I just want to add to that. You know, I was going to maybe second what Jonathan said and add to it that, you know, I – I think that, you know, in the long term and in the near term, we're being cautious. In the long term, I'm an optimistic person. I have a tremendous amount of optimism about the future of this business.

Okay, great. And then just one follow-up, you know, both related to some of the comments around Canada and the tough retail environment and then obviously the dynamics in China. Just, you know, when you think of the inventory you have today, like how different is it on hand versus what you would have expected? 90 days ago, and just any thoughts about the risk to the balance of current goods that you have on hand?

Yeah, we're really happy with where we stand with our inventory. As we've explained and as we've planned, we've really been building out our in-house capacity, which is a core strategy of ours from the beginning, and we've successfully reached a point where we're very happy with our in-house facilities to a point where we're now rationalizing third-party Canadian contractors. And so as a result of this build, we've built a lot of inventory, and through this rationalization, we're going to see the ratio of that inventory to sales come down, and that will become noticeable in the third quarter of next year. And also as a result, we have a good amount of inventories. All of this inventory is staged for next year. As Jonathan mentioned in his prepared remarks, over 80% of it is – is made for next year, and it's all good inventory. So, you know, we feel like we're in a really good position, especially given, you know, the unfortunate events that the coronavirus presented to be able to deliver all of our orders for next year as well with this inventory.

Okay, I appreciate the color. Thank you.

Your next question comes from the line of Oliver Chen from Counting Company. Your line is open.

Hi, thank you. As we model the gross margin on a longer-term basis, should we expect continued pressure from freight, cost inflation, and as you enter newer categories, the negative mix impact? I would love your thoughts.

Thanks, Oliver. I think from our point of view, nothing's changed in the sense that we talk about tailwinds and we talk about headwinds. And our algorithm doesn't change. In other words, we don't see margin over time going massively up or down. What we see is ourselves managing a balance in channel between the tailwinds of bringing more production in-house, pricing efficiency, and reinvesting that in addressing the cost inflation of the inputs that we have, as well as in the development of our product. So we don't see anything that's really changed.

Okay. In the newer categories, it looks like consumer reception has been really good. What are your thoughts on the inventory planning around newer categories and a different kind of risk profile as you assort to year-round product versus some of your core high-margin staples?

We're really excited about the reception to our new products, and I think that the reason why we've been able to deliver great new products to the market is because of our strategy in taking our time around new products and making sure they're right for the marketplace. We're very conservative in how we build inventory with regards to our new products and new product offerings, which is why they build slowly and over time. We believe that's the right way of doing it, and we have a long way ahead of us.

Thank you. And lastly, are you thinking about M&A in terms of your strategy and what you're considering for growth opportunities and synergizing your talents?

We are not. Best regards. Yeah, thanks for your questions.

Our next question comes from the line of Sam Poser from Susquehanna. Please go ahead. Your line is open.

Good morning. Thank you for taking my questions. A couple of things. Prior to the slowdown of the traffic due to the coronavirus, was there a change in the manner, the fill-in orders that were from retailers that was planned for fourth quarter? I mean, was there any impact on any other thing in the fourth quarter, you know, maybe due to weather and so on that impacted your fourth quarter reduction in guidance as well?

No, I mean, if anything, what we saw was that we took more in-season orders than we thought because we guided, as you'll recall, to mid-teens decline in Q3 in wholesale, and we actually came in at an 8% or so decline, and the delta there was the in-season reorders. So, no, absolutely not.

But nothing impacting the expectations of – so some of those reorders may have been pulled from what you're expecting in fourth quarter, but – but nothing else changed.

And the reality was that people wanted the inventory in Q3 when they could sell it. They were keen for it.

On the contrary, our wholesale orders in Q3 were higher than expected. We shifted a lot into Q2 and we expected a year-over-year decline, but it was far less than we thought it would be.

Thank you. And then secondly... Are you doing anything with your logo, adding more Black Label, maybe developing other new logos going forward? I noticed that within the Soho store, relative to others, there's a very large swath of Black Label there, and I was just wondering if you had anything in the works in that regard.

Thanks for your question. We are strong advocates and believers in consumer choice, and we recognize that different consumers have different taste preferences, and that's reflected in the colors of the logos that are available on market.

All right. Thanks very much, and good luck.

Thank you.

Our next question comes from the line of Mark Petrie from CIBC. Please go ahead. Your line is open.

Hey, good morning. I just wanted to ask about the relative sort of pricing levels and price increases that you've taken across the portfolio this season. Not sure if you can quantify what the overall sort of price increase would have been for this year. And sort of interested, I guess, specifically with regards to parkas, but also then in lightweight down, and you called out the success there. And then, you know, you have been introducing many new products at the higher end of the range. I'm not talking about Branta, but just in terms of the core portfolio. I wonder if you could talk about the performance of those newer products at the higher end and your perspectives on pushing prices further in fiscal 2021. Thanks.

So we'll answer your question in two parts. I'll talk a bit about pricing. We've always talked about taking price in the mid-single digits, and that's something that we continue to do. That applies surgically across the product collections. And then we deploy that around the world in line with the global pricing index, followed by other brands. So nothing's changed. We continue to do that.

I had to follow on to Jonathan's comments with regards to us putting new products into the marketplace at higher price points. That has definitely been a strategy of ours, and I'm happy to say it's working extremely well for us, and we intend to continue to do so.

Okay, and then I just wanted to follow up on the previous comment just about the trends in Q4. There does seem to be a pretty healthy inventory level throughout the retail channel, the wholesale channel. I know you haven't seen evidence of discounting, but could you just talk about your conversations with your wholesale partners to this point, their level of sort of comfort with inventory levels today, and how you see that playing out.

Yeah, we have a very strong and strategic relationship with all of our wholesale partners. We've always aligned ourselves with partners who share the same values that we do, and we, you know, our conversations are really easy because, you know, first of all, we are a brand that helps drive traffic to stores as, you know, Many of our wholesale partners have called out themselves, and so the nature of the conversations are very easy. We're an outlier in that we don't believe in being promotional, and our partners share that vision.

Okay. Thanks a lot.

Our next question comes from the line of Ike Boricho from Wells Fargo. Please go ahead. Your line is open.

Hey, thanks for taking the question. Good morning, everyone. I think, Jonathan, just two questions for you. One, just a clarification, just very simplistically. I'm curious, prior to the coronavirus outbreak, given what you had in your pocket for Q3, would you guys have planned to reiterate or raise your fiscal year outlook? Or is there something else on top of that? I just wanted to clarify that. And then when I'm digging in more on Q4 and maybe even beyond, can you just talk about the gross margin implications Because when you think about the revenue issues that you're having at DTC, it sounds like gross margins should be under pressure because of the mix of the business shifting more towards wholesale. But then within that, I'm assuming that there's even more gross margin decline because of what I assume is a higher margin DTC revenue within those stores in China that are going away. So I guess there's any color on the Q4 gross margins and beyond as well. Thanks.

Okay, so I think two things. First of all, we're being very clear that we were on track in Q3 and what's changed, the fundamental thing that's changed is this terrible situation with the coronavirus. That is the sum total of the change in the business. That's what we're talking about here and its impact on shopping consumer shopping trends around the world. So I think that's the first question you asked. As far as gross margins are concerned, we're on record as saying that we've seen high 40s for wholesale gross margins and mid-70s for GTC gross margins as the right place for this business. What you see here is exactly that. And that's something that I expect to play out over time. I don't see any change to that. You'll see some seasonality when spring is stronger, margins for the time being a little bit weaker, where spring is weaker because we're out of season. Margins are a bit stronger. But fundamentally, you're looking at sort of wholesale gross margin more or less where it is, BTC margin more or less where it is going forward, and then the optics of the business will change as wholesale assumes a smaller proportion of our business and DTC a bigger proportion. So nothing changes.

But can you comment on Q4 specifically given what's going on with DTC under pressure and China within DTC under pressure? I'm just trying to understand how much gross margin pressure we should expect for Q4.

I don't think you should be reading things into Q4 that there should be any real difference in pattern to what we saw a year ago in Q4 because Ultimately, to the extent people are buying, they're buying the same mix of products they'd have been buying a year ago.

Thanks. Our next question comes from the line of Alex Walvis from Goldman Sachs. Please go ahead. Your line is open.

Good morning. Thanks so much for taking the question here. My first question is on the Canadian market. You made some comments about challenges there. I wonder if you could elaborate. Did that region fall short of your expectations coming into the quarter, or was that embedded in expectations before? And then my second question is on the European market. A couple of openings there this quarter. Any color on performance there and how that's changing your thinking on the opportunity in the European market? Thanks so much.

Thanks, Alex. I think our wholesale business in Canada is reaching a point of maturity here. The retail environment here is softer than other markets, including the U.S., and frankly, some of our partners did not have great fall-winter seasons, and we are in the process of rebalancing our presence and ending it down, and this is a natural occurrence. It's not concerning to us. Canada is the most developed market in terms of distribution relative to size. In the immediate term, we also have to contend with the impact of the Of the coronavirus, of course, outbreak and just the travel and the effects it has on travel and tourist traffic, and that's going to be a headwind. And none of this at all concerns me when it comes to our brand health or continued DTC growth and potential expansion in Canada. The commercial energy in our stores and the consumer sentiment behind it is and remains extremely strong.

Great. And then maybe a comment on the European market.

European market remains very strong. We opened two new stores there this year and we're very excited about that. First Milan and then Paris. Europe in relation to all of our markets has the lowest percentage of DTC so we see a large Large amount of runway there.

Fantastic. Thanks for all the color.

This concludes our Q&A session for today. I will now turn the call back to Danny Reese for closing remarks.

All right. Well, thank you all very much for taking the time to be here with us today. These are difficult times. We appreciate your interest and your support of Canada Goose, and I very much look forward to speaking to you again at the end of the year.

This concludes today's conference call. Thank you for your participation. You may now disconnect.