Canada Goose Holdings Inc

Good morning. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the Canada Goose fourth 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, Vice President, Investor Relations. You may begin your conference.

Thank you, Chris, 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 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. 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. With that, I will turn the call over to Danny.

Thanks Patrick and good morning everyone. I hope that your families are all safe and that you are all finding your way through these times as best you can. Before we begin, I want to acknowledge recent events of police brutality against black people across North America. The marches, protests, and demonstrations happening around the world are important. This discussion is important. We support and we stand with those who are speaking out against inequality and injustice. As you know, the world is also facing a global health pandemic. I believe that crisis can bring out the best in people. And I've seen that here at Canada News as well. We've been challenged in completely new ways, and I'm so proud of how our company has responded. At all levels, our team has gone above and beyond to help the business weather the storm while supporting each other and the communities that we serve. I want to give special mention to our team and our partners in Greater China. As the first part of Canada Gears to deal with this global pandemic, we're grateful for all of the wisdom and the encouragement that they've shared with the rest of the business throughout the crisis. To all of our employees, thank you for your resilience and your determination during these trying times. All crisis necessitates focus and decisive action. During this crisis, we've spent a lot of time asking ourselves what's important, and we're keeping it simple. Our plan is, first, to do everything we can to support people so that we can emerge from the pandemic together stronger, and second, to put the business in the best possible position for a strong recovery whenever that happens. These two things are at the core of how we are approaching the year ahead. Clearly, we are in uncharted territory. COVID-19 will have far reaching consequences for the entire apparel industry, for the global economy, and for society at large. Every company is facing extraordinary uncertainties and unknowns. So instead of pretending that we have a crystal ball, we are focusing on the knowns, the things that we know to be true. With that in mind, here are six themes They give me great confidence in our future and in our ability to come out of this stronger. Number one, the first quarter is likely to be the most heavily impacted, and it is our smallest quarter. Most of our stores and our wholesale partner stores have been closed since late March. Retail is now starting to open back up in North America and Europe, and Asia is also continuing its recovery. This means the high point for suspended revenue will soon be past us. For Canada Geers specifically, this coincides with a time of year when our revenue is already at its lowest. This reduces the impact and gives us a long runway before we hit our peak selling season in the winter. Two, we have the financial strength to weather this storm. Profitability and cash flow have always been very important to us, so we always had a strong balance sheet, or we already had a strong balance sheet when we began to feel the effect of the pandemic. Over the past few months, as the crisis intensified, we made an additional considered effort across our entire business to further reduce cash outflows and bolster our liquidity. As a high margin business with a clean balance sheet, we remain firmly in control of our destiny. I know that we have the financial resources to weather the storm, and Jonathan will share more detail in his remarks shortly. Specifically on inventory, we're happy with both the amount and the complexion of our existing inventory. Despite having production facilities closed since late March, we largely have what we need to meet demand this year. And because of our own manufacturing infrastructure, we have the ability to quickly make more as needed, even with the required physical distancing measures. Number three, we make authentic, best-in-class products. Our promise is simple and timeless. We make function-first, survival products. They are now also fashionable in urban settings, but at their core, they deliver protection. We know that in previous times of crisis, people have gravitated to Canada Goose as they look for investment products that will be functional and will last for years, not seasons. Number four, we are leading the way in sustainability. Sustainability has been an important issue in the global landscape for years and has been highlighted more acutely through this pandemic. For us too, there's a ton of momentum building around sustainability. While not a new issue for us, we accelerated our efforts in 2018 when we established our corporate citizenship department with the mandate to more deeply embed sustainable practices across our business. In the past year, we've taken a hard look at ourselves and developed a plan to tackle pressing challenges in a much bigger way than ever before. The result is our sustainable impact strategy, which is outlined in our first ever sustainability report that we released in April. This includes aggressive targets and firm deadlines around our carbon footprint and key raw materials in our supply chain. To us, this is a major milestone for the year and something I am really proud of. We're putting a stake in the ground and we're leading the charge, which we all know needs to, leading the changes which we all know need to happen within our industry. Number five, we are well positioned in an increasingly digital world. We've always been digitally native. E-commerce is where we started our direct consumer journey. We've invested in it heavily for years with a long-term view. Having that foundation already in place means that we are not scrambling to build an e-commerce business overnight. What we are doing is quickly reallocating resources and investments right now, which will significantly advance our global omni-channel capabilities by our peak season. And this increased focus on e-commerce is working. We've seen great spikes in online engagement around our PPE manufacturing, new sustainability initiatives, and new product releases like our overboard yellow spring jackets. We're also seeing positive traffic and transactional trends. This tells me that we continue to be a highly relevant brand despite these difficult times and during our smallest quarter. And it gives me confidence that Even in the event of a second wave, we will be well positioned to meet consumer demand. Number six, Canada Goose thrives on change. One thing that I have embraced again and again in my career is that our company is innately capable of dealing with change. In facing our biggest challenges, we have always found a new gear and continued forward to create new opportunities. Entrepreneurship is a core competency at Canada Goose. We have followed our own playbook and succeeded in doing things that have never been done before. Our temporary shift to manufacturing PPE is yet another example of this entrepreneurial spirit in action. I have always believed that our Canadian manufacturing infrastructure was a strategic asset, but never more so than now. When the world shut down and the need for PPE became urgent, we pivoted our manufacturing and answered the call, all while we actively managed the business through this challenging time. In under three weeks, we retooled our supply chain, facilities, and workforce to produce desperately needed PPE for frontline workers. With eight factories across the country, nobody in Canada was better positioned to help, and we knew that it could not wait. Today, our team is producing approximately 100,000 units of gowns every week at cost for provincial and federal contracts, and we have the capacity to do more as needed. We are truly embracing the uncertainty of these times and taking the time to refocus and reset to best position ourselves for continued success. In closing, I am confident that we can take whatever comes our way and come out even stronger on the other side. We are focused on the important things and we are investing heavily in the areas that will be relevant in a pandemic and a post-pandemic world. Our business, our brand, and our culture remain strong, and I continue to believe in the power of Canada Youth and a brighter future for the world. Thank you. And with that, I turn it over to Jonathan to go over the details of our financial results.

Thanks, Danny. Good morning, everyone. Thank you for joining us. I hope you're all safe and sound. The focus of my remarks today will be different. The reach and intensity of COVID-19 on our business has changed dramatically since we last spoke. The initial impacts of the pandemic were limited to our fast-growing Asia business and travel-related demand in international destinations. This became a much larger and more global headwind at the end of the fourth quarter. As North America and Europe closed down, the vast majority of our revenue sources, as well as those of our wholesale partners, were shut off. We're now just starting to come out of that. With that sequencing in mind, I will begin with a brief overview of our results before addressing the actions we've taken and the current situation. Looking at our key metrics for fiscal 2020, you will see a business that still delivered strong growth and robust profitability. That is despite the significant external headwinds. Total revenue increased by 15.4%, to $958.1 million, adjusted EBIT margin was 21.6% and adjusted EPS per diluted share was $1.32. These levels of performance speak to the resilience of our high margin business model. In the fourth quarter specifically, there are a couple of revenue impacts I want to highlight. starting with revenue by channel. DTC decreased by 6.7% to $114.2 million. A near doubling of our store count was offset by disrupted traffic and reduced purchasing from Asian consumers globally. The height of the regional outbreak coincided with the last window of peak full winter shopping around Lunar New Year. On a local basis, consumers were largely confined to their homes and they avoided non-essential shopping as a precaution, even if they had the choice. Outbound international travel and shopping from the region were also greatly limited. In wholesale, revenue decreased by 24.2% to $25 million. Coming out of peak season, we started to see accelerating weakness early in the fourth quarter. This was particularly prevalent in Canada, which we discussed on our last call as having a more challenged retail environment. We made the call to move quickly and significantly pulled back shipments in response. From where we now sit today, we are in a much cleaner inventory position as a result. As COVID-19 started gaining momentum elsewhere, we realised we were in for a longer and more intense storm than we initially expected. We moved quickly and boldly to bolster what was already a very strong financial position. The end result is something uncommon in our industry today. A business that can still be meaningfully cash flow positive on an annual basis with long runway through additional liquidity coverage. This includes PPE manufacturing, which we expect to be cash flow neutral. In the first quarter of fiscal 2021 alone, we have reduced anticipated cash expenses and investments by approximately $90 million, more than offsetting the cash flow impact of lost revenue. The largest driver of these savings is working capital. The mandated suspension of downfield jacket production has eliminated our biggest use of cash at this time of year. With $331.4 million of finished goods on hand at the end of fiscal 20, we do not currently plan to make significant inventory investments in the first half of this fiscal year. As retail reopens, our vertical model is an incredible advantage over those with outsourced just-in-time models in offshore jurisdictions. With fiscal 2021 sales largely supported by inventory on hand, we can easily accelerate or delay the restart of production as needed. From a product perspective, our offering is built around enduring icons, with two-thirds to three-quarters of revenue by collection coming from core styles. This is really quite unique. It reduces margin risk. it supports our ability to carry over inventory from period to period more seamlessly. In terms of savings from operating costs, this includes lower executive compensation and lower variable SG&A from temporary retail and manufacturing closures. We've also refocused our investments in marketing and we have secured rent abatements and deferrals from many, but not all, of our landlords. Partnerships are a give and take. We greatly appreciate the support of those who have worked with us. Finishing with CAPEX, we have reduced investments in both retail and manufacturing expansion, which are no longer needed in the current environment. We are currently planning around a reduction of 30% in annual spend relative to the $75.2 million that we spent in fiscal 2020. As needed, we have further flexibility. Approximately 60% of our planned spend is earmarked for DTC, driven by new store openings. As we've shown in the past, we are comfortable delaying and cancelling uncommitted openings, especially if terms don't work with this new environment. We now negotiate as a matter of course for store closure clauses on all new leases. Alongside cash flow, our balance sheet is another point of strength. We have increased our ability to borrow against our borrowing base in the asset back loan, the ABL, by up to $50 million through a first in, last out facility. Pro forma, as at June 1, 2020, we have cash on hand of $119.7 million and undrawn credit facility capacity of $239.4 million. Most importantly, we have maintained low leverage low interest rate, low interest costs, and a highly flexible covenant light structure. Moving on to current trends, from what was a total standstill a few months ago, we are seeing signs of a gradual recovery in Greater China. On the retail side, footfall around our locations in Shanghai, in Beijing, and in Shenyang, continues to be impacted. However, we are seeing some early green shoots. Conversion has been great for those who do venture out to shop, and our spring collection has resonated well. Not surprisingly, the recovery has been faster online on Tmall. The one exception to this in Asia is Hong Kong. restrictions have cut off the flow of inbound tourism, which is the primary driver of luxury market traffic. Local consumers also have less urgency around purchasing, as outbound travel also remains restricted. As a result, our two stores there are still heavily impaired. That brings us to North America and Europe, where the deaths of COVID-19 are more recent. On March 16, we announced the closure of all retail stores outside of Greater China. That represents 75% of our total fleet. We have just had our first reopenings in Paris on May 20, followed by Milan on May 29, and Montreal yesterday. we continue to evaluate further reopenings on a rolling basis. The first step, of course, is regulatory approval. Approaches have varied significantly by jurisdiction, and we expect that to continue. We also want a high degree of confidence in the safety of our guests, in the safety of our employees, and in sustained levels of sufficient traffic. While we're keen to reopen our network, as is our hallmark, doing this right is much more important than doing it fast. Like everyone in the sector, our stores are going to have to go through an adjustment period. Based on what we've seen, we expect slow starts with gradual resumptions of traffic. As an experiential brand, we believe consumers will continue to value in-store experiences in the longer run. With changes to travel, we will need to take a more localised approach in certain locations. But we know that these stores are still very productive on local demand alone. We also have a well-established footprint in Greater China to serve what are typically our most active international shoppers, but at home. When it comes to e-commerce, as Danny mentioned, consumers are living much more digitally. We have seen strong engagement and significantly higher traffic on our websites, driving positive transaction trends. This momentum is a great sign of brand strength, particularly at a time when people's lives have been turned upside down. That said, it is nowhere near offsetting the much larger temporary revenue shortfalls in other parts of the business. We are currently at a low point in the year for online purchasing. In a buy-now-wear-now world, this is natural given the limited in-season relevance of our offering. Based on historical patterns, we expect e-commerce to become much more of a needle mover in-season during the fall and winter months. Moving on to wholesale. We have had a near total shut off of shipments since the end of March due to the closure of our partner retail operations. This has continued through to the present. As the channel starts back up, you will see us take an even more disciplined approach to our partners and to the shipment volumes. it remains strategically important, but we are increasing our emphasis on DTC, particularly in the early stages of reopening. As you know, this allows us to control the consumer experience directly, while earning double the revenue and triple the profit on a unit-for-unit basis. Reiterating what Danny said in relation to the current trends I've just described, I want to underscore just how well positioned we are with regards to timing. The temporary loss of our primary revenue sources has coincided with our slowest period. Just 7% of fiscal 2020 revenue was generated in the current quarter. We don't get into peak sales and earnings until the winter months in the second half of the year. This reduces the impact and gives us much more buffer relative to the ongoing uncertainties everyone in the sector is facing. In summary, with a resilient and flexible financial profile, we believe we are well positioned to come out of COVID-19 even stronger. We will continue to play offence and focus on the long game. What we stand for as a brand has never been more relevant and our distribution is highly adaptable to how the consumer shopping evolves. COVID-19 has changed the course we're on, but not the destination. The foundation of our long-term potential from channel to geography to product remains the same. With that, I will pass 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, Press star, then the number one on your telephone keypad. The first question comes from Camila Lyon of VTIG. Your line is open.

Hi. Good morning, everyone. Thank you for the commentary and the updates. Thank you. Thanks. I'm doing great. Thanks. You know, you shared a lot there, Jonathan, at the end, and I wanted to delve into some of the points that you made. I guess first, one of the last comments you just made, increasing your focus on DTC. I think that was in light of the shutting of demand from the wholesale channel. Could you just provide some more color on what you mean by that and maybe shed some color on the discussions that you're having with your wholesale partners about fall shipments and then how you're tying all of this into your well-positioned inventory that you have on hand.

If we take the first part of that, which is how we're focusing on DTC, clearly we've talked about the investment program that we've got lined up. We see a significant opportunity to continue to develop our retail portfolio and as well as to work with our existing stores and our existing client base there. We're also investing strongly behind our online business, which we see as pivotal at this time as a core part of our DTC channel.

Okay. Go ahead. I was going to add something to that also. And... We built great relationships with our wholesale partners, and obviously as everyone's stores were closed for a period of time, there's more inventory in-channel, and that's a natural byproduct of what happened. So as a result, our order book will be slightly lower from a wholesale perspective going into next year. That said, largely our... Our products are not discounted, and our business model remains intact, and we're feeling very good about the partners that we have there. Many of them are expecting us to be one of the brands to help lead them through the recovery, and so to the extent that we've always said that wholesale is an important part of our business, they continue to be important.

Great. So is that to suggest that the inventory at wholesale right now is relatively sufficient for the upcoming season, and that's what's going to make you focus on your DTC channel all the more. You may have some fill-in product to create a more full representation, but for the most part, what exists at wholesale is sufficient.

No, not exactly. As I was saying, there is somewhat more inventory in-channel than is typical. That said, our order book going forward, we're very happy with it. It's... it exists, it's strong, it's not as strong as last year because of the inventory that's in channel, but there will be wholesale shipments this year, there will be significant wholesale shipments this year, and the reason why we're focusing on DPC so much is that, especially as we've seen in this environment, that's where people have been engaging, and we've seen great engagement there, and we know that no matter what happens, in the future so unpredictable with regards to this virus, but no matter what happens, people will be online, people will be engaging and shopping online, and we want to have our strongest possible omni-channel experience for as many people as possible on our website, and that's why we're focusing there. But wholesale, to the extent that it may be available, it's also going to be a channel that people shop through.

All wear off. saying is it's just a bit too early to call exactly what that looks like, but as Danny said, we fully expect healthy shipments to the channel.

Is there a direction that you could provide whether it's either positive or negative on the order book at this point?

So I think the key thing to think about is that the visibility of the wholesale channel is much lower than is typical at this time of year. For reasons I've just said, we've shut off shipment since March, and that's continued through to today. So in relation to last year, you should expect lower shipment levels. And it's similarly later timing. But beyond that, it's really too early to call.

Got it. Understood. Thank you. And then just if we could provide some color on your variable versus your fixed costs. You mentioned that you took out about $90 million in expenses. If you could just maybe help articulate your percentages of variable to fixed and how would you think about that going forward for the year?

So the best way to think about this is to think about our cost base in the three components in which I normally describe it. So We have our direct costs, our channel costs, and typically we're able to manage those in line with revenues, certainly when it comes to the components around variable rent and people costs, which are two of the bigger components. The second cost bucket is marketing, which we... would normally expect to stay at the same proportion of revenues. And whilst we don't pick that out as a specific number, we do say that the remainder, that the amount of that varies pretty much in line with revenues. And then the third component is overheads. And when it comes to overheads, that is somewhat more fixed, although obviously we take the appropriate actions there to try and size that for the business size that we are now.

Ladies and gentlemen, moving forward, please limit yourself to one principal question and one follow-up question. The next question comes from Ike Borasho of Wells Fargo. Your line is open.

Hey, good morning, Danny. Jonathan, Patrick, I hope you're all doing well. A couple from me, Jonathan or Danny, not sure who wants to take it, but first off, can you just maybe break out the major buckets of the $90 million in cash savings and how that should be spread across for the year? That would be helpful. And then just on the inventory, really helpful comments. I'm just kind of curious, given how you're managing inventory, how does it limit your ability to potentially introduce newness this year, given it sounds like you're trying to sell a lot of inventory that's already been produced? And is there a situation where obligations to manufacturing PPE potentially limits your ability to produce regular product at some point this year? Thanks, guys.

So let me take the first of those, which is around the cash reduction. And then I'll pass to Danny. So as I said before, we've reduced our cash expenses and investments by approximately 90 million in the quarter. Over two thirds of that comes from working capital. Inventory is typically the largest use of cash at this time of year. And with fiscal 21 largely supported by inventory on hand, it really does greatly reduce our need for further investment. The remainder is split roughly evenly. between reduced operating costs and reduced capex. What I'd also underscore is that we've got further flexibility to reduce cash outflows as the year evolves, should the need arise.

Yeah, and from an inventory point of view, I answered earlier in my comments, we're very happy with the amount of inventory we have and the complexion of the inventory that we have. continued to have the ability to manufacture more of it as needed and the inventory that we have staged was always planned around fiscal 2021 and there was always lots of newness built into it so a lot of our new programs for fall 2021 are alive and well and will be part of our program for this year as we speak we're introducing newness into China, and we're seeing great success, including our new spring Brantic selection, for example.

Great. Thank you.

Your next question comes from Kate Fitzsimmons of RBC. Your line is open.

Yes. Hi. Good morning. Thanks very much for taking my question. I guess if you could just talk about the emphasis on the direct channel. You had alluded to some greater investments in e-commerce and omnichannel. Could you just provide some greater color there? And then, you know, Jonathan, I guess, just how are you approaching store openings into fiscal 21? And as we think about the productivity recovery as the year progresses, just how are you approaching it just given, you know, the strong tourist business that you guys typically have? compared to local customers. Thank you.

So let's take that in sequence, which is initially around the e-commerce. Clearly, as I said in my prepared remarks, we're putting a lot of emphasis on the DTC channel. The consumer is acting more digitally than ever. And as a digital first brand, that puts us in a very strong position. We continue to develop the functionality on our websites. We continue to work that with our stores. We launched some omni-channel functionality here in Canada last year, last fiscal, and that's something that we see as a platform going forward. When it comes to our store openings, I think it's a little... early to call it with integrity. There are a lot of moving parts around reopening timelines, negotiations, how traffic recovers. But we will be agile and flexible as the year evolves. We do have some world-class locations already secured. A couple of examples, one here in Toronto in the Eaton Centre, one in Shanghai in the IAPM Mall. We also have significant flexibility with our commitments. As I said before, we will not sacrifice our standards if the business case is no longer there.

Your next question comes from Omar Saeed of Evercore ISI. Your line is open.

Good morning. Thank you for taking my question. In February, you were really one of the first out there to sound the alarm, even though it was still very early in the pandemic, of the impact on the Chinese consumer, especially the traveling consumer, and how that impacted your business. Maybe you could give a little bit more of an update on what you're seeing with the all-important Chinese consumer, whether it's through digital, whether it's in stores. In China, obviously, there's probably not a lot of Chinese traveling tourists out there, but maybe a little bit more update in terms of how that Chinese consumer is doing in the last couple months or so since that market has reopened. Thanks.

Hey, Mark. It's Danny. Yeah, you know, China is on the road to recovery. You can definitely see that. All of our stores in China are now open, and the recovery is happening, and it's progressing. I think they knew you were correct I mean, I think that it's reasonable to speculate that there'll be a little reduced amount of tourism next year, and what the unknown is, is to the degree to which people shop for all brands, the shopping behaviors and patterns of people, whether they shop in their own country and how much more, or, you know, since they're not traveling. And I think this is, I'll bring it back to online. It's one of the reasons why we've invested so much in our online e-commerce capabilities for this year, because I think that to the extent that people go out to shop, and to the extent those numbers are reduced, the differential will go online, and we want to be able to serve them really well. Another thing that we're seeing, which I think is important to note, is that the people that are going out to shop, the conversion rates are higher. And that means that those who are shopping are shopping with intent.

Thanks for the update, Danny. Good luck, guys. Thank you.

Thank you.

Your next question comes from Jonathan Kompf of Baird. Your line is open.

Yeah, hi, thank you. Can I just maybe get an update, kind of your broader sense when you think of the the economic sensitivity for your brand. I know this is a question that may vary pretty widely across geographies, but in terms of any pressure on discretionary spending in Canada or abroad, how do you think about the ability to withstand and remain relevant?

Thanks, John, for your question. I think that our brand has been able to withstand and even grow through many crises over time, and I think the ability for us to do that is because we provide a functional product. I think that our products last for a lifetime, and they are a safety-protective product. I think for those reasons, people gravitate toward products like that. I think especially this winter, when it's cold outside, if people... don't feel comfortable going outside very much, but want to go for a walk, I can't think of a better item to purchase than the Canada Use product, which is, I think our items are seen as investment items, and I think that that's why we feel very confident that we are more relevant than ever.

Okay, that's really helpful. And maybe just one follow-up, when you think about your key partners, both in Canada, and it's been a topic for the last few quarters, but how do you think about the health of your wholesale partners, and especially if other brands were to be more promotional or impact the margin structure for some of your partners? How do you think about distribution and what that may look like?

Yeah, we're obviously monitoring the situation with wholesale and how that unfolds. We feel very comfortable and we feel very with our relationships with our wholesale partners, which are very strong, and also with the way that our brand is perceived and that we are a full-price brand. I think that to an extent, the wholesale landscape changes. As I said, we're monitoring it, and I think that any changes in that landscape just provide further opportunity for us to lean more heavily into our direct-to-consumer channel, and I think that's a good thing for everyone.

Okay, I appreciate the color. Thanks, everyone. Thank you.

Your next question comes from Adrian Yee of Barclays. Your line is open.

Good morning, everybody. I'm glad you're everybody's well. Danny, I guess my question is on the supply chain. I wanted to talk about the ramp and the gradual resumption of downfield jacket production. How much are you still doing in contract manufacturing versus direct, you know, maybe, you know, currently, and what do you expect that to be at the end of the year? And is there a significant portion of the downfill or the raw material that's actually sourced through China slash Asia?

I'm sorry, I missed the last part of that question. But, I mean, I... Of our aid factories right now, at the moment, they're all manufacturing PPE for government contracts, and we are able to, in some cases, it's province by province in terms of which ones are able to open at which time, but we're able to open as needed to continue to manufacture down-flow products. We have all the raw materials that we need in-house, and we're we're fully able to pivot to manufacturing products that we need as we need them. And you're asking about the percentages. The majority of our production at this point is in-house manufacturing. I think it's a neighborhood of 70% or so right now.

Okay, great. And then, Jonathan... You made a comment during the prepare to market. You said obviously DTC, I believe double the margin. Were you referring to gross margin or four-wall margin on the DTC side or EBIT margin?

My comment is on the four-wall profitability of retail versus wholesale. So it's the retail margin, the bottom line retail margin.

Okay, fantastic. Thank you very much. Best of luck. Thank you.

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

Hey, good morning, and thank you for all the commentary. I just wanted to ask on the marketing strategy and initiatives. And in the past, a lot of it's been sort of grassroots and in-market and event-driven. Obviously, that looks very different in a pandemic and even post-pandemic. And I'm just wondering how you're thinking about marketing initiatives and brand building over the next year.

Yeah, thanks to you for the question. I think, so our philosophy of marketing, first of all, I think it's very social media driven, it's very internet driven, and a lot of it exists online. I think that's very important. I think that at a time like this, you know, one of the tendencies, I think that a lot of brands, a lot of companies, have is the first cut marketing, and I believe that spending and marketing is a wise investment in times like this. I think that it's important, especially for a brand like ours, that we have authentic and real stories to tell, and we continue to do that, and the primary channel for that is online, without question.

Okay, thanks. And also, just wondering, you mentioned some of the positive web trends or online traffic trends that you've been seeing, and just wondering if you can provide a little bit of more commentary in terms of how that's looked by region and then what sort of the pacing of that has been, if it's coincided with sort of lockdowns being eased and broader spending recovering or what that should look like.

Thanks. We don't break out by region or that sort of information, but we are very encouraged by what we're seeing. There's no question about it. It's difficult in this kind of environment, which is which is so uncertain, and also in our smallest quarter, it's difficult to look at any of this data and rely on it as a leading indicator. But overall, the trends are very positive, and we're super happy to see that.

Thanks a lot.

All the best.

Your next question comes from Sam Poser of Susquehanna. Your line is open.

Thank you for taking my questions. Good morning to everybody as well. I just wanted to follow up. I know you're not guiding, but when you think about the back half of the year, do you think that given the mixed benefit of selling goods directly that you'll be able to offset that? maybe some more than offset wholesale shortfalls by the increased business or theoretically the increased business in your direct business, specifically digital?

You know, I think that, I mean, I think that, I think that, You know, the reason why we're not providing a lot of guidance is because it's just so hard to predict. You know, we are super encouraged about it, and there are a lot of positives. There's a lot of things that we're looking at with a great amount of optimism. But, you know, having said that, it's, you know, there's so much uncertainty in the world today that, you know, it's impossible to provide any sort of concrete guidance at this time.

Excellent. Thank you. Do you believe, I mean, what feedback have you been getting both from your direct consumers and from your wholesale partners in many of the initiatives that you've been taking vis-a-vis what you've done in producing PP&E as well as the sustainability efforts that as far as sort of improvement or changes or evolution of the brand, of the Kennedy Goose brand itself, and despite a warm winter last year, some of your wholesale partners, you know, warmer than they might have been without those initiatives, warmer to you rather than they would have been without those initiatives.

I think that the sentiments around candidate use, both with our wholesale partners and with our consumers, remain and continue to be very strong. I think that, you know, to tie that, I mean, to talk about PPE manufacturing, I mean, the reason we decided to make PPE as soon as we became aware of the urgent need for it was because it was the right thing to do. And since then, we've engaged with governments and answered their call, and we're producing lots of it today. And, you know, we're uniquely positioned in Canada having the I don't think anyone else with the capabilities that we have to do what we're doing at the scale that we're doing and we're doing that because we're in a situation where we're able to help and that's the right thing to do and I think that's I'm very proud to be able to do that. I think from a corporate citizen point of view and our sustainability initiatives we all know that the apparel industry has to change and there's a lot of conversation around that and we are committed to being a leader in that. I think that everybody, both our consumers and our retail partners, are happy to see that with anybody because I think that that's a societal need and something that has to change, and we're really excited about moving forward with this and being a major part of that.

Thank you very much, and good luck.

Thank you.

Your next question comes from Michael Binetti of Credit Suisse. Your line is open.

Hey, guys. Thanks for all the commentary today. Congrats on a nice quarter managing a very tough macro. You know, I wanted to ask, I know you gave some commentary on the annual trends in the press release and today on the call, but the changes in the B2C gross margin, I think fourth quarter was up about 550 basis points on a two-year stack in the middle of a pandemic. So something's going very right there. I'm just curious what the composition of that was specifically to the fourth quarter and if that could be a change in how we should think about it going forward. But then backing up, Danny, I wanted to ask you on D2C, I'd love to know on a multi-year basis how we should think about the physical store fleet. I know you said it's too early to look out this year, but The e-commerce opportunity is clear here, but there's been a lot of difficulty imagining what your store fleet could look like longer term. I think the real value creation for this brand in a DCF would be your ability to add these stores that clearly generate returns well above your cost of capital for the long term, whether those stores open and comp negative and then settle in. I know there's been a lot of volatility in figuring that out from the financial world. but you've got a fleet of stores that have very different economic differences on a store-to-store basis. How close do you feel like you are to having a prototype where you could drop in 50 or 100 locations in the North America market of a repeatable prototype with more consistent economics, better leverage on the pre-opening process? I think it's important because it was pointed out earlier in Q&A, a lot of the wholesale channel partners that you have do have some level of financial distress today that's kind of making the The commentary on this call predictably focused more on the D2C side. Thanks.

Okay, so I'll take the gross margin part of that. I think you've heard me talk a lot about the way in which we manage our gross margin in terms of the tailwinds that we create and the headwinds. We've seen that algorithm playing out. It's a good effect. what we see is that with a combination of pricing, sourcing, that we're able to create some very positive tailwinds in gross margin. You see that playing out in DTC. That's combined with favourable mix when it comes to both product and geography. And that helps finance the investment that we continue to make in new product development as well as the inflation remit pressures. But what I would also say is that we see our job over time as keeping our channel margins roughly where they are, and the mid-70s for DTC is where they belong in this model. And that's, broadly speaking, how we see it playing out over time. And that's not changed.

And, yeah, the comment on stores, I think that... I think it's reasonable for you to consider us rolling out a similar number of stores next year, as Jonathan mentioned in his remarks, and in continuous years. We do not see ourselves as a brand, especially in today's retail landscape that has hundreds of stores. We want to have the best and most important stores in the most important locations in the world, and we believe that we are doing that. I think that as the world recovers from this global pandemic, I think physical retail is still going to be important, especially for a brand like ours, which is experiential. I think we've demonstrated that with our experiential store, which I think will be actually uniquely positioned this year, given that it is very socially distanced inherently. I think that you can expect us to continue rolling out stores, but we don't have a A specific target other than that we're not going to open hundreds of stores.

Okay, thank you very much.

Our final question for today comes from Erwin Romberg of HSBC. Your line is open.

Yeah, hi, good morning, gentlemen, and thanks for taking my question. I just wanted to come back to Asia because repatriation of growth in China started way before COVID-19, and I think COVID-19 was just an accelerator. A lot of your luxury tiers are mentioning the fact that they're going at 50% plus. I wonder if you could qualify what you're seeing there, because I think you're saying that traffic is still down, but conversion rates are pretty good. And because you had a lot of purchases from Chinese clientele in North America, I'm wondering if you can quantify what you are seeing in China and And maybe if you have a better approach today in terms of what your sales by nationality look like globally, i.e., what is the proportion of sales you do with Chinese in your view today?

So I think the commentary that we give on this is – very much around the fact that we're at a point in time where sales levels are naturally low. So any context I'm giving around this is against our low point in the year. And therefore, you get a lot more noise than signal, even when you look at all the COVID variables. Now, what we have seen for sure is is we have seen some early signs of recovery in our quietest trading period in mainland China. As I said in my prepared remarks, Hong Kong is still heavily impaired because there's just a complete absence of movement inside and outside of the country. But when it comes to mainland China, we are seeing good, strong performance coming back, very gradually, high conversion rates, particularly standing out. That doesn't matter whether I'm talking about Shanghai, Beijing, or Shenyang. I'm seeing it in all of them, and I'm seeing it more strongly online.

Yeah, a piece of commentary on Hong Kong. I think this is good news. This is good for... Every retailer in Hong Kong, and that latest... speculation is that right now there's a 14-day mandatory quarantine period in Hong Kong so very few travelers are coming from mainland to Hong Kong and they're talking about they're talking about or speculating about what's in that in early July that may or may not happen but whenever that does happen uh that's good news for anybody who has a retail store in Hong Kong because there'll be more tourists and more people from mainland to purchase stuff and that you know that's not that far away and thank you and and just uh uh

quick follow-up on Asia. Also, most of your luxury peers are saying that Korea is also rebounding quite nicely. I mean, I don't think any Korea stores were actually shut during the COVID-19 pandemic. I don't know if you have a footprint there, or if you can tell us a bit how you think about that market in terms of potential.

Korea is a very strong market for us. We do well there. We expect to have a good season there this year, and Overall, the long-term potential in Korea continues to be extremely large.

We're a long way there.

That was the final question for today. I will now return the call to Danny Reese for closing remarks.

Thank you, and thank you all for taking the time to do this today. We appreciate your interest and your support of Canada Goose. Stay safe, and we all look forward to speaking to you again very soon. Take care.

This concludes today's conference call. You may now disconnect.