Canada Goose Holdings Inc

Q1 2023 Earnings Conference Call

8/11/2022

spk05: Good day and welcome to the Canada GOOST first quarter 2023 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Amy Schwalm, VP of Investor Relations. Please go ahead.
spk07: Thank you, Operator, and good morning, everyone. With me are Danny Reese, Chairman and CEO, Jonathan Sinclair, EVP and CFO, and Kerry Baker, President. Our call today, including the Q&A portion, contains forward-looking statements. Each forward-looking statement, including our financial outlook, is subject to risks and uncertainties that could cause actual results to differ materially from those projected. 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 press release issued this morning, as well as the risk factors section of our most recent annual report filed with the 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 them. Lastly, our commentary includes certain non-IFRS financial measures, which are reconciled at the end of our press release. With that, I will turn the call over to Danny.
spk08: Thanks, Amy. Good morning, everyone. This morning, we released our results for first quarter of fiscal 2023, and I'll start with some highlights from the quarter. In Q1, we reported revenue growth of 24%, hitting almost $70 million. This was ahead of our expectations and we are very happy with the trajectory of our business as we move into the fall season. North America continued to be a standout market for our brand. As of June, our stores in mainland China have all reopened and we are seeing positive signals as consumers are returning to stores. In addition, our Made in Canada model continued to help insulate gross margins for us at a time when others are seeing erosion. Our first quarter while the smallest, has always been an indicator of brand strength. Combine that with our exciting product launches, store openings, and the progress we've made against key strategic objectives, I believe we have what it takes to seize the tremendous opportunities that lie ahead of us. From a macro perspective, I think it is important we acknowledge the concerns of a global recession and the uncertainty and volatility of today's world. However, at Canada Goose, as of today, we have not seen any signs of slowing demand. I think it's also important to highlight the strength of our performance through previous recessions. Canada Goose has grown substantially through every recession, save the first wave of COVID. I believe that this is a testament to our products, grounded in performance and functionality, as well as our brand, our luxury positioning, and the brand heat our teams continue to drive around the world. I'd like to give an update on the progress that we continue to make against four key pillars of our long-term strategy. One, growing our direct-to-consumer mix overall. Two, increasing our penetration in key markets. Three, re-envisioning our product offerings. And finally, expanding our margins. In the quarter, across our direct-to-consumer business, we saw comparable sales growth of 10.7%. This is due to strengthening traffic trends and enhanced productivity across our existing store network. As I mentioned, North America performed very well and we see no signs of slowing demand. The U.S. continued to show significant gains on top of those we made through the pandemic with Canada's trajectory surpassing the U.S. in this quarter. The U.S. specifically has a tremendous amount of white space to grow our store network and expand our customer base. We began our West Coast expansion in 2021. We opened our first Californian location in South Coast Plaza last October. That opening was followed by a pop-up store in Seattle's Bellevue Square last November. We will continue to expand our West Coast footprint this year with new stores in Las Vegas, at the shops at Wynn, and in Denver at Cherry Creek, both opening by the end of this calendar year. We have further store openings planned in the U.S. this fiscal, and I look forward to continuing to update you on our progress. With just 43 stores globally, we have so much room to grow our retail store network. We approach new locations strategically and deliberately, placing our stores in some of the most preeminent shopping destinations in the world. Brick and mortar remains a key strength for our business, a meaningful touch point for our customers, and an opportunity for growth as we move forward. In Europe, we are starting to see the return of tourism, which is very encouraging. Recovery across markets varies, France showing the strongest signs of improvement. In Germany and the UK, where we have our highest concentration of stores in the region, tourism is also recovering, albeit at a slower rate. We are in the early stages of our retail store journey in EMEA. Six stores opened during the pandemic, and they are finding their momentum after a few volatile years. The development stage of these stores is reflected in our expectations for fiscal 2023. We continue to leverage our influential wholesale partners for reach and for awareness. Their strong order books also confirm brand heat in the region. Turning to Asia Pacific, as I mentioned earlier, as of June, all our stores in APEC are open and we have begun to see positive momentum as shoppers return to stores. We remain cautiously optimistic in mainland China given the proven resilience of the consumer and due to the operating environment that we see today. Last quarter, we spoke about our plans to open four new stores in China in fiscal 2023. We opened in Xi'an in May of this year with Tianjin Mixi, Qingdao Hisense Plaza, and Chengdu SKP set to open this fall. Our Tianjin Mixi store will be one of our largest in mainland China and will include our award-winning cold room experience. Our Qingdao Hisense Plaza store places Canada goose in one of the most preeminent shopping destinations in this coastal city of almost 9 million people. Finally, our Chengdu SKP store will be our second in the city and our fourth within the highly influential SKP group of properties in mainland China. Moving on, last quarter we announced our joint venture in Japan. Before the end of the calendar year, we plan to open two new stores in Japan. There are also further store openings planned for calendar year 2023, and I will share those with you in the coming months. South Korea represents a tremendous amount of opportunity for us, having transitioned to our new distributor, Lotte Group. We have an incredible amount of white space in which to grow in South Korea relative to others in the market, as well as our own typical market share. We believe we have the right model and the right partner in place to deliver success in the short term and the long term. For both Korea and Japan, we envision multiple new store openings over the next three to five years, as well as dedicated e-commerce capabilities in both markets, which will drive DTC growth in our APAC region. A key element of our growth strategy is expansion into new product categories. We are proud of the progress that we have made globally as a performance luxury lifestyle brand. Let me share some recent examples of success from the first quarter across our DTC business. Lightweight down sales have grown more than 90% since Q1 last year and represented 40% of the total sales in the first quarter. In our apparel category, fleece and knitwear have grown more than 60% over the same period. And all told, non-heavyweight down revenue accounted for approximately 60% of our total sales in the first quarter. That's the highest percentage of non-heavyweight down that we've ever realized. This is just a snapshot of one quarter, but this gives us confidence in our ability to successfully expand new categories. Expanding on that, in September we will launch a new collection that combines the style, performance, and versatility women consumers are looking for with new silhouettes and elevated fabrics and trims. We are taking meaningful steps to grow with the female consumer while continuing to build on the strength of the men's business. To support this key moment, this fall, we will launch our first all-female global campaign featuring an iconic cast of extraordinary women who live in the open. We have a tremendous opportunity with our women's business as we continue to evolve and expand our offering and I look forward to the launch in September. As we noted in our last conference call, we plan to accelerate profitability in fiscal 2023. Jonathan will talk more about this in a moment, but we feel very good about our Made in Canada model and the advantages it provides us against an ever-evolving backdrop. We also feel strongly about the opportunity ahead of us. As I've said in the beginning of my remarks, our first quarter has always been an indicator of brand strength and the year ahead, and we see positive signs across all of our business. Our exciting product launches, store openings, and the progress we've made against key strategic objectives will help us deliver against the tremendous opportunities ahead. I will now turn it over to Jonathan to discuss our results in more detail and our outlook for next quarter.
spk10: Thank you, Danny, and good morning, everyone. All of my comparisons will reference the first quarter ended July 3, 2022, versus the prior year quarter, which ended June 27, 2021, unless I say otherwise. Our Q1 results reflect a strong start to the year. Total revenue increased 24.2% to $69.9 million, which exceeded the top end of our guidance range of $60 to $65 million. On a constant currency basis, total revenue grew 24%. The gap between reported and constant currency revenue growth was quite small as 43.2% of our revenue was denominated in CAD this quarter compared to a lower number typically of some 25% in a full year. DTC revenue increased 19.6% to $34.8 million due to continued retail expansion, an increase in existing store sales and the reopening of stores following COVID-related closures. In Q1 fiscal 2023, we were impacted by COVID-related restrictions in mainland China and similar COVID-related closures in the comparative quarter, which impacted certain stores in Canada and EMEA, and those stores were open this year. We reported DTC comparable sales growth of 10.7% in the quarter, the first time we have reported this metric. As I know companies define it differently, I wanted to point out our definition. We report the measure on a constant currency basis. It includes sales from e-commerce and from stores which have been operating for one full year or 12 successive fiscal months. The measure excludes store sales from both periods for the specific trading days when the stores were closed, whether those closures occurred in the current period or the comparative period. The metric was quite modest this quarter, as it was impacted by factors in mainland China that I've just described. Excluding mainland China, DTC comparable sales growth increased to 32.7% in Q1. Revenue from our wholesale segment increased 27.2% to $33.2 million, largely due to customer requests for earlier shipments as well as pricing changes. In addition, the comparative quarter included $9.3 million in revenue from the Japanese market. Prior to our Japan joint venture, we had a distributor agreement and all revenue related to the Japanese market was recorded in the wholesale channel. This revenue historically occurred primarily in the first and second quarters. As a result of the JV, we now share in a DTC and wholesale business such that revenue recognition will shift to later in the year, more in line with the seasonality of our DTC and wholesale segments for the rest of the business. Given that, Our underlying wholesale revenue, excluding Japan for comparability, was 97.6% up in Q1 2023, and we believe that that better represents normalizing shipping patterns. Revenue increased across all regions except for Asia Pacific. In particular, North America was a standout in terms of strong performance for the quarter. The US continued to perform very well with revenue growth of 68.8% and revenue growth in Canada accelerated to 80.8% following the more recent removal of COVID restrictions in Canada. EMEA grew 37.4% largely due to the retail network expansion compared to the prior year quarter. Europe also benefited from travel corridors reopening and increased U.S. tourism spending in many large cities as the U.S. dollar strengthened relative to the euro. As I mentioned, Asia-Pacific results were impacted by COVID in mainland China, as well as by a shift in the timing of revenue recognition related to the Japan JV. Half of our stores in mainland China had experienced closures, and many had restricted hours. In addition to store closures, we were unable to fulfill e-commerce orders for a meaningful period of time. Improved sales in Macau partially offset these disruptions in mainland China. We grew consolidated gross profit by $12 million to $42.7 million. primarily due to higher revenue and gross margin expansion. We are pleased to report Q1 gross margins increased 660 basis points to 61.1% at a time when others are guiding to lower gross margins due to cost pressures from expedited freight. At a channel level, both DTC and wholesale gross margins expanded, coming in at 72.7% and 50.6% respectively. Q1 2023 gross margins increased largely due to pricing and lower product costs from production efficiencies. The gross margin in wholesale also benefited from more Parker sales compared to the prior year quarter. The adjusted EBIT loss was higher at $75.6 million due to increased SG&A expenses. The increase of 33.4% to $123.4 million was largely driven by the timing of $12.6 million in marketing investments, which occurred earlier this year than compared to fiscal 2022. And these were incurred to drive brand salience ahead of our peak season. In addition, we have $6.9 million in higher costs related to opening new stores and running stores at full capacity, $3.8 million in strategic investments, including digital, and $2.9 million in cost to support the new JV. Adjusted net loss attributable to shareholders after backing out the non-controlling interest was $58.5 million and $0.56 per basic and diluted share. Turning to our balance sheet, I will start by discussing the Japan transaction. We entered into a joint venture with our distributor, Sazabi League, to accelerate our growth. particularly in the DTC channel in Japan, and to better share in the economics of that growth. We determined it should be accounted for as a business combination, consolidating results and backing out a non-controlling interest. We paid cash of $2.6 million and recorded contingent consideration fair valued at $20 million for a total consideration of $22.6 million. In addition, the JV includes a put option fair valued at $21.2 million. Both the contingent consideration and the put option were recorded in other long-term liabilities. In exchange, we acquired $27.3 million of inventory at fair value as opposed to historic cost, which means that there will be less profit recorded as we sell this through. We also acquired a series of other assets and liabilities which are outlined in the MD&A and financials. We ended Q1 fiscal 2023 with cash of $81.8 million compared to $305.9 million at the end of the comparative quarter. That's largely due to a greater investment in working capital and share repurchases of $253.2 million in fiscal 2022. of which $65.9 million occurred in Q4. Inventory was $504.7 million compared to $404.5 million at the end of the comparative quarter. Of the $504.7 million, $27.3 million was included upon entering the Japan JV. Inventory levels increased ahead of our peak selling season as domestic production gradually returned to pre-pandemic manufacturing levels. Supply chain risks are also mitigated by the earlier acquisition of offshore production compared to the prior year quarter. Further, more inventory is being held in Asia Pacific as the size of that business grows in anticipation of the peak season. with more points of distribution across the region. We are monitoring the levels of inventory in each of our sales channels and across geographic regions and aligning with demand that we are forecasting in each region. Turning to our outlook. As Danny mentioned, the macro environment has become more uncertain since our last earnings call in May. we are closely observing the health of the consumer and forecasted demand. To date, current trends for us remain strong and we have not seen signs of slowing demand. Our performance in mainland China has been positive since our stores reopened in June. We continue to expect total revenue of between $1.3 and $1.4 billion. Importantly, the lower end of our full year guidance ranges of revenue and profitability assumes that there will continue to be limited periodic COVID disruptions in mainland China during our peak season. And the higher end of the ranges assumes a return to regular trading levels during our peak season in mainland China. For DTC, this assumes low to high teens comparable sales growth with the channel projected to reach 70 to 73% of total revenue. Wholesale revenue is assumed to be 6% for the year. At roughly double the contribution we saw last year, we continue to expect 60 to 65 million in revenue from the Japanese market. Another key contributor to our outlook is product expansion. Alongside continued momentum in our core products, we are seeing really strong growth in our non-Parker product categories, as Danny touched upon earlier. Moving to profitability, we continue to anticipate adjusted EBIT margin of 19.2% to 20.7%, driven by gross margin expansion, as well as lower SG&A growth and improved retail productivity. We assume consolidated gross margin will be in the high 60s as a percentage of token revenue, with expansion driven by the DTC mix shift. We have a long history of taking price in excess of cost inflation, and that is grounded in the quality and functional value that our products provide. Our differentiated operating model as a vertically integrated manufacturer and with most products made or purchased in Canada and higher average unit prices also helps mitigate some of the inflationary pressures. Gross margin will also benefit from the conversion of our Japanese business from a distributor arrangement to a JV. Albeit that this is only the first quarter and our smallest we have seen green shoots and the impact of improved traffic in markets where closures and restrictions have lifted. This translates to improved store productivity and accelerated profitability. As I said before, and I want to reiterate it here, our margin outlook is not dependent on a full recovery of international traffic, nor on the return of travelling Chinese consumers. Flowing through, we continue to expect adjusted EPS between $1.60 and $1.90, representing growth of 47% to 74%. This does not assume any incremental share buyback activity. Lastly, I will cover our outlook for the second quarter. We expect total revenue of between $255 and $275 million. This is in line with the guidance we talked about at the start of the year and also reflects the earlier shipment of wholesale orders in the first quarter that I described earlier. It also assumes there will continue to be disruptions in this quarter in China related to COVID. We expect adjusted EBIT of between $8 and $18 million. Although we expect lower SG&A growth in the full fiscal year, quarter two 2023 SG&A is expected to be approximately 20% higher than the comparative quarter, largely due to cost of the new stores, overhead support for Japan, volume-related logistics costs, including e-commerce growth, as well as more headcount globally to support the strategic initiatives and expanded regional operations. This flows down to adjusted net income per diluted share of between 2 and 14 cents. In summary, we remain cautiously optimistic for the year ahead. We continue to enjoy the tailwinds of stronger retail traffic and meaningful sales growth in many parts of the world, and we benefit from what we believe to be a unique operating model and supply chain. And, as we get closer to our business season, we are eager to get our new product into the marketplace. None of this is without risk, given the prevailing uncertainties in the macroeconomic and geopolitical environments. While these persist, We are confident in our strategies. We remain focused on the things that we can control. And we'll continue our strategic investments in an effort to drive profitable growth sustainably in the longer term. With that, I will pass it over to the operator to begin Q&A.
spk05: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. In the interest of time, please limit yourself to one question and one follow-up. If you have additional questions, you may re-enter the queue.
spk04: At this time, we will pause momentarily to assemble our And our first question will come from Oliver Chen with Cowen.
spk05: Please go ahead.
spk04: Hi, Danny, Jonathan, and Carrie. Great quarter. China continues to be a big opportunity. Last peak season ended with closures due to COVID and Omicron in China. Stores have just opened up again recently. How confident are you with respect to brand strength in China as you head into your peak season? And to follow up on women's and non-heavy execution, they both sound really exciting. Would love a color on the women's opportunity head as a percentage of mix and any other details you could provide and the key points of differentiation. On the non-heavy customer side, what is this customer like versus your traditional Parker customer? Thanks a lot.
spk08: Thanks, Oliver. I appreciate the questions. and they're good questions. I think we're very confident with China for a number of reasons and we've built a strong business there to date and we continue to see strong demand from our Chinese consumers there who continue to love our products and there's strong demand there. Recent trends are really encouraging. All of our stores are open again as of June and the trends today show positive momentum there and we expect to see that continue. Another thing I think that's really important is our ability to renew leases and to secure new ones that are in the best shopping districts. Being successful at renewing leases and securing new ones in the best shopping districts with excellent adjacencies, especially in China, it's a testament to brand heat. It's really hard to get great adjacencies unless we're drawing consumers into the malls and the shopping centers. Yeah, that's the reason why we're able to get this sort of real estate, and that's a very strong point, and it shows me why we're strong in China. Our brand guidance surveys continue to be strong. Brand awareness and conversion in the region is strong. We do our own brand surveys, and we've seen some very strong results there as well, as well as key leadership joining us in China. been very important recently, Belinda Wong. She's joined our board, and she's a highly respected professional and a leader at Starbucks who runs their Asian business. And she's recently joined our board of directors and has been very insightful in navigating the Chinese landscape and helping us do that. In addition to that, we hired a new president for the region who starts in early fall, and that also helps further strengthen our local leadership. So we're really committed to China for the long term. And I think that's the most important thing. It was a very positive response to our participation in the China International Import Expo, which we committed to. They're holding that in November in Shanghai, and it serves as the preeminent exhibition for international brands in the Chinese market. And in short, we have great strength and great confidence in our Chinese market. We're in it for the long term. We're making investments for the long term. We're excited about our upcoming peak season. and certainly there's a longer-term opportunity ahead of us in China. With regards to your question about our women's business, we see this as an opportunity for us. Right now, our sales are... more or less 50-50, maybe slightly skewed towards women. Typically, the percentage of business that a company like ours can do with women is higher, and we feel it's a big opportunity. And to that extent, we've really invested heavily in styles and designs that we feel will help accelerate the adoption of our products and our new assortments amongst female consumers.
spk04: Thanks so much, Danny. And as you think about non-heavy jackets and such, what are you seeing with that customer relative to others and the nature of that frequency?
spk08: Thank you. I think that our products have long appealed both to men and to female consumers. And I think that it's a matter of us designing and creating a new category of products that resonate with women in a different kind of way when you're looking to wear them in different use cases. And we've demonstrated that we have repeat customers of all genders and we feel that there's opportunity in the women's category and hopefully we'll be able to increase through these initiatives, we'll be able to increase our sales to the percentage of our business that we transact with the female consumer which will be a benefit to the overall top line.
spk04: Best regards.
spk05: Thanks Oliver. Our next question will come from Ike Beruchow with Wells Fargo. Please go ahead.
spk03: Hey, good morning everyone. I guess my one question is I wanted to go back to, I think Danny, the comment you made, so maybe this is for you or Jonathan. Understanding that 1Q is just a very small quarter and fairly irrelevant to the year, but I think you mentioned that it's always been a key indicator for you guys of brand strength for the remainder of the calendar year. Is there anything else you can kind of share with us you know, anecdotally or more specifically about how much visibility you do have in the business go forward into holiday, whether it be conversations with your wholesale partners or order book or just anything that kind of gives you confidence that the brand strength you're seeing in a seasonally low period will and can and will kind of translate into a sustained momentum through the rest of the year.
spk08: Yeah, thanks, Ike. I can say that, you know, our first quarter for us has always been an indicator of brand strength and a leading indicator of what's to come. We've always looked at it that way. This year, as you know, we posted revenue growth 24% to almost $70 million this quarter. All of the metrics, all of the momentum that we've seen has been very strong. That does give us some very strong conviction that that will continue. I think that our product is a product that people buy Because of its functionality, I think that the products we make work. And even in hard times, recessionary times, should that become the case, people buy products like ours because they last for a lifetime, not for a season. We have a lifetime warranty on our products. They offer protection, and they're timeless. And we have grown through every economic cycle over the last 20 years, save for the first year of COVID. And because of these reasons, we do feel strong about the future and about the quarters to come.
spk10: I think, sorry, I was just going to add, Ike, that if we think about it through the wholesale lens, first of all, obviously we had an order at the beginning of the year. Our guidance then was for 6% growth for the wholesale business this year. It remains 6%. We're not having any conversations that would cause us to vary that view. And as you've seen, we've started off strongly in terms of shipments to the wholesale community. So we feel pretty confident about that. I think the other thing, which is, I mean, it's a sort of a rearward-looking measure, but something about momentum in the business. If you look at the comp number of 10.7%, it's okay. But if you look under the hood, and we've disclosed this so that we can try and convey the underlying momentum, if you exclude mainland China, which has its own characteristics this quarter, then we're looking at 32.7%. I feel that demonstrates something about momentum as well.
spk03: And then Jonathan, just one follow-up. When you look at the inventory in the channel across the globe or North America, is there anything, not necessarily you guys, but anything that you're seeing in the channel where maybe there's building inventory or more competitive pressure in the categories you operate in or does it continue to look fairly clean to you guys?
spk10: Yeah, I mean we're not seeing anything that gives us any cause for concern. I think a little bit to think about as you look at our own inventory, we've got an increase in the store network size. We're supporting that obviously with the inventory so that we can deliver on the potential of the stores. We're staging it around the world so that we can have it in the right location to take the greatest advantage of that demand when it comes along. And we've got a good number of stores coming on stream in the second half of this year. So by definition, you would correctly expect, given what I've said, that we would see our finished goods inventory levels up year over year. And we've also now got all of our manufacturing back on stream at full capacity, so we feel much better about that. And we're able to bring in the third-party manufacture that bit sooner, too. But we're feeling good and healthy in the inventory, and I think that colors our view of how we'll be able to cope this year.
spk05: Our next question will come from Jonathan Komp with Robert W. Baird. Please go ahead.
spk11: Yeah, hi, thank you. Maybe just to follow up on China, just to clarify, I think there was a comment about positive response following the reopening of the stores there since June. So could you just clarify, is that positive relative to the closure trend or are sales positive there? And then as you think about the balance of the world, how are you contingency planning for some of the economic downside scenarios if you are just given that you mentioned specifically how you're planning for China?
spk08: I'll start with that one and pass it on to Jonathan to add some color after. I think that we've seen that there has been a gradual and meaningful recovery in China and the Chinese market in terms of consumer shopping behavior and we expect to see that to continue and it clearly You know, when stores were opened for the first time, there was a lot of pent-up demand, and consumers went out and did go shopping. So, you know, we've noticed that, and we've noticed that in our own numbers as well. And, you know, our numbers are not back to where they were last year, but they're trending towards there. But that's all built into our guidance. And, you know, we're feeling very positive about the future of our business in China, and not only this year, but in the many years to come. It's a very strong market for us, and it's a very important market for us. And we have a very loyal customer base there. And that's why we're opening more stores there this year. And we feel very, very strongly about the importance of China in our overall business going forward.
spk10: And just so that we're, to add a couple of points to that, you know, we had a number of our stores that got closed during Q1. I think it was eight in total. And obviously traffic and the rest of them was pretty impaired. We weren't able to ship through a lot of the quarter in a wholesale business either, in an online, sorry, business either. And therefore, you know, the numbers were pretty paltry. But as business opened up, we've seen period over period growth. in that business, and that's really encouraging. We've actually also mapped it back to what we were seeing last time China locked down and reopened in a similar way right at the beginning of the pandemic. We can see some similarities in that, which is reassuring. And of course, there is variability in how things turn out there because no one really knows. And what we're seeing, therefore, is that the range is largely influenced by that. Turning to the question of sort of a more broad-based question around the world, then I think that clearly we're dealing with a more uncertain world, and I said that in my prepared remarks. We're in a position where, although we have a luxury offer, we have a very strong value proposition and a very strong functional proposition which differentiates the demand for the products and for this brand as a result. We've navigated a large number of economic cycles in our history. We've got a lot of institutional knowledge about how we fared during that. and other than the first wave of COVID we've been able to grow successfully through them. Obviously we behave very responsibly, we manage things very carefully but also remember last year we had a bunch of headwinds that we had to deal with which were the subject of a lot of conversation as we went through the year that we don't expect to have this year. So on the one hand yes there are economic headwinds that we're having to deal with but on the other hand some of the other headwinds have in our planning gone away.
spk05: Our next question will come from Michael Benetti with Credit Suites. Please go ahead.
spk13: Hey, guys. Thanks for all the help here. I guess just one short one and then a bigger picture question. Well, maybe two short ones. Any other areas in the guidance where you felt you left a little conservatism that could help hit the high end of the range you gave us if China isn't normal? I know the high end of the range includes China having a normal winter. Any cancellations so far that you've seen on some of the broad-based caution we've heard from the retail channel heading into fall holiday? It looks like from your guidance being so stable that the net answer to that is no, but any double-click into their detail. And then, Jonathan, as we walk back through the model a little bit, a few years ago the company thought fiscal 22 or the long term could be a 25% plus EBIT margin business. You've mused on it a little bit from time to time on these calls and I understand not wanting to be firm there yet while we're going through COVID, but what are the unlocks that you need at this point to get there instead of us just dreaming about how realistic it is to think this business really moving towards that potential as we look beyond what you've given us for your outlook this year into fiscal 24?
spk10: Yeah, thanks for that. I think, you know, we've got one of the benefits of our supply chain is we've got a lot of flexibility in it and we are able to work off an allocation model, meaning we are able to respond to demand wherever it is subject to us owning the inventory somewhere. I wouldn't necessarily call it conservatism, but certainly our ability to respond to demand wherever it happens to be is very good. And therefore, I would expect us to be able to react very positively as demand unfolds as we get into the peak season. And to your point about the double click, the double click doesn't give you any different answer. We are seeing on the wholesale order, but we're not seeing cancellations. We are seeing people being very loyal to what they've ordered from us. I think the other point to remember is this is what we call a managed economy in the sense that we typically don't give people everything they've asked for in the wholesale community. And therefore, by scaling back, you've got, relatively speaking, a very healthy channel that is a source of good, strong gross margin density for the wholesale client base. And therefore, we don't and wouldn't expect to see cancellations. When it comes to our margin expansion and the journey there, it comes from concerted growth in the retail network. It's very simple, and it's one of the reasons why we're out there with our metric around comp growth now, because we want to demonstrate the progress, and ultimately this is the route that gets us there. We've got a very strong network of stores. They're in the right places. We continue to add, as you heard Danny mention. And as that sales density improves through comparable growth, we will see the margin come through. The marginal margin for an incremental sale is probably closer to 50% than it is to the company operating margin. It's a natural point of leverage. And then when you see that leverage come up, when you think about the income statement, you see that leverage come through in the operating costs of the stores to some extent and in operating leverage coming at the overheads as well. So we feel really confident that as retail densities improve, And that's a huge focus for us as an organization. That is the big unlock. Obviously, we keep a very firm hand on costs. We have a big focus on ROI for what we do invest. But beyond that, there's not too much more hidden secrets as to how we do it.
spk05: Our next question will come from Omar Saad with Evercore ISI. Please go ahead.
spk12: Good morning. Thanks for taking my question. I wanted to follow up a little bit on China. Maybe you could remind us a little bit of how the business developed last winter in China. If I recall, lockdowns kind of hit at the wrong time ahead of the Olympics. And then I was also hoping maybe you could Talk a little bit more about the Japanese market, how you see that business, the opportunity there, and the impetus behind the JV thing.
spk10: So I think if we just talk a little bit about the pattern of business in China last year, we had mostly a very strong quarter three, which obviously is one of the two peak shopping quarters. And that saw us through October and November. And then we got to the beginnings of the lockdowns that restricted traffic and eventually caused store closures as well. And that program rolled from about December through June this year. So it wasn't something that sort of stopped when we ended the fiscal. It was something that continued for, call it, six months. And to be clear, we're still not assuming we are disruption-free there. It's something that we see as an improving trend, but it won't be a straight line.
spk08: Thanks, Jonathan. And your comments on the Japanese market, we're very excited about business there. I'm very excited about business there. It's a Japanese market that we We've been in for quite some time. At the moment, now with this joint venture, we're in the Japanese market with a very strong partner. They have a very strong understanding of developing brands and developing Western brands in Japan. And we're very confident that we're going to be able to build a very strong, a much stronger business, and also a much stronger DTC business in Japan through this joint venture.
spk05: Our next question will come from Megan Annette with TD Securities. Please go ahead.
spk06: Thanks. Good morning. I just have a question around CapEx and how you're thinking about that, both in the near term and the mid term. Can you give us your thoughts on how you feel your manufacturing footprint is positioned? You know, what the current capacity is there? Do you think that you might require any expansion? Given the strength you're seeing in non-PARCA categories, Is there any change you expect to the mix of your manufacturing between in-house and third-party? Thank you.
spk10: Okay, so CapEx, I think you've got to feel for where we roll to on capital expenditure, and by and large, that's not going to change. It's a factor of the number of store openings that we undertake and investment in the supply chain and operating model of the industry. I don't see that changing fundamentally. We've got slightly more stores opening this year, so probably it will go up in proportion to that. But we don't see that as a huge variable in the way that we run this business. Our manufacturing footprint is very solid. It has plenty of flexibility in it. One of the benefits of owning eight factories is that you can really allocate product to the best places so that you have, if you like, some factories might be more focused on lots more short runs. Some might be focused on some of the very big volume lines. You can play tunes around it. And we certainly don't see that as any form of limitation. for our current and projected plans. I think inevitably, as we get into more categories, we've got a rule that says that we go to the best places in the world to get our product made. That's not going to change. And therefore, there may be some shift away from the proportion of our business that's made in Canada. And as you'll recall, last year that was 84%. Yep.
spk08: And to be clear, the vast majority of our downfield products are all made in our factories here in Canada.
spk05: Our next question will come from Brooke Roach with Goldman Sachs. Please go ahead.
spk01: Good morning and thank you so much for taking our question. The US has been a strong market for your brand. Can you talk to your view of the sustainability of that business and your growth outlook for the rest of the year within your DTC channel? And then bigger picture, as you contemplate the brand investments and the store and product expansion that you've made in the North American market, what do you think is the right zip code for the medium to long-term revenue growth algorithm in that marketplace? Thank you.
spk00: Thanks for your question. I think for the US when you look at that, I mean we're still very early days. And as you've seen, it's driving our North American growth across channels. Wholesale channel is strong as well. And when you look at our store pipeline, we do have a lot of planned store openings. And I think that speaks to the sustained growth that we anticipate from that market. I think people are still learning who the brand is. I think they're discovering the products that we have. They're not buying just parkas. They're buying across categories. They're buying into our new categories much faster than even, I would say, a more mature market. So for us, yeah, we don't see any signs of slowdown. In fact, we're just continue to fuel the fire.
spk10: And if I can talk a little bit to your question about how to think about growth and potential in that market. I think taking what Carrie said, therefore there's a ton of opportunity. So as you think about the stores that we do have, you should expect the business there to grow. It will grow by price, it will grow by the fact that we will sell more products in more product categories, therefore there will be volume growth, and we think that there's plenty of opportunity. And as we bring new stores online, we expect that the sales density in the newer stores to come close to or be the same as the sort of sales density that we're enjoying in our existing estate and more. Particularly in the U.S., you know it's one of our strongest performing markets right now. But I would also remind you that for every step forward we make in the U.S., actually, that's part of the global potential too, because we dial up in a 30-30-30 world between North America, EMEA, and Asia Pacific. And therefore, for me, as we add business in North America, it increases our potential in EMEA, and it increases our potential in Asia Pacific as well.
spk05: Our next question will come from Adrian Yee with Barclays. Please go ahead.
spk09: Good morning. It's great to see the positive momentum. Danny, I wanted to go back to your comment on your sign-to-see shoppers returning. And I know that the way that many retailers do it, they look at the credit card data and kind of the country of origin there. So when you look at that analysis, what's the kind of percentage sale from tourists today versus maybe more normalized pre-pandemic. And then, Jonathan, what is the percent of sales from mainland China? I know we get Asia, but we've been kind of digging deeper for this quarter versus last year. And then kind of from the lower product cost, is that due to freight improvement, modal mix, or is it due to economies of scale, which is a little bit more secular and more kind of long-term? Thank you.
spk08: Thank you for your question. As it relates to tourist sales, my assumption is you're referring to tourist sales within China and not internal tourism, not external tourism. So to be clear, we have assumed no international tourism in any of our models, and we've not built that into our guidance. We have not before and we still are not building that into any guidance for this year. We are assuming that mainland China trends back more towards normal and that normal means more open towards our peak selling season. And that's how we look at tourist sales.
spk10: Yeah. When it comes to our mainland China business in the quarter, it's still the majority of the Asia-Pacific business, because there simply isn't very much else going on. But as I said, it's just that the Asia-Pacific business wasn't particularly big. Within that APAC segment, you've got Japan, but that's only a little bit of DTC this quarter. You've got Hong Kong, so a little bit of DTC. You've got Macau, slightly better. Ultimately, there's not a huge amount else. That's the answer there. And on no product cost. One of the things to think about is that we are, as we move back into higher volumes as we come out of COVID, so you sort of get the benefit, if I can put it this way, of overhead absorption. In other words, the same factory and the same cost base is producing more units and therefore you're getting lower costs. You're coming back to better costs. So that's really what you're seeing embedded And of course, we have a sourcing function. We're very focused on how we improve our cost of goods all the time. It's one of the tailwinds that we create as well as other efficiencies. And all of those together combine to give us lower product cost.
spk05: Our last question will come from Jay Sol with UBS. Please go ahead.
spk02: Great. Thank you so much. My question is on the footwear business. What's the plan to follow up, you know, last year's launch this year? You know, maybe can you talk about any kind of general revenue targets you have and sort of the marketing expense that you plan this year to continue to grow that business? Thank you.
spk08: Yeah. Thanks, Jay, for your question. We definitely have extensive plans to follow up on our footwear launch last year. We're expanding our style mix and some really great new styles that are going to be really popular I believe both in outdoor performance settings as well as in urban settings and we're going to continue building up that business in the right way and so I would say you know from a materiality point of view we're not looking for it to be a material part of our business yet we're building it in the same way that we have built all of our other categories which is slow and steady and properly and Over time, we see this as a very large business opportunity and it will be a material piece of our business, but just not quite yet, probably not for a few years.
spk05: This concludes our question and answer session, which also concludes our conference for today. Thank you for attending today's presentation.
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