Canada Goose Holdings Inc. (GOOS) Earnings Call Transcript & Summary

Good morning, and thank you for joining us for this next session of the Goldman Sachs Global Retailing Conference. My name is Brooke Roach and I cover the apparel and accessories brands here at Goldman Sachs. And it is my pleasure to introduce Canada Goose as our next fireside chat session. With me today, we have Dani Reiss, Chairman and CEO; and Jonathan Sinclair, EVP and CFO. Welcome Dani, welcome, Jonathan.

Great to be here.

Dani, it's been about 6 months since you unveiled your new 5-year strategic growth plan. Can you update us on the progress that you've seen so far versus your expectations? And also the most important opportunities that you see as you look ahead?

Yes. Thank you again, answering the question. I'm so excited about the opportunities for our brand. Since we've become a public company, we've grown tremendously and tremendous opportunities that continue to be ahead of us, and our annual growth rate has been quite good. I think that we've really been in the last 6 months leading into our 3 pillars of growth. The first one is to accelerate our consumer growth. And in particular, means our growth with different demographics to get -- bring different consumers into the brand. We feel that we have a big opportunity with women -- female customers to grow a percentage of our sales with women, also millennials and Gen Z. It's something that's always been important to us is to stay relevant with today's younger consumers and that applied to this generation as much as it applied to previous generations, including my own. And as we've grown with older, we've -- our existing consumers have stayed loyal to our brand and being relevant with today's younger consumers is important and it's working really well, and we're seeing that in our numbers. So that's -- that's our first growth pillar. Our second is to build out our DTC network. And we decided when the pandemic happen, we decided that we were going to continue to build our store network. We decided it was an important way of connecting with our customers and we decided that even though we didn't know when it would end, but it would be important to come out strong and have a good network of stores. And in addition to that, we don't have that many stores. We've opened 6 of our 16 stores, about 1/3 of our stores we plan to open this year so far and we're on track to open the rest on time and on schedule on budget. And our DTC growth has been very strong. We see ourselves having between 100 to 130 stores over the next 5 years and we're well on track with that. Our last quarter or DTC store comp was 28%. So we're doing very well. And the final pillar of our strategy is new categories. We've successfully launched new categories -- I'm sorry, from a brand that started out with heavy way down to [indiscernible] public that was 15% of our -- only 15% of our business was other categories. Today it was [indiscernible]. So those are the 3 key pillars of our strategy. Further to that, if I can add one more thing, talk about a transformation project, which is going on internally and we will be working at that very diligently for many months now. It's a project that's going to phase itself over and have impact over a number of years. Ultimately, it's going to deliver $150 million of annualized cost -- SG&A cost savings a year and that's by fiscal 2028. And currently, there's a number of different work streams that we're working on, both retail and operations and technology and Oregon office, another one of them recently, we've redesigned our organization completely, and we've begun to implement that. And we've recently been able to rationalize and streamline our workforce by about 10% of our corporate employees, which will make us a more effective and more efficient organization. We'll eliminate the duplication of roles in the organization. So it's a very exciting time and happy to be maturing as a company as well.

That's great. Let's dive into some of the strategic growth pillars of the early sense of success that you've had there so far. Maybe we could start with product expansion. Can you elaborate on the most important drivers of recent success and the contribution that those categories are going to have to growth in margins this year? And then maybe as a follow-up, sometimes we hear from investors who want to understand the growth momentum of the heavy way down category. Perhaps you could talk about what initiatives you have in place to continue to drive your core even as you expand into these new product initiatives.

Yes. For sure, our core is very important to us. Obviously, it has continued to grow alongside our new categories. It's important to note that our new categories, all of them that I referenced earlier used to be 15% of our revenue is now close to 40% of our sales, and that's an important metric. And those new categories, while our existing categories and heavy way down or iconic category continues to grow at a nice pace. The new categories are growing faster. And that's important. That demonstrates that they're being adopted at retail and that consumers really love the products that we're producing and bringing to the marketplace. We have developed over time a new product category playbook, we call it. And it is the way that we get into new products and start them and build them over time until they become a material part of our overall sales and revenue complexion. So for example, I mean, lightweight down is a great example. It's the original example that we have. We started introducing and playing with lightweight down 7 or so years ago and it was a small category we built it. It matured and today, it's 20% of our revenue, roughly over 20% of our revenue, same margin profile as the rest of our business, which is exactly the way we see the rest of our category is growing. So as we get into apparel, which includes net wear, includes fleece, which is doing incredibly well and sweat and that's what we call apparel. That's growing very quickly. Also, we follow the same playbook, and it's going to become eventually a material part of our overall sales complexion and it's going to be similar, if not the same margin or better margin profile. And footwear as well. Footwear has done really well so far as our newest launch. It's small. And there's a lot of buzz in the market about it. They're great products. They put function first. And as with everything we do, we want to make a best-in-class product made in the best place to make it and so footwear, we expect to follow the same kind of trajectory and eventually be a very material part of our overall order book.

I think it's also worth adding that to dimensionalize the progress we're making on apparel. If we compare the size of our apparel business, with where might weight down was at this point in its journey, it's about triple the size. So we're really pleased with the speed of adoption of new categories.

That's great. Let's shift to the second pillar of your strategy, which is growth in DTC in particular, in stores. Store expansion is a pretty big tenant of the 5-year growth plan. Dani, how are your new stores performing versus your expectations? And how does that play into your other strategic opportunities, such as winning with women?

Very important. I mean, we're very happy with our performance of our stores. Our first quarter, our revenues were up 60% and 28% comp growth in our stores. Like I mentioned earlier, we think that we feel that we have a very concentrated relatively small group set of retail stores in our network, a tremendous opportunity to grow that base in really important places around the world that address different demographics and address different categories for where we pop up. I think omnichannel is also a very -- it's very, very important. As far omnichannel as part of this as well because we are very committed to for -- to be available for our fans and our consumers to buy our products anytime, anywhere and anyhow they want to do that. And that means that any piece of inventory that we have in any store any location should be available to them. And we're working very hard on the technology back end of that to enable this kind of omnichannel technology so that our -- so our customers are able to have that exceptional experience. And our in-store experience has been something we've also really leaned in heavily. We have award-winning installations with our snow rooms. And there I'd say approximately half of our stores now and almost all of the new stores that we built. And it's really important to have that sort of experience available to our consumers.

I think it's also worth connecting the progress on womens and the progress of the new categories with how the stores are expanding. So as we go into new zones where we haven't had stores before, we're actually able to present the Canada Goose of today in front of the consumer. And so instead of them approaching them, I've always come here for X, they're actually able to engage with the entire offer out of the game. In the same way, women's, as Dani mentioned, is not half of our business everywhere. It's actually more than half of our business in North America and we're really pleased with that and see real momentum bind. But in Europe and in Asia, we've got even more opportunity to grow our women's business. So we're really excited for the potential for that as well.

Yes, 2 points I'll add as well. Like all these new categories that we have, we opened stores in new locations. People walk into our stores and they don't -- they see us as a multi-category brand and they -- different kinds of consumers are entering our brands through different products and they historically have. So it's -- we have more addressable consumers and we have more products for those addressable consumers and the way they work together is working very powerfully.

Maybe on the regional performance of the stores. One of the questions that we get asked very frequently is how stores in North America are performing, both in terms of store productivity, comp growth as the stores enter year 1, year 2, year 3 and also the profitability of those stores. I'm curious if you can elaborate on that a little bit more, Jonathan.

Sure. I think that the North American business performance in Q1 was a good first step. It's a momentum that we've seen continue particularly in Canada, which is growing very well. We're seeing growth overall in our North American stores. I think that there is clearly a macro in the U.S., which is, let's say, not perfect. But we've considered that as we've talked about the business and we believe we're able to navigate that successfully with very much more focused on the longer run. If we think about how our retail estate sits around the world, our top-performing sales density stores sit in Asia. Our second highest site in North America and our third highest sit in Europe. And at that time, we're very happy with that. And actually, even at that level, our margins in the U.S., our formal margins are above the average that we're seeing for the network overall. So we're very pleased that explore confidence to keep investing in North America. And we do that with very much of a long-term lens, particularly given that we're signing up typically 10-year leases, and therefore, we're looking beyond the time horizon of any economic cycle. And so we feel pretty good about our North American business and its potential remembering that the U.S. is one of the world's top 3 luxury markets.

One additional follow-up for you is, as we've invested a lot more in DTC, we've seen sharper swings in the profitability of Canada Goose overall. How are you thinking about that impact on your business over time? And what gives you confidence in the improved profitability that's embedded in the company's guide for fiscal third quarter?

So I think we're going through a business model change in Canada and we've been doing this for a number of years. We've all talked about the switch between wholesale and DTC. And there's an inevitability in a seasonal business. There's a more marked proportion of business that's done in DTC in Q3 and in Q4 according to our fiscal. And that's quite normal and it's not a surprise. But what it does mean is that as wholesale has occupied a diminishing portion of the total business and DTC occupies more. You start to see the shape of those underlying businesses emerge more into the consolidated picture. So it used to be that Q2 was a profitable quarter and Q3 was a profitable quarter because it was all about wholesale, you go back to IPO, we were 89% wholesale. Therefore, Q2 was a profitable quarter, a big proportion of the revenue in Q3. Obviously, still very important, Q4 used to make a loss. Q4 now makes profit. It's an important quarter. Q3 proportion is a less important quarter and obviously, you have the carrying cost of the network. So it's not a huge surprise. It is breakeven or a small loss relative to what we're seeing in Q3 and Q4. So from a shape point of view, from a strategic point of view, we're actually evolving the way we expected to. As we look forward on that, is product diversification continues to have an impact and it makes us even more relevant in the first half of the year, what today is a 25%-75% business on a consolidated basis may move towards 35%-65%, but we're talking a 5-year time horizon, not this week, not next week, not next year. It's a gradual evolution to that, that we expect to see happen. When it comes to the third quarter of this year, we understand that there's a macro in the U.S. that's a little bit more challenging. But we've got ourselves used to that and that's very much factored into our thinking for the year and the fourth quarter. And equally, we didn't assume that China would be a V-shaped recovery and that seems to be bearing out. So I think that -- but conversely, the stores will -- we believe, will operate normally throughout the entire quarter. And therefore, we're coming up against somewhat softer comps as a result in the U.S. because it took a sharp left turn at the end of Q3 last year and also because, obviously, China was heavily interrupted throughout the quarter. So we therefore think that the growth this quarter will be in this coming quarter will be more marked, and we feel pretty good about it.

I want to follow up on some of those macro comments that you provided because I'd love to hear you square the doubling of the North America opportunity over the course of the next 5 years with some of these more modest North America macro comments. How do you think about that as you bridge the short term to the long term?

I think that the -- we are relatively speaking, underpenetrated in the U.S. There's a huge opportunity for us to grow our business in the U.S. We came in the fairly in double digits in store numbers. We're opening in important locations. Obviously, we already had customers [indiscernible]. We've got various stores that are opening around the country where we're not sure we test with pop-ups when we are short, then we commit to leases. We feel that the opportunity in the U.S. is very strong. We see that in the initial take-up of the stores. And so we don't want the noise of a near-term 3-month, 6-month pressure on the economy, again, in the way of building the business for the longer run.

Final question on North America before we move on to other geographies. One of the questions that we're getting a lot from investors is how to understand the magnitude of the outperformance that you're seeing in Canada today relative to the U.S. Can you contextualize what you're seeing there and the durability of that outperformance?

Yes, I can talk about a little bit for sure. I mean Canada is -- Canada is a very -- obviously, a very strong market for us. It's the one -- it's a market where we're very -- our penetration and our mix of DTC to wholesale SKUs more DTC. And we're very well known. Our brand awareness is very high. We continue to -- I think we continue to -- we're a very strong brand in Canada. Canada is very proud of Canada Goose, and we're a beloved brand in our home country. We're also a market where because of the home market advantage typically happens is where our products are more attractively priced in our home market. And so that is a good opportunity for tourism now. During the pandemic, we've been able to keep Canada extremely strong. And as it is today, even in -- even with an absence of a lot of tourism has yet to return. And this tourism, we all imagine will return over the next 5 years. And as it does, but I think that's going to even strengthen Canada and all of North America even further than we've been able -- we've been able to make with local markets. So the strength we see today is actually coming mostly from local and regional markets as opposed to tourism where historically, a lot of it came from before. So I think that those are some of the reasons that we have a lot of confidence.

We often get asked about are you done in Canada? Are you mature in Canada because it was your home market, it was your first market. And the reality is we've got a ton of opportunity. We're not done with the store network. We're not done on the expansion of technology and the impact that omnichannel can have is not done in terms of the category expansion. We've got a lot of roadway ahead of this even in our first market.

For sure. And not [indiscernible] I want to make a big higher-level comment, like relates to all of our markets, including Canada, when people -- or Jonathan just talked about being saturated or like we're nowhere close to that. We're actually a small brand. Our company is just passed $1 billion last year. And other companies as we know in the world that are many billions of dollars, and they're not over-penetrated and they're not oversaturated, and they don't get those sorts of questions. So we've been getting these sorts of questions since our IPO days. And I think that -- and even before that, I think since that time, we have demonstrated that we can diversify our product categories. We can grow in all of the markets the way that we anticipate and believe we could and we've proven that we can do that. And I think that when you look at the size of other brands and the size of the potential, it's in the many billions of dollars and that's why we're so convicted that we could continue to perform or continue to execute against all of our growth plans.

China is one of the biggest growth opportunities that you've seen for the brand. And you talked about it a little bit earlier, but you've also talked about some reopening momentum and some macro comments in the region in aggregate. Can you elaborate on your view of China growth this year, both in terms of recapturing the $160 million of lost revenue relative to where you think you could be, but also into FY '25 and beyond.

I'll start first on and Jonathan over to give some more color on it financially, but I think China is a massive market opportunity for us. We're very excited about it. When we entered China before the pandemic, there was a lot of pent-up demand for our brand and on a relatively modest brand awareness numbers and -- but there's a tonne of pent-up demand and we entered the market, and we performed extremely well. And our brand awareness and our -- and the demand for our brand in China continues to be very strong. That is why that during the past few years, we continue to open stores in the Chinese market, knowing that they may not be open all the time, but it's important to have that infrastructure and we want to come out strong when they could be open. So today, we have 19 stores in Mainland China. And 19 stores in Mainland China is not a lot of stores. There's a lot of -- I mean there are many companies with way more stores than that in China. And I think that -- what's important for us is to continue to stay relevant to continue to appeal to -- continue to have a strong brand and we do. Our brand is very strong and so our core fundamental belief in despite any near-term headwinds to the extent that they may affect us or not. We have a long road ahead in China. And on the size of our business today, [indiscernible] comparison to the size of the business that it can be. And that's what we're building this for...

And I think there's probably 3 points to that. Firstly, on the face of $160 million, things live to remember for a long time. I think that we always said we did not plan a V-shape recovery. And that was because none of us understood the consequence on the Chinese economy of the zero COVID policies and how long it will take to recover. So yes, we've anticipated some of that coming back the stores were open, they won't. We did not anticipate it all coming back this year. So we see that as upside. Secondly, we've been very pure about how we've approached our distribution strategy. As Dani said, [indiscernible] multiple stores, with Tier 1 and Tier 2 cities only online for reach beyond that, but with Tier 1 and Tier 2, and we're not going beyond that. And with only 19 stores, take the city of Shanghai, for example, we have 2 stores. We have one store in [indiscernible], one store in Pudong. And I can name any number of brands we've got any number of stores in Pudong and any number of stores in [indiscernible] without even really trying. And the reality is that we will develop our footprint there without stepping away from the major centers of wealth and without the major stepping away from the majors to the centers of population that are in our addressable market. The third point I'd make is it's worth remembering why Canada Goose is appealing in China. Because as luxury went into China, everybody went together. And they all went to the same landlords and all the landlords adopted them. And this I'm going back 10, 15 years. But the result is all the models look the same because they've all got the same brands. Now you can somebody like us coming on, we represent differentiation. We represent newness, we represent a different consumer set. And therefore, we actually enhance the stores along with other brands that might do the same. And so as a result, when we're at the CIIE and we're back there again this year for the second time. We have the [indiscernible] speaking a path to our door offering us space. So instead of us going to them and say, what can you give us? They're going to come to me, come to me, come to me in various conversations around that. So the result is it gives us great confidence to think about how we develop that market over time, and we know we're at the starting gate. And what is a market that's one of the top 3, as I said earlier, in relation to the U.S.

Yes, usually, I will also add one more thing to that, which is Canada Goose, which is also known for representing branded Canada. And the brand -- Canada's brand around the world is a very strong brand. And we've seen that. I've seen that time and again, probably in the world how people around the world love Canada and I think the relationship between Canadian people and Chinese people are very strong, and the brand of Canada has certainly helped us in our journey, I think continue to.

Last quarter, you reiterated your fiscal 2024 guidance. How does your guidance account for uncertainty in today's macro environment by channel and geography?

So I think I've talked a bit about the U.S. China macros, which are probably the 2 that are getting the greatest discussion. We've reflected those, but we've also reflected our size, our stage of evolution, our opportunity, the steps we've taken in the business. And so we think that we've fairly included it -- is it all in the goes. We believe so. But we've also got a very strong store [indiscernible] and we talked about that. We've got strong momentum business. We feel pretty confident about what we've got lined up. Sure, wholesale is down, but we saw that coming. That's why we -- that's why our wholesale assumption is down 6% year-over-year, that's what we said. And I think that is okay by us because in the end, wholesale for this brand is something that we take great care to manage. We'd rather have less inventory out there, less wholesale and know that it's going through in the best possible way than to overload the channel because that doesn't help anybody. So we're very clear about that.

And one of the questions we're asking all companies at our conference today is their outlook for the consumer backdrop. Do you think that the consumer is going to face more headwinds or less headwinds next year in comparison to 2023. And are you thinking -- how are you thinking about the health of the consumer in your core income demographic cohorts?

I think that we try and think about our business for sure for the long term. We really don't think about it quarter-by-quarter and even year-to-year, it's generation to generation, and we are growing. We are growing year-over-year, we have grown year-over-year, and we continue to do that, both top line, for sure. Our EBIT margin went down a little bit during COVID and we have a path to recovery. We were 25% headed towards 30% before the pandemic, and there's no reason why with the return of Chinese tourism [indiscernible] that can come back. I think that this brand, we've seen like in the 27 years I've been involved in this company. We've grown through every economic cycle, every recession, every economic downturn. I think that our products are inherently built for protection. And I think that their products that are appealing at any time. So while there may be macro pressures during any specific time of year-to-year, we don't base our decisions on that or those are things that are beyond our control. And we know that our brand is strong. That's the most important thing. We have the product available. We are putting a lot of marketing behind it, and we have consumers who are very interested in what we have to offer.

I think what I'd add is certainly, since I've been here and beyond, the -- we've conducted market research on our consumers on sort of the brand health brand guidelines type of base every 6 months around the world, multiple cities. So you get a lot of continuity of read. And we're not detecting any shift in how consumers see us in these times. And that's really important.

That's great. One other question that we're asking all companies at our conference today is that of the category outlook given some of the share of wallet shift dynamics. Luxury has seen a little bit more pressure this year as more consumers spend their dollars on experiences versus things. As you look into next year, what do you think is the one most important factor to drive increased spending in your core category?

I think for us, new products and excitement is very important. I think staying relevant -- I think staying relevant with the younger demographics and with all of our demographics. But our new categories and some of the collaborations that we're doing are very exciting. And I think it would be the things that we need to do to stay top of mind with our consumers. And I believe that they're going to be affected.

And that innovation allows you to drive another mid-single-digit pricing increase next year?

Absolutely. It's a fundamental in this business. The pricing power remains very strong. I refer to the market research we do before. Another price just simply doesn't come up as a conversation in that. I think that we've been -- whilst we always talk mid-single digits, it's a lot more sophisticated than that because we've got so much continuity in what we sell. Continuity in this business is measured in years, typically rather than in seasons. And so we've got -- that means we've got a lot of data of price versus volume over time and with that understanding of the elasticity, it means that our price changes are surgical. They ladder up to the mid-single digits that you referred to. But we actually do this in a very considered way, geography by geography and then deploy the international pricing matrix over it.

Let's put all of this together. You've got a lot of strategic growth drivers, a lot of new initiatives. Jonathan, maybe sticking with you, the 5-year outlook target talks about a very healthy improvement in your long-term EBIT margin relative to where you are today. Can you provide an update on the cadence that you think is achievable in the near term versus the drivers that accrue towards the end of that time horizon and each of the key levers that will drive that 30% EBIT margin over time.

Yes. I think it's relatively straightforward. I think there are really 3 things that are going to make the difference. The first is the development of the store network. We're gating the stores in at CAD 4,000 a square foot. And we're gaining those stores at 40% margin. So if it is not going to deliver CAD 4,000 a square foot, it's not going to deliver a 40% margin, it isn't going to have kind of a goose over the door. It's simple as that. By the time we get to the sort of size of the state that Dani talked about, you can do your math in terms of 3,000 square feet and CAD 4,000 a square foot, work that through. It's about 1/3 of the gap that exists between where we are today in margin and where we want to be. The second part is the organic growth. The reality is that our sales density for our network has been higher in the past and the reasons Dani outlined has come down. We see a lot of opportunity through the development of our business, development of omnichannel, development of the categories to grow that sales density in our existing stores. And that's part of our organic growth, alongside growth in online, alongside growth in wholesale and grow alongside omnichannel, alongside the establishment of Travel Retail. You put all of those together and that's worth the second 1/3 of the gap. The last piece comes in the transformation program. So we've talked about $150 million as our goals are running for our annual saving and running costs. And that comes in between saved costs and avoided costs. But the important thing is it's coming from a number of strands. It's not just in 1 place. It's the organization and an operating model that Dani described before. It's in sourcing, supply chain and technology. It's in marketing. Not just about what we spend so the efficiency with which it gets spent and the strategic precision of where we put the money. And by doing that, we believe we can realize those savings within fiscal '28. You -- so as we open the stores, as we get the comp growth and the organic growth in the business, and as that transformation program moves from planning into implementation, we expect to start to see meaningful progress towards the 30% cost.

Great. Thank you, Danny. Thank you, Jonathan, and thank you all in the audience for being here today.

Thank you.

Thank you.