Canada Goose lowers outlook as China's zero-COVID policy hits sales

FILE PHOTO: Jackets hang in the showroom of the Canada Goose factory in Toronto

Canada Goose Holdings Inc. is sanguine about growth as it heads into the holiday shopping season, supported by increased revenues in its second quarter, but still revised down its full-year outlook amid a hit to sales in China, one of its key markets.

Affluent shoppers, undeterred by high inflation and rising interest rates, brought in $277.2 million in sales for the second quarter ended Oct. 2, a 19 per cent increase from the same quarter last year, the company reported Wednesday. Sales grew 22.3 per cent when taking into account global currency fluctuations, the company said in a press release.

“There is no doubt that the macroeconomic backdrop continues to present challenges, but I’m very confident that the strong underlying fundamentals of our business will help us navigate them well,” chief executive Dani Reiss told analysts on an earnings call. “We’re seeing (COVID) disruptions affect an increasing number of (Chinese) cities in which we operate. As a result, we’ve updated our outlook for the year.”

Gross profits increased nearly 23 per cent to $165.8 million and adjusted earnings before interest and tax grew more than 70 per cent to $29.6 million. Earnings per basic and diluted shares dropped 66.7 per cent to three cents.

Here’s what you need to know:

China

Canada Goose first entered China in 2018 and the country has since become its biggest market with 16 brick-and-mortar locations — the most of any nation in which it has a presence. However, the Chinese government’s zero-COVID policy means continuous lockdowns, mass testing and quarantining have dampened discretionary spending in Asia’s largest economy.

In the Asia-Pacific region, sales dropped 4.2 per cent, with Reiss attributing the loss to suppressed purchases in China. In each of its other markets — Canada, the United States and Europe — sales grew between 20 and 35 per cent for the quarter.

Reiss said Canada Goose is “investing in China for the long-term,” and underlined how the company is renewing and securing new leases as a “testament to the brand strength” in China. “We need to sign new leases with landlords in the most important malls in the most important places, which just reaffirms their confidence in our brand and the extent to which our brand drives traffic to their malls,” he said. “If that weren’t the case, they would not be signing leases with us.”

To bring better revenue diversification, the company is executing on its expansion plans in Japan, South Korea and in the western United States. It opened a store in Osaka last month and will open a store in Las Vegas in the “coming days.” It also plans to open more pop-up shops this fall in the U.S.

Full-year outlook

Canada Goose expects revenue windfalls from the upcoming holiday shopping season, especially in China. Singles’ Day, the largest online shopping day in the world, is coming up on Nov. 11 and Reiss said he’s already seeing “extremely strong performance.”

Still, the company chose to trim its full-year outlook. “The reality of upholding a dynamic zero-COVID policy … has meant fairly consistent, periodic disruptions persisted,” chief financial officer Jonathan Sinclair told analysts. “When you consider this alongside the broader, global macroeconomic uncertainty, we felt it was prudent to meaningfully revise our guidance ranges.”

Canada Goose expects total revenue between $1.2 billion and $1.3 billion, compared to original guidance of $1.3 billion to $1.4 billion. It also provided guidance for the third quarter, with sales expected to ring in between $580 million to $660 million.

Financials

Canada Goose generates the majority of its wholesale revenue in the second and third quarter of its fiscal year, while the majority of direct-to-consumer (DTC) sales, which include retail and e-commerce, get booked in the third and fourth quarter. In fiscal 2022, the middle quarters generated more than 82 per cent of annual wholesale revenues while the third and fourth quarters brought in 85 per cent of DTC revenues for the year.

In the second quarter, the parka maker booked higher revenues in its wholesale segment, up more than 21 per cent to $180.7 million, and growth in the DTC segment, up 15.2 per cent to $94.8 million.

Shares of Canada Goose dropped more than two per cent in Toronto to $20.74 as of 12:01 p.m.

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