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Canada Goose stock nosedives as it cuts outlook due to China disruptions

Shares of Canada Goose fell 24 per cent by the closing bell on Thursday

HANGZHOU, CHINA - DECEMBER 01 2021: A man walks by a store of Canada Goose in Hangzhou in east Chinas Zhejiang province Wednesday, Dec. 01, 2021. The Canadian brand has announced its Chinese shops will offer refunding to customers for returned goods, after a fineprint of the otherwise was disclosed by a customer and went viral on the Chinese Internet. (Photo credit should read LONG WEI/Future Publishing via Getty Images)
Canada Goose's stock closed down 24 per cent on Thursday after the company slashed its full year sales expectations due to COVID-19 disruptions in China. (LONG WEI/Future Publishing via Getty Images) (Future Publishing via Getty Images)

Canada Goose's stock (GOOS.TO)(GOOS) plummeted 24 per cent on Thursday after the company slashed its full year sales expectations due to COVID-19 disruptions in China and softening demand in North America.

The Toronto-based luxury parka maker cut its outlook for the fiscal year, predicting that sales, profit and margins will be lower than previously thought, due to weakness in what is a crucial quarter for the company.

"We did face challenges during a seasonally significant third quarter, the largest being in mainland China where disruptions were worse than we had anticipated, impacting our performance significantly," Canada Goose chief executive Dani Reiss said on a conference call with analysts on Thursday after the release of third quarter results.

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"It's really important to note that we firmly believe these trends – disruptions in China and softness in North America – are temporary and our brand's strength remains incredibly healthy."

Shares of Canada Goose closed the trading day on Thursday on the Toronto Stock Exchange at $25.00, a decline of 24 per cent compared to Wednesday's close.

While China began to lift its COVID-19 lockdowns in the third quarter of the year, Reiss said the sudden lifting of restrictions led to a surge of infections "which had a significant impact on our business during what is typically our most productive trading month."

"Consumer traffic decreased dramatically and staffing levels were impacted due to illness," Reiss said. In some cases, Canada Goose had to temporarily shut stores altogether. The company estimates the impact resulted in a loss of $60 million in sales.

Total sales in the third quarter ending Jan. 1 were $576.7 million, a decline of 2 per cent compared to the same time last year. Sales in the Asia Pacific market fell 9 per cent, while sales in Canada fell 8 per cent. Net income attributable to shareholders in the quarter totalled $134.9 million, or $1.28 per diluted share, down from $151.3 million, or $1.40 per diluted share, last year.

At the same time, the company saw demand in North America soften towards the end of the quarter, resulting in further weakness in sales. While store traffic was up in Canada and the United States, the company reported a lower conversion rate, meaning fewer people who entered its stores or its online site purchased products. The lower conversion rate resulted in a loss of $25 million in sales.

"When it comes to our performance in the current quarter in North America, there is definitely a macro impact. There's no doubt about that," chief financial officer Jonathan Sinclair said on a conference call with analysts.

"We can see a natural level of hesitance in consumers at the moment, which seems to permeate the sector from what we can see."

As a result, the company is now grappling with higher inventory levels. Inventory in the third quarter totalled $482 million, a 31 per cent increase compared to the same quarter last year.

Wells Fargo analyst Ike Boruchow wrote in a note to clients that the weakness in China and North America, combined with heavier inventories and higher expenses, led to Thursday's selloff.

"With North America (approximately) 50 per cent of the business year-to-date, greater caution out of the home market is likely to be a sticking point on the stock in the near term," Boruchow wrote.

Canada Goose now expects total sales to be in the range of $1.175 billion and $1.195 billion, down from its previous forecast of between $1.2 billion and $1.3 billion. The company also said it expects its profit margin to be between 14.2 and 15.3 per cent, down from an earlier estimate of between 17.9 and 19.6 per cent. Net income is expected to be between 92 cents and $1.03 per diluted share, compared to a previous forecast of between $1.31 and $1.62 per diluted share.

Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.

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