Canada Goose (GOOS) has seen top and bottom line trouble over the course of the pandemic as has been the case with the rest of the retail segment, although the luxury winter coat manufacturer could see momentum regain during the holiday season. Shares are still far off all-time highs, but the pandemic related shift to DTC spending should aid sales recovery and future growth in key markets such as China, which could put Canada Goose back on track to challenge all-time highs by late 2021.

FQ2 results released early in November showed positive signs to build upon even though revenues shrunk significantly YoY and margins contracted heavily due to sales in PPE (personal protective equipment). Revenues fell 33.7% for the quarter, bringing fiscal 1H revenues down 39.7% after a poor FQ1. Typical seasonal strength had faded slightly with the pandemic as Wholesale revenues are a main driver for FQ2 and partially in FQ3.

While gross margin declined 1030 bp and net margin 2,850 bp for fiscal 1H, much of that was the result of higher operating expenses as well as heightened contribution from PPE. Excluding PPE, which generated $30.1 million in revenue (15.5% of total quarterly revenue) on a 3.5% gross margin, Canada Goose has actually seen margin improvement. Gross margin excluding PPE for FQ2 rose 150 bp YoY to 56.1%.

EBIT and net income both declined over 80% YoY as operating expenses rose relative to revenues; temporary closures of stores and reduced shipments of product to Wholesale locations in FQ1 and costs associated with reopening as well as less absorption of overhead from lower production levels (higher costs per unit) cut into these figures.

As FQ3 continues, Canada Goose should be seeing a shift to favor e-commerce due to seasonality trends as well as pandemic fueled trends. DTC revenues seasonally have been a primary driver for FQ3 and FQ4. Although DTC remains a key driver of gross margin at about 76%, operating margin has felt the impact of deleveraging of overhead, pushing operating margin to the mid-teens. However, due to a warm start to the winter, sales could be impacted by a trough in demand due to these warm weather patterns, thereby impacting FQ3 sales, Canada Goose’s most important quarter. BTIG estimates that “digital traffic is down 36% YTD when it should be surging,” and while that could lead to underwhelming FQ3 performance, long-term pictures of sales and digital growth look more rosy.

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Canada Goose has been witnessing some signs of strength in DTC and international channels even as the retail picture slowly starts to improve. There’s been a higher shift to DTC in FY20 in its main market Canada, as well as “a 19.3% increase in DTC revenue generated from Greater China [during FQ2].” This shift is key for improving profitability as the “DTC mix shift [is] highly accretive to revenue and operating profit per unit vs. wholesale.”

DTC expansion is highly important in Canada Goose’s quest of unlocking major international expansion, due to the lack of physical footprints needed to pave growth. With the pandemic, DTC spending in general has increased dramatically – Cyber Monday’s sales hit $10.8 billion, a 15.1% YoY rise, as more shopping shifted online during the holiday weekend blitz; November also saw 10 days of the 30 with daily shopping spend over $3 billion. Continual increases in total retail shopping online could translate to more revenue generation from these channels for Canada Goose.

As a percentage of revenues, DTC has seen continual increases each year, from 28.8% in FY17 to 54.8% in FY20, as that sales channel has provided the largest growth to revenues in the past few years. This shift to DTC should allow revenues to recover from pandemic impacts to reach C$1.4 billion by FY23 (~US$1.08 billion).

Source: Investor Presentation

Yet there are also large opportunities geographically. Although Canada remains the core market and largest provider of revenue by nation, growth in ‘rest of’ – EU/China/Japan – has tremendous potential.

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EU and rest of world contribute 40% of revenues for Canada Goose, but offer some of the highest potential in terms of luxury spend in the upcoming years. Total luxury market spend is estimated to be 33% for Europe, 27% for Greater China and 9% for Japan; by 2025, “Chinese consumers are set to confirm their place as the most important buyers of luxury, accounting for nearly half of all purchases worldwide [and] mainland China will account for 28 percent of the luxury market, up from 11 percent in 2019.”

Yet it’s not just the absolute growth potential in luxury goods that points to promising growth in international regions – there’s also growth within DTC in luxury spend, like a 2-in-1 combo. Online channels have seen double-digit growth and are expected “to gain share and account for up to 30 percent of the market by 2025″ led by a younger generation of consumers.

Margins typically follow a very predictable wave based on seasonality trends, and as FQ3 approaches, margins should continue to see more expansion (given that the chart below does not show adjusted margin excluding PPE). Gross margin for FQ3 could rise to 57%, a 900 bp expansion sequentially, as DTC revenues drive holiday strength.

ChartData by YCharts

Long term, margins should continue to follow this seasonal trend, with a low during FQ1 and a peak during FQ3, based on sales patterns and primary sales channels. Yet the shift to more DTC could see small, continual margin expansion, possibly with gross margin up to 60% by FY23 as revenues recover to near US$1 billion or higher.

Although Canada Goose occupies one of the pole positions in luxury winterwear, it’s not the only retailer seeing declines in revenue – North Face (VFC) saw global revenues decrease 25% for its fiscal Q2 and 30% during its fiscal 1H, with the declines attributable to the pandemic. However, VF noted that those revenue declines were offset by e-commerce growth, similar to trends seen within Canada Goose. North Face and Canada Goose still occupy different levels of ‘luxury’ in terms of pricing and material quality, as North Face is priced lower and does not use similar materials like coyote fur.

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Steady seasonal margins alongside a recovery in revenues to and above levels by FY22 and an increasing shift to favor DTC sales could see incremental gains in margins as well as profitability, as Canada Goose looks to bring margin strength from in-sourcing and other manufacturing efficiencies as production levels scale back up. While FQ3, as the seasonally strongest quarter and most important in terms of revenue generation, could see some weakness as has been the case for 1H, the long-term growth picture for Canada Goose remains intact. International expansion provides entry into key regions in Europe and China through DTC, and rising spend in luxury good and through DTC by younger consumers could see more gains in that segment’s revenues in two to three years’ time. Revenues could be set on a path to C$1.4 billion by FY23, a ~46% increase from FY20, and record revenues along with stable seasonal (and potentially higher) margins should see an improved profitability picture through then as well, putting shares possibly on track to reach record highs by late FY22.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.


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