Canada Goose shares fall after parka-maker cuts outlook over Omicron disruption

Canada Goose Holdings Inc. on Thursday cut its full-year guidance following lower-than-expected retail growth in Asia and Europe after being hit by the unanticipated severity of the Omicron wave.

The luxury parka maker’s shares were down more than 15 per cent to $36.70 in Toronto as of 11 a.m. The stock had plunged more than 17 per cent after the opening of the TSX and fell almost 20 per cent in New York.

Revenue at the Toronto-based company grew to $586.1 million in the third quarter ending Jan. 2, 2022, a 26.5 per cent increase from the year before. Adjusted earnings before interest and taxes came in at just under $207 million, slightly less than analyst expectations of $209 million.

Global e-commerce and direct-to-consumer sales helped boost top-line growth and purchases in the United States, and offset lower growth in China and Europe. On a per-share basis, earnings were US$1.44.

But the slower sales in China, a key focus for Canada Goose, and a stall in luxury tourism prompted the company to reduce its forward guidance. The company had raised revenue expectations in November to between $1.12 billion and $1.17 billion, before the Omicron variant spread around the world.

It now expects revenue to come in between $1.0 billion and $1.1 billion. Thursday’s earnings put it $214.7 million away from meeting the bottom of its latest projection.

“We view these disruptions as temporary and in the case of (Asia), we’ve already seen sequential improvement in the past two weeks,” chief executive Dani Reiss told investors in an earnings call. He also said the apparel company, which manufactures its products in Canada, did not have any “material revenue or margin headwinds” related to supply or shipping constraints.

“We’re confident in our inventory position going into fiscal 2023 and we’re confident in our ability to navigate inflationary pressures,” Reiss said.

Canada Goose is facing a calendar year in which central banks in have already raised or are poised to raise interest rates, broadly impacting the spending patterns of consumers. Inflation has hit three- and four-decade highs in Canada and the U.S., respectively, and central banks in both countries are gearing up for rate hikes in March.

The company is well positioned to weather an overall drop in consumer spending, chief financial officer Jonathan Sinclair said. It has pricing power for its expensive coats and clothing, and the demographic that can afford $1,000 parkas is unlikely to be affected by any downturn, he said.

Some luxury retailers will continue to see growth even as interest rates go up, Goldman Sachs Group Inc. analysts Brooke Roach and Julie Hoover wrote in a December report.

“We believe the wealth effects and spending impulses of the consumer with higher income will be greater in an environment of inflating essential goods costs,” they said. “All else equal, we prefer brands with higher opening price points in an environment of rising costs, as the opportunity to drive modest mix shift price increases is likely to be less noticeable to the consumer at a higher range than a fixed low-cost item.”

Direct-to-consumer sales are another area Canada Goose is shifting its efforts toward, seeking to take advantage of higher margins compared to the less-lucrative wholesale side of the business.

Its e-commerce and retail sales grew 49 per cent to $445.4 million from $299.4 million year over year. In China, that growth was up 35 per cent. Wholesale declined to $160.6 million from $136.7 million globally.

Gross margin for direct-to-consumer sales was down from a year earlier, at 71 per cent from 78 per cent, while wholesale was down 50 per cent from 51 per cent.

Reiss cited the expansion of Canada Goose’s clothing line and new product launches, such as shoes, as the reason for lower margins in the direct-to-consumer segment, which cut into hot demand for its parkas.

The company is also trying to shift from a seasonal business, with sales peaking in the holidays and winter, to a year-round apparel maker, he said.