Canadian Stock Series: Canada Goose —After Surging 16%, Shareholder Returns Still Exceed 8%

In this earnings report review, we will focus on analyzing the following questions:

（1）Why did the company's profits see such a significant increase?

（2）How are the company's main businesses performing, and do they have the potential for long-term growth?

（3）What is the company's shareholder return situation, and does it have sufficient cash on hand to realize future shareholder returns?

Canada Goose is a high-end down jacket and warm clothing sales company, operating mainly through three divisions: Direct to Consumer (DTC, 76%), Wholesale (11%), and Other (13%, including sales to friends and family, employee sales). The DTC business is the pillar of Canada Goose's revenue, accounting for over 75% of the total revenue, becoming the most important engine driving revenue and profit growth.

Figure: Revenue Structure Changes (Million CAD)

In this quarter's financial report:

(1) DTC business revenue was CAD 271 million, up 19.34% year-over-year; operating profit was CAD 105 million, up 11.5%, becoming the main driver of the company's strong revenue and profit growth.

(2) The total revenue of the wholesale business was CAD 41.4 million, a decrease of 9% year-over-year, weakening the overall revenue growth and becoming an unfavorable factor affecting the company's performance.

(3) Other business sectors performed particularly strong this quarter, with sales exceeding CAD 45 million, up 123.7% year-over-year, and over 300% sequentially, accounting for 13% of total revenue this quarter; operating profit also soared to nearly CAD 10 million, up 113% year-over-year.

It is important to note that in historical financial statements, the sales revenue from the company's other business sectors has always accounted for less than 3% of total revenue. However, this quarter it suddenly rose to 13%, offsetting the decline in wholesale revenue.

Considering that all three business divisions had a significant impact on the company's performance this quarter, let's take a closer look at the specific performance and future prospects of each division.

In the full year of 2023, Canada Goose added 17 new brick-and-mortar stores, a 70% increase year-over-year, bringing the total number of global stores to 68, directly driving DTC sales revenue growth. Additionally, the company attracted customers through various activities, gaining both online and offline traffic.

In the Asia-Pacific market, the company held several marketing campaigns targeting the Lunar New Year through emails and in-store promotions this quarter, driving growth in retail store and online traffic. Furthermore, the pre-New Year tourism boom in Harbin led to an increase in down jacket sales in China, resulting in a strong increase in DTC business retail sales in the Asia-Pacific region, reaching CAD 104 million, up 29.6% year-over-year.

In the North American market, the onset of warmer weather occurred later this year, allowing the company to sell down jackets for a longer period. In addition, the increase in the number of physical stores, successful new store promotions, and friends and family referral activities drove the DTC business sales in the North American market to increase by 24.2% year-over-year, reaching CAD 58 million and turning a loss into a profit.

Chart: North American Temperature Changes (°C)

At the earnings call for this quarter, company executives stated that in the future, the company will continue to promote products including down jackets, HyBridge knit jackets, Huron hoodies, and more. They have hired their first creative director, Haider, at a high cost, aiming to have best-selling items in all seasons, further expanding the customer base and maintaining returning customers. We expect the DTC business to remain the primary pillar of earnings in the next fiscal year and to continue its positive development trend.

In the fourth fiscal quarter, Canada Goose's other business segment revenue rose from CAD 20.2 million in the same period last year to CAD 45.1 million, doubling its revenue. The department's revenue primarily includes employee sales, friends and family sales, and third-party sales from the new knitwear factory.

Company executives stated that the year-over-year growth in this segment this quarter was mainly due to the successful implementation of inventory management strategies. The company increased internal sales to employees and their families, allowing them to purchase company products at discounted prices, driving a significant increase in revenue and making these employees global brand ambassadors. In the second half of the year, the company intends to expand the impact of this strategy, making other business units the second engine driving company performance growth.

Chart:  Other Department Revenue Changes (Million CAD)

Financial data shows that the fourth fiscal quarter wholesale income for Canada Goose was CAD 41.4 million, a 9% decrease year-over-year. The company's explanation for the decline in wholesale revenue is that it tightened the total supply to wholesale partners, eliminated partners that did not align with the brand's positioning, and focused product supply on luxury vendors to increase exclusivity.

Although the company provided an explanation and stated that this is the result of business adjustments and brand upgrades, we are not optimistic about the future prospects of the company's wholesale business. Aside from the CAD 3 million loss due to the reduction of wholesale partners, the company's wholesale revenue still has a gap of nearly CAD 1.1 million compared to the same quarter last year, a gap that is clearly a result of the current international luxury market downturn.

Previously, international luxury giants like Kering Group reported a revenue decline of over 10% in the first quarter of the year, and footwear companies like Nike also announced significant layoffs. Following suit, Canada Goose also announced a 17% layoff plan, and the decline in wholesale business revenue this quarter further confirms this. In the coming quarters, if the company continues to define its products as luxury items, the wholesale business faces the risk of continued decline.

The increase in sales revenue from Canada Goose's DTC business and other departments this quarter is the main factor for the substantial rise in net profits, injecting strong momentum into the increase in profitability.

(1) The company implemented a large-scale layoff plan, which, although increasing severance costs, still resulted in a slight decline of 0.5% in sales and administrative expense ratio. Additionally, company executives stated that the personnel adjustment is for better store management and brand image operations and indicated that this trend will not continue.(2) The company benefits from the Canadian government's freight and tariff concessions, with tax and freight expenses decreasing compared to the same period last year.

Overall, driven by an increase in revenue and a decrease in expense ratios, the company's operating profit achieved a year-over-year growth of 45.3%, reaching CAD 40.1 million. Additionally, the company adjusted for severance costs due to layoffs, with adjusted net profit (non-GAAP) reaching CAD 19.3 million, a year-over-year increase of 31.3%, far exceeding market expectations.

Chart:  Company Net Profit Margin (Adjusted) (%)

When analyzing the investment value of Canada Goose, we need to focus on the performance of EPS and shareholder returns.

With rapid growth in the DTC business and other departments this quarter, the company's EPS rose from CAD 0.14 in the same period last year to CAD 0.19 this quarter, an increase of over 35%.

However, as a high-end brand for warm clothing, Canada Goose's performance shows significant seasonality. In the coming quarters, as temperatures warm up, the company's profitability will inevitably be affected, and maintaining stable long-term growth in EPS will be challenging. The company needs to adjust its sales strategies and products. The recent high-cost recruitment of its first creative director and the launch of spring items like the Huron hoodie are undoubtedly attempts to empower the brand's long-term growth. If successful, the company's EPS could see stable development.

Since its IPO, Canada Goose has not conducted dividend distribution activities; instead, the company mainly relies on buybacks to achieve shareholder returns. In the 2024 fiscal year, the company repurchased approximately 7.8 million company shares.

Based on the company's current stock price of CAD 17.93, the return rate of shareholders is about 8.1%, far exceeding the U.S. risk-free interest rate level. Additionally, the company currently has a cash and cash equivalents balance of approximately CAD 145 million, which is expected to continue to provide generous shareholder returns in the next fiscal year.