Canada Goose cuts outlook after COVID disruption hits China sales

Canada Goose cuts outlook after COVID disruption hits China sales

Revenue down in third quarter

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Canada Goose Holdings Inc. reported a drop in third-quarter sales amid disruption from China lifting its zero-COVID-19 policy and a tougher macro environment in North America, causing the retailer to lower its outlook for the fiscal 2023 year.

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The luxury parka maker on Feb. 2 said it expects total revenue of between $1.18 billion and $1.2 billion for its full fiscal year instead of the $1.2 billion to $1.3 billion it forecast in November, when it had also lowered guidance from the previous quarter.

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The Toronto-based company reported revenue dropped 1.6 per cent in the third quarter ended Jan. 1 from a year earlier to $576.7 million. On a per-share basis, diluted earnings dropped nearly nine per cent to $1.28. Net income fell by almost 11 per cent to $134.9 million. Gross profit “was favourably impacted by pricing,” the company said, and edged up a bit more than half a per cent to $416.4 million. Adjusted earnings before taxes and interest decreased nearly eight per cent to $197.1 million.

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After the initial spike in China’s COVID-19 cases dampened sales, they have since increased, and chief executive Dani Reiss said the company will power through the “short-term pressures.”

“We did face challenges during a seasonally significant third quarter, the largest being mainland China, where disruptions were worse than we had anticipated, impacting our performance significantly,” he told analysts on the earnings call. “These short-term pressures will not change how we think about our business. We are and have always been building this brand for the long term.”

Here’s what you need to know:

China

China is Canada Goose’s biggest market with 16 brick-and-mortar locations — the most of any country in which the retailer has a physical presence. Throughout the pandemic, China’s zero-COVID approach to controlling the virus meant continuous lockdowns, mass testing and quarantining dampened discretionary spending in Asia’s largest economy and impacted Canada Goose’s sales.

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Late last year when the Chinese government announced it would no longer enforce its zero-COVID policy, infections and deaths spiked, forcing lockdowns in various parts of the country. Canada Goose sales in China and the Asia Pacific region dropped more than nine per cent in the third quarter to $167.6 million.

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“What we did not anticipate was the sudden reopening in early December,” Reiss said. “This led to a surge in infections, which had a significant impact on our business during what is typically our most productive trading month.”

The disruptions led to an estimated $60 million in lost revenue. Overall sales for the company came in below previous expectations of between $580 million and $660 million because of the slump in China, the retailer said.

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Reiss said consumers have returned since the reopening, with same-store traffic up 30 per cent year over year in China while Hong Kong’s traffic has tripled from last year. Same-store sales is a metric retailers use to compare sales from existing stores that have been open for more than a year and excludes sales from newly opened stores.

Company executives also said they anticipate further growth in the fourth quarter because of the Lunar New Year holiday, an important celebration for many cultures, particularly in East Asia, that involves plenty of gift-giving.

North America

In North America, Canada Goose said its sales have been impacted by the worsening macroeconomic environment. Sales in the United States grew nearly 19 per cent to $182.8 million. In Canada, sales decreased eight per cent to $109.2 million. Consumers have been pulling back on spending as higher interest rates eat into purchasing power and inflation remains high.

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The company estimated that the tough economic environment led to a sales loss of $25 million.

“In North America, there is definitely a macro impact. There’s no doubt about that,” chief financial officer Jonathan Sinclair told analysts. “What we are seeing is less conversion happening on the website. And I think we can see a natural level of hesitancy in consumers at the moment, which seems to permeate the sector, from what we can see.”

  1. Parkas at the Canada Goose factory in Toronto.

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

  2. Loblaw's social media team went on the defensive on Jan. 31, responding to criticism from disgruntled customers tweeting about the company and the end of the price freeze.

    Loblaw fights back on Twitter after end of price freeze draws criticism

Outlook

Canada Goose lowered its outlook for the fiscal 2023 year because China’s destabilizing reopening and dampened consumer spending in North America dented sales in the third quarter.

It expects adjusted earnings before interest and tax to land somewhere between $167 million to $182 million, representing a margin of 14.2 to 15.3 per cent.

In the fourth quarter, Canada Goose expects total revenue will be between $251 million and $275 million. Adjusted earnings before interest and tax are forecast between $19 million and $35 million.

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