This post updates my 7/5/18 initial post on Canada Goose ( http://discussion.fool.com/heads-up-on-an-explosive-growth-compa… ) with the release of Q1-2019 results on 8/7/2019.
CANADA GOOSE HOLDINGS, INC.
Business
Canada Goose Holdings Inc. (GOOS) design, manufacture, and sell premium outdoor apparel for men, women, youth, children, and babies. The Company’s apparel collections include various styles of parkas, jackets, shells, vests, knitwear and accessories for the fall, winter, and spring seasons.
Operating Segments
The Company classifies its business in two operating and reportable segments/channels: Wholesale and Direct-to-Consumer.
The Wholesale business comprises sales made to a mix of functional and fashionable retailers, including major luxury department stores, outdoor specialty stores, individual shops, and to international distributors.
The Direct-to-Consumer (DTC) business comprises sales through the country-specific e-commerce platforms and its Company-owned retail stores.
Seasonality
Following and analyzing quarterly financial results, reported by Canada Goose, requires fully understanding the effects of seasonality on its business operations. Here’s the company’s statement.
“We experience seasonal fluctuations in our revenue and operating results and historically have realized a significant portion of our wholesale revenue and operating income for the year during our second and third fiscal quarters and Direct-to-Consumer revenue and operating income in our third and fourth fiscal quarters. Thus, lower-than-expected net revenue in these periods could have an adverse impact on our annual operating results.
Working capital requirements typically increase during the first and second quarters of the fiscal year as inventory builds to support peak shipping and selling periods and, accordingly, typically decrease during the third and fourth quarters of the fiscal year as inventory is sold. Expenses in our Direct-to-Consumer channel are consistent over the year while revenue and related cash collections fluctuate. Borrowings on our revolving facility have historically increased over the first and second quarters, and are repaid over the balance of the fiscal year. Cash flows from operating activities are typically highest in the third and fourth quarters of the fiscal year due to reduced working capital requirements during that period and increased cash inflows from the peak selling season.”
CANADA GOOSE Q1-FY2019 RESULTS.
Dani Reiss, President & Chief Executive Officer, stated: “Our strong start to the year, in our smallest fiscal quarter, is a great leading indicator. Our products and our brand continue to resonate with people around the world, and our direct-to-consumer channel was a standout performer in the quarter. Productivity across our retail store network in this off-peak period was exceptional, reducing the loss impact of our strategic growth investments and giving us a favorable tailwind for the rest of the year.” [my emphasis in bold]
Results for Q1 2019 ending 6/30/2018 for Canada Goose show the following:
[Please note that most of the GOOS financials are based on Canadian dollars. For exceptions, I’ve indicated USD - U.S. dollars]
• Total revenue increased 58.5% YoY to $44.7 million in Q1’19 from $28.2 million for Q1’18.
• Direct-to-consumer (DTC) revenue increased 179.5% YoY to $23.2 million for Q1’19 from $8.3 million for Q1’18.
• Wholesale revenue increased 8% YoY to $21.5 million for Q1’19 from $19.9 million for Q1’18, driven by higher order volumes from existing retail partners.
• Gross profit increased 116.7% YoY to $28.6 million, a gross margin of 64.0%, for Q1’19, compared to $13.2 million, a gross margin of 46.8%, for Q1’18. The increase in gross profit and gross margin was primarily attributable to revenue growth and favorable changes in channel mix with an increased proportion of revenue from our DTC channel. As a result of our seasonality, changes that impact gross margin can have a disproportionate impact on the quarterly results when they are recorded in our off peak periods.
• DTC gross profit was $17.7 million, a gross margin of 76.3%, for Q1’19 compared to $6.2 million, a gross margin of 74.7%, for Q1’18. The increase in gross margin was primarily driven by product mix and partially offset by unfavorable foreign exchange fluctuations.
• Wholesale gross profit was $10.9 million, a gross margin of 50.7%, for Q1’19 compared to $7.0 million, a gross margin of 35.2%, for Q1’18. The increase in gross margin was primarily attributable to a different wholesale mix in the quarter compared to the same quarter last year. Favorable foreign exchange fluctuations between the purchase of raw materials and the sale of product also contributed to lower unit costs, and inventory provision movements were lower in the current period.
• SG&A expenses for Q1’18 were $45.1 million compared to $25.8 million for Q1’17. The $19.3 million or 74.8% increase was primarily attributable to increased personnel in all segments and in our corporate office to support growth, incremental costs associated with four retail stores opened in fiscal 2018, investment in IT support, increased marketing spending, professional fees and other costs of public company compliance, offset by the benefit of foreign exchange gains. SG&A expenses increased as expected as a percentage of sales from 91.5% in the first quarter of fiscal 2018 to 100.9% in fiscal 2019 , an increase of 9.4 percentage points, as a result of higher fixed operating costs in a typically low revenue quarter.
• Total operating loss was $(19.9) million in Q1’19, compared to a loss of $(14.8) million for Q1’18. Operating loss as a percentage of revenue (operating margin) for Q1’18 was 44.5% compared to 52.5% for Q1’17, an improvement of 8.0 percentage points.
• Unallocated corporate expenses were $25.9 million in Q1’19, compared to $13.4 million for Q1’18. The increase was due to SG&A growth investments including marketing, corporate headcount and IT, as well as higher professional fees and other costs relating to public company compliance.
• Unallocated depreciation and amortization was $3.4 million in Q1’19, compared to $2.2 million for Q1’18, driven by the retail store opening program.
• DTC operating income was $6.5 million, an operating margin of 28.0%, for Q1’19, compared to an operating loss of $(0.3) million for Q1’18. The shift to a positive operating margin was driven by strong retail store productivity, as well as channel gross margin expansion and a lower level of pre-opening costs.
• Wholesale operating income was $2.9 million, an operating margin of 13.5%, for Q1’19 compared to $1.1 million, an operating margin of 5.5%, for Q1’18. The increase in operating margin was driven by an increase in channel gross margin, partially offset by higher channel SG&A as a percentage of sales, due to additions to headcount and costs for sales and operations support.
• As the company typically experiences reduced or negative net income in first quarters, net income loss was $(18.7) million or $(0.17) per basic and diluted share for Q1’19, driven by the factors described above.
• Adjusted EBITDA was $(13.5) million for Q1’19, compared to $(13.6) million for Q1’18.
• Adjusted net loss was $(17.1) million, or $(0.16) per basic and diluted share for Q1’19, compared to an adjusted net loss of $(13.3) million, or $(0.12) per basic and diluted share for Q1’18.
FISCAL 2019 & LONG-TERM OUTLOOK
Canada Goose reiterates the following outlook for fiscal year 2019:
• Annual revenue growth of at least 20%
• Adjusted EBITDA margin expansion of at least 50 basis points
• Annual growth in adjusted net income per diluted share of at least 25%
Key assumptions underlying the fiscal 2019 outlook above are as follows:
• Wholesale revenue growth in the mid-single-digits on a percentage basis;
• Five new retail stores in operation by the onset of the peak winter selling season;
• Six retail stores in operation in off-peak periods in the first half of the year, compared to two in fiscal year 2018;
• SG&A growth investments in infrastructure and people including IT and the establishment of a country office in China to lead market development efforts;
• SG&A fees to operating partners on DTC sales in China;
• Capital expenditures of $65 million including investments in new retail stores, IT and manufacturing capacity;
• Weighted average diluted shares outstanding of 112.1 million;
• Effective annual tax rate approximately in-line with fiscal 2018.
Over the next three fiscal years, the Company currently expects the following:
• Average annual revenue growth of at least 20%;
• Annual adjusted EBITDA margin of at least 26% in fiscal 2021
• Average annual growth in adjusted net income per diluted share of at least 25%
I also reiterate my comment in my previous GOOS post that, given its YoY annual revenue growth of 33%. 39% and 46% for FY 2016. 2017 and 2018, respectively, the above revenue growth of at least 20% guidance is too conservative.
CORPORATE FINANCIALS
Overall, Canada Goos continues on a growth path that shows:
• Explosive rapid growth in market cap, revenue, net income, earnings and share price;
• Strong growth in all margins;
• Strong growth in ROIC;
• Strong FCF; and
• Stable capital structure.
Revenue, Net Income, EPS and Price Growth
**FY MARKET NET Diluted CLOSING**
**(Apr-Mar) CAP REVENUE Change INCOME Change EPS Change PRICE Change**
**QTR (USD $M) (CAD $ M) YoY (CAD $ M) YoY (CAD $) YoY (USD $) YoY**
**Q1 06/18 6.41 B 44.7 58.5% (18.7) (0.17) 58.85 198.0%**
**FY 2018 3.62 B 591.181 46.4% 96.055 343.9% 0.86 309.5% 33.42 109.4%**
Q4-03/18 3.62 B 124.821 144.3% 8.092 0.07 33.42 109.4%
Q3-12/17 3.38 B 265.825 27.2% 62.925 61.0% 0.57 50.0% 31.56
Q2-09/17 2.17 B 172.330 34.7% 37.122 85.4% 0.33 65.0% 20.55
Q1-06/17 2.10 B 28.205 79.7% (12.089) (0.11) 19.75
**FY 2017 1.70 B 403.777 38.8% 21.640 (18.3%) 0.21 (19.2%) 15.96**
Q4-03/17 1.70 B 51.096 21.9% (23.431) (0.23) 15.96
Q3-12/16 209.051 81.0% 39.088 82.3% 0.38 81.0%
Q2-09/16 127.935 16.6% 20.019 8.4% 0.20 11.1%
Q1-06/16 15.695 (33.8%) (14.036) (0.14)
**FY 2016 290.830 33.2% 26.485 83.6% 0.26 85.7%**
Q4-03/16 41.921 (9.202) (0.09)
Q3-12/15 115.504 21.446 0.21
Q2-09/15 109.694 18.475 0.18
Q1-06/15 23.711 (4.234) (0.04)
**FY 2015 218.414 14.425 0.14**
In just one quarter, the market cap of Canada Goose jumped 77% from $3.62 billion for the 4th quarter ending on 3/31/18 to $6.41 billion at the end of next Q1’19 on 6/30/18.
Canada Goose continues it substantial year over year growth trend in annual and quarterly revenues as the total revenue increased 58.5% YoY to $44.7 million in Q1’19 from $28.2 million for Q1’18. Direct-to-consumer (DTC) revenue increased 179.5% YoY to $23.2 million for Q1’19 from $8.3 million for Q1’18. Wholesale revenue increased 8% YoY to $21.5 million for Q1’19 from $19.9 million for Q1’18, driven by higher order volumes from existing retail partners.
As the company typically experiences reduced or negative net income in first quarters, net income loss was $(18.7) million or $(0.17) per basic and diluted share for Q1’19, driven by the factors given above in the Q1 results.
Segments
Canada Goose reports their results in two segments which are aligned with their sales channels: Wholesale and Direct-to-Consumer (DTC). They measure each reportable operating segment’s performance based on revenue and segment operating income. As of March 31, 2018 , they sell through their wholesale segment to retail partners and distributors in 38 countries. Their DTC segment includes online sales through their e-commerce sites to customers in Austria, Belgium, Canada, China, France, Germany, Ireland, Luxembourg, the Netherlands, Sweden, the U.K. and the U.S. and sales to customers from their Company-owned retail stores in Boston, Calgary, Chicago, London, New York City and Toronto.
Their wholesale segment and DTC segment represented 56.9% and 43.1% , respectively, of their total revenue, in fiscal 2018 . For fiscal 2017, their wholesale segment and DTC segment represented 71.5% and 28.5%, respectively, of their revenue, and for fiscal 2016 , their wholesale segment and DTC segment represented 88.6% and 11.4%, respectively. They expect to experience an increasing proportion of revenue from their DTC segment as they open more retail stores and expand e-commerce access in future years.
Seasonality
They experience seasonal fluctuations in their revenue and operating results and historically have realized a significant portion of their annual wholesale revenue during their second and third fiscal quarters and DTC revenue in the third and fourth fiscal quarters. They generated 74.2% , 83.5% , and 77.4% of their revenues in the second and third fiscal quarters of fiscal 2018 , fiscal 2017 and fiscal 2016, respectively. In their wholesale channel, they have visibility into expected future revenues, with a majority of orders received prior to the end of the prior fiscal year, enabling them to manufacture inventory to wholesale demand. That said, seasonal fluctuations in wholesale customer demand have shifted the delivery timing of customer orders between quarters in prior years, and can be expected to affect the quarterly pattern of wholesale revenue in future. Because of seasonal fluctuations in revenue and fixed costs associated with their business, particularly the headcount growth and premises costs associated with their expanding DTC channel, they typically experience reduced or negative net income and adjusted EBITDA in the first and fourth quarters. Working capital requirements typically increase throughout their first and second fiscal quarters as inventory builds to support their peak shipping and selling period from August to the end of the calendar year. Cash flows from operating activities are typically highest in the third and fourth quarters of the fiscal year due to the peak period for DTC and collection of receivables from revenue earlier in the year. As a result of their seasonality, changes that impact gross margin and adjusted EBITDA can have a disproportionate impact on the quarterly results when they are recorded in our off-peak periods.
Margins
**MARGINS GROSS OPERATING PROFIT**
Q1'19-6/18 63.9% -44.5% -41.8%
vs.
Q1’18-6/17 46.8% -52.5% -42.9%
FY 2018-3/18 57.2% 23.4% 16.3%
FY 2017-3/17 50.9% 10.0% 5.4%
FY 2016-3/16 48.5% 14.1% 9.1%
FY 2015-3/15 40.6% 12.2% 6.6%
Gross profit increased 116.7% YoY to $28.6 million, a gross margin of 64.0%, for Q1’19, compared to $13.2 million, a gross margin of 46.8%, for Q1’18. The increase in gross profit and gross margin was primarily attributable to revenue growth and favorable changes in channel mix with an increased proportion of revenue from our DTC channel. As a result of our seasonality, changes that impact gross margin can have a disproportionate impact on the quarterly results when they are recorded in our off peak periods.
DTC gross profit was $17.7 million, a gross margin of 76.3%, for Q1’19 compared to $6.2 million, a gross margin of 74.7%, for Q1’18. The increase in gross margin was primarily driven by product mix and partially offset by unfavorable foreign exchange fluctuations.
Wholesale gross profit was $10.9 million, a gross margin of 50.7%, for Q1’19 compared to $7.0 million, a gross margin of 35.2%, for Q1’18. The increase in gross margin was primarily attributable to a different wholesale mix in the quarter compared to the same quarter last year. Favorable foreign exchange fluctuations between the purchase of raw materials and the sale of product also contributed to lower unit costs, and inventory provision movements were lower in the current period.
Total operating loss was $(19.9) million in Q1’19, compared to a loss of $(14.8) million for Q1’18. Operating loss as a percentage of revenue (operating margin) for Q1’18 was 44.5% compared to 52.5% for Q1’17, an improvement of 8.0 percentage points.
Free Cash Flow
**GOOS FCF**
**($ M)**
TTM 34.6
Q1’19 (121.45)
vs.
Q1’18 (65.36)
FY 2018-3/18 71.47
FY 2017-3/17 9.76
FY 2016-3/16 (21.39)
FY 2015-3/15 (0.83)
===========================================
Capital Structure
Canada Goose has maintained a stable capital structure. My only comment is that I prefer debt/equity less than 40%. Current debt/equity ratio requires investor vigilance.
**CAPITAL STRUCTURE GOOS**
**Q1’19 ending 6/29/2018 (CAD $ M)**
Cash & cash equivalents 14.6 M
Working Capital 212.3 M
Current Ratio 3.24
LT Debt (mrq) 140.4 M
Total Stockholders’ Equity 225.8 M
LT Debt/Stockholders’ Equity 62.2%
LT Debt/Capitalization 38.3%
==========================================
CURRENT FINANCIAL STATUS
**GOOS**
MARKET CAP $ 6.04 B
Employees 2,700
52-WK HIGH 68.75
PRICE 8/9/18 55.06
52-WK LOW 16.96
52-Wk Price Change 182.6%
Y-T-D Price Change 74.5%
EV/EBITDA (mrq) 59.33
P/E 85.23
EV/Sales (ttm) 14.81
P/S (ttm) 13.61
Over the recent 52-week period, the GOOS share price has substantially increased by 182.6%. The following Big Chart shows Canda Goose (GOOS) superbly outperforming the S&P 500 as well as favorites held by many investors here, i.e., Nutanix (NTNX), Shopify (SHOP), Square (SQ) and Twilio (TWLO).
http://bigcharts.marketwatch.com/advchart/frames/frames.asp?..
GOOS share price is up 88% Y-T-D. Here’s the Y-T-D performance where GOOS is performing well among the aforementioned board favorites, except for TWLO which lately is in a league of its own:
http://bigcharts.marketwatch.com/advchart/frames/frames.asp?..
Explosive growth in stock price, in turn, has caused increases in EV/EBITDA, P/E, EV/Revenue and P/S.
CORPORATE MANAGEMENT
In my initial GOOS post, I mentioned that Canada Goose was founded in 1957, but neglected to mention that current President and CEO Dani Reiss is the grandson of Samuel Tick, a Polish Jewish immigrant who founded Metro Sportwear Ltd. (the precursor to Canada Goose) which specialized in woolen vests, raincoats and snowmobile suits. Reiss’ father served as CEO from 1982 to 2000 and rebranded the company as Snow Goose that designed cold weather jackets and parkas. Dani Reiss decided to join the family business in 1997 and learned the business by working in every area of the company’s factory and traveling with company sales managers on visits to apparel buyers in Europe, where he recognized that European customers associated the product with idealized images of the Canadian Wilderness that later encouraged him to change the company’s name to Canada Goose. In 2001, at age 27, Dani Reiss became President and CEO and decided to continue to manufacture their product in Canada, while others in the North American apparel industry moved their manufacturing to Asia to increase profit margins. Under his leadership, Canada Goose has become known as a “Made in Canada” champion. Reiss is also a member of the Board of Directors.
https://investor.canadagoose.com/corporate-governance/defaul…
On December 10, 2013, Canada Goose, one of the world’s leading manufacturers of extreme weather outerwear, announced the completion of a definitive agreement to sell a majority stake in the company to Bain Capital Private Equity, a leading global private investment firm. Dani Reiss would remain President and CEO and continue to own a significant minority stake in the company. Financial terms of the private transaction were not disclosed.
On 3/16/2017 Bain took Canada Goose Holdings Inc. public.
With Bain Capital and Dani Reiss controlling 58,315,708 (70.0%) and 24,992,446 (30.0%) multiple voting shares respectively, on 6/14/2017, Canada Goose Holdings Inc. filed a short form base PREP prospectus for a secondary offering of 12,500,000 subordinate voting shares by Bain Capital, Dani Reiss and certain members of the company management. Based on the closing price of CDN $29.63 on June 13, 2017, the offering is valued at $370.4 million. The selling shareholders have granted underwriters an over-allotment option for 1,875,000 additional subordinate shares. If the option were to be exercised in full, the selling shareholders would received additional $55.6 million in proceeds.
On 6/20/2018, Canada Goose Holdings Inc. announced that certain of its shareholders intend to offer for sale 10,000,000 subordinate voting shares by way of secondary offering with price to be announced. Bain Capital funds, Dani Reiss (President & CEO) and John Black (CFO) are selling 8.4 million, 1.5 million and 100,000 shares respectively. Upon closing of the offering, Bain Capital and Reiss continue to own 39,363,742 and 23,130,334 multiple voting shares, representing voting control of 59.83% and 32.88% respectively.
SUMMARY
Canada Goose is a LTBH investment in my family’s portfolios as this company continues to fire and accelerate all cylinders on an explosive growth-oriented course. It has (a) a top-notch business plan that is easy to understand and is operating in the black, (b) highly competent management, (c) a strong balance sheet, (d) a stable capital structure, and (e) strong growth in revenue, earnings, margins, FCF and ROIC among other considerations, that enable Canada Goose to substantially outperform the S&P 500. So as one of my all-time favorites Janis Joplin soulfully sang, “Get it while you can,” I added to our GOOS holdings when the share price pulled back prior to the Q1 release.
Q1’19 results for an off-peak period are not only outstanding/superb, but also give a favorable tailwind for the rest of the year.
As always, conduct your own due diligence and decision-making.
Regards,
Ray