Canada Goose Holdings Inc. — FY2018 Form 20-F
Reporting period: Fiscal year ended March 31, 2018; the filing also reports the three months ended March 31, 2018 (the fiscal fourth quarter). The requested “2017 Q4” is not a separate reporting period in this annual filing. Financial statements are audited and prepared under IFRS in Canadian dollars (CAD), unless noted otherwise.
Business context
Canada Goose designs, manufactures, distributes and sells premium outerwear, knitwear and accessories through wholesale and direct-to-consumer (DTC) channels. At year-end, it sold in 38 countries through approximately 2,200 wholesale distribution points, 12 e-commerce sites and six company-operated retail stores. Fiscal 2018 growth included new stores, expanded e-commerce, and a larger DTC contribution.
Key financial metrics
| CAD millions, except per-share data | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | 591.2 | 403.8 | +46.4% |
| Gross profit / margin | 347.6 / 58.8% | 212.1 / 52.5% | Margin +6.3 points |
| Operating income / margin | 138.1 / 23.4% | 40.5 / 10.0% | +97.6 |
| Net income | 96.1 | 21.6 | +74.4 |
| Diluted EPS | $0.86 | $0.21 | +$0.65 |
| Operating cash flow | 126.2 | 39.3 | +86.9 |
| Investing cash flow | (34.4) | (27.0) | — |
| Financing cash flow | (7.9) | (9.9) | — |
| Cash at year-end | 95.3 | 9.7 | +85.6 |
For the fourth quarter, revenue was CAD 124.8 million, up 144.3% year over year; gross margin was 62.7%, versus 54.4%. Operating income was CAD 14.8 million, compared with an operating loss of CAD 28.6 million, and net income was CAD 8.1 million, compared with a net loss of CAD 23.4 million.
Fiscal 2018 revenue grew in both channels: wholesale revenue was CAD 336.2 million (+16.5%) and DTC revenue was CAD 255.0 million (+121.3%). DTC reached 43.1% of total revenue, versus 28.5% in FY2017. Segment operating income was CAD 120.6 million for wholesale and CAD 134.7 million for DTC; these are segment measures and do not equal consolidated operating income because of unallocated costs.
At March 31, 2018, working capital was CAD 167.4 million, total assets CAD 548.4 million and shareholders’ equity CAD 243.6 million. Term-loan principal was CAD 146.6 million (US$113.8 million); the revolver was fully repaid, with CAD 97.8 million of unused availability. The company reported net cash of CAD 51.4 million after debt and stated that cash, operating cash flows and the revolver should cover requirements for the next 12 months. No quarterly cash-flow figures are provided in the filing text.
Material changes versus comparable periods
- Annual revenue rose 46.4%, with DTC expansion the largest channel growth driver. Revenue increased across Canada, the United States and Rest of World.
- Gross margin expanded from 52.5% to 58.8%, primarily due to the greater DTC mix; operating margin rose from 10.0% to 23.4%.
- Operating cash flow increased to CAD 126.2 million. Capital spending and other investing outflows totaled CAD 34.4 million, mainly for manufacturing and distribution expansion, stores, shop-in-shops and technology.
- Inventory increased CAD 39.9 million to CAD 165.4 million. Inventory provisions for obsolescence and shrinkage were CAD 13.4 million, compared with CAD 4.9 million a year earlier.
- SG&A increased CAD 35.1 million to CAD 200.1 million, reflecting store and e-commerce expansion, headcount, marketing and public-company costs. FY2017 included one-time items, including a CAD 9.6 million Bain management-agreement termination fee and CAD 10.0 million of IPO transaction costs.
Outlook, commentary, risks and unusual items
- Plans, not formal earnings guidance: Management described continued DTC, product and geographic expansion. It planned five new stores ahead of the 2018 holiday season, including Beijing and Hong Kong, and e-commerce through Alibaba’s Tmall platform. It also expected to open a sixth manufacturing facility in Winnipeg in June 2018. The filing provides no quantified FY2019 revenue or earnings guidance.
- Seasonality: 74.2% of FY2018 revenue occurred in the second and third fiscal quarters. Management cautions that performance in peak selling periods can disproportionately affect annual results; first and fourth quarters commonly have lower or negative earnings.
- Internal controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at March 31, 2018. Material weaknesses covered revenue and related receivables/customer-master access, inventory existence and valuation/inventory-master access, and accuracy and completeness of information used in controls, including ERP-derived spreadsheets. Deloitte issued an adverse opinion on internal control; it issued an unqualified opinion on the financial statements. Management did not expect full remediation in FY2019.
- Quarterly unusual items: Fourth-quarter gross margin benefited from DTC mix but was partly offset by post-peak inventory provisions and a quality-related provision for select products. The company also noted that FY2017 fourth-quarter results were affected by products removed from sales channels, discounts and allowances, and prior-period one-time costs.
- Principal risks: Dependence on premium discretionary outerwear and seasonal demand; rapid-growth and DTC execution; inventory forecasting; key suppliers and raw-material, labour and freight costs; wholesale partner concentration and payment risk; brand, counterfeit and product-quality risks; foreign exchange and variable-rate debt; cyber/privacy and regulatory compliance; and trade-policy uncertainty. The company also disclosed no material legal proceedings pending.
- Governance and capital allocation: Multiple voting shares carry ten votes each. Bain Capital and the CEO together held approximately 95% of voting power at March 31, 2018, limiting subordinate shareholders’ influence. The board did not expect to pay dividends in the foreseeable future.
Important facts for investors to verify
- Review the audited financial statements, cash-flow detail and non-IFRS reconciliations; adjusted EBITDA was CAD 149.2 million versus IFRS operating income of CAD 138.1 million.
- Track the adequacy and trend of inventory provisions, inventory growth, and the reported select-product quality issue.
- Monitor remediation and independent testing of the material weaknesses, particularly revenue, receivables, inventory and control-data processes.
- Confirm actual store, China e-commerce and Winnipeg facility openings, and whether DTC growth sustains margins after store operating and lease costs.
- Assess debt service, revolver availability, the US-dollar term loan, currency and interest-rate hedges, and seasonal liquidity needs.
- Consider the dual-class voting structure, Bain Capital’s influence, and the absence of expected dividends when evaluating shareholder rights and returns.