Canada Goose Holdings Inc. — Form 20-F Summary
Period: Fiscal year ended March 31, 2019, with fourth-quarter results for the three months ended March 31, 2019 compared with the same quarter in 2018. The filing is an annual report, not a standalone quarterly filing. Amounts are Canadian dollars unless noted otherwise; financial statements follow IFRS.
Business context and reporting period
Canada Goose designs, manufactures and sells premium apparel through wholesale and direct-to-consumer (DTC) channels. Fiscal 2019 included the November 2018 acquisition of footwear company Baffin. DTC accounted for 51.9% of annual revenue, up from 43.1% in fiscal 2018; the business is highly seasonal, with 75.8% of fiscal 2019 revenue generated in the second and third quarters.
Key financial metrics
| Metric (CAD millions, except per-share data) | Fiscal 2019 | Fiscal 2018 | Q4 fiscal 2019 | Q4 fiscal 2018 |
|---|---|---|---|---|
| Revenue | 830.5 | 591.2 | 156.2 | 124.8 |
| Gross profit | 516.8 | 347.6 | 102.4 | 78.2 |
| Gross margin | 62.2% | 58.8% | 65.6% | 62.7% |
| Operating income | 196.7 | 138.1 | 11.7 | 14.8 |
| Net income | 143.6 | 96.1 | 9.0 | 8.1 |
| Diluted EPS | $1.28 | $0.86 | $0.08 | $0.07 |
| Adjusted EBITDA (non-IFRS) | 229.6 | 149.2 | 20.4 | 21.8 |
Annual revenue grew 40.5% (39.0% at constant currency). DTC revenue rose 69.1% to $431.3 million; wholesale revenue increased 18.7% to $399.2 million. Fiscal 2019 operating margin was 23.7%, versus 23.4%; adjusted EBITDA margin was 27.6%, versus 25.2%. Annual income tax expense was $38.9 million, with a 21.3% effective rate.
For Q4, revenue rose 25.2% (23.2% at constant currency), while operating income declined 20.9% and operating margin fell to 7.5% from 11.9%. SG&A increased 39.6% to $85.0 million and reached 54.4% of quarterly revenue, reflecting store expansion, Greater China operations, marketing and scaling costs. Net income increased to $9.0 million, including a $0.4 million income tax recovery.
Fiscal 2019 operating cash flow was $73.4 million, down from $126.2 million; the filing attributes the decline primarily to working-capital investment, higher taxes paid and higher interest paid. Investing cash outflow was $82.9 million, including $33.6 million for Baffin, capital spending and intangible-asset investment. Cash declined to $88.6 million from $95.3 million. Net working capital increased to $188.0 million from $72.1 million, mainly reflecting a $101.9 million inventory increase.
At March 31, 2019, the company had $152.4 million of term-loan principal outstanding, no revolving borrowings and $165.5 million of unused revolving capacity. Cash less term-loan principal implies net debt of approximately $63.8 million; management reported net debt leverage of 0.6 times adjusted EBITDA. Total assets were $725.4 million and shareholders’ equity was $399.1 million. Contractual obligations included $253.4 million of operating lease commitments. The filing reports no material off-balance-sheet arrangements.
Material changes versus comparable periods
- Annual revenue increased $239.3 million, supported by growth across channels and geographies. Rest of World revenue grew 60.5% and, for the first time, exceeded U.S. revenue.
- Annual gross margin expanded 340 basis points, reflecting DTC mix, pricing and efficiencies, partly offset by higher manufacturing labour costs. DTC produced 75.3% gross margin versus 48.1% for wholesale.
- Annual SG&A rose 51.0% to $302.1 million, faster than revenue, due to DTC expansion, marketing, Greater China entry, headcount and IT investment, Baffin and secondary-offering costs.
- Fiscal 2019 Q4 revenue increased, but operating income and adjusted EBITDA declined as expenses grew and the quarter remained seasonally softer.
- Baffin was acquired for $35.1 million in total consideration, including $33.6 million cash and $1.5 million in shares; a further $3.0 million is payable in 2020.
Outlook, commentary, risks and unusual items
- Management plans continued global expansion, DTC growth, selective store openings, wholesale development and broader product offerings. Six additional stores were announced for fiscal 2020. No specific revenue or earnings guidance is provided.
- After year-end, lenders amended the facilities: the revolving commitment increased to $300 million, with a seasonal increase to $350 million, and maturity extended to 2024; the term-loan margin fell from LIBOR plus 4.0% to LIBOR plus 3.5%, with maturity extended to 2024.
- The company expects to adopt IFRS 16 leases in fiscal 2020. It estimated initial right-of-use assets of $130–$150 million and lease liabilities of $140–$160 million, before deferred-tax effects; additional post-transition lease balances of $55–$65 million were recorded in April 2019.
- Management and the auditor identified material weaknesses in internal control over financial reporting, including controls over revenue and receivables, inventory valuation and costing, master-data access, and information used in controls. Management deemed controls ineffective at March 31, 2019; the auditor issued an adverse opinion on internal control, while giving an unqualified opinion on the financial statements. Remediation was underway, with no assurance or timetable for completion.
- Key risks include seasonality and weather sensitivity; reliance on premium discretionary apparel, suppliers and wholesale partners; inventory forecasting; execution of DTC and Greater China expansion; foreign exchange, raw-material, labour and interest-rate exposure; cyber and privacy risks; and brand, animal-welfare and counterfeit-related risks.
- The company reported no material legal proceedings pending and does not expect to pay dividends in the foreseeable future. Its dual-class shares concentrate voting power: multiple-voting shareholders held about 90% of voting power at March 31, 2019.
Important facts for investors to verify
- Whether revenue, receivable and inventory control weaknesses are remediated and operating effectively, and whether the new ERP controls address the cited deficiencies.
- Inventory quality, sell-through and markdown exposure following the $101.9 million annual inventory increase.
- Whether DTC growth and planned store openings generate returns sufficient to offset higher fixed costs and SG&A.
- The cash-flow and earnings effects of IFRS 16 lease adoption, the amended debt terms and the Baffin acquisition.
- How non-IFRS measures, including adjusted EBITDA and net debt, reconcile to IFRS results and compare with peers.
- Current voting control, share count and any repurchases under the announced normal course issuer bid.