Canada Goose Holdings Inc. — Form 20-F Summary
Reporting period: Fiscal 2020, the 52 weeks ended March 29, 2020; the filing also reports the 13-week fourth quarter ended March 29, 2020. Comparative fourth-quarter results are for the three months ended March 31, 2019, so the periods differ by one day. Financial statements are prepared under IFRS and presented in Canadian dollars (C$), unless noted otherwise.
Business context
Canada Goose designs, manufactures, distributes and sells performance luxury apparel through direct-to-consumer (DTC) e-commerce and stores, and wholesale partners and distributors. At year-end it operated 20 retail stores and e-commerce in 13 national markets; products were distributed in 47 countries. DTC generated 54.8% of fiscal 2020 revenue. The business is highly seasonal, with 77.9% of annual revenue generated in the second and third fiscal quarters combined.
Financial performance
| C$ millions, except per-share data | FY2020 | FY2019 | Q4 FY2020 | Q4 FY2019 |
|---|---|---|---|---|
| Revenue | 958.1 | 830.5 | 140.9 | 156.2 |
| Gross profit | 593.3 | 516.8 | 93.6 | 102.4 |
| Gross margin | 61.9% | 62.2% | 66.4% | 65.6% |
| Operating income (loss) | 192.1 | 196.7 | (17.2) | 11.7 |
| Net income | 151.7 | 143.6 | 2.5 | 9.0 |
| Diluted EPS | C$1.36 | C$1.28 | C$0.02 | C$0.08 |
| Adjusted EBIT (non-IFRS) | 207.4 | 206.9 | (9.7) | 13.0 |
Fiscal 2020 revenue increased 15.4% (15.9% constant currency). DTC revenue rose 21.7% to C$525.0 million, while wholesale revenue rose 7.4% to C$424.0 million. Asia revenue increased 78.3% to C$199.9 million, reflecting Greater China expansion and new stores. Annual operating margin declined to 20.1% from 23.7%; adjusted EBIT margin fell to 21.6% from 24.9%. Net income nevertheless increased 5.6%, helped by a C$23.1 million deferred tax benefit related to Swiss tax reform; the effective tax rate was 7.3% versus 21.3%.
Fourth-quarter revenue fell 9.8% (8.8% constant currency), reflecting COVID-19-related closures, reduced traffic and tourism, and lower wholesale shipments. Gross margin increased 80 basis points, largely from channel and product mix, but the quarter recorded an operating loss. A C$24.2 million income-tax recovery contributed to reported net income of C$2.5 million despite a C$21.7 million pre-tax loss.
Cash flow, liquidity and debt
- Fiscal 2020 operating cash flow was C$62.5 million, down from C$73.4 million. Investing cash outflow was C$62.3 million; financing cash outflow was C$58.7 million, including C$38.7 million for share repurchases and C$24.7 million of lease-liability principal payments.
- Free operating cash flow, a non-IFRS measure, was negative C$24.5 million, compared with positive C$24.1 million in FY2019. Cash declined to C$31.7 million from C$88.6 million.
- Inventory rose C$145.0 million to C$412.3 million, primarily to build a buffer ahead of moving production in-house and reducing third-party manufacturing capacity. Net working capital was C$327.1 million, versus C$188.0 million.
- At year-end, term-loan principal was C$159.3 million; there were no revolver or China short-term borrowings. Unused revolver borrowing capacity was C$226.6 million, subject to the borrowing base, with C$5.7 million of letters of credit outstanding. Lease liabilities recognized under IFRS 16 were C$227.9 million, including C$35.9 million due within one year. The company reported C$355.5 million of net debt including lease liabilities and net debt leverage of 1.3 times adjusted EBITDAR.
- The term loan bore interest at 5.10% at year-end and matured December 2024. Credit-facility covenants were met at March 29, 2020. In May 2020, the company added a C$50 million first-in, last-out revolving facility at a 2-percentage-point higher interest rate, with maturity in May 2021.
Changes, outlook and material items
- COVID-19 materially disrupted operations in the fourth quarter. North American and European retail stores and North American manufacturing facilities were temporarily closed in March 2020. As of June 2, most of those stores remained closed; the Montreal, Paris and Milan stores had reopened. Mainland China stores had resumed normal hours in April, but traffic remained below pre-pandemic levels; Hong Kong hours remained reduced.
- Eight Canadian manufacturing facilities were partially reopened in April to produce personal protective equipment for Canadian healthcare workers. Management expected significant adverse effects on first-quarter FY2021 results and potential further effects thereafter. It warned that store reopening, partner operations, tourism and discretionary spending could remain impaired. No quantified FY2021 revenue or earnings guidance is provided.
- On May 20, 2020, the company laid off 125 employees, approximately 2.5% of its workforce. Its separate disclosure also reports temporary layoffs related to closures and PPE production.
- The company adopted IFRS 16 in FY2020 without restating prior periods. The change brought lease assets and liabilities onto the balance sheet and shifted lease costs from rent expense to depreciation and interest, affecting comparisons of operating results, cash flows and leverage.
- Fiscal 2020 included C$4.6 million of identified COVID-19 costs in adjusted EBIT reconciliations, C$7.0 million of accelerated unamortized term-loan costs, and the Swiss tax-reform benefit. Management’s non-IFRS adjustments should be considered alongside IFRS results.
- Two shareholder class-action matters were disclosed: a U.S. action alleging misleading statements about inventory and product demand, and Canadian actions alleging misrepresentations related to down and fur sourcing and an alleged investigation. The company intended to defend the claims; outcomes and potential losses could not be estimated.
- Management said a material weakness disclosed for FY2019—concerning revenue and receivables, inventory, and information used in controls—was remediated by year-end FY2020. Management and Deloitte concluded internal control over financial reporting was effective as of March 29, 2020, although the auditor performed additional procedures because controls had been ineffective during part of the year.
- Management’s strategy remains global and DTC expansion, broader product offerings and greater in-house production. Execution is exposed to seasonality, consumer demand, inventory forecasting, supplier concentration, currency and input-cost volatility, store economics, brand risks and the continuing pandemic. No dividend was planned for the foreseeable future.
Important facts for investors to verify
- Subsequent quarterly disclosures on store reopenings, wholesale shipments, demand, and the pace and cost of resuming outerwear production.
- Inventory quality, sell-through and markdown exposure, given the C$412.3 million balance and substantial year-over-year build.
- Liquidity and borrowing-base availability under the revolving facilities, including use and cost of the May 2020 FILO facility and compliance with covenants.
- Cash generation and leverage trends, separating IFRS 16 lease effects from cash debt and reviewing the company’s non-IFRS reconciliations.
- Progress and financial impact of the planned reduction in third-party manufacturing, as well as store profitability and DTC investment returns.
- Developments in the shareholder litigation and any changes in reported internal-control effectiveness or inventory and revenue audit risks.