Canada Goose Holdings Inc. (GOOS) Q4 2017 Earnings Report, Transcript and Summary

Good morning. My name is Carol and I will be your conference operator today. At this time, I would like to welcome everyone to the Canada Goose Q4 and Full Year Fiscal 2017 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] At this time, I would like to turn the call over to Allison Malkin of ICR.

Good morning and thank you for joining us today. With me today are Dani Reiss, CEO; and John Black, CFO. For today’s call, Dani will begin with highlight of our fiscal year performance and then review the priorities we are focused on in fiscal 2018 and longer term. Following this, John will provide details of our financial results and outlook. After our prepared remarks, we will take your questions. Before we will begin, I would like to inform you that this call including the Q&A portion of the call include forward-looking statements about plans for our business and our fiscal 2018 and long-term outlook. Each forward-looking statement made on this call is subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statement. Additional information regarding these factors appears under the heading Cautionary Note Regarding Forward-Looking Statements and risk factors, in our annual report on Form 20-F, which will be filed with the SEC and available on our website at www.canadagoose.com and under risk factors in our final prospectus filed with the SEC on March 16, 2017 and in the earnings press release that we furnished today under the heading Cautionary Note Regarding Forward-Looking Statements. The forward-looking statements made on this call speak only as of today and we undertake no obligation to update or revise any of these statements. During this conference call, in order to provide greater transparency regarding Canada Goose’s operating performance, we refer to certain non-IFRS financial measures that involve adjustments to IFRS results. Any non-IFRS financial measures presented should not be considered to be an alternative to financial measures required by IFRS, should not be considered measures of Canada Goose’s liquidity and are unlikely to be comparable to non-IFRS financial measures provided by other companies. Any non-IFRS financial measures referenced on this call are reconciled to the most directly comparable IFRS financial measure in a table at the end of our earnings press release issued this morning and available in the Investor Relations section of our website at www.canadagoose.com. With that, I will turn the call over to Dani.

Thank you, Allison and good morning everyone, and welcome to Canada Goose’s very first earnings call. Our fourth quarter performance capped off another extremely successful year for Canada Goose. For the year, revenues were above our expectations and increased more than 40% on a constant currency basis over fiscal 2016, and adjusted earnings per diluted share were up over 43% compared to fiscal 2016. We saw growth across channels, geographies, and seasons which we believe is a strong testament to the continued and growing demand for Canada Goose products around the world. It’s also an indication of our ability to deliver best-in-class products that perform in almost every element and climate. We’re excited to continue building upon the strong momentum in fiscal 2018. I want to remind you to think about our results on a long-term basis, not quarterly as we operate a seasonal and high growth business which can have a significant impact on results quarter-to-quarter and year-to-year. Looking at our business through this lens is an important factor to interpreting our results and the health of our business. With that, we are extremely proud of several milestones that occurred during fiscal 2017. In particular, we made significant progress in strengthening and expanding our geographic footprint in both new and existing markets and across wholesale and direct-to-consumer channels. This is driven not only by the introduction of a broader product offering but also by our continued efforts to authentically and creatively tell our story around the world. We saw tremendous success and we made significant headway in the growth of our direct-to-consumer or DTC channel which includes our e-commerce sites and our company-owned retail stores. DTC ended the year at 28.6% of our total sales, up from less than 5% two years ago. We are excited to continue growing this channel. Not only has it driven higher margin expansion due to higher profitability versus wholesale, it also enables us to engage directly with customers and bring the brand to life through a rich brand experience which is presented through our own filter. Our first two retail stores, which opened ahead of the 2016 holiday season in Yorkdale Shopping Centre in Toronto and Soho in New York City far exceeded our expectations and established themselves as true retail destinations with visits from local consumers and tourists from 31 countries in the first six months. We’re looking forward to building on this momentum as we open our next retail stores. So far, we’ve announced the opening of two new retail stores, one on The Magnificent Mile in Chicago and one on Regent Street in London, England, this fall. Moving to ecommerce. Building on our early success, we’ve doubled our footprint with the launch of online stores in France and the UK in fall of 2016. Our websites received visitors from nearly every country in the world last year and overall traffic increased significantly. In fact, it increased double digits in almost every market. We also saw strong momentum in traffic coming from a much more diverse marketplace than the core cities where we have higher awareness. This year also saw us embrace our product offerings -- enhance our product offering by introducing what I believe was our best expression of spring to date, a curated collection that brought to life our philosophy of delivering both performance and style. We saw very solid sell-through of spring products highlighting the positive response from customers through our ultra lightweight down products and windwear styles. This is a strong indication that Canada Goose is a relevant brand in all seasons. We continue to elevate our core collection by introducing new silhouettes and styles in our fall winter 2016 collection including HyBridge 2.0 and other mixed material styles, which met with positive consumer response. In addition, there is continued strong momentum in lightweight down, especially in European markets, which enable a natural transition into spring product at retail. We also launched three successful collaborations with Vetements, October’s Very Own, and Opening Ceremony, to introduce exclusive new styles that leverage our iconic silhouettes and to authentically speak to a broader segment of the marketplace. Other notable highlights from this year include, continued growth in our wholesale channel across geographies with revenues up almost 14% on a constant currency basis from fiscal 2016. Even in our largest markets, Canada and United States, we continued to experience strong growth. Internationally, we experienced growths in market where we believe there is significant runway for our brand including the United Kingdom, Germany, and Russia. We are also very excited with the growth across our other international markets, which represent significant opportunity for continued expansion. In Asia, we are very pleased with our performance in Japan and Korea where we have world-class distribution partners who maximize the potential for our brand in these longstanding markets. Both partners are recognized as great brand builders and they share our vision for building awareness and a disciplined approach to managing the business for the long term. And while we’re just scratching the surface with the opportunities that we see in China, we are thrilled to see that many of our products sell quickly. We believe this clearly speaks to the demand in this part of the world. We look forward to capitalizing on increasing demand in Asia and other parts of the world in fiscal 2018 and beyond. To drive brand awareness, we continue to find authentic and creative ways to tell our stories across the globe. Part of what makes Canada Goose so special in my opinion is the authentic marketing that we have continued to deliver especially within the film and entertainment industry and with our Goose people. Again, this year, our jackets have protected countless film and TV crews from the elements as they have done so for decades. And they’ve also been seen on screen in TV shows and award winning films. Throughout the year, we also continued to leverage our Goose people as brand ambassadors, many of them took on challenging adventures in extreme conditions like Ray Zahab who faced subzero temperatures and whiteout conditions as he tracked across Baffin Island in March. As we grow and continue to build awareness, we are intently focused to improve the authenticity of a Canada Goose brand. Our DTC channel and increased digital marketing presence that are supporting our growth will help us to continue to introduce many more customers to our brand. Investment to support our future growth on operational level will continue by Canada Goose. In August 2016, we started operating our fifth manufacturing facility, located just outside of Montreal and Quebec, which added to our current capacity and significantly increases our future capacity. This investment is evidence of our leadership in helping to rebuild the Canadian apparel manufacturing infrastructure and is a testament to our commitment to making our core products on Canadian soil. We believe we are well-positioned and efficient and flexible sourcing and manufacturing base to fuel our increasing capacity needs. We also continued to enhance our supply chain and we successfully formalized and implemented our down transparency standard and fur transparency standard across our supply chain. Built on a foundation of authenticity, these comprehensive traceability programs for both fur and down enable us to further ensure our products are properly and ethically sourced and the materials are full traceable throughout supply chain. Finally, we would not be the company we are today without the talent that we have. And we are excited about the great team members that have joined as recently. Over the past year, we have hired over 500 new employees, mostly in our manufacturing arms to help sustain on credible growth momentum; as well, we hired industry veteran, Lee Turlington as our Chief Product Officer and Jackie Poriadjian-Asch as our Chief Marketing Officer. Kevin Spreekmeester, our Chief Brand Officer, will be retiring in early June, and I sincerely want to thank him for his contributions, especially in helping us build our brand and our culture over the last years, last eight years at Canada Goose. As we look ahead, we will continue to apply stringent discipline with regards to our growth. Key priorities for fiscal 2018 include as follows: Continuing to pursue global growth as we strengthen our presence in existing and less developed markets; diversifying our continued through our continued ecommerce and DTC rollout; enhancing and expanding our product offering to strengthen brand loyalty, drive market penetration and expanded geographic appeal; and driving higher margins through operational excellence. With regards to the top line, within wholesale, we plan to expand and deepen our product offering at current points of distribution and maximize relationships with our retail partners by implementing more shop in shops in strategic locations. Additionally, we expect to expand into new doors and geographies while building upon the success of spring. Our focus remains on unimpeachable execution and pursuing continue growth. With regards to our direct to consumer channel, we are on track to introduce our ecommerce platform to serve the new countries in Europe and target opening three retail locations including Chicago and London, as I mentioned earlier. While we expect every store we open will be profitable, we do not believe it is responsible to expect these new stores replicate the exceptional performance of our first two stores. Of course, it goes without saying that we expect a strong contribution from new stores. The jacket sold in our DTC channel provides us two to four times more margin than a jacket sold in wholesale. Our work in our DTC channel will continue to focus on customer engagement and developing an immersive and seamless in-store experience for our guests. Operationally, we expect to continue to scale manufacturing our existing facilities, seek opportunities to optimize our manufacturing mix, innovate and investment in technology to improve efficiency and output in order to support our future growth. Overall, Canada Goose performed at a very high level in fiscal 2017. We elevated the Canada Goose brand with consumers around the world, maintaining our heritage, delivering high-quality, technically innovative product that consumers can rely on. We are proud of our accomplishments this year, which also marks the 60th anniversary for the company. We see significant opportunity to continue our favorable momentum and believe the growing power of Canada Goose brand. Coupled with our disciplined approach to growth, that will enable us to report consistent, sustained momentum in sales and earnings and increase value for Canada Goose shareholders. I want to thank each and every employee for the contribution to making fiscal 2017 such a strong and memorable year for the company. With that, I will now turn it over to John to review our financial results in more detail.

Thank you, Dani. Good morning everyone and thank you for joining us. Financial performance was very strong in fiscal 2017, and I’m excited to be sharing the details with you. We executed on a number key initiatives and performance improved significantly across all financial metrics. And we were also very pleased with the fourth quarter performance. As Dani mentioned, this year, we excelled in a number of our strategic priorities. Results in the direct-to-consumer or DTC sales channel delivered strong top-line and margin contribution. The 2017 spring collection launched in Q4 and has been the most successful to-date. Margins expanded on the strength of our DTC performance. Before I review the detailed financial results, I would like to take a few moments to point out some of the important characteristics regarding our business and how we manage these items. We believe that this will be helpful to you and to develop your earnings models. As you know, a significant portion of our business is in a wholesale channel. We closed our order book in the first quarter for shipments that began to take place later in the year. While orders are non-binding, our order book gives us visibility into the annual wholesale revenue. In fact, at this point in the fiscal year, we have a great line of sight into our wholesale business, which last year represented 70% of our total sales. In addition, our business’s seasonality results in a greater percentage of our revenue and earnings occurring in the third -- second and third fiscal quarters. We’ve just finished our fourth quarter and are in the midst of our first quarter fiscal 2018, both of these periods representing a smaller percentage of our volume than fiscal year 2017 Q2 and Q3. Q4 fiscal 2017 revenues accounted for 13% of total revenues for the year while Q1 of fiscal 2017 represented 4%. Given the lower revenue base of these quarters, we experienced pressure on our profitability during these quarters, as our SG&A spending continues regardless of quarterly revenue. The last item to cover is the impact of foreign exchange. Revenues are denominated in Canadian dollars, U.S. dollars, euros and pound sterling. Shifts in sales and changes in the exchange rates relative to the Canadian dollar impact our results. To assist in understanding these impacts on our revenue, we also report revenue on a constant currency basis to isolate the impact of foreign exchange comparable periods. Now, with that explained, let me review the highlights from our fourth quarter and full fiscal results before providing our outlook for fiscal 2018. As a reminder, our results are in Canadian dollars. First, our fourth quarter fiscal 2017 highlights. Revenue increased by 21.9% to $51.1 million, up from the prior year by 27% on a constant currency basis. Direct-to-consumer revenue grew from $13.2 million to $36.5 million as our retail stores continued to perform well throughout the winter months. Wholesale revenue dropped by $14 million to $14.6 million in the fourth quarter due to the shift in timing of sales to Q3 as compared with financial 2016 when shipments took place in Q4. As Dani noted, the 2017 spring collection launched during the quarter and was very well received. Consolidated gross margin expanded by 950 basis points to 54.4% from 44.9%, again driven by outperformance in our direct-to-consumer channel, which saw gross margins expand by 400 basis points to 75.8%, consistent with the first three quarters of fiscal 2017. Our wholesale channel saw gross margins contract to 0.9%. The year-over-year decrease in Q4 reflects three factors. First, deleverage on our lower sales base, driven by timing shift in sales into Q3 this year from Q4 in fiscal 2016; second, an increase in cost of sales due to a raw material cost adjustment; and third, to a lesser extent, a mix of lower margin products including spring, which given its smaller quantities had not yet reached scale to leverage fixed cost. On an annual basis, our wholesale gross margin was in line with our expectations. Selling, general and admin expenses were $54.7 million, up $27.4 million from the fourth quarter of fiscal 2016. This quarter, SG&A costs included total charges of $22.8 million primarily related to a number of onetime costs associated with the IPO and that we do not expect to recur. Adjusted EBITDA loss was $11.4 million compared to $7.6 million loss in the fourth quarter of fiscal 2016. During Q3 of fiscal 2017, we had a recapitalization transaction which has increased our debt. Average borrowings in the fourth quarter were $239.6 million compared to $147.4 million in the same quarter of fiscal 2016. The increase in borrowings had a corresponding impact to interest expense. As you know, we repaid $100 million in total debt with the IPO proceeds. This paydown resulted in the gain on revaluation of the term loan of $5.9 million and accelerated deferred financing chargers of $2.1 million. These combined effects resulted in decreased interest expense for the quarter of $0.6 million compared to the same quarter in fiscal 2016. On an IFRS basis for the quarter, we reported net loss of $23.4 million or $0.23 per diluted share based on a 103.2 million weighted average diluted shares compared to last year’s reported loss for the fourth quarter of $9.2 million or $0.09 per diluted share on a 102 million weighted average diluted shares. On an adjusted basis, we reported loss per diluted share of $0.15 for the quarter compared to $0.08 for the same quarter in fiscal 2016. Now for our full year performance. Revenue increased by 38.8% to $403 million versus prior year of 41.6% on a constant currency basis, driven by strong performance in our direct-to-consumer channel which saw revenues increase from $82.2 million to $115.2 million compared to the prior year. This was on the strength of opening our two new retail stores, continued success in our Canadian and U.S. ecommerce sites and two new ecommerce sites. Our wholesale revenue channel performed well within our expectations, delivering a revenue increase of 11.9% to $288 million or 13.7% on a constant currency basis. Gross margin expanded 240 basis points to 52.5% from 50.1%, again driven by strong performance in our DTC channel, which saw gross margins expand by 220 basis points to 75.5% and global price increases. These benefits were somewhat offset by changing sales mix towards Canadian dollar sales, weak pound sterling versus the Canadian dollar, and inventory adjustments recorded throughout the year. Our wholesale channel yielded gross margin of 43.3%, a modest decline from fiscal 2016. The decline in segment gross margin of 380 basis points was a result of the factors I’ve already described. Selling, general and administrative expenses as a percentage of net revenue were 40.8% compared to 34.4% last year. Most of the increase was attributable to significant one-time expenses related to the IPO, including termination of the management agreement, stock compensation, and the impact of direct-to-consumer expansion. Direct-to-consumer sales carry more SG&A costs in the form rent and personnel costs for retail stores, shipping, logistics and ecommerce sales and other factors. However, this is more than offset by the margin benefit we gained. In fiscal 2017, this was particularly evident given the retail stores opened in our most profitable quarter and did not operate in our lower seasons. We also invested in new staff to support our business across the globe. Adjusted EBITDA increased by 49.2% to $81 million from $54.3 million at fiscal 2016, an important point to remember was that this year’s profitability had the benefit of two stores in only opened during the peak season and did not carry the full SG&A cost over the year. We expect this to normalize over time as these stores are operational and incurring expenses for a full year. Interest expense for the year was $10 million versus $8 million last year. Given our successful refinancing of the revolving credit facility, growth in the business, recapitalization and repayments of debt, fiscal 2017 interest expense is not very comparable to 2016. Included in this year’s expense is higher expense due to increased average borrowings, a gain on the revaluation of the term loan due to the IPO repayment and underlying interest rate changes, interest payments of $3.9 million on subordinated debt that was extinguished in December and the write-off of deferred financing costs for various refinancings during the year. The effective tax rate was approximately 30% in fiscal 2017 while our blended statutory rate was 25%. The increase in the year related primarily to non-deductible expenses for stock compensation. As a reminder, we add this back to adjusted net income. In fiscal 2016, we had a $3.5 million onetime tax benefit related to establishing our international headquarters that yielded an effective tax rate of 19%. For fiscal 2017, we reported net income of $21.6 million compared to last year’s reported net income of $26.5 million. In those respective periods, diluted earnings per share on an IFRS basis were $0.21 and $0.26, respectively. Adjusted net income was $44.1 million compared to $30.1 million in fiscal 2016. We view adjusted net income per share as a useful metric to evaluate our business, given the activities that occurred during the year. Since the IPO occurred late in the year, we also believe it is helpful to provide a comparable share count on a pro forma basis as if the IPO happened at the beginning of fiscal year 2017. On an adjusted basis, we reported $0.41 pro forma diluted share for fiscal 2017 versus $0.30 per diluted share in fiscal 2016. Now, turning to the balance sheet. At the end of the fiscal year, our balance sheet was well-positioned ahead of the peak selling season. Inventory levels are low, given top line growth and following a successful winter selling season. With our wholesale order book now closed, production is ramped up on schedule ahead of planned shipments commencing in Q2 of fiscal 2018. For the year, capital expenditures were little more than $28 million, primarily driven by investments in our two existing retail stores, payments made for lease rights in our London retail store, which we expect to open in fiscal 2018, and other corporate investments to support our global growth initiatives. Total debt, net of cash was $142 million at the end of fiscal 2017, compared to $132 million at the end of fiscal 2016, reflecting the change in capital structure from both the recapitalization in December 2016 and our IPO in March of 2017. We are comfortable with the flexibility a revolving credit facility gives us at the start of the year -- the start of the year with approximately $7 million outstanding under this facility. Overall, we are extremely pleased with the performance in fiscal 2017. Now, turning to guidance for fiscal 2018 and beyond. Our strategy is being executed over the long-term and we evaluate our results over that period. As the business goes rapidly and shifts towards direct-to-consumer, new store openings, launches of new products and product lines and the expansion of our geographic footprint will impact annual results. Accordingly, we will be providing guidance for these trends we expect over the next three years. Annual revenue growth on a percentage basis in the mid to high teens, adjusted EBITDA margins expanding in excess of 75 basis points per year, growth in adjusted net income per fully diluted share by approximately 20% for year. Keep in mind, these projections are an average over a three-year period and annual results may deviate as trends in the business occur at different rates, during different time periods, in particular, annualizing new store expansion and investment in support of future growth. For fiscal 2018, we expect to be consistent with our long-term trends, revenue growth on a percentage basis in the mid to high teens; adjusted EBITDA margins flat to modestly expanding in fiscal 2018, following an exceptional 2017. We expect adjusted EBITDA margins to expand an average of greater than 75 basis points per year over the next three year projection period from fiscal 2016 through fiscal 2018. We also expect an average of 75 basis points per year expansion. Adjusted net income per diluted share going in line with our three-year projections when compared to adjusted net income pro forma diluted share in fiscal 2017. Over the two-year period from fiscal 2016 through fiscal 2018 adjusted net income per diluted share is expected to grow at an average of 28.1% per year. In addition, our projections are based on weighted average fully diluted share count for fiscal 2018 of 110.03 million shares. Overall, we’re very excited about the opportunities ahead in fiscal 2018. Now, I would like to turn it back to Dani for some closing remarks.

Thanks John. In summary, we are extremely pleased with the performance this year and the progress we’ve made on our strategy and our exciting outlook for fiscal 2018. I am personally very proud of Canada Goose and all of our teams that have made this company what it is today and what we expect it to be in the future. We continue to have high expectations for future as we build an enduring legacy. We’re really excited to be able to share our story with the public markets and deliver value to our shareholders while continuing to deliver our authentic product to our growing customer base. And with that, I’d like to turn it over to the operator to begin the Q&A portion of this call. Operator?

Thank you. [Operator Instructions] And our first question today comes from Ike Boruchow from Wells Fargo. Please go ahead.

Hi. Good morning everyone and congrats on a great quarter out of the gate. I guess my question is, could you maybe help us help explain the wholesale gross margin in the quarter a little bit more? I think maybe bucket those three factors that you mentioned in terms of the impacts. And then to that point, if it’s possible, could you help tell us what the impact on the sales and gross profit was from the timing shift that did impact Q3, just so we can get a sense of normalizing that when we look at the quarter?

Sure. I’ll talk about the wholesale gross margin. There is a couple of questions in there, Ike. So, first of all, the wholesale gross margin for the year was 43.3% and that’s within our expected range of 43% to 47%. There were few adjustments taking place over the year and in the quarter that affected that. In particular, in the fourth quarter, we had an adjustment for inventory costs of $3.2 million that resulted from costing, from costing adjustments we made to our provisions. So, on an annualized basis -- and we would not expect that adjustment to recur. So, on an annualized basis, if our range is from 43% to 47%, we’d expect that to come in the midpoint of that range in the future year. Looking at the fourth quarter is something that is bit difficult, because it only represented 13% of our total volume for the year. So, when you look at that, it tends to distort any type of adjustment.

Our next question comes from Lindsay Drucker Mann from Goldman Sachs. Please go ahead.

Thanks. Good morning, everyone. I was hoping now that you mentioned the fall order book is closed, can you talk to what your order book indicates sales will be for the wholesale business across your fiscal -- I guess FY18 or even just the fall portion of it?

Sure. So, the order book is closed, Lindsay and the impact is included in our guidance. So, the order book is basically where we’d expect it to be and we’re on our way to producing towards it.

Yes, I’m really happy with it. We do not really think this is -- that number is quite -- I’m really happy with where fall order book is coming in.

Maybe just to follow-up. Could you talk about -- you mentioned a couple of times how pleased you are with the lighter weight styles. Can you talk about, in your fall order book, what proportion of orders are lightweight for the upcoming fall season versus what they were last year, anything you could do to dimensionalize how much momentum is behind that specific category?

We don’t break down our order book by different product category, but certainly our lighter weight categories are growing and all of our categories are growing but lightweight is growing at an even faster rate. So, we’re very pleased with the way our product assortment is coming in.

Our next question comes from Christian Buss from Credit Suisse. Please go ahead.

You’ve now had about nine months into your retail stores being opened, wondering if you could provide some perspective of how you’re thinking of the profitability and the potential contribution from those retail stores that’s changed given what you’ve seen so far?

Christian, the profitability of the first two stores we opened in Soho and Toronto were exceptional. And although we expect things to continue to go very well, we don’t think it’s prudent to forecast on that basis going forward. So, we’re expecting the margin to continue to improve as we grow. In addition, the direct-to-consumer channel had about 28% of our total volume, that’s up from I think about 19%; it was 17% the year before. We expect that to get closer to equal with the direct -- the wholesale channel over time.

That’s encouraging. And could you talk about e-commerce geography rollout this year, as a follow-up; where are you expecting to launch, how many regions?

We’re planning to launch ecomm in seven more markets in Europe this year. And as I mentioned earlier, we received visitors through our ecommerce sites from almost every country in the world this year. So, it’s a growing number of people, traffic volume is growing, and we’re very, very encouraged by it. To be specific, the seven new markets that we’re opening are Germany, Sweden, Netherlands, Ireland, Belgium, Luxemburg, and Austria.

Our next question comes from Brian Tunick from Royal Bank of Canada. Please go ahead.

Thanks. I’ll add my congrats as well, guys. Just curious on some of the metrics or how we should think about some wholesale growth views for the coming year. I guess you mentioned, new doors and also geographic mix. So, just curious where in the world the expansion is coming from beyond sort of what we already saw in the filings, new doors, is that high-end department store and sporting goods or are there other retailers that you guys are looking at? And then, the second piece of that is what kind of pricing increases are you assuming in your wholesale business for the coming year? Thank you.

Our wholesale growth next year is coming primarily from same-store sales, and we’re growing within our existing footprints with our established partners; in some cases, we’re opening new doors. We don’t get into, as you know, door counts or how many doors we have and what parts of world across geographies. But we’re certainly expanding our wholesale footprint with world-class partners. As per our plan and it’s going really, really well, we remain a shining star in the wholesale landscape with all of our partners, and we expect to see that continue.

And then, regarding price increases assumed in the model, and also any comments on what kind of lift you’re seeing in shop-in-shops that you’ve done the last year? Thank you.

Shop-in-shops are certainly brand enhancing and Canada Goose is a destination and consumers from all over the world will come and gravitate towards the enhanced brand experience that shop-in-shop provides. In terms of pricing, I’ll let John answer that question.

So, for competitive reasons, we’re not going down to the level of price increases, we don’t want that sort of information disclosed.

Our next question comes from John Morris from BMO Capital Markets. Please go ahead.

Thanks. Hey, good morning Dani and good morning, John. Congratulations on a good start here. I think question is sort of really more for John at this point on SG&A outlook. We’ve got some investment initiatives on tap. I think we’ve got the new logistic center. Maybe if you can just -- as well as, I guess the websites that you’re starting up that you mentioned already internationally. Just give us the flavor of what are other investment initiatives are on tap and what kind of growth rate and SG&A dollars we should be thinking about for next year?

So, first with regards to the investments that are taking place, we talked about opening new stores and new websites. In addition, there is general IT infrastructure and manufacturing infrastructures that we continue to invest in. Much of that is a capital expenditure, and we’ve talked before about a range of 6% to 8% of our CapEx being 6% to 8% of our total revenue. Regarding SG&A, we also talked about before that the way our income statement lays it out is that for the DTC channel, many of the direct cost of DTC occur in SG&A. So, those will continue to grow in proportion to the new stores and general growth in the DTC channel. So, we expect that to increase. The other point to consider when you’re modeling it is that these stores will have the bulk of their revenue occurring in the winter months and yet these SG&A costs will be consistent throughout the year. Overall, DTC margins and EBITDA margins will increase as a result of this but much of the spending for the DTC channel occurs in the SG&A line.

Now, would you say that SG&A dollar increase next year would be higher or lower than what we saw this year for total company?

I think, SG&A dollar increase next year will be higher.

Your next question comes from Camilo Lyon from Canaccord Genuity. Please go ahead.

Good morning, guys. I’ll also add my congrats on a nice quarter. I wanted to focus a little bit on the spring line, if you could. Could you tell us how much that contributed to the fiscal fourth quarter? Was that predominantly driven by growth or by your DTC channel or is it also balanced with good sell-throughs in your wholesale channel? And if you could just articulate what the appetite is by your wholesale partners to take on more of these non-core categories early on?

We were extremely pleased with how spring did for this season. And spring -- we don’t break down sales in terms of what our sell-through was or what percentage it was. Spring is still a smaller category than our -- smaller part of our business, within our overall business, down business. But, I’d say that every category is doing well. I’d say that for sure, consumers are gravitating towards -- the collection from it was -- absolutely was the best expression [ph] of spring, yet the spring [Indiscernible] that Canada Goose produced, and I think the consumer responded really well to that and we expect to see that continue in following spring seasons.

Was it predominantly constituted in your DTC channel?

That’s across channel.

It was across channel. It was certainly in our DTC channel and also in our wholesale channels and also multiple geographies, in different countries around the world it’s done well. It’s done well across all channels and across all geographies.

And that success I would assume is your wholesale partner is more confident than bigger proportion of that spring assortment going forward?

That would make sense, yes.

Our next question comes from Megan Annette [ph] from TD Securities.

Thank you. Good morning. With respect to the three-year outlook, can you provide any color just on the international growth that’s factored in there, particularly with respect to Asia? And then, just as a follow-up, can you talk to the outlook for international wholesale growth, relative to the DTC?

Pardon?

With respect to the three-year outlook, can you give us any color on the international growth that’s factored in there and focus on Asia in particular? And then, is there any color you can give on the international wholesale growth versus DTC?

Yes, sure. I think that on three-year outlook, I think that the way we look at Asia with regards to our three-year outlook is that it’s still very much in its infancy and we’re currently working on -- especially China, we’re working on our market entry strategy for the Chinese market. At this point, we’re in the Chinese market in some wholesale doors and there is very large opportunity for us in that marketplace, and when we have anything to announce about that, we’ll make that announcement. Europe is -- we don’t break out geographies specifically in terms of sales. John, do you have anything to add to that?

I’ll just add regarding your question about DTC growth. So, DTC has grown from 11% to 28% last year -- year before last, rather, to 28% this year. And as we continue to open more stores and just generally penetrate the DTC market more, we expect that 28% to come closer to even with wholesale over time, and that’s across all channels and all geographies.

Yes. I’ll add one last thing to that. We are very excited about our opportunity across all geographies, existing geographies, white space that continues to remain in United States; as I mentioned, huge markets that we have in China, markets like Russia and Germany, we still have tremendous runway for us, both in our wholesale and our direct-to-consumer channels.

Our next question comes from Mark Petrie from CIBC. Please go ahead.

I just wanted to ask about how the next two retail stores that you guys are going to be opening will be tweaked from the first two. And I guess sort of broader picture, kind of what have been your key learnings as you’ve moved into your own retail stores?

This is good question. We’ve certainly learned a lot from our retail stores. Both of our stores performed above our expectation, which is fantastic. Both of our stores, we feel reflected the ethos and the brand of Canada Goose were a reflection of the cities in which they were in. And feel that it’s really important at all the stores that we have around the world, are reflection of the cities that they are in, as well as a reflection of Canada Goose. And so, they’re not all boilerplate same sort of templates. Operationally, we learned a lot of things and with proprietary learnings and knowledge only improved our already exceptional performance. So, we’re really excited to continue to roll them out in the places, the right locations around the world.

Okay, thanks. And just a follow-up on that, I think you said three new stores. So, when would we expect to hear announcement about the third? I assume, you want to get that opened same sort of timeline of the first two?

Yes. We don’t have anything to announcement at the moment, but you’ll be the first to know when we do.

Our next question comes from Jay Sole from Morgan Stanley. Please go ahead.

Great. Thank you. Dani, you mentioned capacity in your prepared remarks and also just now that the New York and Toronto stores performed above your expectations. If the Chicago store and the London store and whatever the store is and the new online channels, also perform above the expectations, do you have the manufacturing capacity to be able to meet that upside? And can you talk about generally speaking, your overall ability to maybe have a bigger sales growth if that situation presents itself, relative to what your capacity is right now?

We certainly have the capacity to meet any demand that we foresee and for the foreseeable future. We have a long range financial plan and long range sales plan internally, and coupled with that with we have a long range manufacturing plan, and they work hand in hand, and we’re always revisiting it. And making sure that we continue to be building and plan to build the infrastructure we need to support our growth.

Our next question comes from Jim Durran from Barclays. Please go ahead.

Good morning and welcome to the public markets. With respect to your guidance, now that you’ve got fourth quarter in your pocket. Has your perspective on your growth capacity changed or is the guidance that was provided from fiscal 2018 specifically, just a function of an exceptionally strong year in 2017?

So, there is a couple of points. So, first of all, fiscal 2017 did have some exceptionally strong performance across all [ph] channels, but in particular, the one we would look to is the DTC channel. The two stores in particular in Yorkdale and Soho performed beyond even our best expectations. So, in terms of normalizing things, we would suggest that you would have more prudent, more conservative estimate of future store growth. In addition, those same-stores that would -- two stores that we already have opened will be in place for 12 months, so about 12 months of SG&A costs. So, there was some exceptional performance that we plan to normalize out for growth pattern.

Okay. And just in terms of sort of additional insight, color on performance of some key strategic drivers, can you tell us like from a shop in shop standpoint, while I understand it’s a key focus, I’ve heard no tangibility or materiality expressed in terms of where we should expect to see that strategy become more fulsome. And on the spring collection, can you give us any anecdotal insights as to how it might have performed either in your retail stores or online versus how it’s performed in wholesale that would give us some of the same enthusiasm you’ve got about its potential of becoming a bigger, more meaningful business.

Okay, the two questions there, shop-in-shops, and then we don’t give specifics, but certainly we’re rolling out shop-in-shops across all geographies, United States and Europe wherever we have wholesale partners. And with the most strategic ones and we’ve certainly seen an enhanced experience and again as a destination for local and tourist traffic alike having the shop-in-shops certainly enhances the operation. And when it comes to spring, which is the second question, we don’t break down sales by channel. I can tell you that our sales were good in all channels. We’re very, very pleased with the spring performance. And I think it bodes very well for the future and we are very excited about it and hope you are too.

So, I’m sitting here a year from now on shop-in-shop, like where am I going to see material increase in shop-in-shop locations, mostly in the United States or how would that play out?

We’re not disclosing where we’re putting them this year and we’re opportunistic in putting them in the right place at the right time. But, you certainly will see more in United States, you’ll see more in Canada, you’ll see more in Europe.

Our next question comes from Simeon Siegel from Nomura Instinet. Please go ahead.

Thanks. Good morning, guys, and congrats. John, what was the raw material or inventory cost adjustment that you mentioned in wholesale? And then, thanks for all the gross margin color. Can you speak to the operating profit by channel for DTC and wholesale, maybe this quarter and then also just what you’re thinking about those channel margins next year and beyond? Thanks.

Yes. I’ll speak again about the raw material adjustment. So, first of all, it was not material to our financial statements on a full year basis; it was $3.2 million, and it was a result of some inventory that was cost at an incorrect rate. So, we adjusted our provision for it. So that’s straight forward. And again, we would not expect this to recur, so for modeling purposes, our range for the wholesale margin generally would be 43% to 47%. It was little over 43% this year with that and other things happening. So we’d expect it to deviate towards the midpoint of that range. And the second question related to margins, we’re not disclosing that at this time.

Our next question comes from Jonathan Komp from Robert W. Baird. Please go ahead.

Yes. Hi. Thank you. Just to follow up maybe on the broader growth question for fiscal 2018 and the next three years, projecting the topline up mid to high teens in terms of the growth rate, certainly you have an attractive growth rate but also quite a bit lower than what you’ve done. I think in the past three years, you have essentially doubled that growth rate each of the year. So, could you just maybe speak to the degree of conservatism or maybe realism baked into the outlook ahead and how you formulated that growth projection?

We’ve formulated it based on our projecting methodology, which we probably have a bias towards conservatism but we think it’s realistic.

Okay. And then, maybe shorter term, I’m curious if you could maybe just give some insights to extent you’re willing, in terms of some of that forward-looking product extensions, both for new categories and then also as you get into the winter next year, some extensions on the core categories.

We’re always innovating and putting the products into alliance. [Ph] In our core collection, we continue to evolve our core collection and add new products and they tend to be successful. And in terms of new categories, obviously spring, as we talked about extensively today, we’re really excited about it; it’s done really, really well. And we expect to -- we will continue to add to that and to bring more products that consumers want to market. And we’re super excited about spring. New categories we’re launching this fall is knitwear that will be for this upcoming fall. So, those are the short-term new products that we’re looking at. We are very excited about them. I think our -- it’s important to us and our product extension philosophy, our product philosophy is that we make best-in-class products. We are not a company that sales logos and stuff. We like to make the best stuff in the marketplace and we’re going to apply that methodology to all new products we’re putting into market as we mindfully add products to our line.

Our final question today comes from Omar Saad from Evercore ISI. Please go ahead.

Thanks. Good morning. Thanks for taking my question and congratulations on the IPO and all the success for the last few years, really bringing the brand to life. I wanted to ask about how you think long-term about the footprint of the brand, digital versus physical. The team is pretty unique to have this kind of level of penetration of DTC at this stage of kind of lifecycle of the brand, young and small brand at this point. How big do you think that digital business can be and how you think about using social media to -- another technique to really drive that penetration rate, which lot of brands out there with much bigger businesses that would be great [indiscernible] your digital footprint? Thanks.

We’re very happy with the performance of our DTC channel and online is doing great and digital is doing great. We think -- online is doing; stores are doing great. Our DTC strategy is driven by ecommerce; we intend to lead this with ecommerce and have -- build a responsible store footprint to support for amazing in-store brand experience for omni-channel environment. I think that over time and over next -- over years, we think we expect our sales of both DTC and wholesale to grow at different rates and we see them coming more into balance with each other over time. I think that we believe that reaching consumers digitally is a primary way for doing that these days, and that’s our primary method of reaching our consumers.

I’ll turn the call back over to Dani Reiss for closing remarks.

Thank you. Well, thanks again everybody for joining us today. We really appreciate it, really excited to have our first ever earnings call. We very much look forward to seeing many of you guys next week at the Baird conference. Thank you very much, have a great day, and all the best.

Thank you.

This concludes today’s conference. You may now disconnect.