Canada Goose Holdings Inc. (GOOS) Q2 2020 Earnings Report, Transcript and Summary

Good morning. My name is Mariama and I will be your conference operator today. At this time, I would like to welcome everyone to Canada Goose's Second Quarter 2020 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] Thank you. I would now like to turn the call over to Patrick Bourke, Senior Director, Investor Relations. You may begin your conference.

Thank you and good morning, everyone. With me are Dani Reiss, President and CEO; and Jonathan Sinclair, EVP and CFO. After prepared remarks from Dani and Jonathan, we will take your questions. This call including the Q&A portion, includes forward-looking statements. Each forward-looking statement including discussion of our fiscal 2020 outlook is subject to risks and uncertainties that could cause actual results to differ materially from those projected in such statements. Certain material factors and assumptions were considered and applied in making these forward-looking statements. Additional information regarding these forward-looking statements factors and assumptions is available in earnings press release issued this morning, as well as the Risk Factors section of most recent annual report filed with the SEC and Canadian Securities Regulatory. These documents are also available on the Investor Relations section of our website. 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. Our commentary today will include certain non-IFRS financial measures which are reconciled in the table at the end of earnings press release issued this morning and available on the Investor Relations section of our website at canadagoos.com With that, I will turn the call over to Dani.

Thanks Patrick and good morning, everyone. I am really pleased to tell you that the power of brand and our business model pull through despite a challenging external environment and we delivered another strong set of results to finish the first half. And here are the highlights. In the second quarter relative to last year, revenue grew by 27.7% and adjusted EPS per diluted share increased 23.9%. Even with the unrest at Hong Kong, revenue in Asia nearly doubled to $48.9 million. Revenue in the US increased by 38.5% on a constant currency basis. Revenue in Canada grew by 29.9% against tough comparisons at our most developed market. This is a strong result. From a brand perspective, it is great to see customers at home embracing our lightweight down jacket and knitwear. From a channel perspective, wholesale led the way with this largest quarter, with revenue increasing by 22.9%. This was complemented by direct-to-consumer growth of 47.2% like in the first quarter we continued to fulfill partner requests for earlier shipments on the back of increased operational flexibility. With that as starting point there are a couple of specific topics that I would like to address. Let me start with Hong Kong. As I'm sure you're aware the situation has intensified since our last call. But the impact on tourism and retail traffic, the performance of our store and IFC has impacted it significantly. The same goes for a recently opened location at Ocean Center which is a fifth of our nine openings this year. With this addition, we are established in the two most important luxury retail districts in the city, complementing the mix of guests we've already reached through IFC. Although, we wish that the situation was different today, we're developing markets and building stores for decades, not just for the next quarter. Fortunately, during our second quarter, strong top-line performances in other markets offset the impact in Hong Kong. We're watching the situation closely and evaluating actions to streamline our cost base on the ground, including negotiating accommodations from landlords. Moving on wholesale timing is another important topic for understanding our business. The channel operates largely as a planned economy. Our fall winter and spring order books are set down to the color, style and/or well in advance, and this gives us great visibility through the year. The timing of when we ship these orders can and does shift from month-to-month in any given year. It comes down to a balance of what our partners want delivery and when we can manufacture their orders most efficiently. This year we've been well positioned to fulfill customer needs earlier. The shape of every year has always been different and so movements of order between quarters or months are not reliable indicates of annual performance. I am really pleased that we've shipped so much of our fall winter order book earlier which naturally means less shipment in the next quarter. It does not mean the underlying demand in the channel is changing. We continue to expect wholesale revenue to grow in the high-single-digits in fiscal 2020. This shift has already impacted our numbers for Europe and rest of world where revenue decreased by 3.4% in constant currency. For the same reason, this is not something that I am at all concerned about. And it at - as it is our most wholesale centric region, and it grew by 79.7% in the first quarter. So if your order ships this quarter is a logical follow-on effect. As you have seen before, growth rates in any given geography can vary from quarter-to-quarter exactly for this reason. Lastly, I want to provide an update inventory, which we discussed last quarter. We've continued to build an inventory buffer ahead of growth to maximize production efficiency and long-term commercial flexibility. Going back to our IPO, a key growth strategy has been increasing in-house production to control our own destiny, provide greater flexibility and to increase margin. Initially, this meant expanding in-house capacity alongside expanding existing contractor production. And building four factories over the 2.5 years. Over half of our down full production is now in-house and we're at a stage where we can actively reduce our CMT's in the coming year. I continue to feel very good about size and the current composition of our inventory position. We continue to operate commercially with discipline and selective allocation model both at wholesale and in our own DTC channels and always at full price. Going into next year, once the rationalization and transition are complete, we intend to improve inventory efficiency relative to sales and expect that our inventory levels relative to revenue will trend lower over time. I'm also excited to share with you a few things that we're doing with innovation and experimentation in retail, this season. I believe that our - I believe that our customers on our brand and the value of our brand is defined by some of their experiences. Innovation and experimentation is an important part of that puzzle for us. With consumers looking to use outerwear to express our own personality more and more, a recent relaunch of BRANTA is a great example. A focused collection of six never to be repeated styles is an elevated interpretation of Canada uses heritage, designed to inspire loyal brand fans and reach new audiences with Pinnacle product. Through versatile 4 in 1 and 3 in 1 and reversible styles, the feature on artistic print and luxury fabrics such as Loro Piana wool. BRANTA has been a high impact centerpiece on our floors and the commercial response so far has been incredible. We've also introduced pilot programs to incurred self-expression, including the ability to add personal details on their jackets, and to customize for consumers, to customize their jacket with new hood brim options, offering new reflective comfort and insulated brim choices. Consumers can tailor their jacket, where to wear and how they use it in their own personal style preferences. The customers' response from these programs has been extremely positive and we are learning a lot to inform future direction of both product and retail engagement. Similar to our innovation with cold rooms and customization, and personalization pilot programs, we continue to experiment and evolve with retail formats. In a fast changing digital first world, you cannot succeed by repeating the same-store concept again and again, one box does not fit all. There are so many interesting opportunities out there to micro target specific locations, customers, influences and experiences. This year, we've activated a number of new direct-to-consumer formats to test and learn what works where, what customers want and how we can deliver exceptional experiences in new ways. As we have done in the past, we're also utilizing pop-ups to activate markets and test locations for permanent openings. But later this week will be opening at Tyson's Galleria in Washington DC area. And we're excited to be bringing our amazing candidate user experience to life there. Going back to my initial remarks. Having global brand strength, multiple avenues of growth and the discipline and focus to execute well are so important in times like this. Winter is just kicked into high gear. And I'm really encouraged by how we are performing despite the continued external headwinds, and ongoing uncertainties. Despite that, we continue to see long line-ups in our stores across geographies which show the power of great product and exceptional experiences. And with that, I'll turn over to Jonathan to go into the specifics of our financial results.

Good morning, Dani, and good morning, everyone. Thank you for joining us. We delivered strong second quarter results in line with our expectations. Brand power geographic diversity and high quality distribution continued to be a winning combination. We were able to offset the impact of disruptions in Hong-Kong with strong performances in other markets against external uncertainties. We're executing with discipline, and we're pleased to be in a position to reaffirm guidance for the year. Now with that backdrop, I'll walk you through the numbers in detail. Please note that all new figures are quoted in Canadian dollars. The second quarter compared to the same quarter last year, revenue grew 27.7% to $294 million or 28.3% on a constant currency basis. Also was a standout performer in the largest quarter with revenue growing 22.2% or 22.9% on constant currency basis. This is primarily driven by growth from existing partners complemented by earlier ship and timing relative to last year. Incremental revenue from Baffin and its peak sales quarter also had an impact. We continue to assume high single digit wholesale growth for the year. This reflects our performance through the first half with a materially higher proportion or winter orders fulfilled relative to last year. We also anniversary the acquisition of Baffin at the start in November. For these reasons we expect wholesale revenues in Q3 to decrease in the mid-teens on a percentage basis year-over-year. This is purely a function of timing, with fewer remaining for winter orders to work through and that's what drives the quarter. In the Q4, we transition to the spring order book and late season for winter replenishment. We're pleased to satisfy our obligations to our partners earlier putting our 2000 plus points of distribution in a better position for the peak season. However, this does not change the commercial discipline with which we supply and operate this channel. DTC revenue increased by 47.2% or 47.4% on a constant currency basis. Now due to the transition to a 445 fiscal calendar this year, we lost one day in the quarter relative to last year. Excluding the extra day in the prior period, growth would have been 49.3%. Our established store and e-commerce markets perform well and our new store openings had good starts with Shenyang and Edmonton being particularly noteworthy. Moving on to geography, we make great strides in key markets alongside continued growth at home. Starting with Asia, our top line nearly doubled to $48.9 million, and while Japan growth was much lower than Q1 into shipping time, it still continued to be a positive contributor as of course it did incremental revenue from DTC operations in Greater China. And Hong-Kong specifically our store was inevitably impacted by external disrupt. Outside given the effects on tourism and traffic, we're pleased with how it actually performed. We're fortunate to have a global business with the resilience to offset this with strong performances in other geographies. Unfortunately, and as we're all aware, the situation in Hong-Kong has intensified, as we enter the second half of the year. We also have an additional location at Ocean Center and we anniversary ifc's opening, making the headwind on DTC revenue growth more significant. As you'd expect, we're being - also being very prudent with our local cost base and resource allocation. And that includes doing accommodations with our landlords and service providers a lot. Moving onto the United States, revenue increased by 38.5% in constant currency. This was driven by significant contribution from wholesale in its largest quarter complemented by a strong DTC performance both online and in-store. At home in Canada, revenue increased by 29.9%. Against the tough comparison in the seasonally small quarter, we were pleased with the performance for highly productive DTC channel. Incremental Baffin revenue in its peak quarter was also particularly relevant to Canada. In Europe and rest of world revenue decreased by 3.4% in constant currency, you will recall that in the growth in Q1 was very elevated 79.7%. We call that out as being driven by earlier timing shipment relative to last year. As an output there were fewer remaining for winter orders to ship in Q2 and in our most wholesale centric geography this was the fundamental driver of the decrease. Moving on to revenue, consolidated gross margin was 54.6%. At a channel level, wholesale gross margin came in at 47.5% as expected. This represents normalization relative to the first half of last year, which was elevated to a number of temporary timing factors. As I said before, the mid to high 40s is right where we want to be over annual periods and our comparison, normalized in the second half of this year. DTC gross margin came in at a strong 75.6%. This was driven by the net positive impact of pricing relative to costs. We saw the benefits of tailwinds from our core, which are more significant at this time of year relative to Q1 when the mix for nonprofit growth margin. Wholesale operating income was $90.9 million within operating margin of 41.4%. This reflects the gross margin shift versus last year as I’ve just described, and relatively flat SG&A as a percent of revenues. Turning to DTC talented and excluding pre-opening costs in both periods, our operating margin increased to 45.3% from 43.7% with strong sales productivity and profitability of across all components of this channel, we incurred $3.6 million in preopening cost for the locations not yet open. And this compared to $1 million in the same period last year, including these costs, DTC operating income was $30 million, representing an operating margin of 40.4%. Unallocated corporate expenses were $43.2 million compared to $34.2 million last year, while unallocated depreciation was $2.3 million compared to $1.8 million. Increase in corporate SG&A was primarily driven by increased growth investments in marketing, corporate headcount and infrastructure including Greater China. Combined, this resulted in total operating income $75.4 million. That compares to $65 million last year. On a non-IFRS basis adjusted EBIT was $79.2 million compared to $66.5 million last year. Net income was $60.6 million, or $0.55 per diluted share, compared to $49.9 million or $0.45 per diluted share last year. Adjusted net income, which excludes a $4 million impact from preopening cost was $63.6 million or $0.57 per diluted share compared to $51.1 million, or $0.46 per diluted share last year. It's also worth noting that earnings in the quarter benefited from a change in the effective tax rate, the 12.8% to 18.1%. last year. Now this is largely a temporary timing impact. It relates the differences in the transfer of inventory to the specific geographies and the applicable tax rates. We continue to assume an effective tax rate for the full year in the area of 21.3%, which is what we achieved in fiscal 2018. Turning quickly to the balance sheet, we ended the quarter with net debt of $537.9 million. That includes $224.2 million in lease liability as presented under IFRS-16. On a spot basis at the quarter end net debt to EBITDA on trailing 12-month period was 2.0x. This reflects a seasonal peak in financing about working capital cycle achieved through our short-term facilities. Net working capital was $383 million, compared to $270 million in the same quarter last year. This reflects a continuation of our planned inventory build and was partially offset by increases in accounts payable and accrued liabilities. Support the staging needs about international PTC expansion and maximize the efficiency of our new in-house manufacturing capacity coming online. We have built up buffer inventory in innovative core styles for longer term commercial flexibility. This buffer gives us continuity as we rationalize third party CMTs. Moving beyond this fiscal year once this transition is complete, we expect our inventory levels to begin to normalize. In summary, we're really pleased with our moments during the first half of the fiscal year, and we're well positioned as we enter our busiest commercial period. While external uncertainties are a reality, we remain confident the power of the brand and indeed in our business model. Against this backdrop, we continue to deliver strong growth in revenue and earnings. And we're pleased to reiterate our outlook for the year. Now I'll turn back to Dani for some closing remarks.

Thanks, Jonathan. First half of the year has truly been great. And with the peak season now in full swing, there are a number of exciting things on the horizon. When we opened our first store in Paris on Rue Saint-Honore shortly. This is a dream come true for me personally, and I can't wait to see it up and running. We're also launching our first concept store actually regarding to Toronto, experimental and experiential way to engage with our local friends. And last but not least, we will be introducing our first small format resort town location in Banff, which is one of Canada's most beautiful and popular international destinations. And with that, I'll now turn it over to the operator to begin the Q&A.

[Operator Instructions] Your first question comes from the line of Kate Fitzsimons with RBC Capital Markets. Your line is open.

Yes. Hi. Good morning, guys. Congratulations on the momentum. I guess my first question is, the growth rates in your more established markets Canada and U.S. were very impressive in the quarter. How do you think about what's driving the demand in the home market, particularly at the wholesale Channel, as well as growth opportunities go forward in North America? And then secondly on Asia, obviously very impressive growth there despite that disruption in Hong Kong. Can you just dig into what you're seeing and other markets as an offset? And Dani, it's been about a year since you've been in China. What would you say have been the more interesting or surprising learnings there more recently, just despite the fact that what's going on in Hong Kong? Thanks so much.

Thank you for your questions. I think that our brand has never been stronger and it continues to grow. Global awareness and affinity of our brand are in a great place and you can see that in our results. And we're significantly growing our business in all geographies, and we continue to achieve very significant pace of growth off of a much larger base today. I think that some anecdotes, as it's gotten colder. The lineups at our stores, we get again, people can't bring out overnight to get at some of our collaborations and to make sure they get one of them. So the demand for our products is as truly never been stronger across all geographies. And to speak to China, and yes, we were there for a year. And as you can see the result, there's also been great this quarter, we had almost doubled our business in China. And I think that we took the right approach there by building by running China from China and investing in infrastructure and offices in country. And I think the results are showing dividends notwithstanding, obviously what's going on in Hong Kong. That we're hoping to resolve itself in a positive way for everybody. But in the meantime China is great, demand is strong and China consumers, our brand is really resonating with them.

Your next question comes from the line of Omar Saad with Evercore ISI. Your line is open.

Thanks. Good morning, nice quarter. I wanted to ask about follow up on a lot of your comments around the supply chain production and the inventory build. Looks like you're continuing to kind of build that quarterly production how much you guys are producing. Obviously also doing more in-house, I think you said 50% or over 50%. Maybe you could talk about do you expect production to still ramp whether its internal production or with your external suppliers over the next year or two from these levels or do you expect the production to level off at some point? And also on manufacturing, do you think you get to a level much above 50% over time? Are you kind of happy where it is? And then help us think about, I think there was a comment around building some of the core items longer-term and inventory, can you help us understand that dynamic and maybe you could frame it inventories per store or another metric that helps us understand get comfortable with how the inventory flows through the seasons and throughout the year. Thanks guys.

Thanks for questions. I will talk a little bit our manufacturing strategy, that's go all way back to -it was pointed out, as we went public is one of our key growth strategy that we are going to bring a lot of our manufacturing in-house by either building and/ or acquiring new facilities. And we've built over I think four plus facilities now since then. And we've been able to bring a lot more capacity in-house to the point where I think last year it was close to 50% of our manufacturing. And I think to point how high I can go; I think there's still room to go over higher than that. We don't have an absolute target but I think that there's still room to grow and that is important for a number of reasons. important to be able to control our own destiny and to have control over our own supply chain. And also obviously, we get to bring as we're getting house, we increase our opportunity for additional margin. And so we're really excited to be able to do that. And some of that has resulted in having a little bit more inventory because we obviously, in our view it's better to have more of an inventory than not enough good inventory. And the thing about inventories, it's important for you to know about our company is that we're different than many in that approximately two thirds or 75% of our inventory is carryover inventory. And that's the stuff that we're making. So there's no excess inventory risk here. It's not risky inventory. It's inventory that will be sold at full price and its inventory available and has been available for many years. So I think that I'm not worried at all about our inventory and inventory risk and this sort of inventory position is something that we're used to in Canada, even going back in 20 years we were a smaller company. We have more room to relative to sale, it wouldn't bother us at all because that's where our company works. Jonathan, you want add any thoughts to that.

I mean just building on that, it's clear that we build inventory in manufacturing ahead of the curve. I mean in core products in way Dani is just described and that means it doesn't line up hopefully sales trends and what we're trying to do and particularly here we're sort of -we're addressing a transition through CMT rationalization and that puts us in a great position for continued growth in fiscal 2021 as well. So on the one hand that's not dynamics we necessarily expect to change in the near term, but we do expect the position to improve relative to revenues once the effects of rationalization take effect. And I think I'd take you back something I said last quarter that we look at inventory in terms of turns in this business once you strip out manufacturing more materials and work and process and that level of turns on an average basis puts us pretty much in line with where others are in fast-moving highly seasonal businesses like this.

Your next question comes from the line of Michael Binetti with Credit Suisse. Your line is open.

Hey, guys, good morning. Thanks for taking our questions here. So I guess you reiterating the guidance for wholesales will be up high single digits for the year, but then you gave us some color that we think they'll be down mid-teens in third quarter. I think that leaves us with a pretty wide range of outcomes and wholesale for fourth quarter where from positive double digits to even slightly negative. But I think Dani you described that as a period when you'll start shipping for spring and also replenishing for winter. Can you just help us understand the upside versus the downside in that guidance, speak to the scenario that could result in something near the low end there, even negative at fourth quarter. And then I also want to say within that guidance for wholesale revenues would be down in the third quarter. What region do you think we'll see most impacted? And is that largely US given the second quarter growth rate that we just saw? Thank you.

Yes. I mean so we - the way the wholesale business works we come into the knowing the wholesale order book for all the seasons. And therefore to some extent as Dani describes it as a managed economy. To some extent therefore we know what the outcome is and that's why we assume high single digits within our guidance. And therefore there's inevitability. So if we supply it sooner, if we supply it sooner than the reality is the order book is fulfilled. Now none of that stops our wholesale partners coming back and asking for more, but you'll also recall that we operate an allocation level here. And the allocation model is privileges our in-stores first and then our e-commerce. And then we consider how replenishment of wholesale orders, when it makes sense to do so. And that's consistent with what we've done in the past. So clearly if we get as and when those requests come through, we look at them in that context and against that model. And I think the reality is as you look forward obviously then we've got a new season with being supplied in the fourth which is spring/summer and that's got its own dynamics in any event. But from our point of view we look at the wholesale channel as both important in the sense of being a very strong channel and also important in terms of its role at placing the brand.

I think just to add on. Our wholesale business for the year is looking like it's going to end up, last year we thought it would and we're really happy about that and Michael you asked about like it the range we have to downsize upsides like this. Given that we feel very confident that it's going to end up where we thought it would. That's not a -there's no downside there at all. It's just exactly where we thought we end - and we have inventory available for reorder should there be -does that feel -should that come into play.

Your next question comes from the line of Ike Boruchow with Wells Fargo. Your line is now open.

Hey, Dani, Jonathan, Patrick. Good morning. Let me add my congrats. I guess Jonathan or Dani just a question, two questions on the wholesale. You guys have talked about the pull forward effect many times and again like the brand are so strong that you're clearly getting orders earlier. Just kind of curious is there any way to quantify the pull forward so we can kind of think about dollar that may be shifted into Q2 from Q3? And then Jonathan, there's been some normalization on the wholesale gross margin. And you've been very helpful to kind of talk us through what's going on there. Any color on how to think about the wholesale gross margins in the back half and specifically Q3 just basically trying to figure out if there's any more normalization or dynamics we should keep in mind as we model that out? Thanks a lot.

That's okay. So I think if we, let's start with the timing of when our customers want us to ship product. I mean that we're very much in their hands and in that sense. And when they asked for it, we do our level best to ship it. Best way to look at this is to remember what our full year assumption is underpins our guidance, which is high single digits. And if you look at it in that context, the extent that it's way above that then that's where we've got customers seeking to get the product service. And I think that's the best way to answer that. I think when it comes to the wholesale gross margin, no, we're right where we want to be, 47.5% in Q2 that's really the right sort of zone for this business. Comparisons inevitably with last year have distorted the read and they get easier through the remainder of the year. There are different reasons both Q1 and Q2 last year having margins in the 50 area and we've been calling that out as a typical. And you saw last year that we had landed at 48.1%. We continue to believe that the right way to look at this, is mid to high 40s in the wholesale business in this sector.

Your next question comes from Alex Walvis with Goldman Sachs. Your line is open.

Good morning. Thanks so much for taking the questions here. So first question is on the operating margin guidance. You've reiterated the guidance for the full year implying some expansion in the back half and I wondered if you could talk us through the drivers of this between mix and then some operating leverage in each of the divisions. And what are the key components of that are. My second question is on the BRANTA product. I think you mentioned that this isn't intended to reach some new consumers. I wondered if you could elaborate a little bit on that point. Are you planning to distribute it all through to new channels going forward? And how could that expand the relevance of the brand? Thank you.

So let me answer the guidance piece. I think the reality is we're guiding to 20% revenue growth 25% earning, at least 20% revenue growth at least 25% earnings growth this year. Now as we move into the second semester clearly DTC moves to the full and that's going to be the principal characteristic in the second half. We will continue to invest heavily in marketing as we move through the particularly the third semester which is a third quarter which is the very important and that will allow us to really leverage that channel which as we know is our most profitable channel. I think that's the fundamental dynamic that's going to shift as we move into the second half of the year, but the weight of the marketing in the third quarter is likely to mean that that will push margin expansion towards the end of that quarter into the fourth quarter.

Alex, I'll add some thoughts about BRANTA. BRANTA is up. We're re-launching, we had BRANTA products in the line of number of years ago. And I think we're a bit earlier with them. At this point, we are seeing, today we're seeing tremendous demand for them which is great. They continue to be, obviously, function first products. They're also the pinnacle products and they're really - they're intended to define performance luxury everywhere and to redefine performance luxury everywhere and not just to follow what's already been done. We are doing it completely different way and I think that pinnacle product that's aimed at the top of the pyramid and consumers who've been Canada Goose fans for a long time who want the something new and different and its really working. And enabled us to excite our fans in new ways and to reach new audiences with this kind of product. So lots of thinking behind BRANTA and why we want to launch it now and I'm really happy that we did.

Your next question comes from Mark Petrie with CIBC. Your line is open.

Yes. I wanted to follow up actually on that line of questioning around BRANTA. And I guess more broadly you've been pushing prices up and also introducing new parkas at higher price points and sort of push through some of the barriers that I think you would have talked about previously. So I guess what have you seen in terms of response. You already addressed BRANTA but I guess in terms of the core parka business and how does that impact? How you think about positioning the portfolio going forward?

I think that I think that the category is - the category of luxury outerwear is something that didn't exist 10 or 15 years ago and we helped create and I think that it continues to grow. I know it's a growing category and certainly we're introducing new products at higher prices. And that's working well for us. The products that we're bringing to the market that are there -that are priced higher have performed extremely well. So I think that bodes well for the future and we're very excited about it.

And I guess just to follow up on the wholesale gross margin topic. It is also down slightly from the level two years ago, presumably there is some leverage from the greater in-house manufacturing. So what is the most material sort of headwinds on that number versus two years ago.

So I think it's worth reminding ourselves of the gross margin algorithm that we work with here, well of the tailwind and headwinds because we do create tailwind, and we do that because we want to address that- the headwinds. Tailwinds that we deal with obviously a pricing and scale and in sourcing of manufacturing. That's-those are the things that help us the most in terms of moving our margin forward. We have cost inflation in labor which was probably more significant in the second half of last year and the earlier part of this year. Then we also have cost price inflation in materials. And of course we have reinvestment in new product. As well as we continue to develop the product offer in both our existing and new categories.

And so how would you talk about sort of the product level margins in wholesale?

But our product level -our product level margins in the wholesale are fine. They're absolutely where they belong. There's sort of an industry pricing structure and we're very much in line with that. And therefore that determines where your wholesale margins are now, which is why we continue to say mid to high forces is exactly where they belong.

Your last question comes from the line of Oliver Chen with Cowen. Your line is open.

Good morning. This is Ross Collins on for Oliver. I just wanted to follow up on the retail formats the pop ups that you mentioned. I just want to understand kind of timing of them. Will they just be for the holiday period or kind of a longer term basis? And then I'm also the kind of inventory and assortment implications of those pop ups? And lastly just geography will they just be within or I guess will they within all of your geographies or just within one or two? Thanks.

Thanks for questions, yes, pop up are -these are important things. I think I wouldn't characterize there was a new strategy for us. And we've done - with pop ups for a number of years, both at wholesale partners and on our own. It's kind of a bit of a catch-all phrase and they are used for a moment in the time from -for moment in time brand experiences and for events. And it's also -they're also really useful tools in figuring out future of programs, their locations if you could show up somewhere for a brief period of time and see how well that works. So for example will Tyson's Galleria specifically which is we're opening shortly, it's about exploring and testing in that DC Market area and see how well are program installed and perform in that marketplace. And I think in today's retail environment that happened to pop up strategy well executed, it is really important and I think that it's -the retail environments changing, it's important to be nimble and wrap with it.

I think because our experimental and because they represent learning experiences for us, the financial contributions they make are of course much less significant than the retail and wholesale. And I think it's important to keep that in mind. There's a wide range of sizes of durations that they represent and of course all of that is factored into our guidance.

There are no further questions at this time. I will now turn the call back over to Dani Reiss for closing remark.

Thank you and thank you all for taking the time to be here with us today. We appreciate your interest and your support of Canada Goose. And this is our last earnings call for the year. And, in fact, for the decade. We like wish you a great holiday season, early Happy New Year and I very much look forward to updating you on our progress when we report our third quarter results next year. Thank you very much.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. And you may now disconnect.