Canada Goose Holdings Inc. (NYSE: GOOS) Q4 2020 Earnings Call Transcript

Canada Goose Holdings Inc. (GOOS) Q4 2020 earnings call dated Jun. 03, 2020

Corporate Participants:

Patrick Bourke — Vice President, Investor Relations

Dani Reiss — President and Chief Executive Officer

Jonathan Sinclair — Executive Vice President, Chief Financial Officer

Analysts:

Camilo Lyon — BTIG — Analyst

Ike Boruchow — Wells Fargo — Analyst

Kate Fitzsimons — RBC — Analyst

Omar Saad — Evercore ISI — Analyst

Jonathan Komp — Baird — Analyst

Adrienne Yih — Barclays — Analyst

Mark Petrie — CIBC — Analyst

Sam Poser — Susquehanna — Analyst

Michael Binetti — Credit Suisse — Analyst

Erwan Rambourg — HSBC — Analyst

Presentation:

Operator

Good morning. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the Canada Goose Fourth 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, Vice President, Investor Relations. You may begin your conference.

Patrick Bourke — Vice President, Investor Relations

Thank you, Chris, 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 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 our earnings press release issued this morning, as well as in the Risk Factors section of our most recent annual report. These documents are also available on the Investor Relations section of our website. 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.

Our commentary today will include certain non-IFRS financial measures, which are reconciled in the table at the end of our earnings press release.

With that, I will turn the call over to Dani.

Dani Reiss — President and Chief Executive Officer

Thanks, Patrick, and good morning, everyone. I hope that your families are all safe and that you’re all finding your way through these times as best you can.

Before we begin, I want to acknowledge the recent events of police brutality against black people across North America. The marches, protests and demonstrations happening around the world are important. This discussion is important. We support, and we stand with those who are speaking out against inequality and in justice.

As you know, the world is also facing a global health pandemic. I believe that crisis can — I believe that crisis can bring out the best in people, and I’ve seen that here in Canada Goose as well. We’ve been challenged in completely new ways, and I’m so proud of how our Company has responded. At all levels, our team has gone above and beyond to help the business weather the storm, while supporting each other and the communities that we serve.

I want to give special mention to our team and our partners in Greater China. As the first part of Canada Goose to deal with this global pandemic, we are grateful for the all of the wisdom and the encouragement that they’ve shared with the rest of the business throughout the crisis. To all of our employee, thank you for your resilience and your determination during these trying times.

All crisis necessitates focus and decisive action. During this crisis, we spent a lot of time asking ourselves what’s important, and we are keeping it simple. Our plan is, first, to do everything we can to support people so that we can emerge from the pandemic together stronger; and second, to put the business in the best possible position for a strong recovery whenever that happens. These two things are at the core of how we are approaching the year ahead.

Clearly, we are in uncharted territory. COVID-19 will have far-reaching consequences for the entire apparel industry, for a global economy and for a society at large. Every company is facing extraordinary uncertainties and unknowns. So instead of pretending that we have a crystal ball, we are focusing on the knowns, the things that we know to be true.

With that in mind, here is six themes that give me great confidence in our future and in our ability to come out of this stronger. Number 1, the first quarter is likely to be the most heavily impacted, and it is our smallest quarter. Most of our stores and our wholesale partner stores have been closed since late March. Retail is now starting to open back up in North America and Europe, and Asia is also continuing its recovery. This means the high point for suspended revenue will soon be past us. For Canada Goose specifically this coincides with a time of year when our revenue is already at its lowest. This reduces the impact that gives us a long runway before we hit our peak selling season in the winter.

Two, we have the financial strength to weather the storm. Profitability and cash flow have always been very important to us. So we always had a strong balance sheet. And we already had a strong balance sheet when we began to feel the effect of the pandemic. Over the past few months, as the crisis intensified, we made an additional considered effort across our entire business to further reduce cash outflows and bolster our liquidity. As a high margin business with a clean balance sheet, we remain firmly in control of our destiny. I know that we have the financial resources to weather the storm, and Jonathan will share more detail in his remarks shortly.

Specifically on inventory, we are happy with the amount and the complexion of our existing inventory. Despite having production facilities closed since late March, we largely have what we need to meet demand this year. And because of our own manufacturing infrastructure, we have the ability to quickly make more as needed, even with the required physical-distancing measures.

Number 3, we make authentic best-in-class products. Our promise is simple and timeless. We make function-first survival products. They are now also fashionable in — in urban settings, but at their core, they deliver protection. We know that in previous times of crisis, people have gravitated to Canada Goose, as they look for investment products that will be functional and that will last for years, in all [Phonetic] seasons.

Number 4, we are leading the way in sustainability. Sustainability has been an important issue in the global landscape for years and has been highlighted more acutely through this pandemic. For us too, there is a ton of momentum building around sustainability. While not a new issue for us, we accelerated our efforts in 2018 when we established our Corporate Citizenship Department with the mandate to more deeply embed sustainable practices across our business.

In the past year, we’ve taken a hard look at ourselves and developed a plan to tackle pressing challenges in a much bigger way than ever before. The result is our sustainable impact strategy, which is outlined in our first ever sustainability report that we released in April. This includes aggressive targets and firm deadlines around our carbon footprint and key raw materials in our supply chain. To us this is a major milestone for the year and something I am really proud of. We are putting a stake in the ground and we are leading the charge, which we all know needs — leading the changes, which we only need to opt [Phonetic] within our industry.

Number 5, we are well positioned in an increasingly digital world. We have always been digitally native. E-commerce is where we started our direct-to-consumer journey. We’ve invested in heavily for years with a long-term view. Having that foundation already in placement that we are now scrambling to build an e-commerce business overnight. What we are doing is quickly reallocating resources and investments right now, which will significantly advance our global omni-channel capabilities by our peak season. And this increased focus on e-commerce is working.

We’ve seen great spikes in online engagement around our PPE manufacturing, new sustainability initiatives and new product releases, like our Overboard Yellow spring jackets. We are also seeing positive traffic and transactional trends. This tells me that we continued to be a highly relevant brand despite these difficult times and during the smallest quarter, and it gives me confidence that even in the event of a second wave we will be well positioned to meet consumer demand.

Number 6, Canada Goose thrives on change. One thing that I have embraced again and again in my career is, our Company is innately capable of dealing with change. In facing our biggest challenges, we have always count in new Year and continue forward to create new opportunities. Entrepreneurship is a core competency at Canada Goose. We’ve followed our own playbook and succeeded in doing things we’ve never been done before. Our temporary shift to manufacturing PPE is yet another example of this entrepreneurial spirit in action. I have always believed that our Canadian manufacturing infrastructure was a strategic asset, but never more so than now.

When the world shut down and the need for PPE became urgent, we pivoted our manufacturing and answered the call, all while we actively manage the business through this challenging time. In under three weeks, we retooled our supply chain facilities and work force to produce desperately needed PPE for frontline workers. With eight factories across the country, nobody in Canada was better positioned to help and we knew that it could not wait. Today our team is producing approximately 100,000 units of gallons every week at cost for provincial and federal contracts, and we have the capacity to do more as needed. We are truly embracing the uncertainty of this times and taking the time to refocus and reset to best position ourselves for continued success.

In closing, I am confident that we can take whatever comes our way, and come out even stronger on the other side. We are important — we are focused on the important things, and we are investing heavily in the areas that will be relevant in a pandemic and post-pandemic world. Our business, our brand and our culture remains strong, and I continue to believe in the power of Canada Goose and a brighter future for the world.

Thank you. And with that, I’ll turn it over to Jonathan to go over the details of our financial results.

Jonathan Sinclair — Executive Vice President, Chief Financial Officer

Thanks, Dani. Good morning, everyone. Thank you for joining us. I hope you are all safe and sound. The focus of my remarks today will be different. The reach and intensity of COVID-19 on our business has changed dramatically since we last spoke. The initial impacts of the pandemic were limited to our fast growing Asia business and travel-related demand in international destinations. This became a much larger and more global headwind at the end of the fourth quarter.

As North America and Europe closed down, the vast majority of our revenue sources, as well as those of our wholesale partners, were shut off. We are now just starting to come out of that. With that sequencing in mind, I will begin with a brief overview of our results, before addressing the actions we’ve taken and the current situation.

Looking at our key metrics for fiscal 2020, you will see a business that still delivered strong growth and robust profitability. That is despite the significant external headwinds. Total revenue increased by 15.4% to CAD958.1 million, adjusted EBIT margin was 21.6% and adjusted EPS per diluted share was CAD1.32. These levels of performance speak to the resilience of our high-margin business model.

In the fourth quarter specifically there are a couple of revenue impacts I want to highlight. Starting with revenue by channel. DTC decreased by CAD0.067 to CAD114.2 million. A near doubling of our store count was offset by disrupted traffic and reduced purchasing from Asian consumers, globally. The height of the regional outbreak coincided with the last window of peak fall-winter shopping around Lunar New Year. On a local basis, consumers were largely confined to their homes, and they avoided nonessential shopping as a precaution even if they have the choice. Outbound international travel and shopping from the region were also greatly limited.

In wholesale, revenue decreased by 24.2% to CAD25 million. Coming out of peak season, we started to see accelerating weakness early in the fourth quarter. This was particularly prevalent in Canada, which we discussed on our last call as having a more challenged retail environment. We made the call to move quickly, and significantly pulled back shipments in response. From where we now sit today, we are in a much cleaner inventory position as a result.

As COVID-19 started gaining momentum elsewhere, we’ve realized we were in for a longer and more intense storm than we initially expected. We moved quickly and boldly to bolster what was already a very strong financial position. The end result is something uncommon in our industry today. A business that can still be meaningfully cash flow positive on an annual basis with long runway through additional liquidity coverage. This includes PPE manufacturing, which we expect to be cash flow neutral.

In the first quarter of fiscal 2021 alone, we have reduced anticipated cash expenses and investments by approximately CAD90 million, more than offsetting the cash flow impact of lost revenue. The largest driver of these savings is working capital. The mandated suspension of down-filled jacket production has eliminated our biggest use of cash at this time of year. With CAD331.4 million of finished goods on hand at the end of fiscal 2020, we do not currently plan to make significant inventory investments in the first half of this fiscal year.

As retail reopens, our vertical model is an incredible advantage over those with outsourced just-in-time models in offshore jurisdictions. With fiscal 2021 sales largely supported by inventory on hand, we can easily accelerate or delay when we start the production as needed. From a product perspective, our offering is built around enduring icons with two-thirds to three-quarters of revenue by collection coming from core styles. This is really quite unique. It reduces margin risk. It supports our ability to carry over inventory from period-to-period more seamlessly.

In terms of savings from operating costs, this includes lower executive compensation and lower variable SG&A from temporary retail and manufacturing closures. We’ve also refocused our investments in marketing, and we have secured rent abatements and deferrals for many, but not all of our landlords. Partnerships are a give and take. We greatly appreciate the support of those who have worked with us.

Finishing with capex. We have reduced investments in both retail and manufacturing expansion, which are no longer needed in the current environment. We are currently planning around a reduction of 30% in annual spend relative to the CAD75.2 million that we spent in fiscal 2020. As needed we have further flexibility. Approximately 60% of our planned spend is earmarked for DTC, driven by new store openings. As we’ve shown in the past, we are comfortable delaying and cancelling uncommitted openings, especially if terms don’t work with this new environment. We now negotiate as a matter of course [Phonetic] for store closure clauses on all new leases.

Alongside cash flow, our balance sheet is another point of strength. We have increased our ability to borrow against our borrowing base in the asset backed loan, the ABL, by up to CAD50 million through a first in last out facility. Pro forma as at June 1, 2020, we have cash on hand of CAD119.7 million and undrawn credit facility capacity of CAD239.4 million. Most importantly, we have maintained low leverage, low interest rate, low interest costs and a highly flexible covenant light structure.

Moving on to current trends. From what was a total standstill a few months ago, we are seeing signs of a gradual recovery in Greater China. On the retail side, footfall around our locations in Shanghai, in Beijing and in Shenyang continues to be impacted. However, we are seeing some early green shoots. Conversion has been great for those who do venture out to shop. And our spring collection has resonated well. Not surprisingly, the recovery has been faster online on Tmall. The one exception to this in Asia is Hong Kong. Restrictions have cut off the flow of inbound tourism, which is the primary driver of luxury market traffic. Local consumers also have less urgency around purchasing, as outbound travel also remains restricted. As a result, our two stores there are still heavily impaired.

That brings us to North America and Europe, where the depths of COVID-19 are more recent. On March 16, we announced the closure of all retail stores outside of Greater China. That represents 75% of our total fleet. We have just had our first re-openings in Paris on May 20, followed by Milan on May 29 and Montreal, yesterday. We continue to evaluate further re-openings on a rolling basis. The first, of course, is regulatory approval. Approaches have varied significantly by jurisdiction, and we expect that to continue. We also want a high degree of confidence in the safety of our guests, in the safety of our employees, and in sustained levels of sufficient traffic.

While we’re keen to reopen our network, as is our hallmark doing this right, is much more important than doing it fast. Like everyone in this sector, our stores are going to have to go through an adjustment period. Based on what we’ve seen, we expect slow starts with gradual resumptions of traffic. As an experiential brand, We believe consumers will continue to value in-store experiences in the longer run. With changes to travel, we will need to take a more localized approach in certain locations, but we know that these stores are still very productive on local demand alone. We also have a well established footprint in Greater China to serve what are typically our most active international shoppers, but at home.

When it comes to e-commerce, as Dani mentioned, consumers are living much more digitally. We have seen strong engagement and significantly higher traffic on our websites driving positive transaction trends. This momentum is a great sign of brand strength, particularly at the time when people’s lives have been turned upside down.

That said, it is nowhere near offsetting the much larger temporary revenue shortfalls in other parts of the business. We are currently at a low point in the year for online purchasing. In a buy now, wear now world. This is natural given the limited in-season relevance of our offering. Based on historical patterns, we expect e-commerce to become much more of a needle mover in season during the fall and winter months.

Moving on to wholesale. We have had a near total shutoff of shipments since the end of March due to the closure of our partner retail operations. This has continued through to the present. As the channel starts back up, you will see us take an even more disciplined approach to our partners and to the shipment volumes. It remains strategically important, but we are increasing our emphasis on DTC, particularly in the early stages of reopening. As you know, this allows us to control the consumer experience directly while earning double the revenue and triple the profit on a unit-for-unit basis.

Reiterating what Dani said in relation to the current trends I’ve just described, I want to underscore just how well positioned we are with regards to timing. The temporary loss of our primary revenue sources has coincided with our slowest period. Just 7% of fiscal 2020 revenue was generated in the current quarter. We don’t get into peak sales and earnings until the winter months in the second half of the year. This reduces the impact and gives us much more buffer relative to the ongoing uncertainties everyone in the sector is facing.

In summary, with a resilient and flexible financial profile, we believe we are well positioned to come out of COVID-19 even stronger. We will continue to play offense and focus on the long game. What we stand for as a brand has never been more relevant, and our distribution is highly adaptable to how the consumer shopping evolves. COVID-19 has changed the course we’re on, but not the destination. The foundation of our long-term potential from channel to geography to product remains the same.

With that, I will pass it over to the Operator to begin Q&A.

Questions and Answers:

Operator

Thank you. [Operator Instructions] The first question comes from Camilo Lyon of BTIG. Your line is open.

Camilo Lyon — BTIG — Analyst

Hi. Good morning, everyone. Thank you for the commentary and the updates.

Dani Reiss — President and Chief Executive Officer

Camilo, welcome back. How are you doing?

Camilo Lyon — BTIG — Analyst

Thank you. Thanks. I’m doing great. Thanks. You shared a lot there, Jonathan, at the end, and I wanted to delve into some of the points that you made. I guess first, one of the last comments you just made, increasing your focus on DTC, I think that was in light of the shut-in of demand from the wholesale channel. Could you just provide some more color on what you mean by that and maybe shed some color on the discussions that you’re having with your wholesale partners about fall shipments, and then how you’re tying all of this into your well positioned inventory that you have on hand?

Jonathan Sinclair — Executive Vice President, Chief Financial Officer

Yes. If we take the first part of that, which is how we’re focusing on DTC, clearly we’ve talked about the investment program that we’ve got lined up. We see a significant opportunity to continue to develop our retail portfolio, as well as to work with our existing stores and our existing client base there. We’re also investing strongly behind our online business, which we see as pivotal at this time as part of our — core part of our DTC channel.

Dani Reiss — President and Chief Executive Officer

Yeah. [Speech overlap]

Camilo Lyon — BTIG — Analyst

Okay. Go ahead.

Dani Reiss — President and Chief Executive Officer

I was going to add some color on wholesale. And we have great relationships with our wholesale partners. And obviously, as everyone’s stores were closed for a period of time, there’s more still inventory [Phonetic] in channel, and that’s a natural by-product of what happened. But, so as a result — as a result our order book will be slightly lower from a wholesale perspective going into next year. That said, largely our products are not discounted and our business model remains intact, and we’re feeling very good about the partners that we have there. Many of them are expecting us to be one of the brands that help lead them through the recovery, and so to the extent that — we’ve always said the wholesale is an important part of our business and continue to be important.

Camilo Lyon — BTIG — Analyst

Great. So is that to suggest that the inventory at wholesale right now is relatively sufficient for the upcoming season, and that’s what’s going to make you focus on your DTC channel all the more, that you may have some fill-in product to create a more full representation but for the most part, what exists at retail — wholesale is sufficient?

Dani Reiss — President and Chief Executive Officer

No. Not exactly. We — as I was saying, there is more — there is somewhat more wholesale — inventory in channel than is typical. That said, our order book going forward, we’re very happy with it. It exists. It’s strong. It’s not as strong as last year because of the inventory that’s in channel. But there will be wholesale shipments this year. There will be significant wholesale shipments this year, and the reason why we’re focused on DTC so much is that, especially as we’ve seen in this environment, that’s where people have been engaging.

We’ve seen great engagement there, and we know that no matter what happens — and the future is so unpredictable as we wrestle with this virus, but no matter what happens people will be online, people will be engaging and shopping online, and we want to have our strongest possible omni-channel experience for as many people as possible on our website. And that’s why we’re focusing there. But wholesale, and to the extent that it may be available, it’s also going to be a channel that people shop there.

Jonathan Sinclair — Executive Vice President, Chief Financial Officer

All we’re saying is, it’s just a bit too early to call exactly what that looks like. But as Dani said, we fully expect healthy shipments in the channel.

Camilo Lyon — BTIG — Analyst

Is there a direction that you could provide, that’s either positive or negative on the order book at this point?

Jonathan Sinclair — Executive Vice President, Chief Financial Officer

So, I think the key thing to think about is the visibility of the wholesale channel is much lower than it’s typical at this time of year. For reasons I’ve just said, we’ve shut off shipments since March, and that has continued through to today. So you should — in relation to last year, you should expect lower shipment channels — lower shipment levels, sorry, and a similarly later timing. But beyond that, it’s really too early to call.

Camilo Lyon — BTIG — Analyst

Got it. Understood. Thank you. And then, just if you could provide some color on your variable versus your fixed costs, you mentioned that you took out about CAD90 million in expenses. If you could just maybe help articulate your percentages of variable to fixed and how we should think about that going forward for the year?

Jonathan Sinclair — Executive Vice President, Chief Financial Officer

So the best way to think about this is to think about our cost base and the three components in which I normally describe it. So we have our direct costs, our channel costs. And typically, we’re able to manage those in line with revenues, certainly when it comes to the components around variable rent and people costs, which are two of the bigger components.

The second cost bucket is marketing, which we would normally expect to stay at the same proportion of revenues, and whilst we don’t pick that out as a specific number, we do say that the remainder — that the amount of that varies pretty much in line with revenues. And then the third component is overheads. And when it comes to overheads, that is somewhat more fixed, although, obviously, we take the appropriate actions there to try and size that for the business size that we are now.

Operator

[Operator Instructions] The next question comes from Ike Boruchow of Wells Fargo. Your line is open.

Ike Boruchow — Wells Fargo — Analyst

Hey. Good morning, Dani, Jonathan, Patrick. I hope you’re all doing well. The couple from me Jonathan or Dani not sure who wants to take it. But first, can you just maybe break out the major buckets of the CAD90 million in cash savings and how that should be spread across for the year? That’d be helpful. And then just on the inventory, really helpful comments. I’m just kind of curious, given what you’re — how you’re managing inventory. How does it limit your ability to potentially introduce some newness this year given it sounds like you’re trying to sell inventory that’s already been produced, and is there a situation where obligations to manufacturing PPE potentially limits your ability to produce regular product at some point this year? Thanks, guys.

Jonathan Sinclair — Executive Vice President, Chief Financial Officer

So let me take the first of those, which is around the cash reduction, and then I’ll pass to Dani. So as I said before, we’ve reduced our cash expenses and investments by approximately CAD90 million in the quarter. Over two-thirds of that comes from working capital. Inventory is typically the largest use of cash at this time of year, and with fiscal 2021 largely supported by inventory on hand, it really does greatly reduce our need for further investment. The remainder is split roughly evenly between reduced operating costs and reduced capex. What I’d also underscore is that we’ve got further flexibility to reduce cash outflows as the year evolves, should the need arise.

Dani Reiss — President and Chief Executive Officer

Yeah, and from an inventory [Phonetic] point of view, Ike, we — I had answered earlier in my comments, we’re very happy with the amount of inventory we have and the complexion of inventory that we have, and also continued to have the ability to — we did — we continued to have the ability to manufacture more of it as needed. And the inventory that we have staged was always planned to run fiscal 2021, and there was always lots of newness built into it. So a lot of the — so a lot of our new programs for fall 2021 are alive and well and will be part of our program for this year. As we speak, we’re introducing newness into Greater China, and we’re seeing great success, including our new spring brand collection, for example.

Ike Boruchow — Wells Fargo — Analyst

Great. Thank you.

Operator

Your next question comes from Kate Fitzsimons of RBC. Your line is open.

Kate Fitzsimons — RBC — Analyst

Yeah. Hi. Good morning. Thanks very much for taking my questions. I guess, if you could just talk about the emphasis on the direct channel, you had alluded to some greater investments in e-commerce and omni-channel. Could you just provide some greater color there? And then Jonathan, I guess, just how are you approaching store openings into fiscal 2021? And as we think about the productivity recovery as the year progresses, how are you approaching it, just given the strong tourist business that you guys typically have compared to local customers? Thank you.

Jonathan Sinclair — Executive Vice President, Chief Financial Officer

So — let’s take that in sequence, which is around — initially around the e-commerce. Clearly, as we — as I said in my prepared remarks, we’re putting a lot of emphasis on the DTC channel. The consumer is acting more digitally than ever, and as a digital-first brand that puts us in a very strong position. We continued to develop the functionality on our websites, we continued to work that with our stores, we launched some omni-channel functionality here in Canada last year, last fiscal, and that’s something that we see as a platform going forward.

When it comes to our store openings, I think it’s a little early to call it with integrity. There are a lot of moving parts around reopening timelines, negotiations, how traffic recovers. But we will be agile and flexible as the year evolves. We do have some world-class locations already secured. A couple of examples, one here in Toronto in the Eaton Center, one in Shanghai in the IAPM Mall. And we also have significant flexibility with our commitments. As I said before, we will not sacrifice our standards if the business case is no longer there.

Operator

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

Omar Saad — Evercore ISI — Analyst

Good morning. Thank you for taking my question. In February, you were really one of the first out there to sound the alarm, even though it was still very early in the pandemic of the impact on the Chinese consumer, especially the traveling consumer and how that impacted your business. Maybe you give a little bit more of an update on what you’re seeing with the Chinese — all-important Chinese consumer, whether it’s through digital, whether it’s in stores? In China, obviously, there’s probably not a lot of Chinese traveling tourists out there. But maybe a little bit more update in terms of how that Chinese consumer is doing in the last couple of months or so since that market has reopened? Thanks.

Dani Reiss — President and Chief Executive Officer

Hey Omar, it’s Dani. It’s — yeah, China is on the road to recovery. We definitely see that. And all of our stores in China now open, and the recovery is happening, and it’s progressing. I think that you are correct, and I think that it’s reasonable to speculate that there will be a reduced amount of tourism next year. And what the unknown is the degree to [Phonetic] which people shop for all brands, the shopping behaviors and patterns of people, whether they shop in their own country and how much more since they’re not travelling.

And I think this is — I’ll bring it back to online. It’s one of the reasons why we’ve invested so much in our online and e-commerce capabilities for this year. Because I think that to the extent that people go out to shop and to the extent those numbers are reduced, the differential will go online and we want to be able to serve them really well. Another thing that we’re seeing, which I think is important to note is that the people that are going out to shop, their conversion rates are higher, and that means that those who are shopping are shopping with intent.

Omar Saad — Evercore ISI — Analyst

Thanks for the update, Dani. Good luck, guys.

Jonathan Sinclair — Executive Vice President, Chief Financial Officer

Thank you.

Dani Reiss — President and Chief Executive Officer

Thank you.

Operator

Your next question comes from Jonathan Komp with Baird. Your line is open.

Jonathan Komp — Baird — Analyst

Yeah. Hi. Thank you. Can I just maybe get an update kind of your broader sense when you think of the economic sensitivity for your brand? I know that it was a question that may vary pretty widely across geographies. But in terms of any pressure on discretionary spending in Canada or abroad, how do you think about the ability to withstand and remain relevant?

Dani Reiss — President and Chief Executive Officer

Thanks, Jon, for your question. I think that our brand has been able to withstand and even grow through many crises over time, and I think the ability for us to do that is because we provide a functional product. I think that our products last for a lifetime, and they are a safety protective product. I think — and I think for those reasons people gravitate towards products like that. I think especially this winter when it’s cold outside, if people don’t feel comfortable going outside very much but want to go for a walk, I can’t think of a better item to purchase than a Canada Goose product, which is a — I think our items are seen as investment items, and I think that’s why we feel very confident that we are more relevant than ever.

Jonathan Komp — Baird — Analyst

Okay. That’s really helpful. And maybe just one follow-up, when you think about your key partners both in Canada and — it has been a topic over the last few quarters, but how do you think about the health of your wholesale partners, and especially, if other brands were to be more promotional or impact the margin structure for some of your partners? How do you think about kind of distribution and what that may look like?

Dani Reiss — President and Chief Executive Officer

Yeah. We’re obviously monitoring the situation and with the wholesale and how that unfolds. We feel very comfortable and we feel very secure with our relationships with our wholesale partners, which are very strong, and also with the way that our brand is perceived and that we are a full-price brand. I think that to the extent the wholesale landscape changes, we’re — as I said, we’re monitoring it, and I think that any changes in that landscape just provide further opportunity for us to lean more heavily into our direct-to-consumer channel. And I think that’s a good thing for our business.

Jonathan Komp — Baird — Analyst

Okay. I appreciate the color. Thanks, everyone.

Dani Reiss — President and Chief Executive Officer

Thank you.

Operator

Your next question comes from Adrienne Yih of Barclays. Your line is open.

Adrienne Yih — Barclays — Analyst

Good morning, everybody. Glad to hear everybody is well. Dani, I guess my question is on the supply chain. I wanted to talk about the ramp and the gradual resumption of down-filled jacket production. How much are you still doing in contract manufacturing versus direct, maybe currently? And what do you expect that to be at the end of the year? And is there a significant portion of the down fill or the raw material that’s actually sourced through China/Asia?

Dani Reiss — President and Chief Executive Officer

I’m sorry, I missed the last part of that question. But what I’d tell you — I mean, I — over eight factories right now they’re — at the moment, they’re all manufacturing PPE for government contracts. And we are able to, in some cases — it’s province by province in terms of which ones are able to open at which time, but we’re able to open as needed to continue to manufacture down-filled products.

We have all of the raw materials that we need in-house, and we’re fully able to pivot to manufacturing products that we need, as we need them. And you asked about the percentages. The majority of our production at this point is in-house manufacturing. I think it’s in the neighborhood of 70% or so right now.

Adrienne Yih — Barclays — Analyst

Okay. Great. And then, Jonathan, you made a comment during your prepared remarks, you’d said obviously DTC, I believe, double the margin. Were you referring to gross margin or four-wall margin — on the DTC side or EBIT margin?

Jonathan Sinclair — Executive Vice President, Chief Financial Officer

No, my comment is on the four-wall profitability of retail versus wholesale. So it’s the retail margin, the bottom line retail margin.

Adrienne Yih — Barclays — Analyst

Okay. Fantastic. Thank you very much. Best of luck.

Dani Reiss — President and Chief Executive Officer

Thank you.

Operator

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

Mark Petrie — CIBC — Analyst

Hey, good morning, and thank you for all the commentary. I just wanted to ask on the marketing strategy and initiatives. And in the past, a lot of it’s been sort of grassroots and in-market and event-driven. Obviously, that looks very different in a pandemic and even post-pandemic. And I’m just wondering how you’re thinking about marketing initiatives and brand-building over the next year.

Dani Reiss — President and Chief Executive Officer

Yeah. Thanks — thank you for the question. I think — so our philosophy on marketing, first of all, I think it’s very social media-driven, it’s very internet-driven, and a lot of it exists online. I think that’s very important. I think that at a time like this, one of the tendencies I think that a lot of brands, a lot of companies have is to first cut marketing and I believe that spending on marketing is a wise investment at times like this.

I think that it’s important, especially for a brand like ours, that we have authentic and real stories to tell, and we continue to do that and the primary channel for that is online, without question.

Mark Petrie — CIBC — Analyst

Okay. Thanks. And also just wondering, you mentioned some of the positive web trends or online traffic trends that you’ve been seeing. I’m just wondering if you can provide a little bit more commentary in terms of how that’s looked by region and then what sort of the pacing of that has been, if it’s coincided with sort of lockdowns being eased and broader spending recovering or what that’ll look like? Thanks.

Dani Reiss — President and Chief Executive Officer

Well, we don’t break out by region or that sort of information, but we are very encouraged by what we’re seeing, there’s no question about it. It’s difficult — the problem in this kind of environment, which is so uncertain, and also in our smallest quarter, it’s difficult to look at any of this data and rely on it as a leading indicator. But overall, the trends are very positive and we’re super happy to see that.

Mark Petrie — CIBC — Analyst

Thanks a lot. All the best.

Dani Reiss — President and Chief Executive Officer

Thank you.

Operator

Your next question comes from Sam Poser of Susquehanna. Your line is open.

Sam Poser — Susquehanna — Analyst

Thank you for taking my questions. Good morning, and I hope everybody is well. I wanted to — I just wanted to follow up, when you think about — I know you’re not guiding, but when you think about the back half of the year, do you think that given the revenues, the mix benefit of selling goods directly, that you’ll be able to offset maybe some wholesales more than offset wholesale shortfalls by the increased business, or theoretically the increased business in your direct business, specifically digital?

Dani Reiss — President and Chief Executive Officer

I think that — I mean, I think that — it’s the reason why we’re not providing guidance is because it’s so hard to predict. We are super encouraged about it and there’s a lot of positives and a lot of things that we’re looking at with a great amount of optimism. But having said that, it’s — there’s so much uncertainty in the world today that it’s impossible to provide any sort of concrete guidance at this time.

Sam Poser — Susquehanna — Analyst

Thanks. Thank you. And then secondly, do you believe — I mean, what feedback have you been getting both from your direct consumers and from your wholesale partners in many of the initiatives that you’ve been taking vis-a-vis what you’ve done in producing PP&E, as well as the sustainability efforts as far as sort of improvement or changes or evolution of the brand — of the Canada Goose brand itself? And despite a warm winter last year, some of your wholesale partners, warmer than they might have been without those initiatives, warmer to you rather than they would have been without those initiatives.

Dani Reiss — President and Chief Executive Officer

I think that the sentiment around Canada Goose, both with our wholesale partners and with our consumers, remains and continues to be very strong. I think that — to tie that, and talk about PPE manufacturing, I mean the reason we decided to make PPE as soon as we were — became aware of the urgent need forward because it was the right thing to do, and since then we’ve engaged with governments and answered their call and we’re producing lots of it today. And the — we were uniquely positioned in Canada, having the — I don’t think there’s anyone else with the capabilities that we have to do what we’re doing, at the scale that we’re doing. And we’re doing that because we’re in a situation where we were able to help, and that’s the right thing to do.

And I think that’s — I’m very proud to be able to do that. I think from a corporate citizen point of view and our sustainability initiatives, these are — we all know that the apparel industry has to change and there’s a lot of conversation around that, and we are committed to being a leader in that. I think that everybody, both our consumers and our retail partners, are happy to see that with anybody because I think that that’s a societal need and something that has to change, and we’re really excited about moving forward with this and being a major part of that.

Sam Poser — Susquehanna — Analyst

Thank you very much, and good luck.

Operator

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

Michael Binetti — Credit Suisse — Analyst

Hey, guys. Thanks for all the commentary today. Congrats on a nice quarter, managing a very tough macro. I wanted to ask, I know you gave some commentary on the annual trends in the press release and today on the call, but the changes in the D2C gross margin, it was up — I think, fourth quarter was up about 550 basis points on a two-year stack in the middle of a pandemic. So something is going very right there. I’m just curious what the composition of that was, specifically in the fourth quarter, and if that could be change in how we should think about it going forward.

But then, backing up, Dani, I wanted to ask you on D2C. I’d love to know on a multi-year basis how we should think about the physical store fleet. I know you said it’s too early to look out this year, but the e-commerce opportunity is clear here. But there’s been a lot of difficulty imagining what your store fleet could look like longer term. I think the real value creation for this brand in a DCF would be your ability to add these stores that clearly generate returns well above your cost of capital. For the long term, whether those stores open and comp negative and then settle in, I know there’s been a lot of volatility in figuring that out from the financial world. But you’ve got a fleet of stores that has very different economic differences on a store-to-store basis.

How close do you feel like you are to having a prototype where you could drop in 50 locations or 100 locations in the North America market, have a repeatable prototype with more consistent economics, better leverage on the preopening process? I think it’s important because as it was pointed out earlier in Q&A, a lot of the wholesale channel partners that you have do have some level of financial distress today that’s kind of making the commentary on this call predictably focused more on the D2C side. Thanks.

Jonathan Sinclair — Executive Vice President, Chief Financial Officer

Okay. So, I’ll take the gross margin part of that. I think you’ve heard me talk a lot about the way in which we manage our gross margin in terms of the tailwinds that we create and the headwinds. We’ve seen that algorithm playing out to good effect. What we see is that with a combination of pricing, sourcing, that we’re able to create some very positive tailwinds in gross margin. You see that playing out in DTC. That’s combined with favorable mix when it comes to both product and geography, and that helps finance the investment that we continue to make in new product development as well as the inflationary pressures. But what I would also say is that we see our job over time as keeping our channel margins roughly where they are. And the mid-70s for DTC is where they belong in this model and that’s broadly speaking how we see it playing out over time, and that’s not changed.

Michael Binetti — Credit Suisse — Analyst

Got it.

Dani Reiss — President and Chief Executive Officer

And, yeah, to comment on stores, I think that — I think it’s reasonable for you to consider us rolling out similar number of stores next year, as Jonathan mentioned in his remarks, and continue this year. We do not see ourselves as a brand, especially in today’s retail landscape that has hundreds of stores. We want to have the best and most important stores in the most important locations in the world, and we believe that we are doing that. I think that as the world recovers from this global pandemic, I think physical retail is still going to be important, especially for a brand like ours which is experiential. And I think we’ve demonstrated that with our experiential stores, which I think will be actually uniquely positioned this year, given that it is very social-distanced inherently. I think that — so, I think that you can expect us to continue rolling out stores, but we don’t have a specific target. Other than that, we’re not going to open hundreds of stores.

Michael Binetti — Credit Suisse — Analyst

Okay. Thank you very much.

Operator

Our final question for today comes from Erwan Rambourg of HSBC. Your line is open.

Erwan Rambourg — HSBC — Analyst

Yeah. Hi. Good morning, gentlemen, and thanks for taking my question. I just wanted to come back to Asia because repatriation of growth in China started way before COVID-19, I think COVID-19 was just an accelerator. A lot of your luxury peers are mentioning the fact that they’re growing at 60%-plus. I wonder if you could qualify what you’re seeing there? Because I think you were saying that traffic is still down but conversion rates are pretty good and because you had a lot of purchases from Chinese clientele in North America, I’m wondering if you can quantify what you are seeing in China. And maybe if you have a better approach today in terms of what your sales by nationality look like globally, i.e. what is the proportion of sales you do with Chinese in your view today?

Jonathan Sinclair — Executive Vice President, Chief Financial Officer

So, I think the commentary that we’d give on this is very much around the fact that we’re at a point in time where sales levels are naturally low. So any context I’m giving around this is against our low point in the year. And therefore, you get a lot more noise and signal even when you look at all the COVID variables. What we have seen for sure is we have seen some early signs of recovery in our quietest trading period in mainland China.

As I said — as in — as I said in my remarks — prepared remarks, Hong Kong is still heavily impaired because there’s just a complete absence of movement inside and outside of the country. But when it comes to mainland China, we are seeing good, strong performance coming back very gradually, high conversion rates particularly standing out, and that doesn’t matter whether I’m talking about Shanghai, Beijing or Shenyang. I’m seeing it in all of them, and I’m seeing it more strongly online.

Dani Reiss — President and Chief Executive Officer

Yeah. [Indecipherable] commentary on Hong Kong. I think this is a good news, this is good for business, this relates to every retailer in Hong Kong and that the latest speculation is that right now, there’s a 14-day mandatory quarantine period in Hong Kong, so very few travelers are coming from mainland to Hong Kong and they’re talking about or speculating about lifting that in early July. That may or may not happen. But whenever that does happen, that’s good news for anybody who has a retail store in Hong Kong because there will be more tourists and more people from mainland to purchase stuff, and that’s not that far away.

Erwan Rambourg — HSBC — Analyst

Thank you. And just a quick follow-up on Asia also, most of your luxury peers are saying that Korea is also rebounding quite nicely. I mean, I don’t think any Korea stores were actually shut during the COVID-19 pandemic. I don’t know if you have a footprint there or if you can tell us a bit how you think about that market in terms of potential.

Dani Reiss — President and Chief Executive Officer

Korea is a very strong market for us. We do well there. We — considering their next year, we expect to have a good season there this year. And overall, the long-term potential in Korea continues to be extremely large and we have a lot of runway there.

Operator

That was the final…

Jonathan Sinclair — Executive Vice President, Chief Financial Officer

Remember, that one is a distributor market for us.

Operator

That was the final question for today. I will now return the call to Dani Reiss for closing remarks.

Dani Reiss — President and Chief Executive Officer

Thank you. And thank you all for taking the time to be with us today. We appreciate your interest and your support of Canada Goose. Stay safe, and we all look forward to speaking to you again very soon. Take care.

Operator

[Operator Closing Remarks]