Canada Goose says labor costs hit profit margins, shares dive

(Reuters) - Luxury coat maker Canada Goose said higher labor costs in Ontario and investments to expand overseas hit profit margins in the third quarter, driving its shares down 9 percent on Thursday.

A sign of Canada Goose is pictured outside its store in Beijing's Sanlitun area, China December 15, 2018. REUTERS/Jason Lee

The Toronto-based company’s results also came as data showed U.S. retail sales recorded their worst drop in more than nine years, suggesting a sharp slowdown in economic activity at the end of 2018.

Those worries overshadowed news of Canada Goose’s better-than-expected earnings in the quarter ended December and a stronger outlook for full-year revenue.

Profit margins at the company’s direct-to-consumer business, which includes online stores and company-owned retail outlets, were 76.1 percent, compared with 76.5 percent a year earlier. At its wholesale unit, margins fell to about 48 percent from 51 percent.

Higher labor costs affected the wholesale unit more because that business has lower profit margins, Chief Executive Dani Reiss said on a conference call with analysts.

Ontario, Canada’s most populous province, raised minimum wages by 21 percent to C$14, an increase that went into effect in January last year.

“Despite a clear path to revenue growth, channel level gross margin declines raise questions about future upside and whether shares are priced for perfection,” analyst Simeon Siegel of Nomura Instinet said.

Canada Goose has so far weathered a broader retail slowdown in North America thanks to its premium tag and brand value. Its high-end parkas range from anywhere between $500 and $1,700 in the United States.

Reiss told analysts he was “really bullish and excited” about demand in China, the biggest market for luxury products in the world.

The company opened its first store in mainland China in December, drawing a large crowd of shoppers eager to buy its 9,000-yuan ($1,330) coats. Canada Goose expects to have about 20 brick-and-mortar stores around the world by 2020.

The company now expects revenue growth of at least 35 percent in the year ending March, compared with an earlier forecast of a 30 percent rise, as it bets on the overseas expansion.

Its December-quarter revenue climbed 50 percent, while net income surged to C$103.4 million from C$63 million a year earlier. Excluding one-time items, Canada Goose earned 96 Canadian cents per share, beating analysts’ average estimate of 81 Canadian cents, according to IBES data from Refinitiv.

The per-share earnings figure was 18 percent ahead of Wall Street estimates, the smallest margin in at least eight quarters, according to Refinitiv data.

Toronto-listed shares of the company fell 6.7 percent in morning trading, while U.S. shares were lower by 9 percent.

Reporting by Arundhati Sarkar in Bengaluru; Editing by Sai Sachin Ravikumar