Canada Goose Holdings Inc

TSX:GOOS

Earnings Call Transcript 2021-Q2

[Operator]

Good morning. My name is Ashley, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Canada Goose Second Quarter 2021 Earnings Call. [Operator Instructions] I would now like to turn the call over to Patrick Bourke, Vice President, Investor Relations. You may begin your conference.

[Patrick Bourke, Senior Director of Investor Relations]

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. We ask that these are limited to 1 each to allow as many as possible to participate within the allotted time. 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 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 issued this morning and available on our Investor Relations website. With that, I will turn the call over to Dani.

[Dani Reiss, Chairman, President & CEO]

Thank you, Patrick, and good morning, everyone. Thank you for joining us on the call today. I'm really pleased to be here to provide you with an update on our performance for the second quarter to reiterate our strategic approach to navigating the COVID-19 environment and highlight trends that we see across our business going into our peak selling season this winter. Like everyone, we continue to navigate the ongoing complexities of today's world and witness how the pandemic is reshaping the global economic landscape. As I said before, I believe the adversity when viewed as an opportunity to drive success. Building on that and believe that the uncertainties that we have faced this year have sharpened our focus and made us even more disciplined and flexible. Our performance in this environment has reinforced my confidence in our business and our brand in this fiscal year and beyond. On our last earnings call, I spoke to you about our approach to navigating the global pandemic, namely where we see opportunity, we've accelerated our strategic plans to capture it. This approach is working, and we are seeing acceleration across our business heading into our busiest season. And so here is an update on the progress we have made on this front. First, our e-commerce business is accelerating. Second, our business in Mainland, China, has grown by over 30% this quarter. And third, our continued operational discipline has driven a return to profitability. I'm proud of the way our team has executed, particularly in light of such uncertainty and in such a challenging global environment. We have demonstrated the flexibility to execute against the strategic priorities we saw for our business and our deliberate and decisive action has driven strong results. Not only have we navigated the current environment, we have reaffirmed our confidence in our ability to manage through uncertainty and come out stronger. This is a competency we expect will continue to serve us well going forward. Regarding our global e-commerce business, we are pleased with the positive traction we have seen this quarter, which resulted in revenue growing more than 10%. Within that growth, we realized an increase in momentum in September. Moving past Q2, we have seen further acceleration in continued improvement across our business. Digital will obviously play an important role in the future of retail, and we will continue to invest in expanding both wholly owned international e-commerce and our omnichannel solutions. The strength of our e-commerce business will remain an important asset and business driver as digital adoption continues to grow among consumers globally. Next, on to our continued expansion in China, where we continue to successfully execute against our strategic growth plans for our business. I am very pleased to report that our business in Mainland China has recovered to pre COVID levels, with revenue growing this quarter by more than 30% compared to the same quarter last year. As we set out to do, we concentrated our new store expansion efforts for the year in this market, more than doubling our footprint so far. We have continued to make significant investments in this important luxury market to drive a long-term and sustainable business in the region for years to come. With this foundation in place and against the backdrop of the continued acceleration of sales that we have seen beyond Q2, I'm very optimistic about the strategic approach that we have taken to market. Another highlight this past quarter was our profitability, while still delivering on our long-term growth strategy, early in the pandemic, we took a rigorous approach to assessing our SG&A, which, as it relates to this quarter, resulted in a decline of 15%. As well, despite a lower revenue base due to disruptions, we have already returned to showing an operating profit. And our free operating cash flow was the same as it was this time last year. Our high-margin model, combined with our savings initiatives, are paying off. While we have taken a flexible approach to managing our expenses where opportunity exists, we have approached incremental investment opportunities with decisiveness. In our current environment, we see opportunity in building our brand through strategic marketing to grow demand and to reach new audiences. In particular, we focused these investments on our digital businesses globally and the Mainland, China, bricks-and-mortar businesses. As I noted earlier, we see these businesses as key performance drivers going forward. And so we believe these moves to drive and capture demand of where it exists will continue to be important. Now I'd also like to touch on how we're thinking about consumer behavior as it relates to trends we're seeing across markets heading into the winter season. We strongly believe these trends will build on foundational strengths, which we consider to be a tailwind as we head into the season. First, this year, we've seen the word protection take on a new meaning in the world, and by extension, across our business. Today's consumers' needs are changing. Consumers are looking to spend more time outside, not just for normal day-to-day purposes but also for necessity. For decades, we have helped to protect explorers, scientists and everyday consumers from the element in some of the harshest environments in the world. We are known for protection, we are the reference parka. With consumers spending more time outdoor of this winter both recreationally and professionally, we believe this will create an elevated demand for functional, authentic and protective apparel. As a brand, we have never been more relevant and more universally needed. Beyond our core products, we've continued to explore new ways to protect people. In September, we launched our first-line of face mask for consumers designed for comfort as well as protection. This product extension was a natural evolution of the foundation we built through our Canada Goose response program, which created over 2 million units of personal protective equipment for frontline healthcare workers. Consumers' response to our masks has been remarkable. The collection is one of our most visited pages on our website with a strong sell-through globally. As a result, and thanks to our very flexible manufacturing capabilities, we are actively producing more masks to meet the demand. Second, we continue to see strong demand across our new categories and products. In August, we introduced our first fleet collection across our DTC channels. Focused and purposeful, the collection is built on the foundations and experience that we gained through knitwear. The reaction from consumers was exceptional with the collection nearing sellout in many regions. Again, our expansion into a new product category has been validated. As we expand authentically into a variety of new offerings, our promise to consumers has always been that we will only make best-in-class product. Delivering on that promise has proven to be the foundation of our success. Product and category expansions have become a core competency for us at Canada Goose as we purposefully and methodically expand our consumer relevance as a lifestyle brand. And we believe that this core competency is a solid foundation for our business ahead of our footwear launch next fall. Third, doing good is good for business. Last month, we learned that the cadence of the New Jack school, Arctic Bay needed winter clothing. Inbound shipments to the village that had been impacted by the pandemic. So in partnership with Ryan Reynolds, we announced the donation of more than 300 Canada Goose parkas as well as Bath & Boots to help keep the students warm this winter. At the same time, we also announced the expansion of our Resource Center Program. Until now, we have donated over 1 million meters of fabric and other materials to communities in the north through our Resource Center Program. Now the program will also see thousands of repurposed parkas donated to any communities across the Arctic. These refurbed parkas will not only deliver warmth and protection to communities in the north, but they will also deliver against our commitment to operate more sustainably. We are building a more circular business model, reducing ways while strengthening our commitment to communities in the north. Finally, bricks and mortar remains an important connection to consumers long term. I've already spoken about our investments in Mainland China and the growth we've realized through our expansions there. I'm also pleased to give an update about our Yorkdale store here in Toronto. During the last quarter, we completed an important expansion to Yorkdale, nearly doubling its footprint. Yorkdale has consistently proven itself to be one of our most productive locations since opening in 2016, and I look forward to its continued success especially heading into our peak selling season. Moving beyond North America, our stores in Europe have been impacted by nonessential business closures. London and Milan both begin a foreclosure today and tomorrow, respectively. And Paris is closed for at least 2 more weeks. I'm proud of our retail team and the strength in leadership that they continue to display as we navigate this current climate. In closing, I believe our performance this quarter reflects our discipline, flexibility and our strong financial position. We've shown that the strategic approach we've taken to navigating the current environment is driving results, and we have confidence in our accelerating trajectory. Now that we're heading into our most productive season in the fiscal year that began with so many unknowns, and it's still not without uncertainty, I remain very optimistic about this year and beyond. I look forward to updating you on that in the months to come. With that, I will turn it over to Jonathan, who will go over our financial results with you in more detail.

[Jonathan Sinclair, CFO & Executive VP]

Thanks, Dani. Good morning, everyone. Thank you for joining us. Reflecting on our progress in quarter 2, there are 3 key themes that stand out, our 2 strategic priorities, Mainland, China, and e-commerce, are leading the way in our recovery. A high-margin business model and our implemented savings initiatives are driving profitability and cash flow. And we're entering the peak season in an agile position. We are unlocking cash through inventory already staged while retaining commercial flexibility. Turning to the historical results. Total revenue decreased by 33.7% to $194.8 million. In normal times, this is our largest wholesale quarter. Following a near total shut off in quarter 1, we gradually and carefully resumed shipments in quarter 2, with channel revenue decreasing by 45.7% to $118.5 million. In the DTC channel, revenue decreased by 37.7% to $46.2 million in a seasonally slow period. This was driven by lower contributions from stores in North America and Europe in the early stages of reopening. As expected, traffic was significantly lower due to the pandemic. We also contended with reduced operating hours and limited occupancy levels. Within DTC, e-commerce was a bright spot. We had double-digit revenue growth for the quarter, with a significant acceleration in trend in September. We are encouraged by this positive momentum moving towards peak online demand in Q3. From a geographic lens, Mainland, China, was the first market to return to growth with DTC revenue increasing by over 30%. From a near total shutdown only 9 months ago, this is a powerful recovery. Foot traffic has normalized, the consumers eager to spend and brand momentum is strong. In terms of profitability, the adjusted EBIT margin was 8.1% despite significant disruptions to the top line. Excluding not-for-profit PPE manufacturing, consolidated gross margin was 55.8%, 120 basis points higher than last year. We had pristine full price economics across the business with a DTC gross margin of 76.8% and a wholesale gross margin of 47.6%. Total SG&A decreased by 15.1%. This was supported by variable components in our cost base, including marketing and contingent rent as well as our implemented savings initiatives. As it stands today, we expect SG&A to be in line with last year in the back half of the fiscal year. This step-up is driven by strategic investments in brand building and demand building, focused on e-commerce and Mainland, China. We have flexibility in both directions to capitalize on further trends and further opportunities or to reduce spend as needed. Turning to cash flow. The resilience of our model is even sharper. In a quarter where total revenue decreased by 1/3, free operating cash flow was the same as it was a year ago. We moved quickly to resize and refocus our investment plans at the start of the pandemic, and it's paid off. On working capital, specifically, we're past the peak and we're in an agile position. As a manufacturer that stages inventory earlier, we expect the planned drawdown of our finished goods to generate significant cash in full winter. Our unique model built around evergreen product and domestic in-house production also gives us lots of commercial flexibility in season. Relative to more rigid offshore supply chains, we believe we can adjust the demand upside much faster if warranted. On the financing side, we upsized our loan to USD 300 million and extended its maturity through 2027. This shifts a portion of our short-term borrowings to a more permanent capital base while maintaining low leverage and a flexible covenant-light structure. Moving to operations. We are on track for peak season. In manufacturing, we've had a smooth and successful restart to down fill jacket production at all 8 facilities across Canada. Doing this in the middle of a pandemic and alongside PPE manufacturing is no small task. It is truly a testament to the grit of our amazing team. We've also completed a third-party logistics transition during this time to enhance the scalability of our distribution and our e-commerce service levels across the globe. The first phase of our digital cross-border initiative is complete with 18 new countries turned on during the second quarter. We're excited to continue expanding the global canvas of our in-house e-commerce business. In-store omni shopping is also going live as we speak in U.S. retail. We expect this to be a real needle mover for experience and for conversion. In terms of new stores, we continue to execute against the 7 committed openings we discussed on our last call. This includes Mainland China, where there are 4 stores, 2 high conviction locations in Toronto and Ottawa and Berlin. Performance to date in our new stores in China, in particular, has been very encouraging. Finishing with current trends, we are seeing further improvement across our business, particularly in the DTC channel. Retail in Mainland China is now at pre pandemic levels. Our performance during Golden Week was reassuringly strong, with a notable pickup in traffic driven by domestic tourism. Digital momentum is also encouraging online on Tmall, including a growing non-parka penetration. Unfortunately, Hong Kong is a very challenged or be it contained situation. As you know, operations there were disrupted at this point last year, but we are still seeing significantly lower revenue. Our near total shutoff of inbound and outbound tourism continues due to quarantine requirements, and local economic conditions are therefore challenged. In North America, all of our stores are currently in operation. While in Europe, all 3 stores are now closed again due to the mandatory directives. For those that are open, material pressures on traffic and capacity remain, but we're pleased to see local guests gravitating back. Irrespective of the pandemic, we remain confident in the strategic value and profitability of our highly selective network. Assuming no further closures, we expect to offset a greater proportion of these retail declines through e-commerce. Across key markets, our sites have continued to accelerate since September as the time when you'l wear it really matters for our performance. Digital is moving in the right direction with higher growth rates on a bigger base. In wholesale, we expect to see a better rate of decline relative to Q2, driven by later shipment timing with more of an in-season fulfillment model. We're in a good and clean position due to the proactive measures we've taken throughout the pandemic. Operational and financial risks remain, including the recent closures in Europe. We will continue to take a brand-first approach, while increasing our strategic emphasis on DTC. Lastly, I want to touch quickly on our not-for-profit PPE manufacturing activities. We're now nearing the end of completion of the current contractual obligations. As a result, we expect revenue in the Other segment in Q3 to be down to just over 1/3 of the level we had in Q2. In summary, it's getting Canada Goose cold at just the right time. Consumers want to be outside more than ever, and they want best-in-class products to protect them. With the first half of the fiscal year behind us, top line momentum is accelerating. Across our business, we're seeing improvement and we're reaping the benefits of our financial resilience. Critically, we're doing this while preserving the agility to react and to accelerate. While uncertainties remain, and the situation is, for sure, fast evolving. We are encouraged by our progress, and we're excited about what lies ahead. And with that, I'll pass it over to the operator to begin Q&A.

[Operator]

[Operator Instructions] Your first question comes from Oliver Chen from Cowen.

[Oliver Chen, MD & Senior Equity Research Analyst]

The DTC strength in China was really impressive. How would you contrast that against the overall Asia performance, which was down around 15%? And any details there? I would also love your views on as we model inventory in the next few quarters, how do you expect inventory versus sales to trend in the current status on freshness? It sounds very good.

[Jonathan Sinclair, CFO & Executive VP]

Right. So taking those in sequence, thanks, Oliver. First of all, our Asian business, of course, is broader than just great -- just Mainland China. Our Mainland, China, performance that I've already described on the call, I've also described the headwinds we're facing in Hong Kong. And the other components of our Asian business are about wholesale, where we've already said that there's a difference in timing. So between the difference in timing and Hong Kong, they are headwinds compared to the tailwind we've got in Mainland, China. Now turning to inventory. I think the key here is, although we don't provide guidance, and that includes inventory, it obviously depends on how revenues evolve during the remainder of the year. But I can say what I've said in the past that we expect it to be down meaningfully by the end of fiscal '21.

[Dani Reiss, Chairman, President & CEO]

Yes. I'll just chip in, Oliver. Dani here. And on the inventory point, I echo everything that Jonathan said, and just to point out today is and has been, and we've reiterated our plans to -- listen we're doing what is in our plans and our intention is that our inventory levels will be materially lower than they are now and lower than they were last year relative to our sales. And we seem to be on track to do that. Our trajectory is very strong, and it's looking to be very positive.

[Operator]

Your next question comes from Adrienne Yih with Barclays.

[Adrienne Eugenia Yih-Tennant]

Yes. I guess my question is on the stores. So the 7 stores that you marked for this year, all of them, it looks like you have 26 listed on your website. So is there 1 more to be opened? Or are all of them actually opened at this point? And then in terms of the inventory, just a little bit more color there. Is the inventory in your channel partners also expected to be exceptionally clean? And what are you seeing from your order book from your channel partners in the -- during the season?

[Dani Reiss, Chairman, President & CEO]

Yes. Thank you for your question. With regards to the stores, we've opened most of them. There's 3 more stores that we plan to open in China this year. But most of our stores have been opened. And as I pointed out, but they've really driven -- been very successful. Our business in China is doing really well and accelerating. And the 3 more stores are only going to add to that. As far as inventory, I'll refer to Jonathan to answer that question.

[Jonathan Sinclair, CFO & Executive VP]

Yes. I mean, as we discussed in the prepared remarks, we've been very disciplined about feeding the channel, the wholesale channel this season. Very careful in the way that it's being done, and therefore, the inventory is very clean in channel. And we're being very measured about that. To the extent that we start to get wholesale reorders, that's fine we'll see to those. Remember, we are prioritizing DTC, and we're not focused on chasing wholesale business this year.

[Operator]

Our next question comes from Kate Fitzsimons with RBC Capital Markets.

[Kate Bridget Fitzsimons, Assistant Vice President]

I guess, just quickly, on Hong Kong, can you speak to the duration of the drag associated with some of the store -- I guess, the weaker traffic levels you are seeing? How much longer do you expect Hong Kong will be a drag on the Asia business? And Dani, just higher levels on your view on the store base in the market and the brands positioning there? And then really quickly, Jonathan, on the channel, gross margins, very resilient this quarter. How should we think about some of the puts and takes on the channel gross margins as we look ahead, just given the benefit of the government subsidies this quarter?

[Dani Reiss, Chairman, President & CEO]

Kate, thanks for your questions, Dani here. Yes, I think that -- I think with regards to Hong Kong as a question. And we're cautious about it. We don't -- no one really knows when Hong Kong's going to reopen and not have their 14-day quarantine. Our internal -- the way we look at it, we approach it very cautiously. I'll point out, although we have exposure there, we -- unlike most brands, we only have 2 stores in Hong Kong, and I think that's really important. Because although it is affecting us and those stores will typically be better, expected to do to a large amount of business for all brands, stores that our exposure is limited. And that's important. And hopefully, it'll reopen sooner than later. But it's impossible to predict when that's going to be. So we've taken a conservative approach internally on that.

[Jonathan Sinclair, CFO & Executive VP]

And just around that point off before we talk about gross margin. And the number of stores that we've got in Mainland, China, and as we approach the peak in that business, I think you find that's very much the dominant factor in the region's performance going forward. Now when it comes to gross margin, clearly, we're very pleased with the gross margin performance in the quarter. But I'll come back to what I've always said, which is there is a natural place that the gross margin -- we expect gross margin to be in each of these channels. In DTC, we expect it to be in and around the mid-70s, and in wholesale, mid- to high 40s. As far as I'm concerned, we're in that spot at the moment. That's the same to what we expect to see -- to stay in.

[Operator]

Your next question comes from Ike Boruchow with Wells Fargo.

[Irwin Bernard Boruchow]

For Dani or Jonathan, just 2 quick ones. Just we talked a lot about brand heat when it comes to the Canada Goose brand. Maybe Dani, could you give us your thoughts on where that brand heat is in today's environment, specifically in North America? And then maybe for Jonathan, just longer-term plans with the PPE business? Just kind of curious how you're thinking about that into next year and beyond.

[Dani Reiss, Chairman, President & CEO]

Hi, Ike, thanks for your question. We're feeling really good about our brand. I think that we've never been more relevant today than we've been than not -- we've never been relevant. We are the reference parka. We are -- people are looking to spend more time outside, and we are a brand that can deliver on that. And so we feel really good that heading into our peak season, we expect to see the acceleration that we are seeing typically and happily and not foreseeing it this year as well. We know the consumers are looking to spend more time outside, not just for normal day-to-day versus purposes, but also out of necessity. And we believe that this will positively impact our business. And so our relevance is really strong, and we believe that, that drives our brand heat, which is -- which remains very strong.

[Jonathan Sinclair, CFO & Executive VP]

When it comes to PPE, I think the important thing here to think about is it's essentially event-driven. So earlier this year, there was a need, we stepped up. We pivoted in about 2 or 3 weeks and produced what we've been producing for the last few months. I think to the extent that there's further requirements from the country to help support front lines, we'll be there. But at this stage, it would be wrong to comment further.

[Dani Reiss, Chairman, President & CEO]

Further, I think in one thing just about back to the brand heat thing, to add some more color to it. Just to point out, we're obviously, as always, full price brand. And we're seeing lines outside of many of our stores as we're used to seeing. This is an anecdote to talk a little bit about the relevance and the heat of our brand and the demand for the products that we have around the world.

[Operator]

Your next question comes from Erwan Rambourg with HSBC.

[Erwan Rambourg, Global Co]

I hope you can hear me. I just had a follow-up on a comment from Jonathan. So on wholesale, I think you made it clear that inventories were really clean. I'm just wondering if you could talk about the mindset of your partners. And I think in the prepared remarks, you talked about a better rate of decline. And I'm just wondering if that's looking at Q3 or looking at H2? And then secondly, on e-commerce, can you talk to any new markets or any new partners that could impact positively H2 sales for that channel?

[Dani Reiss, Chairman, President & CEO]

So yes, I'll address both those questions. Our wholesale partners are very important to us, and we have some of the best wholesale partners in the world. And our relationships are strong. And a lot of our wholesale partners are accounting on Canada Goose's to drive, their recovery, and we're seeing that happen. We're seeing that well, we did see some orders shift to the right because of the earlier store closures earlier in the year. Now we're finding that wholesale partners are wanting us to deliver goods more of their orders sooner. And so we're very encouraged by that, and we continue to work very closely with them, and they're a really, really important part of our business. And there's certainly -- I'm really considering the upside there. To the second part of the question was...

[Jonathan Sinclair, CFO & Executive VP]

And I think the important point here is a couple of points. First of all, this is -- e-commerce, as we describe it here, is what we do and on the websites that we manage and where we ship directly. I know about Tmall in Mainland, China, or ourselves in the rest of the world. And this quarter, we saw growth. And that was driven by progress in our major existing markets across North America, Western Europe and Mainland, China. Frost order, e-comm is exciting. It's a longer-term initiative, and that expands our compass globally. But they're smaller individual markets, but nevertheless, will happen with us for the -- we'll have them with us for the remainder of the year. Overall, we're in the mid-30s in terms of the total number of markets we're shipping to now.

[Operator]

Your next question comes from Omar Saad with Evercore ISI.

[Omar Regis Saad]

I wanted to ask a follow-up to -- the China numbers you guys were talking about are great. We know that China -- you're probably losing some Chinese business to Chinese consumers with the lack of tourism and travel. Do you have a sense for how that kind of Chinese cohort is performing with you guys on a more global basis, understanding that you're still -- your footprint in Mainland, China itself is still really low. And then I actually wanted to ask a technical follow-up on the inventory. I want to understand, I guess, why the inventory is still growing, given the fact that your production has been at limited levels. Does that have to do with the transition from outsourced to in-store? Just kind of want to understand the dynamic there.

[Dani Reiss, Chairman, President & CEO]

Thanks for your question. And I'll take -- address the Chinese tourist business. And certainly, there's been a reduction in tourism around the world. A lot of those tourists come from Mainland, China. And that we've seen that impact our stores around the world. As have all brands, we -- I think our strategic approach that we took in China by adding physical retail in China has helped capture local Chinese tourist demand within China. And I think that, that's working really well, as evidenced by our growth and the continued acceleration even through October in China. And so, yes, I think that's working. And I think that, in collaboration with our e-commerce growth and acceleration globally, is an offset to the reduced tourist levels this year.

[Jonathan Sinclair, CFO & Executive VP]

And when it comes to inventory, I think what's important to remember is that Q2 is not a big quarter when it comes to revenues for this business. So much more than Q3. And so as we -- remember that we've restarted production at the beginning of Q2. And that was specifically to add newness and depth for the full winter, in other words for the forthcoming season. So we're now at the point where sales really pick up, and that will naturally drive down inventory levels through the remainder of the year. And as you correctly point out, there's also a transition going on with some of our third-party CMTs at the same time.

[Operator]

Your next question comes from Camilo Lyon with BTIG.

[Camilo Russi Lyon, MD and Lifestyle Brands & Wellness Analyst]

I wanted to learn more a little bit about the progression of your store productivity levels. You went from like a near shutdown of mainly all your stores. It sound -- it looks like there's been a pickup in in-store level productivity. Certainly, you've talked about that in China. So I guess the question is, how are you seeing that progress in other regions? Are you still seeing any pressure on traffic? Are you driving a point only business? Is there a better sort of conversion rate that you guys are experiencing? Any color on the store productivity levels relative to last year will be incredibly helpful.

[Jonathan Sinclair, CFO & Executive VP]

Yes. It's a good question, Camilo. And clearly, in China, we saw the pattern established when they started to react in 9 months ago, and sort of that's gradually built up. And that's helped us manage our expectations in terms of what we might expect to see elsewhere in the world. Obviously, that gets interrupted where you get local lockdowns as we're experiencing right now in Europe. But there is a pattern of gradual improvement as people get used to shopping in the new way and visiting stores in a new way. There's no doubt that traffic is challenged. But on the other hand, what I would say is that people who are out to shop, mean to shop, and therefore, we do see better conversion.

[Operator]

Your next question comes from Sam Poser with Susquehanna.

[Samuel Marc Poser, Senior Analyst]

Just 1 question. There's a bump in -- you mentioned that you would defer to -- you were focusing more on DTC. But to what degree will you respond if there is demand from your wholesale partners to -- if their demand goes up going in? To what degree will you respond in the back half of the year?

[Dani Reiss, Chairman, President & CEO]

We're very flexible. We have a lot of levers at our disposal, and we're able to shift as we choose to do so. So we're able to service both our wholesale channels and our DTC channels. I think it's important from a -- our direct relationship with our consumers in our DTC channel is very important to us, so we're going to make sure that has all the inventory needs. But we were deliberate in making sure we were in a strong inventory position, as we always do, and this there's no difference so that we can service wholesale as well as DTC.

[Jonathan Sinclair, CFO & Executive VP]

Yes. I think the key here is that we're responding rather than chasing.

[Operator]

Your next question comes from Jay Sole with UBS.

[Mauricio Serna]

This is Mauricio Serna on behalf of Jay Sole. I just wanted to ask if you could provide us a little bit more color on what you were saying about the brand heat in China. If you could also talk a little bit more how the sales progression went throughout the quarter, the acceleration in DTC? And how does that trend -- how does that has kind of carry on into October so far? And also, I wanted to ask, on the other hand, on the cost side, if you see any headwinds into the season, particularly for e-commerce with -- all related to freight costs and distribution and shipping. And also if -- and also on the government subsidies, I mean, how long should that be a benefit to the gross margin?

[Dani Reiss, Chairman, President & CEO]

Thank you for your question. Just to readdress the brand heat question. I don't believe we've ever been more relevant given that our product is a best-in-class needed product at this point in time for people around the world who want social distance outside. And our acceleration that we've seen in October has been really encouraging. And continue to point to the lines around at our stores in Toronto and Yorkdale and around the world, the demand, the visible demand, anecdotally, is extremely strong. I'll hand over to Jonathan to take some of the technical question.

[Jonathan Sinclair, CFO & Executive VP]

Yes. From a cost point of view, we don't see particular headwinds. I think the point that I was making in my prepared remarks is we're very keen to invest where it makes sense, and where we see the opportunity and the likelihood of payback, we'll get behind it. But we're not looking at particular headwinds. I think when it comes to subsidies, in the immediate term, we don't envision any real changes. And when they do end, I think we'll find ourselves in a rather more robust environment where our business is not coming out of the shutdown.

[Operator]

Your final question comes from Alexander Walvis with Goldman Sachs.

[Alexandra E. Walvis, Research Analyst]

I had a question on your comment that you've had some in-store omnichannel initiatives going live in North America. I wonder if you could elaborate on what features are being rollout, the pace of the rollout. And then you -- how you're thinking about future plans to extend that into the international business?

[Jonathan Sinclair, CFO & Executive VP]

Yes. I mean, it's something that we learned from last year. We already piloted it last full winter in Canada. And we saw it. It was a real needle mover in performance. Because obviously you're opening up all of the inventory and all of the sizes in all of the colors to the consumer at the same time. And therefore, it gives you far more selling power and far greater conversion power as a brand ambassador. And that's something that we expect to see enacted now in U.S.A., and in due course, we will take that initiative around the world. But that's something that we -- that is going live as we speak in the U.S. And we see that as a really important driver of business.

[Operator]

I will now hand the call back to management for closing remarks.

[Dani Reiss, Chairman, President & CEO]

Thank you. I'd like to thank everybody for joining us here today on our call, and I look forward to speaking to you again at the end of next quarter. Stay safe.

[Operator]

That concludes today's conference. Thank you for your participation. You may now disconnect.