Canada Goose Holdings Inc

TSX:GOOS

Earnings Call Analysis

Company Adjusts Full-Year 2024 Guidance Amid Macro Pressures

Q2 revenue rose slightly by 1% to $281.1 million; however, on a constant currency basis, it fell by 3% year-over-year due to the strong euro. Direct-to-consumer (DTC) sales grew 15% to $109.4 million, while wholesale experienced a 10% dip. The company's Q2 gross margin expanded significantly to 63.9%. Despite improvements, Q2 adjusted EBIT declined from $26.3 million to $15.6 million. Inventory levels rose slightly by 2%, and efforts to streamline operations reduced the company's workforce by 10%. For fiscal 2024, the company now forecasts revenue between $1.2 billion and $1.4 billion, with a projected operating margin of 11-16%. DTC revenue is expected to comprise roughly 70% of total revenue, with a single-digit to low double-digit change in comparable sales. Wholesale revenue is anticipated to drop by a low to mid-teens percentage. The non-IFRS adjusted EBIT projection is set at $135 million to $225 million, assuming a high-60s gross margin percentage. SG&A expenses could grow by a mid-teens percentage, mitigated by around $15 million in savings from transformation efforts. Adjusted net income per diluted share is estimated between $0.60 and $1.40, considering a high-teens effective tax rate and 103.5 million diluted shares. The Q3 guidance estimates revenue between $575 million and $700 million, adjusted EBIT from $190 million to $265 million, and adjusted net income per diluted share ranging from $1.22 to $1.76.

Steady Top-line Performance Amid Currency Challenges

The company reported a solid performance on the top and bottom line in the second quarter, with revenues slightly up by 1% year-over-year to reach $281.1 million. However, it wasn't all green as currency headwinds were felt, with a constant currency basis showing a 3% decline in revenue.

Retail Channels Show Mixed Results

Direct-to-Consumer (DTC) sales showed resilience, marking a 15% surge to $109.4 million, buoyed by nearly a 12% growth on a constant currency basis. This contrasted sharply with the wholesale revenue segment, which saw a marked decline of 10% year-over-year to $162 million.

Regional Growth Highlights Expansion Initiatives

Revenue trends varied geographically, with Asia Pacific and Europe, Middle East, and Africa (EMEA) regions experiencing increases by 13% and 6% respectively, while North America saw a decline of 7% year-over-year. The decrease in North America was mainly due to a drop in wholesale revenues, partially offset by growth in the company's DTC channels.

Gross Margin Expansion Amidst Mixed Segment Performance

Q2 saw a remarkable 410 basis points expansion in gross margin, reaching 63.9%. This was attributed to strategic pricing, a favorable product mix shift toward non-heavyweight down products, and a larger proportion of DTC sales. However, the DTC gross margin did experience a slight dip of 60 basis points year-over-year to 76%. On the flip side, wholesale margins improved significantly, increasing to 57% and marking a 620 basis points improvement over the previous year.

Inventory Management and Share Repurchases

The company concluded Q2 with a modest 2% increase in inventory compared to last year. They actively bought back shares, investing $29.9 million for 1.36 million shares. The company reported a net debt of $851.9 million, an increase from last year due to these share buybacks and preparations for peak seasonal demand.

Estimated Savings and Cost-Cutting Measures

Operational enhancements were a focus, with efforts to improve store productivity and inventory management. These initiatives are part of a broader transformation program anticipated to save approximately 15% of the expected $150 million by fiscal '28, a milestone they're currently ahead of.

Revised Fiscal Year 2024 Outlook Amid Economic Uncertainty

Despite strong first half results for fiscal 2024, the company has revised its full-year 2024 guidance due to a tough macroeconomic landscape. They now forecast total revenue between $1.2 billion and $1.4 billion and a DTC revenue comprising about 70% of total revenue. The guidance also predicts wholesale revenue to decrease by a low to mid-teens percentage year-over-year. Adjusted non-IFRS EBIT is expected to be between $135 million and $225 million for fiscal 2024, with an operating margin ranging from 11% to 16%.

Insight into Expected Costs and Profits

The company anticipates cost-saving initiatives to mitigate a mid-teens percentage growth in SG&A expense due to an expanding DTC network. Projected non-IFRS adjusted net income per diluted share is now set at $0.60 to $1.40, with additional forecasting for the third quarter expecting revenue between $575 million and $700 million, and non-IFRS adjusted net income per diluted share estimated between $1.22 and $1.76.

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, and welcome to the Canada Goose Q2 2024 Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to turn the call over to Ana Raman, Head of Investor Relations. Please go ahead, Ms. Raman.

[Ana Raman, executive]

Thank you, operator, and good morning, everyone. With me are Dani Reiss, Chairman and CEO; Jonathan Sinclair, EVP and CFO; and Carrie Baker, President.

After Dani's and Jonathan's prepared remarks, we will open it up for your questions. Our call today, including the Q&A portion, includes forward-looking statements. Each forward-looking statement, including without limitation, discussion of our financial outlook, is subject to risks and uncertainties that could cause actual results to differ materially from those projected.

Certain material factors and assumptions were considered and applied in making these forward-looking statements. Additional information regarding these statements, factors and assumptions, and regarding material factors that could cause actual results to differ from those projected is available in our earnings press release issued this morning, as well as in our filings with U.S. and Canadian securities regulators.

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.

We report in Canadian dollars, so all amounts discussed today are in Canadian dollars unless otherwise indicated.

Please note that financial results described on today's call will compare second quarter results ended October 1, 2023, with the same period ended October 2, 2022, unless noted otherwise.

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

With that, I'll turn the call over to Dani.

[Dani Reiss, executive]

Thanks, Ana, and good morning, everyone. We delivered solid second quarter results, reflecting the strength of our iconic brand in key global markets and progress across our strategic initiatives. Our Q2 fiscal 2024 revenue was in line with our expectations at $281.1 million, and we exceeded the top end of our earnings guidance range as we balance investment in our growth initiatives with a focus on operational discipline, delivering $15.6 million in adjusted EBIT and $0.16 in adjusted earnings per share.

For Q3, we are taking a more conservative approach in regards to our expectations given the macro environment we see across many of our markets today. As a result, we are revising our full year outlook, which reflects the moderation in sales growth and continued investments in our priorities, balanced with prudent expense actions. Jonathan will expand on both our second quarter results and updated guidance shortly.

In Q2, more consumers came to shop with Canada Goose but in the same period last year as our brand continues to capture the attention of shoppers around the world. Our innovative high-performance products and elevated luxury experience are resonating with our loyal consumers, who even with this high inflationary backdrop are returning to enjoy more of our offerings.

As we continue to navigate an uncertain global macro landscape, our business is prepared for anticipated demand, admits to reduced visibility. While this macro environment presents a headwind, we remain focused on building for the long term, guided by our 3 strategic pillars: driving consumer-focused growth, building our DTC network and expanding our product categories.

I will take you through the progress we have made on each of these pillars. First, driving consumer-focused growth. Q2 DTC channel revenue of $109.4 million was up by 15% compared to the same period last year. Our top priority here is investing in our brand to inspire and engage consumers and drive desirability through customer experiences, targeted marketing campaigns and partnerships.

Starting with our distinctive elevated luxury retail experience that we call Canadian warmth, which is defined as Canada Goose's customer journey. In Q2, we began to roll out the Canadian warmth experience across our store network, which during our pilot phase showed a positive uplift in conversion. This is important as we look to capitalize on our strong traffic trends.

While the effects on conversion across our networks are not expected to completely take hold immediately, we are taking a test and learn approach to guide us in moving this metric up and to the right.

Second, our brand marketing campaigns. In September, we launched our fall winter campaign, featuring 3 trailed leading women who represent the Canada Goose ethos, while they are living their authentic lives out in the open. The early weeks of this campaign have been very successful, receiving well over 1 billion media impressions.

In late October, we held our largest event to date in China, as we celebrated our fifth anniversary of our first brick-and-mortar store in the region. We welcomed nearly 500 guest tour event held in Shanghai, during which they took in our first ever fashion show in the country, which was held outdoors. The event was one of our most successful activation in the market so far, resulting in over 3 billion media impressions.

Chinese shoppers continue to be a driver of our growth, both inside and increasingly outside the country. As of Q2, we had 21 stores in China, a position that we have built opportunistically, backed by strong demand for our brand in this market and knowing that this will position us well following the pandemic.

I was in China last month for our 5-year anniversary celebration, and visited our stores, and met with top customers, and I was pleased to see the level of profit in the stores and truly impressed with the guest experience our customers are receiving.

Our third approach of brand building is partnerships, through which we continue to drive cultural relevancy and tap into new audiences, one important aspect being product collaborations. In September, we launched a collaboration with London-based fashion house, Rokh, and artist, Matt McCormick, that included 8 exclusive pieces for women. Products from this collab were featured across select Canada Goose stores, in place with strategic and influential fashion retailers like the overstreet market.

In October, we launched another collab with luxury streetwear brand, Pyer Moss, featuring a colorful, limited edition capsule, inspired by the street culture in Brooklyn, catering to both men and women.

Both collabs are seeing solid reception from our customers, and more importantly, growing exciting media coverage globally and building brand awareness around the world.

Earnings during second quarter, building our DTC network. In Q2, we opened 6 new permanent stores. In addition to the conversion of 2 temporary stores to permanent during the quarter, we had 62 permanent stores at the end of the period. We opened new stores in L.A., Atlanta and Philadelphia in the United States. In Mainland China, we opened a store in Tianjin and a second store in Shanghai. And in Japan, we will open our second store in Tokyo.

With 9 new permanent stores opened so far in fiscal '24, we are well positioned with consumers in key geographies as we enter the holiday shopping season.

We also opened our first travel retail store in the Frankfurt International Airport in September. With just a month into its opening, and the store is off to a good start, receiving positive feedback from customers as they connect to this important international hubs.

[indiscernible] Retail is a new part of our wholesale programs, and we're eager to test and learn in the selling environment as we refine our growth plan and attract a brand-new type of clientele, traveler.

Let's now talk about DTC home sales. which include both in-store and online sales. DTC comp sales were down 7% year-over-year, as total store comp sales increased slightly, offset by a decrease in e-commerce revenue. While traffic grew significantly both online and off-line across all regions, DTC comp growth was down in the U.S., EMEA and Mainland China.

Growth in Hong Kong, Taiwan, and Macau was robust, fueled by the return of mainland Chinese to us. Canada DTC growth also increased, particularly in cities with high levels of tourism, including Vancouver, [indiscernible] and Toronto.

Overall, we saw softer conversion in Q2 year-over-year, which we believe may be due to the macroeconomic environment in which consumers are spending closer to need, exacerbated by the later onset of cold weather that many regions have been experiencing.

Turning to online commerce. Although our stores contributed the majority of our DTC revenue in Q2, e-commerce is an important part of our broader strategy to create a seamless omnichannel experience. We are investing in the end-to-end online shopping journey to drive better conversion and minimize returns.

On the front end, we continue to implement new features, such as a size and fit module, while enhancing the back end through improvements in merchandising, navigation and site architecture and performance, just to name a few initiatives.

In Q2, we made good traction in both top and middle of funnel activities, increasing visits to our product pages in additions to [indiscernible]. While our overall Q2 DTC comp results were not ideal, our teams are actively working to change its dynamic and trajectory to drive top line growth such as converting on the strong profit trends we have had in the quarter across our owned channels.

Turning to our third pillar, expanding on product categories. In Q2, the demand for non-heavyweight down products grew, expanding its share of revenue within the overall mix. While total sales were heavily down or flat year-over-year, revenue in this category grew within our DTC channel, reflecting continued strength for our core product.

Within non-heavy weight down, rainwear was our fastest-growing category in the second quarter, followed by apparel. The Chilliwack fleece bomber, [ hit on ] pants and hoody and jacket and HyBridge knit jacket were the most popular apparel pieces with our customers.

When we look at who is purchasing our non-heavy weight down products in Q2, we see that more of our repeat customers are coming back to the brand they love to purchase additional items. This is another reason that we are focused on offering customers amazing and authentic experiences that keep them returning for more.

As in our footwear category, sales of our recently launched sneaker line in July ramped up and remained at consistent levels through the second quarter, and I'm happy to see the category performing to our expectations.

Taking a step back, we are executing on our product road map, and we're excited with the newness we're injecting into our upcoming product assortments. Product is always top of mind for us, and I and our design teams are actively working with top-tier design talent to ensure that execution against our product road map continues during this time of transition.

In closing, Canada Goose is first and foremost about our product. We don't compromise on our vision of being a leading luxury brand, which is defined by our products' high-performance style and craftsmanship.

Although we are facing an uncertain and challenging global macroeconomic backdrop at this time, our fundamentals are strong, and we look forward to seeing many more people enjoy Canada Goose products in the months and the years ahead.

Before I hand the call over to Jonathan, I want to congratulate him on his appointment to the role of President of APAC; and Neil Bowden on the role of Chief Financial Officer, both of which will be effective on April 1, 2024. Both Jonathan and Neil have deep experience with Canada Goose, allowing for a smooth transition between role and continuity across the business while supporting our growth and expansion in APAC.

Thank you. And with that, I'll hand it over to Jonathan.

[Jonathan Sinclair, executive]

Thank you, Dani, and good morning, everyone. We are pleased with our solid top and bottom line performance in the quarter, reflecting demand and strong operational discipline. Revenue for the second quarter was $281.1 million, up 1% year-over-year, driven by growth in our DTC channel.

On a constant currency basis, revenue was down 3% year-over-year as the euro strengthened against the Canadian dollar. DTC sales of $109.4 million grew 15%, or just under 12% on a constant currency basis over the same period last year as a result of retail store expansion. DTC revenue was 39% of total sales in Q2, compared to 34% in the same quarter last year.

As our store footprint expanded and consumer demand increased in our more profitable DTC segment, we continue to intentionally shift our proportion of channel revenue to sell directly to our end consumers.

Q2 wholesale revenue of $162 million was down 10% year-over-year, or 15% down on a constant currency basis due to the planned streamlining of our wholesale partners.

Similar to Q1, we delivered earlier shipments to our wholesalers who are excited to have the products available ahead of the peak season.

We continue to see caution amongst the wholesale community, which is reflected in our order book across all geographies as a challenging macroeconomic backdrop continues to present headwinds.

Moving to performance by geography. Q2 revenue increased in Asia Pacific and in EMEA, whilst it decreased in North America year-over-year. North America revenue of $124.1 million was down 7% or 8% down on a constant currency basis as lower wholesale revenue was partially offset by growth in our DTC channel.

In Q2, our DTC segment in North America grew high single digits year-over-year due to solid store performance. In the U.S., DTC sales grew low double digits due to new store sales. Traffic was substantially higher year-over-year as we more than doubled our store count to 13 permanent stores. We're taking meaningful steps to grow the female consumer while continuing to build on the success of the men's business.

In the second quarter, the share of transactions from women remained stable year-over-year, with pieces from our full winter '23 collection resonating in the quarter. From a product standpoint, apparel and rain categories led the growth in the non-heavyweight down portion of the business. This demonstrates our ability to provide an all-season relevant product offering to our customers.

Moving to Canada, our home market, we registered modest DTC growth compared to the same period last year due to growth at our brick-and-mortar stores as revenue contributions from tourists continued to grow within the mix alongside a reduced wholesale penetration.

Turning to Asia Pacific. This region had a solid quarter, with revenue increasing 13% year-over-year to $63.8 million, up 11% on a constant currency basis. We had especially strong performance in our stores in Hong Kong, in Taiwan and in Macau, with a continued return of Chinese tourism.

Store sales rose in Mainland China, where lifting of COVID restrictions that has led to a solid rebound in domestic spending. We continue to expand our product mix and grow our non-heavyweight down offers, with rainwear apparel and footwear, representing a larger portion of total revenues on a year-over-year basis in the region.

Lastly, EMEA revenue was up 6% year-over-year to $93.2 million, or down 4% on a constant currency basis as wholesale revenue was partially offset by softer DTC channel performance.

Wholesale outperformance was led by earlier shipments of orders to our partners. DTC store revenue was offset by lower e-commerce revenue as consumers felt the pinch of weakening macroeconomic conditions. We continue to see the share of revenue from international tourism grow as a proportion of total revenues in the region.

Rainwear was a standout category during the quarter, growing significantly compared to last year, with Europe experiencing more rainfall than average during the summer.

Moving to gross profit. Our second quarter gross profit grew 8% year-over-year to $179.5 million, driven by gross margin expansion. Q2 gross margin expanded 410 basis points to 63.9%. This was due to pricing, a favorable product mix, even with non-heavyweight down, outpacing heavyweight down, I might say, and a higher mix of DTC sales.

The increase in the gross margin of our products were seen across nearly all categories, with non-heavyweight down outpacing the margin expansion of our established heavyweight downs segment.

DTC gross margin was 76% in Q2, down 60 basis points year-over-year, while wholesale margins increased to 57%, up 620 basis points, again compared to the second quarter of last year.

Gross margin in the DTC segment was marginally low due to inflationary product costs and higher freight charges due to increased volume in the U.S. and in Mainland China, partially offset by favorable pricing.

Wholesale margin was higher primarily due to pricing, which included, importantly, foreign exchange tailwinds due to the strengthening of the euro relative to the Canadian dollar, as well as preference for our higher-margin styles within the heavyweight and lightweight segments by our wholesale partners.

Adjusted EBIT was $15.6 million. That was down compared to $26.3 million we made in the second quarter of last year, but at the same time, was above the top end of our guidance range due to strong operational execution. This was primarily due to lower-than-planned SG&A spend as we drove efficiencies across the business through a combination of slowing hiring, process improvements and automation of manual processes.

SG&A spend of $177.2 million was largely associated with the higher cost coming from the expansion of our retail network, in particular, rent and employee costs, as well as the timing of marketing spend, onetime corporate restructuring expenses and our transformation program, which I'll discuss in a little bit more detail shortly. Adjusted net income attributable to shareholders was $16.2 million or $0.16 per basic share.

Moving to our balance sheet. We ended the second quarter of fiscal '24 with inventory of $519.7 million, and that was up 2% from $511.5 million at the end of the same period last year as inventory growth decelerated for the third consecutive quarter.

In Q2, we bought back approximately 1.36 million shares for a total cash consideration of $29.9 million, ending the quarter with $851.9 million of net debt on our balance sheet compared to $734.1 million at the end of the second quarter of fiscal 2023. The year-over-year increase was due to our investment in the NCIB, our share buyback program, and higher borrowing as we prepare for our peak season.

Since the commencement of our NCIB, we have repurchased 3.7 million shares, or 68% of the amount authorized under the program. As you know, this is a strategic pillar in our capital allocation policy and something we keep under constant review.

We're comfortable with net debt leverage of 3.3x adjusted EBITDA at the end of the quarter, which you should remember reflects a seasonal cash flow point for the business. Based on the seasonality of the business, we expect to reduce our net debt leverage ratio by the end of the fiscal year.

During the second quarter, as part of the transformation program, we took meaningful steps to identify and eliminate inefficiencies from our cost base while enhancing customer experiences.

We streamlined our corporate workforce, reducing nonstore and nonmanufacturing head count by approximately 10%, resulting in a more lean and centralized structure to support the next phase of growth.

We also transitioned more production in-house with nearly 85% of our domestically produced jackets manufactured in-house in the second quarter of fiscal 2024, compared to 58% as recently as the fourth quarter of fiscal 2023. In-house production gives us greater flexibility and quality control over our manufacturing process and consequently control over inventory management.

We also rolled out a number of initiatives to enhance store productivity, touching staffing, merchandising and layout as we seek to improve conversion and customer satisfaction.

Together, this has resulted in an estimated savings run rate of approximately 15% of the $150 million we expect as a result of our transformation program by fiscal '28, and that progress is ahead of our expectations.

Turning to our outlook. We had a solid first half of fiscal 2024, delivering on the top line, delivering on the bottom line expectations. And we're making good progress across our strategic pillars and our transformation program and seeing some early benefits of our work in the positive adjusted EBIT achieved in the second quarter.

We remain confident that our strategy is the right one to achieve long-term sustainable growth and improved profitability.

All of that said, however, our outlook for the back half of fiscal '24 has come under pressure due to an increasingly challenging global macroeconomic environment that has impact to consumer decision-making and prioritization of spend.

As a result, we saw early momentum gathered in our second quarter, begin to slow noticeably in September. While we began to see some improvement in late October, visibility remains reduced. To reflect the increased uncertainty in the macro environment, we are revising and expanding the potential range of outcomes for revenue, for non-IFRS adjusted EBIT, and for non-IFRS adjusted net income per diluted share for fiscal 2024.

As a result, we are updating our full year 2024 guidance as follows. We expect total revenue to be between $1.2 billion and $1.4 billion for the full year. Our revenue guidance assumes DTC revenue to be around 70% of total revenue, representing a high single-digit increase to a low double-digit decrease in year-over-year DTC comparable sales growth and continued store expansion. We now plan to open 15 new permanent stores this year, 9 of which are open as of today. We also expect wholesale revenue to decrease year-over-year by a low to mid-teens percentage, reflecting the continued editing of our wholesale door count, which I would remind you is 6% down. Revised reorder expectations and expansion of our store retail network.

We now expect non-IFRS adjusted EBIT between $135 million and $225 million in fiscal 2024, representing an operating margin of between 11% and 16%. This assumes the gross margin percentage to be in the high 60s on a full year basis, with DTC and wholesale gross margin in the mid-70s and low 50s, respectively.

We expect SG&A expense to grow at a mid-teens percentage rate on a year-over-year basis due to the larger DTC network and the associated operating cost base, moderated by cost-saving initiatives, including around $15 million in savings from the transformation program in fiscal 2024.

We expect non-IFRS adjusted net income per diluted share to be between $0.60 and $1.40. This assumes an effective tax rate in the high teens as a percentage of income before taxes and a weighted average of diluted shares outstanding of 103.5 million units for fiscal 2024.

Consistent with this annual guidance, our guidance for the third quarter is as follows. We expect revenue between $575 million and $700 million. Non-IFRS adjusted EBIT between $190 million and $265 million and non-IFRS adjusted net income per diluted share between $1.22 and $1.76.

The outlook I provided represents our most likely range of outcomes based on the trends we've seen so far this quarter, and consequently, where we believe this may take us for the entire third quarter and the full fiscal year.

In summary, while the macroeconomic environment presents challenges, we remain very focused on the things we can control: our products, our brand and our operations.

In addition to advancing our 3 pillars, we are taking clear steps to improve our operational efficiencies, and we're seeing positive results.

I'm excited about our prospects as we continue to build on our luxury positioning and execute our strategy to drive profitable growth over the long term and the best possible results in the coming quarter.

With that, operator, please open up the lines for questions.

[Operator]

[Operator Instructions] Our first question comes from Brooke Roach from Goldman Sachs.

[Brooke Roach, analyst]

I was wondering if we could discuss a little bit more context on the trend that you're seeing throughout the quarter as you move through the fall season, both in stores and online by consumer cohort. What changes are you seeing in consumer behavior? And how are consumers resonating with different aspects of your brand, including a new women's collection?

[Dani Reiss, executive]

Brooke, thanks for the question. We are -- so yes, the trends that we're seeing are mixed, we are seeing traffic in our stores is up. We would see to see that, we have opportunity to continue to drive conversion of that traffic. It's -- our consumers are [indiscernible] towards the new products and the mix of consumers in our stores remains strong. There's lots of a high percentage of new consumers as well as returning consumers. And we're encouraged by that.

We do continue to see, and we have started to see some softening earlier. And as Jonathan alluded to earlier, in October and recently, we've started to see that getting a little bit better. And it's hard at this point to know what -- how much of that is a new trend and this is going to continue, which is why we've taken a cautious approach. But we're certainly encouraged from a brand perspective to see the traffic at our stores is up.

[Carrie Baker, executive]

I can just jump in, too. Brooke, just on the split of men to women. So you've heard Jonathan talk about what we talked about before, about how we're really trying to dial in and increase that share of women customers. And so we saw that happen significantly in the U.S., in Canada and EMEA that remained pretty stable.

Where we saw a bit more change is GenX customers, that decreased within the mix this quarter, which again, it lines up with what we're thinking and what we're hearing and seeing in the industry in terms of the aspirational customer being a little bit more challenged right now.

[Brooke Roach, analyst]

And if I could just follow up with one additional question on China. Can you elaborate on what is now embedded in your updated full year guidance for Chinese consumer growth, both in Mainland China but also globally?

[Jonathan Sinclair, executive]

Yes. So I think when it comes to China, we're seeing an environment which is still somewhat challenged in terms of the economic impact on the Chinese consumer.

That said, we are coming up against very much softer comps as we go through November and into December, as you recall last year, there was very little business being done at that critical time. So we do expect to see some growth coming out of Mainland China for that reason.

When we look more broadly, what we're seeing is that the Chinese consumer is starting to travel. But really, that travel is an Asian phenomenon rather than a global phenomenon. So we are definitely seeing more Chinese consumers across Southeast Asia, and we're seeing that manifest itself, particularly in our stores in Hong Kong and Macau.

[Operator]

Our next question comes from Ike Boruchow from Wells Fargo.

[Irwin Boruchow, analyst]

Two questions for me. Number one, just at a high level curious. How is the business preparing for the banning of PFAs in key markets like New York, for example? I'm just kind of curious, how do you -- are you adjusting manufacturing? What's the conversation internally?

And then looking at the P&L, this quarter specifically. The other revenue line was up to $8 million or $9 million from like less than $2 million last year again. Just can you comment on what exactly is driving that? What's embedded in that? And then, what is that other line kind of forecasted to be the rest of the year as well? How should we think about that?

[Carrie Baker, executive]

On the -- thanks, Ike. On the first question of PFAs. So this is a topic we've been talking about for many, many years. We obviously have a robust program in our sustainability, and you've seen our goals and objectives on that trajectory. So we're well underway. We're -- I would say, we're feeling strong, ahead of schedule. So it's something that we look at region by region. I would not say that's the only factor that we look at.

Our sustainability under our human nature platform is quite robust. And so that's one of our key factors and focuses as we come up to some of these deadlines that we see ahead.

[Dani Reiss, executive]

Yes. I'll just add to that. I think that our [indiscernible] integrated supply chain manufacturing infrastructure lever our strengths, and one of our core competencies is an area that we excel, and we feel that we're very much ahead of the curve when it comes to these sorts of matters.

[Jonathan Sinclair, executive]

And then when it comes to the growth in the performance in the second quarter. Obviously, it was year-over-year. I think you have to remember is that quarter 2 is all about our wholesale business, really. And the DTC only starts to get going in earnest towards the end of the quarter 2, as you go through September.

And so as a result, any growth you see there doesn't really show up in the waiting, and it's therefore something that's very much more about the wholesale business, which, as we've said all along, is going to be down year-over-year.

And even though, we were able to meet consumer request to ship somewhat sooner, the reality is that we still end up down year-over-year in wholesale, and that produces an overall flat picture.

The key numbers in there, though, is our DTC business is growing in double digits despite the drop in comps. We're still making headwind and the growth in that business.

[Irwin Boruchow, analyst]

Right. But I'm asking about the other line. I'm just seeing because of the friends and family event that happened a couple of quarters ago, I was curious, like what is going on that's driving the higher revenue and other? And then what should we expect the rest of the year?

[Jonathan Sinclair, executive]

I mean, again, as I said before, friends and family for us is a relatively insignificant part of the total business. It was up 8 million year-over-year in terms of sales from employees, and friends and family generally speaking.

It's a level of business that is likely to, in our view, mirror last year as we go through the rest of the year. And we see it as a normal business activity.

[Operator]

Our next question comes from Oliver Chen from TD Cowen.

[Oliver Chen, analyst]

On the call up on certain macros and buying closer to need in cold weather, just at the -- in your guidance range, it would be helpful to understand what's assumed on the higher end of guidance as well as the lower end.

And as you thought about this consumer, that's prioritizing certain things. Which parts of your assortment were most impacted?

And second, you have made a lot of progress in innovation and a lot of great callouts about what's happening forward with innovation and cultural relevance as well as product. What percentage mix is non-heavyweight down? And how should we forecast that going forward given all your initiatives?

[Jonathan Sinclair, executive]

So if I can comment on the -- obviously, we expect a continuation of the macro. We're not expecting that suddenly to pivot.

I think what we would say is that, particularly in the U.S., remember that, really, we saw that bite quite suddenly and quite sharply as the holiday season began last year. So we sort of become a bit more comparable with that at the back part of Q3.

I think when it comes to weather, obviously, we're coming out of a very unseasonally warm -- unseasonably warm September, which, by popular record is -- by popular account is record-breaking across both geographies. We have not assumed an especially mild winter or especially cold winter in the range of guidance, we've assumed normal weather conditions.

Weather impacts this business in the sense that it's -- it prompts -- the first cold snap prompts business. It sort of reminds the consumer that this is the time that they should go and buy cold weather gift. And so the longer you wait for that, the later it starts. And I think that is what we've experienced this year.

I think when it comes to the consumer set, as Carrie was describing before. I think that GenX, and that's really where the aspirational consumer is most concentrated, is probably the area we're seeing most affected by all.

When it comes to non-heavyweight down, our business is -- obviously, it's fairly seasonal, and therefore, non-heavyweight down is more concentrated in particularly Q1 and Q2 as we saw this year. But as we think about it for the full year, it's still going to be over half of the business by value.

Last year, it was, I think, 63%. And we should think about it to be in and around the high 50s, low 60s, as a sort of normal place for the time being as we grow and establish the non-heavyweight down categories.

What I would also add is in Q2, we saw about 5, 6x the growth rate in non-heavyweight down, compared to the growth that we saw in heavyweight down, understanding both of them were up.

[Carrie Baker, executive]

And on that, the thing that -- very helpful -- the thing that excites me about that is where we're seeing that. So higher sales growth in terms of rainwear. So we're seeing that in APAC, followed by North America and then EMEA.

I think Dani referred to this before about our fleece category. So we're seeing massive uptick in that, whether it's outerwear, whether it's a layering piece, customers are gravitating towards the other Chilliwack and the Simcoe.

What I really love about all of this is that none of the category expansion isn't coming at the expense of gross margin. So as we get into new categories at different price points, we're still able to both margins.

[Dani Reiss, executive]

Oliver, if I can just -- sorry, just jump in and just to add into -- I just want to go back to the point I made earlier about traffic and how strong we're feeling about our brand, given the traffic trends in our stores.

And this company has changed a lot over the years, from one that was really wholesale-focused one, to we're now we're more DTC than ever before, which is a really good thing for us in so many ways.

But also, when it does, as it pushes our revenue further to the right. And I think we've just brought back to your guidance question, all the responsible, why didn't the range of outcomes.

It's really early to tell. I'm excited to how the macro environment is going to play out these at certain times, and we felt that's the responsible thing to do. But in regards to how we're feeling about our brand. And overall, we're feeling really good about it.

[Oliver Chen, analyst]

A quick follow-up. You made progress on your e-commerce, and you have really great leadership there. But what's happening in that business in terms of what we should know? The consumer interface looks much better, and the content looks really integrated. But overall, across the industry, we've been seeing traffic and conversion issues.

[Dani Reiss, executive]

Yes. I appreciate the comments on our website, you call a platform network. We're really focused on it. Also seeing traffic being very strong there as we are in store, which is great. And we've got multiple projects going on. Many, we test that we're working on currently to optimize conversion, and that's where we're focusing on.

And many of those tests are working, and I expect to continue to see those show progress in the quarter and the years to come.

[Operator]

Our next question comes from Rick Patel from Raymond James.

[Rakesh Patel, analyst]

You talked about seeing more gross margin expansion in the non-heavyweight down category. I was hoping you can expand on the drivers of that and how we should think about the sustainability of these margins as we think about the puts and takes going forward.

[Jonathan Sinclair, executive]

Yes, Rick, it's Jonathan. Our gross margin story has been very much consistent over the years. We've been very clear that over the longer run, we are talking about mid-70s in DTC, mid-high 40s in wholesale. At the moment, we've got a tailwind of FX. So hence, this year, we're somewhat stronger than that in wholesale.

But the reality is that the way we manage this is that we mature the margins as the category grows. And so back in the Investor Day that we did in February this year, we deliberately printed the consolidated gross margin for lightweight down to illustrate the fact that it's very close to the corporate margin.

And that's important because as the category has built out to a meaningful second pillar in this business, what we've been able to do is to grow the gross margins back to the level that we would expect them to be as a mature category.

So you correctly assume that, for example, footwear margins are not that strong right now. But that's okay because we're on a trajectory. And if I stand back from all of this, and I go back to, call it, 2018 when we were, let's say, 85% heavyweight down, and consider that we've -- that mix has come down to sort of low 60s.

Our margins have stayed the same. So what we've been able to do through that journey is actually manage the overall algorithm to accommodate those -- the maturing and improving gross margins outside of heavyweight down and balance the tailwinds that we create with the investment in product development and investment in scale until that point happens.

So I hope that gives you a sense of it. We're certainly not changing our perspective on the sustainability of those gross margins, nor are we expecting to raise them overall because one of the key components is that we continue to invest new product development in new categories. We need the space to do it within the overall gross margin.

[Rakesh Patel, analyst]

And you also touched on an improvement in late October. Can you just expand on that? Does that reflect marketing or product activation? Or is it a function of just week-to-week volatility?

[Jonathan Sinclair, executive]

I think the -- you're right, we do touch on the fact that we're seeing sequential improvement. And I think that's obviously key. Inevitably, there are activities that we do as we get into peak season, that's true every year. I think around us, you were also getting the advent of fall, which you're probably seeing or feeling firsthand. And as that happens as well, it's -- you've got the coalescence, if you like, of the activity that we're undertaking and the climate becoming a little bit more seasonal. And so the two come together and the business starts to build.

[Dani Reiss, executive]

Absolutely, to that. I mean, the time when we expect to see this happen, this is where our business and the flow of our business every year.

And starting in September, every week is bigger than the previous week, and -- so this -- the acceleration we started to see towards the end of October, it's promising. And it's not enough yet to indicate a complete shift in trends, but it's certainly a right spot and we're optimistic.

[Operator]

Next question comes from Robby Ohmes from Bank of America.

[Robert Ohmes, analyst]

I was curious if, given the sort of change in the global operating environment, if you're thinking about changes in the promotional strategy for Canada Goose to drive better response from customers? And also just with the weakness in the wholesale channel, are there any thoughts of any adjustments to strategy in wholesale, like maybe more of a relationship with Amazon or other distribution channels to sort of support revenue growth in this tougher environment?

[Dani Reiss, executive]

Robby, thanks for your question. Yes. So from our point, there is absolutely no change with regards to our strategy. We're -- in our commercial brand, our product sells through very well at full price. And the value that is inherent in the products that we build here in Canada is something that our consumer recognize, and know the demand that we build for our products is something that we've always taken great pride in. And so yes -- so no, we have no plans to change our strategy.

[Robert Ohmes, analyst]

And any thoughts on changes in distribution strategy? Maybe opening up more with Amazon, as an example?

[Dani Reiss, executive]

No, in fact, we don't. There's a time when we sold through Amazon many years ago, and we decided that to stop doing that. That decision turned out to be the right one for us, and helped accelerate our own online business at the time.

So we feel that we have the right alchemy of partners, and we're going to stick with them.

[Carrie Baker, executive]

Yes, I think just to cut in on the -- just to add on some color on the state stay with the same strategy. We may add some doors. We're not looking to add volume of doors. But strategic accounts, influencer accounts, of course, those change year-after-year, season after season, who -- are they meeting a different customer that we want to reach?

So those are where we think about adding. Generally, as you've heard us talk about it's streamlining wholesale to make sure that we're doing better business, bigger business with the right partners that treat the brand right, understand that it's a full price brand, full-price proposition.

So nothing on that front has changed, but I just want to clarify who we would add with if we did.

[Jonathan Sinclair, executive]

Otherwise, it has to be brand accretive. And that's our guiding light. And ultimately, that's why we're leaning further into DTC in this journey.

[Operator]

Our next question comes from Jonathan Komp from Baird.

[Jonathan Komp, analyst]

Jonathan, congrats on the new role. I want to ask just about that transition, and I know it will take some time to occur.

But could you just maybe elaborate more on the reasons for the leadership change in the Asia Pacific region? And then maybe more near term, if you could just talk a little bit more about separate of the easy comparisons in China in the next few months. What's your sense of the recovery for the Chinese consumer, and how that's faring versus your expectations?

[Dani Reiss, executive]

Thanks, Jon, for question. I'll start to give high level commentary on the management changes and leadership changes, which I'm very excited about.

So Jonathan moving to APAC. Obviously, Jonathan is a tremendous knowledge of our business over the years. And that goes on the same. And he's also got a tremendous knowledge of the agent market from this business and past businesses. He's been involved with in that region. Great knowledge of the retail landscape and storage agencies. And was a key also in negotiating our JV agreement with Japan.

So Jonathan perfectly suit that role and gives me someone -- another person that I trust deeply in that region, and that's very important.

And with all regards to Neil. Neil's been working at Canada Goose for a long time now. He knows our business and our brand intimately, he's a protector of it, and has been -- we've been molding him and building him up for this role, and he's ready to take an audience. We're excited for us and for him that we've reached this moment. So it's an exciting future.

And I don't know, Jonathan, talk about that.

[Jonathan Sinclair, executive]

So to answer it, and thank you for your comments. But to answer your question about Mainland China, I think that you'll recall what was happening a year ago. I think [indiscernible] week has been an interesting time this year. It's not been the sort of peak that we've experienced in pre-COVID and in years prior.

But I -- what we're -- as we look forward, we're going to be open in November. We're going to open in December. And these are critical months as important as October is, November is way more important, December way more important to get.

And we're looking forward to full trading in all of our stores. We've got all of the right inventories well staged around the region. And we believe we're well positioned to take advantage of the consumer demand. And particularly as the cooler temperatures are settling, which is probably it's only just beginning to happen, Northern China and Shanghai is still very warm.

[Jonathan Komp, analyst]

That's really helpful. And then if I could just ask one follow-up on the margin outlook. I know that lower half of the guidance this year embeds lower EBIT margin year-over-year for the full year. Is there any way, as we look forward, you can give a better sense of what SG&A growth might look like? And just any more context around the multiyear margin recovery potential?

[Jonathan Sinclair, executive]

Yes. I mean we -- yes, we remain very clear that there are 3 things that will drive our overall margin recovery. One is comp growth, and clearly, that's a pressure point right now. The second is successful opening of stores during the expected levels of productivity. And the third is the transformation program, where we're already making headway.

And you're hearing today that not only are we -- we got run rate savings, we've got in year savings. And the best way I can manifest that operational execution to you is if you look at the upper end of the guidance now and look at the level of profitability that's in build into it, it's the same level of profitability that we were expecting when we got to a higher level of revenue previously.

So we've been able to bring into the mix a significant first step. That's important because that gives us some of the momentum we need to start building that third leg of our growth where we focus on building comp growth and continuing the retail network development alongside.

[Operator]

Our next question comes from Mark Petrie from CIBC.

[Mark Petrie, analyst]

I just want to follow up on the U.S. specifically. And if you could give any more color with regards to sort of the detail on sales patterns, particularly by regions, and then also, store cohorts. And I appreciate any comments about the ramp-up of stores opened in the last year or so.

[Carrie Baker, executive]

So the U.S., yes, we talked about -- under some pressure. Obviously, revenue is down year-over-year, 11%.

But the good news, as we've talked about a lot, and this is what our opportunity to win, is traffic is substantially higher. So obviously, doubled our store count. We opened 3 new stores in best center, in Phipps Plaza and King of Prussia.

So traffic is there. They're coming. They're engaging with the brand. As we said, I think there's a bit of a hit to that aspirational customer that generally people are just maybe waiting to see. Their urgency isn't the same as we've seen in years previous.

In terms of regional news, I mean, we continue to succeed a bit, similar to Canada, where tourism is happening. So you see that in the West Coast. You see that in New York area. That's not a new phenomenon for us but continue to see that.

New stores are opening well. I would say, because we're opening it in this environment where it's a little bit more challenged, we're not seeing the same types of instant lineups that we would before. Again, still very happy with the traffic and the engagement and the brand buzz around that. But a little bit more tempered, I would say, than maybe -- definitely pre-pandemic, but maybe in the last 3 years.

So it hasn't changed our strategy. Again, we build stores for the long term effect. We know that those are the right locations. We know that, that's where the traffic will be eventually, and that they will convert. So we're just waiting for those days to start happening.

[Jonathan Sinclair, executive]

And we're seeing a good contribution from the store expansion to the overall business in the U.S. to the point where as you'd expect and hope. But nevertheless, it's important we reaffirm. We're actually seeing significant top line growth in our total stores cohort in the U.S. even if we're negative on the comps.

[Operator]

Our next question comes from Michael Vu from Barclays.

[Michael Vu, analyst]

Yes, as operator said, this is Michael Vu, and I'm on for Adrienne Yih.

So your inventory position has vastly improved, but we were wondering how does your big sales guidance impact fiscal year and inventory expectations?

[Jonathan Sinclair, executive]

Yes. It's -- obviously, it's a fairly broad range. The range is clearly driven by DTC volatility. And if you go with that, and then you're going to assume that, that range has a maximum impact of 25% of that revenue number on the inventory at the end of the year.

Therefore, it is possible that we end the year, instead of being flat, being slightly up. But we're working very hard to make sure that our production plans and our purchasing are very -- are as tailored as they can be to what we're seeing because we are still driving for improvements and inventory turns both this year and over time.

And what you've also seen this quarter is, as you know, it's our third successive quarter of inventory deceleration. And I think that's important. We've said it all along. We continue to expect that to be the case. And obviously, we're working to make sure we don't end up at the bottom of the revenue range in any event.

[Michael Vu, analyst]

Great. And then can I ask one follow-up question since we're discussing inventory. So how much more do you plan to manufacture in-house this year versus last year? And would you please repeat what you said about the improved merch margin drivers from in-house manufacturing?

[Jonathan Sinclair, executive]

Yes. I mean -- so we're running at 85% now. I think we were, I remember, 75% to 78% in the previous quarter. But with this quarter, we were at 85%. That's sort of where it belongs.

We like having complementary CMT manufacturer. It allows us to put the right manufacturing in the right locations, gives us flexibility. It keeps us resilient. But it's sort of -- that helps us in terms of how we operate.

When it comes to the tailwind that comes through, there is a modest tailwind, but whenever I think about where it comes from because the materials come from us. So if you think about product makeup being, call it, 40% material, 40% labor, 20% overhead. To the extent there's a profit element. The profit elements on the labor and the overheads are not in the materials because it's CMT, they're getting the packages of materials from us in the first place.

So it's one of the components of tailwind that we create alongside pricing alongside sourcing efficiencies. But it sits within our overall margin algorithm, which I was talking about before, is normally being mid-70s, mid- to high 40s between the 2 key channels. And this year's low 50s because of the FX tailwind in wholesale.

[Operator]

Our last question will come from Jay Sole from UBS.

[Jay Sole, analyst]

My question is, you said you're opening 15 stores this year. How many leases have you committed to for next year's store openings?

[Jonathan Sinclair, executive]

Yes. We're relatively early in that journey at the moment, as you'd expect. So we probably got -- we're somewhere in the single digits, a handful of stores at this point, as you would expect.

But obviously, we have our plans and we've got our target locations, and we're well on the negotiations. So it's just sort of where you'd expect to find this at this point in time.

[Jay Sole, analyst]

And Jonathan, can you tell us how many stores you expect to open next year?

[Jonathan Sinclair, executive]

It's a little early for that at the moment because we haven't talked specifically plans for next year. But what I would remind you from the Investor Day is that we've set our stall out for, call it 130 to 150 stores over a 5-year time horizon, including conversion of stores that might be under different arrangements today into our own network.

So that's the best guidance point I can give you with [indiscernible] in that sense, that gives you a sense of pacing.

[Operator]

We have no further questions. I would like to turn the call back over to Ana Raman for closing remarks.

[Ana Raman, executive]

Thanks, everyone, for joining us today. If you have any questions, please reach out to us at [e-mail]. Have a great day. Thank you.

[Operator]

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