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This post originally appeared on the blog of Bainbridge Growth. It is being republished by The Current with permission.
It’s hard to think of a direct-to-consumer brand with a more storied history than Canada Goose. The company was originally established in 1957 as Metro Sportswear, founded by Polish immigrant Sam Tick. His Toronto outerwear company specialized in woolen vests and snowmobile suits. Tick’s son-in-law David Reiss took over during the 1970s, renaming the company Snow Goose, and later Canada Goose.
Through the 1980s, performance climbers and Arctic scientists began using the company’s specialized jackets, including Laure Skreslet, the first Canadian to summit Mt. Everest. Current CEO Dani Reiss took over in 2001, when total sales were $2 million. After politely nudging his father out of the top spot, the 27-year-old Reiss transformed the company from a small manufacturer to a global luxury brand, with a staunch commitment to “Made in Canada.”
Canada Goose marketing is mostly high profile functional demonstrations of product use, i.e. mountain climbers and arctic explorers. (Photo via Twitter)
The company has built a unique Canadian legacy, but their global adoption as a luxury outerwear product and fashion brand has been an even more impressive feat. Over the last decade, the brand has become a dominant player in the luxury outerwear category. Their channel strategy was built around direct to consumer ecommerce and strategic retail locations in luxury shopping districts. They also consistently expand the brand every few years to additional categories, taking advantage of their massive brand equity.
DTC & product expansion
Ecommerce and retail stores make up their DTC category, accounting for two-thirds of sales in the most recent quarter and projected at 70-73% in the next year. Executing this increase in DTC proportion is the company’s number one initiative currently. The wholesale channel (mostly high-end major department stores) makes up the remainder of sales and allows the brand to reach areas where Canada Goose will likely not open a store.
Their online DTC presence came first, as 2014 saw their launch of ecommerce in Canada. The company expanded to an additional 13 national markets over the next five years. In their annual investor presentation, the company calls the decision a “game changer,” but the specific ecommerce percentage of revenue is not disclosed in any company reporting. As of March 2022, they operate ecommerce in 56 different countries.
(Source: Canada Goose Annual Report)
In 2017, the first two retail stores were opened in two world-class luxury destinations, Toronto and NYC (Soho). In the same year, they expanded their brand offering, adding knitwear as their first non-outerwear line. Springwear also joined the catalog at that time.
As of April 2022, the company operates 41 stores, evenly split across the US, CA, EMEA and China with sales evenly split across those geographies. They recently signed a joint venture to operate stores in Japan that is expected to add $65M to $75M to their 1.35B in guided sales in the coming year in addition to a much-anticipated footwear launch.
As many apparel retailers have struggled with their supply chain during the pandemic, Canada Goose’s local production has offered stability to support markets across three continents. CEO Dani Reiss repeatedly mentions their commitment to produce sustainable down-filled jackets in Canada. This has created a “unique supply chain advantage," as 84% of units were made or purchased in Canada in calendar year 2021, with the remainder produced in Europe.
All of these factors combine to create an impressive financial performance. The company saw a decline of only 6% during the fiscal year ended March 2021, not bad for a year when most were quarantined. The most recent year, ended March 2022, saw year-over-year growth of 22%, with 67% of sales from DTC which is an increase from the prior year’s 58%. Breaking down this growth in DTC, retail grew 40%, while ecommerce grew 16%. Wholesale grew 8% and was 33% of revenue. Their “other” category has shrunk to non-material as PPE sales have dissipated as the pandemic subsided.
Gross margin of 67% is an improvement of 6 percentage points over the prior year as the gains in DTC mix drove up total company gross margin. DTC carried a notably high 76% margin. Mix shift toward their non-parka category offset some of this positive channel mix impact as non-parka carries lower margins.
SG&A expenses as a proportion of revenue were 53% in the year, an increase of five percentage points from the prior year. The total spend of C$577M climbed faster than revenue primarily due to incremental spending associated with new stores (C$47M). Store count increased from 28 to 41 over the year as they pursued a higher mix of DTC channel sales. The company also invested in additional brand awareness marketing(C$20M). The company also invested an additional (C$11M) in their new footwear line.
Guidance sales and margin levels are what management believes they can achieve based on a higher DTC mix, the Japan joint venture and the new footwear category. Management made it clear on their most recent earnings call that the guidance does include any improvement in the China COVID situation. They do see incremental improvement if the Chinese tourist begins traveling again.
(Source: Canada Goose annual report)
At a time when many retailers are struggling as pessimism has spread a shadow across the sector, Canada Goose seems to have momentum in revenue growth, confidence in supply chain, and focus on their key initiatives. The balance sheet is strong showing under C$100 million in net debt on total assets of C$1.3B with inventory amounts in line with the same levels over the last three years.
The company has shown how a DTC brand focused almost strictly on product quality and functionality can be successful without huge amounts of marketing spending. We are excited to see how the new initiatives unfold as CG looks positioned to continue to please customers from Manhattan to Antarctica.
Trending in Operations
"Fashion ecommerce is one of the most cumbersome customer experiences that exists," said Rent the Runway CEO Jennifer Hyman.
The rise of generative AI is bringing with it a groundswell of interest and concern about how the capability to automatically synthesize information and create something new will change how we work.
Given that AI will sit within the architecture of our digital lives, it’s also worth considering how the technology will introduce new tools for other aspects of life, as well.
For two ecommerce innovators in the apparel space, it’s a time to explore how it will transform shopping. Rent the Runway is set to roll out new AI-powered search capabilities, while Stitch Fix is drawing on a long history with data science and machine learning to personalize the inventory buying process.
Here’s a look at the initiatives underway at each company, and their visions for the future:
Rent the Runway: From search to concierge
Rent the Runway is putting a focus on the customer experience this year as it seeks to retain more subscribers and continue a yearslong push toward profitability.
This is resulting in the introduction of a variety of new initiatives, from the addition of an extra item to all orders to speeding up page load times. Yet as CEO Jennifer Hyman zooms out, she sees change being necessary on an industry-wide level in fashion. Beyond adding new features, AI can play a transformational role.
“I think that fashion ecommerce is one of the most cumbersome customer experiences that exists. You are searching through pages and pages and pages of content to find the items that you like and no one likes doing this,” Hyman told analysts on the company’s earnings call this week. “As an industry that still is selling physical products, AI is going to be -- fashion is going to be a major beneficiary as an industry.”
As a rental service, Rent the Runway has a distinct niche in fashion that lends itself to AI’s advantages, Hyman said. As opposed to a retailer that a consumer may visit a couple of times a year, RTR is used frequently by customers. So Hyman said there are opportunities to turn Rent the Runway into a “utility” by creating a more seamless experience.
This frequent use also provides a “highly unique” dataset, Hyman said. They know what a customer is planning to do based on what they rented. They know whether she liked or disliked an item, and many customers are reviewing 10 items per month. They know her size and how an item fits. This can be put to work in tools that allow customers to ask questions, and find answers.
The first application that combines AI and these advantages will appear in the coming weeks, when Rent the Runway plans to launch a beta of AI-driven search. The tool will allow customers to search for common terms or use cases for an item. So a person will be able to write “Miami vibe,” “‘clambake in Nantucket,” or “tropical motifs,” and receive results about what to wear for such an occasion.
The goal is to help customers sift through the endless aisle, and instantly finds what's right for them.
“I think that across all fashion sites, all over the world, the way that people are searching for product is fairly vanilla, it's fairly functional, right?" Hyman said. "You can go to a site and search for a T-shirt, you can go to a site and search for a black-tie gown. The fact that we're going to be able to enable our customers to search how they actually want to use this closet in the cloud, to search for items to wear to my beach bonfire this weekend, that is a completely different way to search, and I think that it really brings out the value proposition of what a closet in the cloud is all about."
Hyman sees this as a first step in the company using AI models to improve the product experience, and expects more tools to appear in the coming months. RTR is also introducing an SMS concierge experience for onboarding that allows customers to text with a member of the customer service team. The company is already exploring ways that AI can be incorporated into that tool, as well.
In the longer term, Hyman said the company has a vision that will leverage AI to allow customers to communicate with Rent the Runway asynchronously across different modalities, and have a stylist that is constantly available to recommend items, pick out new inventory and answer questions.
“If we are utilizing AI appropriately over the next few years, I see no reason why someone even has to come to our website,” Hyman said.
Stitch Fix: Inventory buying and beyond
Stitch Fix has long married AI with human curation to provide outfits on a subscription basis.
“For years, we have utilized capabilities in generative AI, injecting scores and language into our personalization engines and, more recently, automatically generated product descriptions,” CEO Katrina Lake told analysts. “We have also developed and implemented more advanced proprietary tools such as outfit generation and personalized style recommendations that create a unique and exciting experience we believe is unmatched in the market.”
A new area where the company is applying AI is inventory buying.
“We have historically utilized a number of tools to make data-informed decisions with our inventory purchases,” Lake said. “Now, directly leveraging our personalization algorithms, we have developed a new tool that creates an exciting paradigm shift, which will utilize math scores at the client level to drive company-level buying actions. We expect the clarity of demand signals at the individual client level to drive more proactive and efficient inventory decisions as a company. And because of this, we expect to see higher success rates on fixes and drive increases in keep rates and [average order value] over time.”
Early results are promising. When compared with existing buying tools, testing showed a 10% lift in keep rate and AOV. By the end of this quarter, Stitch Fix expects 20% of all purchase orders to be algorithmically informed.
With experience using AI and a team in place to build, Stitch Fix is investing in the technology. Like Rent the Runway, it also has a unique dataset that offers an immediate advantage.
Here are Lake’s thoughts about how Stitch Fix’s AI strategy:
One of the things that I love about our experience is that we have generative AI that's really in more of a visual format. And so, the outfits that we have in our app, those are actually taking into account your preferences, what we know about you, and then in combination with what we know that you own in your closet. And to be able to kind of continue to push that technology and to be able to continue to give people more value in their experience with Stitch Fix, that's a really good example of, I think, a capability that is, firstly, really aligned with our capabilities around data and personalization and really unique to us.
And then I think it's also really compelling because I really think that pushes us as we think about what that addressable market is. I think if we can push outfits to be something that can be an asset to everybody, I think that is a universal thing that people would love to be able to have, is to have access to advice on a daily basis around what to wear and how to wear it.
While these are distinct companies, their plans lead us to a common conclusion: While the talk around generative AI might be new, many technology-forward companies already have assets sitting inside them that can be leveraged to build new tools. Uncover what’s already there, learn about the AI’s capabilities and develop a solution that's right for your organization. Then, talk to customers to determine how to improve it. It might mean commerce looks different, but that’s okay. The point is to create a better experience.