Canada Goose Holdings Inc. (GOOS) Q2 2021 Results - Earnings Call

Canada Goose Holdings Inc. (NYSE:GOOS) Q2 2021 Earnings Conference Call November 5, 2020 9:00 AM ET

Company Participants

Patrick Bourke - Vice President, Investor Relations

Dani Reiss - President and Chief Executive Officer

Jonathan Sinclair - Executive Vice President and Chief Financial Officer

Conference Call Participants

Oliver Chen - Cowen

Adrienne Yih - Barclays

Kate Fitzsimons - RBC Capital Markets

Ike Boruchow - Wells Fargo

Erwan Rambourg - HSBC

Omar Saad - Evercore ISI

Camilo Lyon - BTIG

Sam Poser - Susquehanna

Alexandra Walvis - Goldman Sachs

Operator

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. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

I would now like to turn the call over to Patrick Bourke, Vice President, Investor Relations. You may begin your conference.

Patrick Bourke

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 one 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 press release issued this morning, as well as in the Risk Factors section of our most recent annual report. These documents are also available on the Investor Relations section of our website. The forward-looking statements made on this call speak only as of today and we undertake no obligation to update or revise any of the 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 the Investor Relations section of our website.

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

Dani Reiss

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 and 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 in today's world and witness how the pandemic is reshaping the global economic landscape. As I said before, I believe that adversity, when viewed as an opportunity, thrive success. Building on that, I 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, the way we see opportunity. We've accelerated our strategic plans to capture it. This approach is working and we're seeing acceleration across our business heading into our busiest season. And so, here's an update on the progress we've 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've demonstrated the flexibility to execute against the strategic priorities we saw for our business, and our deliver and decisive action has driven strong results. Not only have we navigated the current environment, we reaffirmed our confidence in our ability to manage through uncertainty and come out stronger. This is a competency that we expect will continue to serve us well going forward.

Regarding our global e-commerce business, we are pleased with the positive traction we've seen in this quarter, which resulted in revenue growing more than 10%. Within that growth, we realized an increase in momentum in September. We've been past Q2; we've seen further acceleration and 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 omni-channel 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, onto our continued expansion in China, where we continue to successfully execute against our strategic growth plans for our business. I'm 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've 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, against a backdrop of the continued acceleration of sales that we've 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 the volumes].

In particular, we focus these investments on our digital businesses globally, and 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 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 [flu 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've helped to protect explorers, scientists and everyday consumers from the elements in some of the harshest environments in the world.

We are known for protection. We are the reference parka. With consumer spending more time outdoors 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 masks for consumers designed for comfort as well as protection. This product extension with a natural evolution of the foundation we’ve built through our Canada Goose Response Program, which created over 2 million units of personal protective equipment for frontline healthcare workers.

Consumer response for our mask 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 seller] in many regions. Again, our extension 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 products. 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 students of the Inuujaq School, Arctic Bay in Nunavut needed winter clothing. Inbound shipments to the village 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 bathroom boots to help keep the students warm this winter.

At the same time, we also announced the expansion of our Resource Centre program. Until now, we have donated over 1 million meters of fabric and other materials to communities in the north through our Resource Centre program. Now, the program will also see thousands of repurposed parka donated to [indiscernible] communities across the Arctic. These refurbished 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 waste 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.

Beyond North America, our stores in Europe have been impacted by non-essential business closures. London and Milan both begin a [full-week] closure today and tomorrow respectively, and Paris is closed for at least two more weeks. I'm proud of our retail teams and the strength and 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’ll go over our financial results with you in more detail.

Jonathan Sinclair

Thanks, Dani. Good morning, everyone. Thank you for joining us. Reflecting on our progress in quarter two, there are three key things that stand out. Our two strategic priorities, Mainland China with e-commerce are leading the way in our recovery. Our 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 [in a] total shut-off in quarter one, we gradually and carefully resumed shipments in quarter two, with channel revenue decreasing by 45.7% to [$118.5 million].

In the DTC channel, revenue decreased by 37.7%, [$46.2 million] in the 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're 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 nine months ago, this is a powerful recovery. Foot traffic has normalized, the consumer is eager to spend and brand momentum is strong.

In terms of profitability, the adjusted EBIT margin was 8.1% despite significant disruptions to the topline. 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 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 a third, 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 [indiscernible] of our finished goods to generate significant cash in for 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 a demand upside much faster if warranted.

On the financing side, we upsized our loan to [US$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 [like] structure.

Moving to operations, we are on track for peak season. In manufacturing, we've had a smooth and successful restart down-filled jacket production at all eight 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 campus of our in-house e-commerce business. In-store omni shopping is also going live as we speak in US 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 seven committed openings we discussed on our last call. This includes Mainland China, where there are four stores, two 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. Result 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 Timo, including a growing non-parka penetration.

Unfortunately, Hong Kong is a very challenged [or very] contained situation. As you know, operations there were disrupted at this point last year, but we are still seeing significantly lower revenue and near total shut-off 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 three 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, at the time of year where 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 one-third 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, topline 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.

Question-and-Answer Session

Operator

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

Oliver Chen

Hi, thank you. Good morning. 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? Would also love your views on – as we model inventory in the next few quarters, how do you expect inventory versus sales to trend, and the current status on freshness, it sounds very good? Thank you.

Jonathan Sinclair

Right. So taking those in sequence, thanks, Oliver. First of all, our Asian business, of course, is broader than just Mainland China. Our Mainland China performance, as 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 evolved 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 2021.

Dani Reiss

Yes, I’ll just jump in. Hey, Oliver, it’s Dani, and just on the inventory point, I echo what Jonathan said and just to a point that today is and has been and we've reiterated our plans too. This is more [indiscernible] all of 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 – you know, it’s very positive.

Operator

Your next question comes from Adrienne Yih with Barclays.

Adrienne Yih

Yes, good morning. Thank you for taking my question. I guess my question is on the stores. So, the seven stores that [indiscernible] this year, all of them, it looks like you have 26 listed on your website. So, is there one more to be opened? Or 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? Thank you very much.

Dani Reiss

Yes, thank you for your question. With regards to the stores, we've opened most of them. There's – I believe three more stores that we plan to open in China this year. But most of stores have been open. And as pointed out, they've really driven – they’ve been very successful. Our business in China is doing really well and accelerating. And, you know, the three more that was open [indiscernible] add to that. As far as the inventory, I'll ask Jonathan to answer that question.

Jonathan Sinclair

Yeah, I mean, as we've 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.

Adrienne Yih

Okay.

Jonathan Sinclair

And we're being very measured about that. To the extent that we start to get wholesale reorders, that's fine, [indiscernible] those. But remember, we are prioritizing [BCC] and we're not focused on chasing wholesale businesses here.

Adrienne Yih

Okay, great. Thank you very much, and good luck.

Jonathan Sinclair

Thank you.

Dani Reiss

Thank you.

Operator

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

Kate Fitzsimons

Yes. Hi, good morning. Thank you for taking my question. I guess just quickly on Hong Kong, can you speak to, you know, the duration of the drag associated with some of the store? I guess the weaker traffic levels you are seen, 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 that market and the brand's positioning there? And then, you know, really quickly, Jonathan, on the channel gross margins, you know, 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? Thank you.

Kate Fitzsimons

Hey, thanks for the questions. Dani. I – yes, I think that – I think with regards to Hong Kong was the question, and you know, we're cautious about it. You know, we don't – no one really knows when Hong Kong is going to reopen and not have their 14-day quarantine. You know, our internal – the way we look at it, we approach it very cautiously. I'll point out that, you know, for – although we have exposure there, we – you know, unlike most brands, we only have two stores in Hong Kong and I think that's really important because, you know, its – although it is affecting us, and you know, those stores will typically be expected to do better – to do a larger amount of business for all brands. But our stores there, our exposure is limited and that's important ad hopefully it’ll reopen sooner than later. But it's impossible to predict exactly when that's going to be. So, we've taken a conservative approach internally on that.

Jonathan Sinclair

And just around that point off, before we talk about gross margin and you know, with the number of stores that we've got in Mainland China, and as we approach the peak in that business, I think you'll find that very much the dominant factor in the region's performance going forward.

Now when it comes to gross margin, and clearly we're very pleased with the gross margin performance in the quarter. But I 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 spot we expect to see – to stay in.

Operator

Your next question comes from Ike Boruchow with Wells Fargo.

Ike Boruchow

Hi, good morning, everyone. For Dani or Jonathan just two quick ones. Just we talk a lot about brand heat when it comes to the categories 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, you know, into next year and beyond?

Dani Reiss

Yes. Hi, thanks for your question. We're feeling really good about our brand. You know, I think that we've never been more relevant today than we've been than – we’ve never been relevant. You know, we are the reference parka. We are – you know, 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 – you know, heading into our peak season, we expect to see the acceleration that we are seeing, typically, and happily enough, we're seeing it this year as well.

You know, we know that consumers are looking to spend more time outside, not just for normal day-to-day purposes, but also item necessity and we believe that this will positively impact our business. And so, our relevance is really strong, and, you know, we believe that, you know, that drives our brand, which remains very strong.

Jonathan Sinclair

When it comes to PPE, I think the important thing to hear – to think about is it's essentially event driven. So, earlier this year, there was a need, we stepped up, we pivoted in about two or three weeks and produced what we've been producing since the last few months. I think, to the extent there's further requirements from the country to help support frontlines, we’ll be there. But at this stage, it would be wrong to comment further.

Dani Reiss

Yes. But I think – I have one thing just about back-to-brand [indiscernible] to add some more color to it. Just to point out, you know, 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

Yes. Hi, good morning, gentlemen. I hope you can hear me. I just had a follow-up on prepared comments 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? Thank you.

Dani Reiss

So yes, I’ll address those questions. Our wholesale partners are very important to us and we have some of the wholesale partners in the world and our relationships are strong. And, you know, a lot of our wholesale partners are accounted on Canada Goose’s drive their recovery and we're seeing that happen. We're seeing that – while 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, you know, we’re very encouraged by that, and, you know, we continue to work very closely with them, and they're really, really important part of our business, and, you know, there's just certainly, you know, certainly upside there.

To -- the second part of the question was …

Jonathan Sinclair

And I think the important point here is – a couple of points. First of all, this is – our e-commerce, as we describe it here is what we do. And on the websites, we manage and where we ship directly [indiscernible] and in Mainland China or ourselves in the rest of the world. And this quarter, we saw growth, and that was driven by progress I our major existing markets across North America, Western Europe and Mainland China.

[First order] e-commerce is exciting. It's a longer-term initiative and that expands up our canvas globally. But there's smaller individual markets, but nevertheless, we’ll have them with us fully. We'll have them with us for the remainder of the year. Overall, we're in the mid-set 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 Saad

Good morning. Thanks for taking my question. I wanted to ask a follow-up to the China, numbers you guys were talking about are great. But we know that China – you know, you're probably losing some Chinese business or 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, you know, understanding that you're still – your footprint in Mainland China itself is still really low? And then, you know, actually wanted to ask a technical follow-up on the inventory. You know, I want to understand, I guess why the inventory is still growing given the fact that your production has been at limited level? Does that have to do with the transition from outsourced to in-source, just kind of want to understand the dynamic there? Thanks.

Dani Reiss

Thanks for your question. And I'll address the Chinese tourists business, and certainly, there's been a reduction in tourism around the world. A lot of those tourists come from Mainland China, and you know, that we've seen that impact our stores around the world, as have all brands. We – you know, 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 continued acceleration, even through October in China. And so, yes, I think that's working and I think that – you know, 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

And when it comes to inventory, I think what's important to remember is that, you know, Q2 is not big quarter when it comes to revenues for this business, so – much more than Q3. And so, as we – you know, remember that we restarted production at the beginning of Q2 and that was specifically to add newness and depth for 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 CMT's at the same time.

Operator

Your next question comes from Camilo Lyon with BTIG.

Camilo Lyon

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

Jonathan Sinclair

Yes, it's a good question, Camilo. Clearly, in China, we saw the pattern establish when they started to reopen [indiscernible]. And sort of that’s gradually built up and that helped us manage our expectations in terms of what we might expect to see elsewhere in the world. You know, obviously, that gets interrupted when 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 the new way. There's no doubt that traffic is challenged, but on the other hand, 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.

Sam Poser

Good morning, thank you for taking my questions. Just one question, there's a bump in – you mentioned that you would defer to you are focusing more on DTC, but to what degree will you respond if there is demand from your wholesale partners to – you know, if their demand goes up going in, to what degree would you respond in the back half of the year?

Dani Reiss

You know, we’re very flexible. We have a lot of [indiscernible] at our disposal and we're able to shift as we choose to do so. So we're able to serve as both our wholesale channels and our DTC channels. You know, I think it's important – and our direct relations with our consumers in our DTC channel is very important to us, so we're going to make sure that has all the inventory in it. But we were deliberate in making sure we were in a strong inventory position, as we always do and this is no different so that we can serve as wholesale as well as DTC.

Jonathan Sinclair

You know, I think the key here is that we're responding rather than chasing.

Operator

Your next question comes from Jay Sole with UBS.

Unidentified Analyst

Hi, good morning. This is [indiscernible] on behalf of Jay Sole. 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 and if you could also talk a little bit more on how the sales progression went throughout the quarter and the acceleration in DTC and how does that trend - how does that – has carried on into October so far? And also wanted to ask, on the other hand, on the cost side, if you see any headwinds into the season, particularly for e-commerce, you know, with all [indiscernible] to fright 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? Thank you.

Dani Reiss

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

Jonathan Sinclair

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, excuse me, environment, where our business is not coming out of the shutdown.

Unidentified Analyst

Understood. Thank you.

Jonathan Sinclair

You’re welcome.

Operator

Your final question comes from Alexandra Walvis with Goldman Sachs.

Alexandra Walvis

Good morning. Thanks so much for taking the question here. I have a question on your comments that you had some in-store omni-channel initiatives going live in North America. I wonder if you could elaborate on what features are being rolled out, the pace of the roll-out, and then, you know, how you're thinking about, you know, future plans to expand that into international business?

Jonathan Sinclair

Yes. I mean, it's something that we learned from last year. We already piloted it last fall winter in Canada and we saw it was a real needle mover in performance, because obviously, you're opening up all of the inventory in all of the size and all of the colors for 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 the USA, and in due course, we will take that initiative around the world. But that's something that we're – it's 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

Thank you. I would 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.